RETROSPECTIVE CCFA WAS VALID (BUT ONLY JUST): CFAS “AWASH IN A SEA OF ILLEGALITY”:THE NEED FOR COMPLIANCE

In Pentecost -v- John [2015] EWHC 1970 (QB) Turner J (sitting with Master Leonard as an assessor) held that a retrospective Collective Conditional Fee Agreement was valid between the client and their solicitors, thus valid for the purpose of enforcing an inter partes costs order.

KEY POINTS

  • The statement of success fee in a first collective conditional fee agreement was sufficent to satisfy the requirement under a  second conditional fee agreement.
THE JUDGMENT
Mr Justice Turner :
INTRODUCTION
  1. In 2008, the claimant suffered serious injury when a surgical operation performed upon him by the defendant went badly wrong.
  2. The claimant commenced proceedings in negligence against the defendant. His claim was compromised on terms which were set out in a consent order dated 4 December 2012. The defendant agreed to pay damages in the sum of £525,000 together with the claimant’s costs.
  3. An issue subsequently arose as to the enforceability of a considerable proportion of the claim for costs. The claimant had instructed solicitors, Bolt Burdon Kemp (“BBK”) pursuant to a collective conditional fee agreement (“CCFA”) with the GMB (Southern Region) (“the Union”). A success fee of 100% was claimed. The costs bill came to a total of just over £350,000.
  4. Thereafter, the defendant successfully argued before Master Gordon-Saker that a proper analysis of the contractual framework led to the inevitable conclusion that BBK had no enforceable claim against the claimant in respect of those costs incurred after 2 July 2009. The consequence of this finding was that by the operation of the indemnity principle a very considerable proportion of the costs claimed against the defendant were thereby rendered irrecoverable and BBK were substantially out of pocket. It against this decision that the present appeal has been brought.
THE INDEMNITY PRINCIPLE AND CFAs
  1. The indemnity principle is well established and very familiar to all those concerned in the assessment of costs. Subject to any statutory exceptions, an award of costs can only be made in order to indemnify a litigant against legal costs and expenses that he has paid or become liable to pay. Accordingly, if in any given case the paying party can establish that the contract of retainer between the receiving party and his legal advisers is unenforceable then he can, in turn, take advantage of this by resisting any application against him to pay any costs incurred under such retainer. In this case, the master found that the contract between the claimant and BBK was unenforceable after 2 July 2009 and that the inevitable consequence was that the claim for costs against the defendant was, in itself, rendered unenforceable by the application of the indemnity principle.
  2. The introduction of conditional fee agreements provided fertile soil for challenges brought on behalf of paying parties in support of which it was argued that the relevant agreement did not comply with mandatory statutory and regulatory requirements. Thus a legal adviser’s failure to comply with rules which were intended to protect the interests of litigants began to be deployed by paying parties to avoid liability to pay costs by the operation of the indemnity principle.
  3. The position is clearly and helpfully set out in paragraph 4.2 of Cook on Costs 2015:

“Traditionally the idea that a solicitor would be interested in the outcome of his client’s case (other than professionally) was seen as an undesirable state of affairs. The lawyer should be disinterested in order to give impartial and proper advice. He would therefore need to be paid the same whether the case was won or lost. An agreement which depended upon the outcome of events would run counter to this requirement. Consequently, agreements which did so were considered to be ‘maintaining’ the action and if they included a sharing of the spoils of the litigation they were said to be ‘champertous’. Maintenance and champerty were crimes up to the middle of the last century. Even when abolished as crimes, they remained as torts and still rendered solicitors’ agreements unenforceable…

The Courts and Legal Services Act 1990 (‘CLSA’) created CFAs. The wording of s 58 is not the simplest to understand because it recognises that agreements contingent on the outcome of events are generally unenforceable. So, it carved out an area of contingency fee agreements which would be enforceable, but did not otherwise alter the general position. As Ian Burnett QC [now Burnett LJ] poetically put it in Hollins v Russell [2003] EWCA Civ 718, CFAs are ‘islands of legality in a sea of illegality.’ They have now been joined in this situation by Damages-Based Agreements as of April 2013.

So the Golden Rule to remember in respect of CFAs is that they need to comply with the Courts and Legal Services Act 1990 and any subordinate legislation. If they do not, they become unenforceable contingency fee agreements. They are then unenforceable against the client and, by operation of the indemnity principle, fees generated under such an agreement cannot be recovered from the opponent.

This effect is the root cause of the so-called ‘Costs Wars’ in the early part of this century. Non-compliance was comparatively easy to demonstrate based on the original regulations. Much of those have been swept away but new Regulations and a new CFA Order came into being on 1 April 2013 and there may be more attempts by paying parties to render successful parties’ agreements unenforceable.”

  1. In this case, the basis of challenge lay in the alleged failure of the CCFA to comply with the provisions of section 58 of the Courts and Legal Services Act 1990 which provides in so far as is material:

“(1) A conditional fee agreement which satisfies all of the conditions applicable to it by virtue of this section shall not be unenforceable by reason only of its being a conditional fee agreement; but (subject to subsection (5)) any other conditional fee agreement shall be unenforceable.

(4) The following further conditions are applicable to a conditional fee agreement which provides for a success fee –

it must state the percentage by which the amount of the fees which would be payable if it were not a conditional fee agreement is to be increased; …”

  1. In short, the defendant in this case successfully contended before the Master that the CCFA did not state the percentage uplift after 2 July 2009 and was therefore unenforceable.
THE FACTUAL BACKGROUND
  1. It is now necessary to set out the circumstances of this case in order to understand how an admittedly enforceable CCFA was found to have been rendered unenforceable within four months of the commencement of the retainer of the claimant’s solicitors.
  2. On 18 March 2009, the claimant received a letter from BBK confirming that they would be acting for him under a CCFA with the GMB and enclosing standard information and standard terms.
  3. At the time of this letter, there was in force a CCFA between BBK and the Union dated 17 September 2008. Paragraph 3.2 of this agreement required BBK to prepare and retain a written statement of the success fee as therein defined “when accepting instructions under this agreement in relation to a claim…” BBK thus provided a “Statement of Reasons for Percentage Increase” dated 25 March 2009 setting a success fee of 100% in compliance with paragraph 3.2 and with section 58 of the 1990 Act.
  4. The fly in the ointment for the claimant was the advent of a second CCFA document signed on behalf of BBK and the Union and dated 2 July 2009. It is in identical terms to its predecessor save that paragraph 2.3 thereof extends the categories of litigation which the agreement is expressed to cover. It is not, however, disputed that the claimant’s claim fell within the parameters of both the first and second CCFAs.
  5. By the operation of paragraph 2.3 thereof, the July 2009 agreement applied to “all claims…whether instructions in respect thereof were first received…before, on or after the date of this agreement”. However, on entering into the July 2009 agreement BBK did not prepare a new “Statement of Reasons for Percentage Increase” for the claimant’s case.
  6. The master concluded that, from 2 July 2009, the second CCFA entirely superseded the earlier CCFA. As the July 2009 CCFA was not accompanied by any statement of the percentage by which the fees payable were to be increased in the event of success in respect of the claimant’s claim it was not compliant with section 58(4)(b). Accordingly, he found that the claimant’s solicitors had no enforceable right to costs against the claimant from 2 July 2009 and by the application of the indemnity principle no costs incurred thereafter could be recovered from the defendant either.
THE APPEAL
  1. The claimant contends that the master reached the wrong conclusion, for the following reasons:

i) He was wrong to find that there were two, entirely separate, CCFAs. The CCFA executed in 2009 was simply a variation of its predecessor. Therefore, there did not need to be a further statement of the success fee under that CCFA.ii) Even if this is not correct, and there was a wholly new CCFA from July 2009, then that CCFA did not impact on the claimant’s retainer, because that retainer was created under the 2008 CCFA, and events subsequent to the retainer are irrelevant. The claimant’s retainer subsisted under the 2008 CCFA, in respect of which a written statement of the success fee had been prepared.

iii) Even if this is not correct, and a statement of the success fee was required under a second CCFA, the master should have found that the statement of the success fee prepared on 25 March 2009 was sufficient to satisfy this requirement under the second CCFA as well as the first.

iv) Alternatively, the master should have found that, in the absence of a statement of the success fee under the second CCFA, then the proper analysis was that the claimant’s retainer did not provide for a success fee, and not that it unlawfully stipulated for such a success fee contrary to the requirement of s 58(4) of the CLSA.

THE SCOPE OF THE SECOND CCFA
  1. Despite the fact that both parties concentrated their attention on the first two grounds of appeal, we have reached the conclusion that the issue of central importance arises from the third ground.
  2. The claimant’s skeleton argument deals with the point in three short paragraphs without reference to supporting authority:

“29. The statutory requirement was for the CCFA to state the percentage success fee applicable to the claimant’s case. The CCFA’s mechanism for doing this was to require the solicitor to prepare a written statement of the applicable success fee in every case where the CCFA was utilised: see clause 3.2.

30. In the present case, the solicitors prepared such a statement on 25 March 2009. The exercise was not repeated when the CCFA was reproduced the following July. The solicitors simply continued with the case, without interruption.

31. The claimant contends that, in these circumstances, the existing statement of the success fee was adopted under the post-July 2009 retainer. The solicitors discharged their obligation under clause 3.2 of the CCFA via the statement they had already prepared. That remained the success fee for which they had provided in writing, and which applied to the claimant’s retainer. That retainer therefore satisfied s 58(4) of the CLSA.”

  1. The defendant rejected this contention asserting that there was no factual or legal basis for it.
RETROSPECTIVITY
  1. Paragraph 2.3 of the second CCFA provides, in so far as is material:

“This agreement applies to all claims for personal injuries… conducted by the Solicitors for members of the Union including clinical negligence claims…whether instructions in respect thereof were first received before, on or after the date of this agreement…”

  1. Giving these words their ordinary and natural meaning, it is clear that the second CCFA applies retrospectively to past instructions.
  2. Paragraph 3.1 provides, in so far as is material:

“When accepting instructions under this agreement in relation to a claim Solicitors must inform the member as to the circumstances in which the member may be liable to pay the Solicitor’s charges…”

  1. This paragraph does not require solicitors who have already received instructions prior to the date of the second CCFA and have complied with its requirements to repeat the provision of information already provided. The second CCFA applies retrospectively. It is thus capable of being complied with retrospectively. To hold otherwise would not only produce an absurd result but would run contrary to a straightforward interpretation of the terms of the agreement. By the operation of paragraph 2.3, the acceptance of instructions falls within the second agreement notwithstanding the fact that such instructions were provided before that agreement was entered into.
  2. Precisely the same analysis applies to the terms of paragraph 3.2:

“When accepting instructions under this agreement in relation to a claim…the Solicitors must prepare and retain a written a written-statement (sic.) (” the written statement of the success fee”)…”

  1. Paragraph 3.3 provides:

“The Solicitors shall comply with their obligations under Clauses 3.1 and 3.2 by sending to the member a copy of the “Conditions of GMB Southern Region Legal Aid” worded as set out in the document annexed to this agreement or as may be subsequently agreed by the parties to this agreement.”

  1. I conclude that the retrospective nature of the agreement takes effect to the extent that where such conditions had already been sent prior to the date of the second agreement coming into force there was no contractual obligation to send them again after this later agreement had been concluded. In our view, the use of the word “shall” in this context is as an expression of obligation and not futurity.
  2. As Megaw J. held in Trollope and Colls Ltd v Atomic Power Constructions Ltd [1963] 1 W.L.R. 333 at 339:

“But, so far as I am aware, there is no principle of English Law which provides that a contract cannot in any circumstances have retrospective effect, or that, if it purports to have, in fact, retrospective effect, it is in law a nullity …. Often, as I say, the ultimate contract expressly so provides. I can see no reason why, if the parties so intend and agree, such a stipulation should be denied legal effect.”

  1. In Northern and Shell Plc v John Laing Construction Ltd [2002] EWHC 2258 (TCC) His Honour Judge Thornton QC sitting as a High Court Judge held following a review of the authorities including Trollope and Colls:

“40. From these authorities, I therefore draw the following conclusions:

1. A contract…can take effect retrospectively…

2. Retrospective effect occurs where this is intended by the parties. That intention can be found if provided for in the words of the contract or deed or by way of necessary implication divined from the surrounding circumstances and from business efficacy…

5. The parties’ intention that a contract or deed is to have retrospective effect is more readily to be seen where the parties had a prior contractual relationship preceding the contract.. in question but it is still possible for such retrospective effect to occur where no such prior contractual relationship was in existence where such is provided for by the clear words of the contract or deed.

6. The retrospectivity principle is excluded where, exceptionally, the law or a relevant statutory provision precludes a contract or deed from having retrospective effect. An example of that prohibition is the technical rule governing estates held in land that any term being created cannot start to run from a date prior to the date of the lease.”

  1. The Court of Appeal at [2003] EWCA Civ 1035 upheld the decision of the court below and cited Trollope and Colls with approval.
  2. Further, in Forde v Birmingham City Council [2009] 1 WLR 2732 Christopher Clarke J (as he then was) held that section 58 of the 1990 Act made no provision prohibiting retrospective conditional fee arrangements and such a prohibition should not be implied.
  3. I conclude that on a straightforward interpretation of the terms of the second agreement it applied retrospectively to bring within its scope all pre-existing written statements of success fees and was thus compliant with the requirements of section 58 of the Courts and Legal Services Act 1990.
THE REMAINING ISSUES
  1. The claimant’s success on his third ground of appeal renders it unnecessary for us to embark on a detailed consideration of the remaining grounds. However, for the sake of completeness I would record that I agree with Master Gordon-Saker that the second agreement was a novation and not a mere variation of its predecessor. It was a complete and self contained document that was expressed to apply to all existing retainers. The strongest argument against this conclusion was based upon the assumption that if it were a novation then the consequences would have not made commercial sense. However, once it is recognised that the second agreement was of retrospective effect then there is no need to take an artificial approach to the issue of novation in order to avoid what might otherwise have given rise to an absurd result.
  2. I also find myself in agreement with the master on the second ground and would hold the claimant was bound by the terms of the second agreement on the basis that the Union was at all times continuing to act as his agent and was doing so when entering into the second CCFA.
  3. Finally, I find that the fourth ground of appeal is without merit. If the claimant’s contention had been correct then any CFA which failed to state a percentage fee would not be rendered unenforceable because it could merely be interpreted as not providing for any success fee at all. This would render section 58(4)(b) of the 1990 Act otiose and undermine the protection which Parliament intended thereby to afford to claimants.
CONCUSION
  1. I conclude, therefore, that the claimant’s contentions under his third ground are made out and that his appeal succeeds on this ground alone. The assessment of costs must now proceed on the basis that the second CCFA was enforceable as between the claimant and his solicitors and that, in consequence, the indemnity principle does not avail the defendant.

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