Costs Law Brief
Date: 22 June 2007
Authors: Dr Mr Friston, P Hughes, Prof A McGee, M Smith
Issue: Vol 157, Issue 7278
Categories: Features, Costs
In Myatt and others v National Coal Board [2007] EWCA Civ 307, [2007] ALL ER (D) 301 (Mar) the Court of Appeal dealt with the issue of who should pay the costs of an appeal concerning the enforceability of the claimants’ conditional fee agreements (CFAs). The claimants had lost that appeal (see Myatt and others v National Coal Board [2006] EWCA Civ 1017) and the issue was who should pay the defendants’ costs: should the costs be paid by the claimants themselves, or by their solicitors?
The claimants had no insurance in respect of the appeal because their after the event (ATE) insurance was itself conditional upon their conditional fee agreements being enforceable. Had this not been the case, the defendant would have been content with an order against the claimants themselves, but in view of the fact that the claimants were uninsured, the defendant had no option but to seek costs from the claimants’ solicitors.
The claimants solicitors relied on Tolstoy-Miloslavsky v Aldington [1996] 1 WLR 736, [1996] 2 All ER 556 in which Lord Justice Rose had found that there were only three categories of conduct which can give rise to an order for costs against a solicitor:
(i) within the wasted costs jurisdiction;
(ii) where there has been a breach of duty to the court; and
(iii) where the solicitor acts outside the role of solicitor.
The claimants’ solicitors argued that the claimants had an interest in the costs litigation, and that they were acting as the claimants’ legal representatives in pursuance of that interest; accordingly, they argued, there was no jurisdiction to make the order sought. Lord Justice Dyson disagreed; he found that category (iii) should be understood as including a solicitor who, to use the words of Lord Brown in Dymocks v Todd [2004] 1 WLR 2807, [2005’ 4 All ER 195 is “a real party … in very important and critical respects” and who “not merely funds the proceedings but substantially also contributes, or at any rate, is to benefit from them”.
Dyson LJ found that because a litigant/client might have a modest personal interest in the litigation would not deprive the court of the jurisdiction to make a costs order against a solicitor. He said:
“I have no doubt that there is jurisdiction to make an order under section 51(3) against a solicitor where litigation is pursued by the client for the benefit or to a substantial degree for the benefit of the solicitor.”
He noted that on the facts of the case before him the claimants’ solicitors had a considerable financial interest in the litigation; the claimants themselves had (a lesser) interest in the matter; and that the defendant had not, at an early stage of the appeals process, notified the claimant’s solicitors that, if the appeal failed, it would or might apply for costs against them. The fair and just order to make was that the claimants’ solicitors pay one half of the defendant’s costs. The other members of the Court of Appeal (Lord Justice Lloyd and Sir Henry Brooke) agreed.
Third party costs awards
While an obvious point, it is important to note that the jurisdiction to make a third-party costs award against a solicitor will arise only where the litigation is being pursued wholly or substantially for the benefit of that solicitor. The jurisdiction to make such an order will not arise if the solicitor’s interest is limited to winning the claim on his client’s behalf in order to be paid his costs under a conditional fee agreement. Paying parties involved in cost litigation should note that Dyson LJ gave guidance as to the importance of giving early and adequate notice of an intention to seek a third-party costs award:
“I think it important to emphasise the need for parties who think that they may apply for an order for costs against solicitors in circumstances such as obtained in the present case to warn the solicitors at an early stage, so as to give them a reasonable opportunity for deciding whether or not to continue with the proceedings”.
FIXED COSTS REALLY ARE FIXED
Lamont v Burton [2007] EWCA Civ 429, [2007] All ER (D) 131 (May) highlights a curious consequence of the predictable costs regime. The claimant was injured in a road traffic accident. He instructed solicitors under a conditional fee agreement (CFA) and took out after the event (ATE) insurance. The defendant admitted liability seven days after receipt of the letter of claim.
The parties were not able to agree quantum and proceedings were issued. The defendant made a Pt 36 offer; this was rejected. At a disposal hearing the claimant secured an award that was less advantageous to the claimant than the terms of the Pt 36 offer. The court awarded the claimant his costs up to the latest date on which the Pt 36 offer could have been accepted without needing permission of the court.
Pursuant to CPR Pt 45, had the Pt 36 payment been accepted before trial the success fee would have been modest, that is, 12.5%. The court was invited to restrict the claimant’s success fee to this level, rather than the higher level stipulated in CPR Pt 45 (100%) that would normally apply if a matter reaches trial. The court at first instance declined to do so.
The defendant appealed, arguing that if there was no discretion under CPR r 44.3 to allow a lower success fee than that applicable to a case that reaches trial, this would create a perverse incentive for a claimant’s solicitor to reject an adequate Pt 36 offer made close to trial because a solicitor could find himself better off if he were to sacrifice his post-offer costs in return for a high success fee.
The Court of Appeal rejected the defendant’s arguments. It is wrong, the court held, to use CPR r 44.3 to circumvent the mandatory provisions of CPR Pt 45. The Court of Appeal concluded that it was a matter for the Rule Committee and the Civil Justice Council to consider whether to amend CPR Pt 45 to make special provision to deal with the issue highlighted by this case.
POST-ENTITLEMENT AGREEMENTS
Harrington v Wakeling [2007] EWHC 1184 (Ch), [2007] All ER (D) 317 (May) casts light on two issues:
- the effect on a client’s ability to recover costs from a paying party of an agreement by his solicitor not to pursue him for unpaid costs; and
- whether or not such agreement could be regarded as being a CFA.
It is important to note that Harrington dealt solely with the situation where the agreement between the solicitor and his client was made after the costs order had been made; it is convenient to refer to such an agreement as “a post-entitlement agreement”.
The relevant facts were as follows: Mr Wakeling was ordered to pay Mr Harrington’s costs. After the costs order was made, Harrington made an agreement with his former solicitors that they would not pursue him for any remaining unpaid fees. The broad effect of that agreement was that Harrington’s former solicitors would co-operate with the recovery of costs from Wakeling, but that Harrington would not be actively pursued for any shortfall in recovery. Wakeling argued that, by operation of the indemnity principle, he had no liability to pay any fees beyond those that had already been paid; this was because Harrington had no enforceable liability to pay those fees to his former solicitors.
Mr Justice Mann rejected that argument; he found that the agreement between Harrington and his former solicitors did not extinguish Harrington’s liability for their fees. He found that the mere fact that the former solicitors agreed that they would not bring an action for their outstanding fees was not a complete release of any further liability; it was capable of being merely an agreement not to enforce the liability in one particular way.
Comment
One could be forgiven for finding it difficult to understand why a retainer which is unenforceable by reason of agreement presents no difficulty in relation to the indemnity principle, yet a retainer which is unenforceable for other reasons—such as the operation of s 58(1) of the Courts and Legal Services Act 1990 (as amended)—will result in a breach of the indemnity principle.
The answer probably lies in the particular facts of this case; this is because the agreement between Harrington and his former solicitors did not stop at an agreement that Harrington would not be pursued for the outstanding fees. Instead, the agreement went on to stipulate a mechanism whereby the unpaid fees would be paid, but only in a specified way (namely, out of the asset that was the costs order against Wakeling). It should be noted that while obiter, Mann J did specifically comment (at para 10) that if the agreement had simply been that the former solicitors would not actively pursue their fees, there would have been a breach of the indemnity principle.
Wakeling had a further argument to make; he argued that the agreement was an unenforceable conditional fee agreement. Mann J rejected this argument and drew a distinction between an agreement made to limit fees after the costs order had been made, and an agreement to charge fees only in the event of some future event. He commented that the critical point is the element of “futurity” (Mann J’s word) in the services:
“The essence of a contingency fee is conditionality, and the condition, under any of the above formulations, is the fate of the proceedings in relation to which the retainer and fees relate. This looks to the future.”
While obiter, Mann J went on to explain (at para 23) that even if the agreement was an unenforceable contingency fee agreement, the original retainer may still survive in an enforceable form:
“If the…[new] agreement is good, it varies the original agreement in accordance with its terms. If it is bad it leaves the original agreement unaffected.”
It would be unwise to read too much into these obiter comments. In particular, Mann J was considering a matter in which the post-entitlement agreement might be “bad” solely by reason of it being a contingency fee agreement. It would be wrong to regard post-entitlement agreements as being inconsequential and benign. In particular, circumstances could easily exist where an enforceable retainer was replaced with an unenforceable (but not void) agreement. In view of this, we would urge caution in respect of post-entitlement agreements.
MASTER AGREEMENTS
In Ilangaratne v British Medical Association [2007] EWHC 920 (Ch), [2007] All ER (D) 133 (May) the paying party argued that there had been a breach of the indemnity principle. The issue turned on the significance (if any) of correspondence between an insurer and a solicitor which related not to a specific retainer, but to the relationship between the insurer and the solicitor in general.
Mr Justice Briggs made the following observations:
“[W]here solicitors who contemplate acting in a number of similar matters for a particular client propose, discuss or agree charging rates in general terms (i.e. unconnected with any specific retainer) then any retainer subsequently made in which there is expressed no contrary intention is likely to be held to include by way of incorporation the charging rates thus proposed, discussed or agreed. In relation to charging rates previously agreed, the prior agreement constitutes a form of master agreement incorporated in each subsequent retainer. In relation to charging rates which are merely proposed or discussed, those proposals or discussions are likely to be found to constitute standing offers to provide legal services if retained within the category of case under discussion, which are by implication or by conduct accepted when instructions for any particular subsequent case are first given and received.”
It is implicit from the (complex) history of Ilangaratne that the court can, and in appropriate circumstances should, ask for production of such correspondence where that correspondence is relevant to the matter in hand. Funders (such as unions and insurers) might like to bear this in mind; they should consider whether their retainers are in a form that they would be happy to produce to the court.
Dr Mr Friston, P Hughes, Prof A McGee and M Smith are barristers in the costs team at Kings Chambers. E-mail: costs@kingschambers.com
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