In Stevensdrake -v- Hunt  EWHC 342 (Ch) His Honour Judge Simon Barker QC (sitting as a judge of the High Court) decided that, despite the clear wording of a conditional fee agreement, the defendant was not personally liable to pay costs to a solicitor. The agreement, in reality, was that the solicitor would only be paid if there was a recovery.
(The judgment is worth reading in full because it highlights the somewhat opaque way in which litigation is funded in insolvency litigation: with the essential elements of many funding agreements being “hidden” and done on a (secret) quid pro quo basis . This may be the best (perhaps the only) way practical means of pursuing this type of action. However it would be in the public interest (and certainly in the interest of creditors in some cases) for this to be done more openly and with greater transparency. The end of the LASPO exemption later this year may well make this a much more difficult area to work in.)
“This has been a trial in which an elephant has been lurking in, or at least peering through the glass panelled doors into, the courtroom. The issues as presented and decided have not called for consideration of or a decision upon whether the arrangements that SH insists upon in few or nil asset estate cases offend the indemnity principle, the essence of which is that if a solicitor expressly or impliedly agrees that the firm will not in any circumstances charge the client no costs are recoverable from the other party (Cook on Costs 2015 [12.3]). There is a public interest in there being a practical means by which insolvency practitioners are able to obtain the assistance of lawyers to advise and represent them in the pursuit of misfeasant and dishonest officers and former office holders in nil asset estate cases where no creditor is willing to provide an indemnity, and it is the case that litigation funding is evolving, but at present the indemnity principle remains the law.”
“…the exclusion of personal liability for SL’s fees on the part of SH and agreement that payment should be conditional or contingent on and limited to recoveries cannot be found in and runs contrary to the CFA but it was a stipulation communicated to and accepted by SL and is fundamental to the scope and the meaning of SL’s retainer and, therefore, a necessary and implicit term of their agreement and it overrides or negates any contrary term in the CFA.”
The claimant solicitors were claiming £938.838 in costs from the defendant who was liquidator of a company.
- The solicitors acting for the liquidator in actions which led to settlement of £125,000 and £1.9 million. However the £1.9 million remian unpaid.
- The solicitors had acted under a CFA. They claimed the costs from the insolvency practitioner.
- It was common ground that the actions had ended in “success” as defined by the CFA.
THE GROUNDS OF THE DEFENCE
At the core of SH’s denial of liability for any part of SL’s bill (other than disbursements excluding counsel) are contentions that (1) there is a recognised and established practice in the field of insolvency litigation against estates where there are few or no assets of value that (a) to secure instructions solicitors and counsel offer to provide their legal services on terms that they will become entitled to payment only out of recoveries made in the litigation, (b) to the extent that there are insufficient recoveries, the entitlement to payment would abate pro rata, (c) nevertheless, and so as not to breach the indemnity principle, the strict legal rights created by the conditional fee arrangements stipulate that success in the litigation triggers a liability to pay the fees, and (d) it is known and understood that the parties will not enforce their strict legal rights but operate Recoveries Only Liability (“the Practice”); and, (2) the Practice was (a) an established method of working between SH and GP and (b) expressly adopted in relation to the Sunbow liquidation and the s.212 claims against TP and AS.
DEVELOPMENTS PRIOR TO THE TRIAL
- A Master had already given the claimant summary judgment for sums due to counsel’s fees.
- Certain arguments in relation to part-distribution; breach of fiduciary duty and undue influence were also struck out.
- HHJ Purle QC referred to the different descriptions of SH as defendant as being of no consequence :
” … Describing [SH] as “liquidator of Sunbow limited” does not turn him into a different person, or affect his liability, and it certainly would not be right to equate him with [Sunbow] just because he is liquidator. Sunbow is not a party”.
THE ARGUMENTS AT TRIAL
The fundamental issue was whether there was a contractual agreement that the solicitor would work on a “recoveries” basis. That is, despite the CFA giving a contractual entitlement to full recovery, the solicitor would accept costs on a pro rata basis based on what was recovered (which could possibly be nothing).
REJECTION OF THE “COMMON PRACTICE” ARGUMENT
Somewhat surprisingly the defendant called witnesses who were (in anything but name) “expert witnesses”. There was no permission to call expert evidence in the case There was an attempt to dress this up as “relevant similar fact evidence”, however they served no useful purpose.
SH adduced evidence from five other witnesses with experience in insolvency : Kevin Goldfarb, a chartered accountant and licensed insolvency practitioner and a partner of SH in Griffins, Ian Defty, an FCCA and an ACA and a licensed insolvency practitioner, Christopher Potts, a solicitor specialising in commercial litigation with experience of insolvency through MTIC fraud cases in particular, Nicholas Oliver, a solicitor in charge of his firm’s insolvency and business turnaround team, and Frances Coulson, a solicitor and head of her firm’s insolvency and litigation department and an R3 council member.
Mr Sims QC explained that the purpose of calling these additional witnesses was to adduce relevant similar fact evidence to corroborate the existence and terms of the Practice and also to confirm that the Practice, or recoveries only liability for lawyers’ charges, is not unusual in nil asset estate cases.
Speaking of their own approaches to nil asset estate cases, there was no common thread as to the use of insurance to cover fees; there was a general recognition that it was undesirable to leave an insolvency practitioner exposed to lawyers’ charges where recoveries had not been achieved or fell short of the professionals’ charges; but, there was no common view as to how that problem should be, or was, resolved.
There is no direction for expert evidence in this case. As Mr Sutcliffe QC submitted in his closing submissions, and for the reasons he stated, this evidence adduced by SH did not result in corroboration of the Practice as advanced by SH. There was a general recognition that insolvency practitioners would generally be unwilling to expose themselves to liability for lawyers’ charges in nil asset matters, but no common ground on how this would be achieved ~ whether by contractual agreement, voluntary act, or mutual understanding.
I confess to being left none the wiser in regard to the determination of the issues between SL and SH by this evidence, which occupied at least a half-day of trial time, and continue with the view that everything depends on the particular facts of the case. That is not an adverse reflection of these witnesses, rather it is an observation aimed at the decision to adduce such evidence.
THE FINDINGS ON THE FACT OF THE CASE: DESPITE THE WORDING OF THE CFA THERE WAS A CLEAR AGREEMENT THAT PAYMENT WAS CONTINGENT ON RECOVERY
It is important to note that the judge made a finding based on the facts of that case. The CFA had to be judged alongside contemporary documentation. Correspondence between the parties clearly showed that the solicitor had agreed that the defendant had no personal liability for the solicitor’s fees.
In my judgment the answer to the first issue is that the full terms of the agreement between SH and SL operative from 10.4.08 cannot be ascertained from the CFA alone and that the full terms incorporate a term that SL’s fees would only be paid out of realisations and that SH has no personal liability for those fees. In other words, the 27.4.06 letter from SH and its acceptance by GP had the effect of importing into any agreement for SL to undertake work in relation to the Sunbow liquidation that recovery of assets into the estate was a precondition to SL rendering an invoice to SH for work done by SL. Put more simply, every retainer of SL by SH in relation to any and all aspects of the Sunbow liquidation was to be on the recoveries basis. As to whether incorporation of such a term is a matter of construction or implication, and having regard to the Supreme Court’s decision in Marks and Spencer and, in particular, the speech of Lord Neuberger at -, the exclusion of personal liability for SL’s fees on the part of SH and agreement that payment should be conditional or contingent on and limited to recoveries cannot be found in and runs contrary to the CFA but it was a stipulation communicated to and accepted by SL and is fundamental to the scope and the meaning of SL’s retainer and, therefore, a necessary and implicit term of their agreement and it overrides or negates any contrary term in the CFA. I recognise that this conclusion may, at least superficially, seem at odds with the principles governing construction of and implication of terms into a contract but the volume, quality and sheer weight of the contemporaneous evidence does not admit of any other conclusion.
OTHER IMPORTANT POINTS
Several other important findings were made (although they were obiter).
1. THE JUDGE DID FIND THAT, REGARDLESS OF ANY STRICT LEGAL RIGHTS, THE PARTIES IN THIS CASE WORKED ON A CONVENTION AGREED BETWEEN THEM
“…As I see it, the CFA cannot be severed from SH’s letter of 27.4.06 and GP’s e-mail of 26.5.06, which contain a clear expression by each party of a shared common understanding that SL’s fees would be paid from recoveries and SH would not be personally liable for any shortfall. This shared understanding is not the Practice as defined by SH and on that point SH’s pleading fails, but it would be unrealistic to reject the estoppel by convention point on that ground. GP’s November 2005 e-mail and the numerous communications, written and verbal, referred to above in the section on Background / the facts provide a more than sufficient platform on which to found a submission of a common understanding from which it would be unconscionable to permit SL to withdraw or resile.
Put at its lowest, SH communicated a requirement as to conduct to GP, for SL, which GP not only acquiesced in but also expressly confirmed back to SH and acted upon; that gave rise to an inferred or assumed state of affairs in relation to SL’s charges which affected the way in which the parties conducted themselves in their dealings with each other and from which it would therefore be unjust to allow SL to depart. This more than satisfies the statement of the doctrine made by Lord Steyn in Republic of India v India Steamship Co Ltd  AC 878, p.913E-F and more recently by the Court of Appeal in Christopher Charles Dixon EFI (Loughton) limited v Blindley Heath Investments Limited and others  EWCA Civ 1023-.
2. THE JUDGE ACCEPTED SOME OF THE DEFENDANT’S ARGUMENTS IN RELATION TO UNDUE INFLUENCE
Although not at first attracted to SH’s revised case on this issue, on reflection I accept Mr Sims QC’s submissions. If the CFA was to mark a new beginning on wholly different terms which exposed SH to primary and direct liability for SL’s charges irrespective of recoveries, the disadvantage of such an arrangement to SH would be so significant that SL, through GP, as SH’s solicitor and the beneficiary of this new arrangement could not, in good conscience, do other than expressly draw this new circumstance to SH’s attention. This is a fortiori where SH has already made clear that any such condition would have a terminal effect on the retainer.
3. THE JUDGE ACCEPTED SOME OF THE DEFENDANT’S ARGUMENTS IN RELATION TO BREACH OF FIDUCIARY DUTY
As to breach of fiduciary duty, the disloyalty alleged is non-disclosure of a material change of circumstances to SH’s direct financial detriment and to SL’s direct financial advantage. In my judgment, SH was entitled to trust and rely on GP to disclose, by taking positive steps to draw attention to, any such change in the commercial relationship not merely as a matter of fair dealing at arm’s length but also as an aspect of the solicitor client relationship. That did not occur.
The judge found that the defendant was liable to counsel’s fees; disbursements but not for the claimant’s own charges (base fees and uplift).
“Drawing the strands of the judgments in this litigation together (1) following the decision of HHJ Purle QC SH is liable to SL for the fees of counsel instructed in connection with the Sunbow litigation; (2) SH is also liable to SL for all other disbursements or out of pocket expenses incurred or borne by SL in connection with the Sunbow liquidation; but, (3) SH is not liable to SL for SL’s own charges (basic costs and uplift). SH is also liable to SL for interest on unpaid or late payment of disbursements pursuant to contract or as a matter of general law.”
The earlier appeal in this case can be found at  EWHC 1527 (Ch)