SUCCESS FEES : DEFECTIVE NOTICE OF FUNDING AND RELIEF FROM SANCTIONS: A WHOLE BUNDLE OF ISSUES
The decision of Mr Justice Edis in O’Brien -v- Shorrock & the MIB  EWHC 1630 (QB) deals with a number of important issues in relation to costs, notice of funding, the backdating of conditional fee agreements and relief from sanctions.
THE ISSUES ON APPEAL
The MIB appealed on several issues following a detailed assessment.
- Whether the CFA could be construed as covering an action under the MIB Untraced Driver’s Agreement.
- The success fee was assessed at 75%. The MIB contended it should be 5% or alternatively 67%.
- An issue relating to the “backdating” of a CFA. It was contended the notice of funding contained an incorrect date and, in the absence of an application for relief from sanctions, no success fee should be allowed at all.
1. The CFA in question covered this civil action against the MIB and not a claim under the Untraced Driver scheme.
2. The District Judge had erred in assessing the success fee at 75% in a case where the claimant’s solicitors own calculation of the risk led to a success fee of 67%. The success fee was reduced to 67%.
3. The Notice of Funding was defective in that it did not give the date on which the CFA was signed. The CFA had been signed on the 21st October 2009 and backdated to the 6th November 2008. The Notice of Funding was defective when it gave the date of the CFA as 6th November 2008. The defendant should have been given notice that the CFA was backdated.
4. The claimant required relief from sanctions. Relief was granted. However this was on terms that the success fee was reduced to 20% for the period between November 2008 to October 2009. The costs after 21st October 2009 were 67%.
5. The defendant recovered 70% of the costs of the appeal, having lost on a point in relation to the construction of the conditional fee agreement.
THE BACKDATED CFA
The claimant’s litigation friend entered into a a CFA on the 21st October 2009. This was stated to take effect from the 6th November 2008 when the solicitors were first instructed. It allowed a 100% success fee.
After a trial in relation to the identify of the driver the action was settled by payment of a lump sum of £1.8 million and periodical payments of £140,000 (index linked). The MIB were to pay the claimant’s costs.
THE SUCCESS FEE
The judge considered arguments in relation to the success feel.
- The MIB submits that the claim was always bound to succeed under either the Untraced Drivers Agreement or the Uninsured Drivers Agreement and that only a small proportion of the costs related to the issue which determined which agreement applied, namely the issue as to the identity of the driver. Therefore, the success fee should have reflected the certainty of the “win” and should not have been more than 5%.
- The first question which the Judge decided was whether the claimant’s solicitors were entitled to a success fee at all. The Judge held that the CFA was intended to cover only the claim under the Uninsured Drivers Agreement. He reached this conclusion on the basis of evidence extrinsic to the CFA itself and does not address the arguments about the construction of the CFA’s terms which had been advanced by the parties, apart from summarising what they had been. In fairness to him, the Judge gave an extempore judgment on a complex issue, perhaps realising that it was unlikely that the argument would stop with him, however elegantly he expressed himself. The nature of detailed assessment proceedings requires a number of decisions to be taken during the hearing and it is easy to pick apart the reasoning at leisure on appeal. If costs judges reserved every decision they had to take detailed assessments would never end. I therefore propose to try and identify the thrust of the reasoning at each stage and to consider its sufficiency without demanding an unrealistically high standard of drafting.
- Having said that, I conclude that the basis of his conclusion on this issue is not entirely clear. He said
“Much is made by the defendant, quite properly, of the leading authority of C v W and it seems to me that is a proposition for stating that in assessing what a reasonable success fee is the court can only look at the risk to which the receiving party’s solicitors were contractually exposed. I am satisfied that they were contractually exposed as if this matter were a no win/no fee agreement and that this is a case where, had they been unsuccessful, there was no intention to go pursuing any other means and that the whole tenor of the CFA agreement was addressing the uninsured claim not the untraced scheme and consequently the claimant’s solicitors entered into this matter on the basis of the definition of “win” was not met. In such circumstances, they are entitled to a success fee.”
- Earlier in his judgment, the Judge had summarised the submission made to him by Mr. Marven which was that a win was guaranteed because even if the claim in court failed on the ground that it was not possible to identify Mr. Shorrock as the negligent driver, the claimant would recover under the Untraced Drivers Scheme which calculates the sum payable in the same way as does the court in a damages action. There had been an offer to pay full compensation under that scheme in 2005 and it was therefore inevitable that the claimant would recover. On its true construction, the CFA covered both types of proceeding and therefore the success fee calculated on the basis that there was any substantial risk of non-recovery was wrong in principle.
- In his Skeleton Argument which was before the Judge, Mr. Marven submitted that the claimant’s solicitors were not contractually exposed to any risk of non-payment at all. This was because they would be paid if the claim against Mr. Shorrock succeeded under the Uninsured Drivers Agreement under the CFA by the MIB. The Untraced Driver’s Scheme is not a cost-bearing scheme except to a very limited extent, but if success were achieved under that agreement it would still count as a “win” under the CFA. This would mean that these costs, including the success fee, could not be recovered from the MIB because on this hypothesis his civil action for damages would have failed at the preliminary issue stage and been dismissed. However, the claimant would be liable to pay them out of his Untraced Drivers Agreement award under the CFA. Contrary to what the Judge was to find, there was always an intention to pursue such a claim if the action for damages against Mr. Shorrock failed. The solicitors were therefore not at risk, although the claimant was. Mr. Marven suggested that the offer of a success fee of 5% was therefore generous: he did not withdraw it.
- It is clear from his reasons quoted above that the Judge decided that the CFA concerned the claim against Mr. Shorrock which, if successful, engaged the Uninsured Drivers Agreement. He said that was its “whole tenor”. However. the issue which the Judge decided was not actually an issue. The MIB was not submitting that there should be no success fee, but that it should be 5% for the reasons which appear above. He decided to award a success fee but did not consider whether it should be 5% because of the low level of risk, or alternatively the unreasonable way in which the funding of this action had been approached. He decided instead that a success fee was payable because “consequently the claimant’s solicitors entered into this matter on the basis of the definition of “win” was not met”. I think that this probably means that a recovery under the Untraced Drivers Agreement would not be a “win” as defined. I am afraid that I am not absolutely clear that the Judge dealt with the submission which was made to him and, in these circumstances, it is necessary for me to do so.
The fee issue: stage 1: decision
- My conclusion is that this CFA was entered into to cover the damages action against Mr. Shorrock and the MIB and not a claim for a payment from the MIB under the Untraced Drivers Agreement. This conclusion is based on a construction of the CFA, and partly on extrinsic matters. I think that the Judge came to the same conclusion, and I think he was right.
- The CFA defines what it covers as a “claim against Michael Shorrock and the Motor Insurers Bureau for damages for personal injury for John O’Brien suffered on 10th July 2002″ and other matters related to that claim. It includes provision for the making of Part 36 offers, which can only be made in claims to which the Civil Procedure Rules apply. In those provisions the CFA refers on several occasions to the level of the “damages” which may be awarded in the claim. There are references to interim damages and provisional damages which are familiar aspects of the powers of the civil courts in personal injury claims. The CFA when supplied to the claimant was accompanied by an explanatory document which has a definition section. The claim is defined as a “Your demand for damages for personal injury whether or not court proceedings are issued.” Damages are defined as “Money that you win whether by a court decision or settlement.”
- A payment under the Untraced Drivers Agreement is not the payment of a claim for damages. It is the payment a sum of money which is awarded under the scheme. It is not “won” from the MIB, but determined and awarded by that body. It requires proof that the death or injury which is the subject of the claim was caused in such circumstances that on the balance of probabilities the untraced person would be liable to pay damages to the applicant in respect of the death or injury. That sum is to be calculated in the same way as a court applying the relevant law would assess the damages if a successful claim for damages had been made against the untraced person. The claim is to the MIB, which will decide the outcome. There is a right of appeal to an arbitrator and the ability to recover costs is very limited. It is, therefore, a conceptually different kind of “claim” from a damages action against Mr. Shorrock in which the MIB is entitled to participate because it has a contingent liability under the Uninsured Drivers Agreement to pay the sum awarded in damages against Mr. Shorrock if he cannot do so. The CFA only refers to covering one claim, in the singular, and it is that against Mr. Shorrock and the MIB for damages. For this simple reason in my judgment it relates to those proceedings only.
- To find otherwise would mean that the claimant might have been liable to pay all his costs of the claim against Mr. Shorrock, should it have failed, including a success fee. Further, he would then also be liable to pay all the irrecoverable costs incurred on his behalf in quantifying his claim after the date of the CFA, including a success fee. There would have been other ways of funding such a claim, such as a contingency fee which would require him to pay a share of the sum of money recovered from the MIB under the Untraced Drivers Agreement or even an old fashioned agreement whereby he agreed to pay the costs in any event knowing that he would be receiving substantial damages from which he could do so. Were he to enter into arrangements of that kind, it would be expected that his litigation friend and, one would expect, his solicitors, would be astute throughout to ensure that costs were strictly controlled because they were going to be paid from the sum which had been judged necessary to be sufficient for his compensation. It would be highly unlikely that he would agree to pay success fees to the lawyers of 100% on that assumption. Any lawyer who permitted a person in the position of this claimant to enter into such a potentially disastrous agreement would be exposed at least to the risk of a professional complaint. There would certainly be a duty to the claimant to explain to his litigation friend exactly what this agreement meant if it were to have any prospect of being enforceable against him in that sense. I have examined the letters which the solicitors wrote and the attendance notes which have been shown to me and there is no such warning. This can only be because it never entered the contemplation of the solicitors that circumstances might arise whereby they would seek to recover their costs of the failed action and of the application under the Untraced Drivers Agreement from the claimant’s damages by applying the CFA to both claims. It appears to me that this context is relevant in deciding what the true construction of the agreement was. This does not breach the rule against admitting the previous negotiations of the parties and their declarations of subjective intent, see Lord Hoffmann’s third proposition in ICS v West Bromwich Building Society  1 WLR, 896, 913B. It is rather artificial to regard the declarations by the solicitors to their client as either negotiations or declarations of subjective intent. This was not in any real sense an arms length negotiation. The solicitors owed a duty of care to their client to give proper advice to their client in relation to the benefits and drawbacks of the CFA which they were offering to his litigation friend. What they said about it is something which would affect the way its language would have been understood by a reasonable man receiving that legal advice, see Lord Hoffmann’s second proposition. It appears to me that the admissible context includes the fact that a solicitor was advising the victim of a very serious road traffic accident through his litigation friend about an issue which was central to his whole future. In this situation there is no obstacle to giving the words in the agreement their natural and ordinary meaning which is that they applied to a single proposed claim to be brought in a court for damages against Mr. Shorrock, which, if successful, would result in an award against him for damages for personal injury which would be satisfied by the MIB under the Uninsured Drivers Agreement. Those words are not, in my judgment, apt to include an application to the MIB for an award of money under a scheme which is not adversarial and lacks many of the features of a court action which are referred to in the CFA. I should not be understood to be expressing any reservations about the utility of the Untraced Drivers Agreement. Whether it is, or is not fit for purpose is beside the point which I have to address. It is enough for me to say that it is not the same as a damages action and could not be covered by a CFA of the kind I am dealing with without specific words to bring that result about.
- In the alternative, Mr. Marven argues for a 5% success fee on the basis that it was not reasonable to proceed in the way which the construction of the CFA which I have upheld involves. This is because the costs relating to quantum were equally valuable to the claimant whichever agreement the claim was pursued under, and he was bound to recover damages in full one way or the other. The choice of the Uninsured Drivers Agreement therefore imposed substantially increased costs on the MIB without any benefit to the claimant.
- The only way in which the claimant could recover the very large costs necessary to prove his claim as to quantum was to succeed in his court proceedings. Otherwise, the money would be usefully spent but not recoverable from the MIB because of the cost regime in Untraced Drivers claims. It seems to me that it was entirely reasonable to choose a means of proceeding which left his damages free for the purposes for which they were intended, rather than being used in part to fund the cost of obtaining them. I therefore reject Mr. Marven’s alternative submission on this point.
- If the claim had failed at the preliminary issue, it seems to me that the solicitors would not have been able to recover the costs covered by the CFA from anyone. Effectively they would have funded that part of the preparation of the Untraced Drivers application which occurred during the currency of the CFA. Having taken that risk, it was not unreasonable to conduct this case as a normal trial in which liability was disputed and dealt with by a preliminary issue. A consequence of the way in which this case was dealt with was that quantum costs were incurred between November 2008 and June 2011 where there was a risk of non-recovery. It is true that there was little or no risk of non-recovery of the quantum costs between June 2011 and June 2012 because, if the claimant had failed at the preliminary issue, such costs would not have been incurred under the CFA which would have come to an end. If work had continued at all it would have been funded in some different way, less advantageous to the claimant. If, as happened, the claimant succeeded on the preliminary issue the costs would be recovered under the CFA and the main risk to recovery would arise only if a Part 36 offer were made and not beaten. I accept that this is a factor which is relevant to the assessment of the success fee, but not that it is capable of reducing it to 5%. I shall therefore have regard to it when dealing with Part 2 of the fee issue.
The fee issue Part 2: if not 5% then 67%?
- The Judge accepted a submission on behalf of the MIB that the success fee of 100% which appears in the CFA was too high, even though the case had gone to trial. He allowed 75% instead. However, he did not accept (or specifically rule on) a submission which had been made orally and in writing that the success fee should not exceed 67%. The submission was made on the basis of the risk assessment completed by the claimant’s solicitors in September 2009. The solicitors operate by means of a “Board” which assesses cases internally and decides which ones to undertake on a CFA and at what level of success fee. The risk assessment identified 5 particular risk factors which had been identified by the Board as follows:-
“A. Lot of contemporaneous evidence lost due to passage of time.”
B. Recollection of witnesses faded due to passage of time.
C. Therefore difficulties in establishing identity of driver who is also uninsured so complexities of MIB uninsured scheme will apply.
D. What evidence there is re ID of driver described as “circumstantial” by police therefore there may be difficulties establishing ID even on balance of probabilities
E. Usual quantum risks – very high value case. MIB likely to resist transfer to uninsured scheme.”
- The Board assessed the prospects of success at 60% and proposed a success fee of 100%. Under the ready reckoner which was used by the profession quite commonly for assessing a success fee on the basis of a percentage estimate of chances of success this figure should have been 67%. That is because a 100% success fee is justified by a riskier case where the prospects are only 50%. The concept is simple: if the prospects are 50%, half the cases will fail and it will be necessary to recover twice the base costs on those that win to fund those that do not. As the prospects rise, so the uplift needed to fund the failures falls because there are fewer of them.
- A complicating feature of this assessment may be the practice which developed by negotiation between the profession and insurers whereby a sliding scale of staged success fees was adopted which would apply to all cases within a particular category. This did not apply to this case because the accident was too long ago. Under the protocol agreed for road traffic claims, the success fee would have been 12.5% if the case concluded before trial, and 100% if it concluded at trial. The quid pro quo for the very high fee for all cases which went to trial was the much reduced fee for the much large number of cases which did not. This approach no doubt accustomed the profession to seeking 100% uplift in any case which went to trial. If that is so, it led to error, see Atack v. Lee  1 WLR 2643 at paragraph 12. That error appears to have featured in some of the submissions made on behalf of the claimant before the Judge and, perhaps, in his decision.
- In this case the CFA said this about the success fee:-
“The success fee is set at 100% of basic charges where the claim concludes at trial; or 100% where the claim concludes before a trial has commenced.”
- This was a single stage CFA with a success fee fixed at 100% whenever the case concluded, that is whether it went to trial or not. Any other construction of the language would be, as Mr. Marven submitted, “sophistry”. It was also a CFA which was to cover an action in which a large quantity of quantum costs would not be incurred under the CFA if the case failed on liability at a preliminary hearing. They would be incurred after the end of the CFA and on some other funding basis. This procedure was firmly in the mind of the solicitors before the CFA was executed because in their letter of advice about it to the litigation friend, dated 14th September 2009, they said “In general I would hope to complete a claim the preliminary stage [sic], which is determining whether we can obtain judgment against Michael Shorrock in 12-18 months.” This language is not entirely clear but can only sensibly mean that they expected a trial of the preliminary issue which would determine liability within that time scale. Therefore the exposure of the solicitors under this contract was never to the full costs of a failed action including liability and quantum. This is true of many split trials and is not a reason for refusing a success fee on the costs incurred after the risk has been eliminated by the success on liability. Nor is it any justification for reducing the success fee in respect of the costs after the event so as to create a staged success fee with the benefit of hindsight. However, it is capable of being relevant to assessing the reasonableness of the overall, single stage success fee which the solicitors chose to insert into the CFA. That is because it was predictable at the date of the CFA that this risk could be managed, and it would be reasonable to reflect that in a success fee. The obligations imposed on the solicitors by the CFA are a critical factor in assessing the reasonableness of a success fee, see C v. W  EWCA Civ 1459. In this case, in respect of a significant proportion of the costs which would be incurred after the liability trial had resulted in a judgment the risk was much lower than it was in respect of the costs before that date. It was not absent entirely but principally involved the risks created by a potential Part 36 offer (the CFA was more generous to the solicitors in the present case than it was in C v W because it provided that they could recover base costs without success fee if he rejected a Part 36 offer on their advice, but failed to beat it).
- When the Judge came to deal with this issue, the proper level of the success fee having rejected the MIB’s principal case, he said this:-
“This is not a staged success fee and indeed the wording is clear, the success fee is set at 100% of basic charges where the claim concludes at trial.
“This claim did not conclude at trial but it is not sufficient to stop there because that does not per se mean that a 100% success fee is the correct level of success fee. It would be completely contrary to public policy that if every time that that was inserted that were to be the proper interpretation. I have glanced, and I put it no more than that, at the witness statements which clearly were available, but what I have given more consideration to are the prospects of success set out in the risk assessment. I think that Potter Rees were to a certain extent brave in taking the uninsured route but it says unequivocally therein that the prospects of success were set out at that time at 60% and even though this matter goes to trial, I am not satisfied that they have increased to such a level, despite the wording of the CFA, that the recoverable item should be at 100%.
“It is a matter of discretion rather than technical analysis that the court is entitled to use and in this particular matter I am going to set the success fee, bearing in mind that the matter went to trial, but not at 100%. I intend to allow a success fee of 75%.”
- It is common ground that when assessing a success fee the court considers the position as it appeared to the solicitor at the time when the CFA was executed, see, if necessary, U v. Liverpool City Council  1 WLR 2657, at paragraph 20. Hindsight is impermissible. A staged success fee agreed at the date of the CFA does not offend against this principle, but it appears to me that the approach taken by the Judge does. He decided that he could not allow a success fee of 100% even though the case went to trial because the risks had not increased after the CFA to such a level. He therefore refused to allow 100%. Presumably, therefore, if he had found that the risk of failure had increased since the risk assessment to 50% he would have allowed the 100% fee claimed. This becomes clear in the final paragraph quoted above. He sets the success fee at 75% “bearing in mind that the matter went to trial”. What he should have done was to assess the fee as at October 2009 before the proceedings had been issued. The risk assessment clearly worked on the basis that the MIB were likely to contest the identification issue, and still assessed the risk of failure as 60%. To allow a higher fee than would be justified by the arithmetical method I have explained above because the matter went to trial (which is the only reason given for choosing 75%) is in my judgment to commit the error of hindsight.
- The arithmetical method of conversion of risk assessment to success fee was applied by the Court of Appeal in C v. W cited above at paragraph 24. Moore-Bick LJ assessed risk himself, applied the ready reckoner and produced a success fee. All the “discretionary” features of the exercise are taken into account in the assessment of the percentage prospects of success. In undertaking this exercise the profession had to balance competing considerations. The ATE insurers wanted the prospects to be good and loaded the premium or refused cover if they were not. The solicitors wanted the prospects to be bad because that would justify a higher success fee if the case succeeded. With these considerations pulling in opposite directions there was some incentive to assess the prospects as accurately as possible. Having done that, there is little room for further adjustment at the conversion stage which is, and rationally should be, a matter of arithmetic. I will mention one other case on this issue. In U v. Liverpool City Council, cited above, at paragraph 25 the Court of Appeal justified a success fee at 50% on the basis that arithmetically it amounted to odds of 2:1 which accorded broadly with some empirical evidence. In that case the court also said this at paragraph 22:-
“Alternatively, he could have selected, as he did in fact, a single-stage success fee, being a fee which he would seek to recover at the same level however quickly or slowly the claim was resolved. In those circumstances it would not be possible to justify so high a success fee.”
- This seems to me to show that two factors are in play to which the Judge gave no weight. First, if the risk assessment is adequate it is a matter or arithmetic to convert it into a success fee. The Judge did not doubt the accuracy of the risk assessment at 60%. Indeed, he could not do so having only glanced at the witness statements and based himself largely upon the risk assessment. There is nothing wrong with his decision not to conduct a thorough re-assessment of the risks by reference to the original evidence. This would be practically impossible in many cases. Where, however the court has not done this it is difficult to discern a proper basis for departing from the assessment conducted by the solicitors at the time. Secondly, where a single stage success fee is used it will be difficult to justify a high level.
- For these reasons I consider that there was no proper basis for the Judge to refuse to apply arithmetically the consequence of the risk assessment of the solicitors, and that he should therefore have allowed a success fee of 67%. The fact that this was a single stage success fee, and that a proportion of the costs were not going to be incurred but unrecovered because of the early stage at which liability was to be decided were factors militating in favour of reducing the success fee below the arithmetical result of the risk assessment, and there was no countervailing factor which required an increase. In the result I have decided to exercise my own discretion and to fix the success fee at 67%. This is a relatively minor adjustment to the result, but it does not result from a different impression being formed from the same factors. It results from giving effect to the factors I have identified which the Judge did not take into account.
- The CFA was made on the 21st October 2009. The Notice of Funding
was given on 24th March 2010 but was sealed by the court on 1st April 2010 which was the date when proceedings were issued. The boxes which were ticked said that in respect of “all claims herein” the case is now being funded by a conditional fee agreement dated 6th November 2008 which provides for a success fee and an insurance policy issued on 12th November 2009 with a level of cover of £150,000 and premium.
- When the CFA was eventually disclosed to the MIB after the Judge effectively compelled disclosure during the detailed assessment proceedings a more complex picture emerged, as described above and repeated here for clarity. At the top of the first page this appears:-
“Agreement date 6th November 2008. (NB As agreed, this Agreement takes effect from when you first instructed Potter Rees)”
- The second page of the CFA substantially concerns the right to cancel under the “doorstep selling” regulations, the Contracts Made in a Consumers Home or Place of Work etc Regulations 2008. The litigation friend was told in the required notice that he had the right to cancel this contact if he wished to do so within 7 days of receipt of the notice. As their name suggests these Regulations apply to a contract between a consumer and a trader which is for the supply of goods or services to the consumer by a trader and which is made during a visit by the trader to the consumer’s home. The evidence shows that it was signed during a visit to the home of the next friend by the solicitors on 21st October 2009. By giving this Notice, the solicitors were declaring to their client that this was the date when the contract was “made”. It could be cancelled at any time up to 28th October 2009 for this reason. In order to protect them in the event of cancellation the solicitors inserted a term which gave them authority to work under the CFA “throughout the period of 7 days from its date“. The preamble to this term required the litigation friend to confirm that he had signed a CFA with Potter Rees on 21st October 2009 and he did so. Therefore, at the top of page 1 the CFA states that its date was 6th November 2008, but on page 2 “its date” is said to be the 21st October 2009 because the solicitors were given authority to work for 7 days from “its date”, being that date.
- The claimant submits that the Judge held that the obligation under paragraph 19.4 of the Practice Direction was to inform the other party, by the Notice of Funding, of the date which the CFA came into effect, rather than the date when it was actually made. The MIB submits that this is simply wrong and that on its ordinary construction paragraph 19.4 requires the date when the agreement was made to be communicated to the other party. Since the claimant’s solicitors did not therefore provide the date of the agreement, but a different date, they were in breach of the obligation. The MIB accepts that the court has power to make an order that the success fee should be recoverable even if it is right about its submission on the construction, but said that this would require a relief from sanction for which no application had been made and which should not be granted. In the absence of such an application no success fee at all should be recoverable because the claimant did not comply with the Practice Direction at any stage. The MIB further submits that the truth of the position only became clear to the MIB when the Judge, at an earlier hearing, had compelled the claimant’s solicitors to disclose the CFA and risk assessment. This had caused an adjournment because the MIB only then realised that the CFA had been executed long after the date in the Notice of Funding and wished to consider the position. At the resumed hearing they submitted that whatever the proper success fee on and after the date when the CFA was executed, it should be lower in respect of the retrospective part which covered 6thNovember 2008-21st October 2009. The Judge agreed and allowed a success fee of only 40% in respect of that time. The MIB’s complaint, in essence, is that there was a serious failure to comply with the Practice Direction because the use of the 6th November 2008 as the date in the Notice of Funding allowed the claimant’s solicitors to claim the maximum possible success fee over the longest possible time without alerting the MIB to the possibility that they might make submissions that there should be a lower success fee (or none at all) for the first period when the CFA had retrospective effect. The fact that this was significant is shown by the fact that when they were able to advance those submissions they were successful to an extent and the claimant has not sought to challenge that outcome.
- In response to this the claimant eventually made an application for relief from sanction on 28th May 2015 and the MIB responded with a witness statement which I received on the morning of the hearing.
- The Judge gave a ruling on this issue. Again it was ex tempore, and was given during a hearing as is necessary in detailed assessment proceedings. The transcript reads as follows:-
“I think the reality here is that in this particular instance I have an issue as to what exactly the date of the agreement is and I understand fully Mr. Marven’s argument that it would stand to reason that the date of the agreement is the date that that agreement is signed but if that is the case, then the wording of the fact that you can retrospectively date these things becomes a complete nonsense. It is the date that is actually there. I take Mr. Robbins’ point, not that Mr. Marven and his team would necessarily have done so at all, but there are people who would jump up and down and say “they are being misled”. For the purpose of –you all know where you stand in this particular matter. You also, those of you — you have all been in front of me on quite regular occasions and you know the way in which I run my court; I am old fashioned, pragmatic and I hope I have two overriding objectives; fairness and the interests of justice. In this instance I am going to treat for the purpose of this particular part that there is not a relief from sanction that the correct date is imposed upon it and that it runs from 6th November.”
- I should record that the Judge gave other rulings on quite technical points taken by the MIB at this hearing, and that no complaint is made about some of them. This was a demanding hearing which concerned a large sum of money and involved a lot of technical argument. It is unsurprising that the sharp focus of an appeal reveals aspects which were capable of improvement. I doubt if any judge could conduct a hearing of this kind without falling victim to infelicities of expression. What the Judge decided here, I think, was that the Notice of Funding did not comply with the Rules, but that no-one was misled and that therefore, in the interests of fairness and the interests of justice no question of relief from sanction arose. If he had held that the Notice of Funding had contained the correct date of the document it would have been unnecessary to refer to broader principles of justice, fairness and pragmatism. This is why he said he was “going to treat for the purpose of this particular part” the document as having the correct date on it.
- In my judgment the Judge was right if he held that the Notice of Funding did not comply with the Practice Direction because it did not contain the date of the document. I shall first explain why I have come to that conclusion and then address his approach to relief from sanction.
- I have set out the relevant parts of the CFA above. In my judgment the position is quite clear. The CFA was “made on” and “dated” on 21st October 2009 as the solicitors accepted when allowing their client a 7 day cancellation period. The agreement made on that date provided that as between the parties it would have retrospective effect so that the solicitors’ entitlement to a success fee in the event of a win would extend to costs incurred throughout their retainer prior to the date of the CFA. That term, like the rest of it, was agreed on the date the CFA was made. The Practice Direction required the solicitors to give notice of the date of the agreement. Where that is not the same as the date when the agreement was to come into force (which might be before or after the date of the agreement) it is the date of the agreement which must be given. Therefore the solicitors failed to comply with the Practice Direction at any time until they disclosed the CFA, after refusing to do so for some time, when they came under direct pressure from the Judge at a hearing of the detailed assessment of costs. It follows that unless the court otherwise orders they cannot recover any success fee at all.
- The problem in this case is now historic because all the relevant provisions and rules have been repealed. It is necessary to give a brief account of it because it is relevant to the issue of relief from sanction. The practice of “back-dating” CFAs is not improper as a matter of contract between solicitor and client. However, there is a clear potential for abuse when recovery from a paying party under an order for costs arises. CFAs with success fees were very valuable instruments when they were entered into at a very early stage when prospects of success may have been very uncertain, and where at a later stage they improved considerably, for example because the defendant admitted liability. A much higher success fee might be justified if the date of the CFA was long before that admission. Less starkly, a solicitor may choose to investigate a case without committing to conducting it to a conclusion and later decide that the prospects justify that commitment. Backdating the agreement involves claiming a success fee on the basis of exposure to risk which was not, in fact, present. That is what happened here. As between the parties to the contract that is not objectionable (subject to the client’s rights as a consumer and as the client of a regulated professional owing him legal duties). Indeed given that it excuses the claimant from paying the pre October 2009 costs himself if the claim fails, the backdating is beneficial to him. As between the parties to the litigation the position is quite different. The aim of the Rules was that the defendant in CFA funded litigation should know the level of risk as to costs to which he was exposed, as far as that was compatible with preserving the claimant’s privilege in the advice as to the merits which he had received. This was to enable the defendant to make sensible decisions about whether to contest the litigation, including whether to settle the amount of costs after a judgment.
- This principle was articulated by Rix LJ in Hawksford Trustees Jersey Ltd. V. Stella Global UK Ltd (No 2)  1 WLR 3597. After explaining the provisions which apply in the present case, he said:-
“The clear intention is that it is to be regarded as unfair for a defendant to be put in a position where he proceeds with litigation in ignorance of his potential liability for the increased costs of a claimant’s funding arrangements.”
- This observation was relied upon by Mr.Bacon QC, on behalf of the claimant, to show that what matters is that the defendant must know the date when the “meter starts to run” (my phrase not his). He says that in a back-dating case that means that it is the start date of the agreement which matters, not the date of the agreement. Since the claimant’s solicitors gave the start date, then they either complied with the Practice Direction or at least did no harm by failing to do so. I do not agree. Rix LJ did not have the present situation in mind, but his words are apt to cover it. What matters is that the paying party must know, to the limited extent possible, not only the existence of his additional liability but also its extent. That includes knowing any matters which might be relevant to any arguments available to limit that liability and in particular whether any part of the costs now claimed to attract a success fee were incurred before the date of the CFA. If the date of the CFA is accurately given in the Notice of Funding and, when the bill is delivered, a success fee on costs incurred before that date is claimed then the position becomes clear. Otherwise there is a danger that the court may award, or the defendant may agree, a success fee on pre-CFA costs where that is not justified at all, or at least not at the level claimed. For this reason, anything less than strict compliance with the Practice Direction should be regarded as significant.
- It appears that during their life, the Rules never really caught up with the development of retrospective CFA agreements. They were regarded as contrary to public policy in some quarters. That issue was not settled until January 2009 in Forde v. Birmingham City Council  1 WLR 2732, to which I shall return at the end of this judgment. Often the difference between the start date and the date of the agreement will be quite small, and the amount of costs affected likewise. Where, as here, the relevant period was nearly a year, the significance of the issue is greater. If solicitors want the benefit of risk taking, then they should actually take the risk by committing to the conduct of the action. I make it clear that I make no finding of sharp practice in this case. This has perhaps been a grey area. To conduct litigation without committing to a risk but to claim a fee as if one had is having the cake and eating it. To do that while supplying only the start date (which is the most advantageous date to the claimant’s solicitor) to the other side is not appropriate. There is nothing in the rules to prevent a solicitor giving Notice of Funding to say, in this case, that the date of the agreement was 21st October 2009 but it was to have effect from 6th November 2008.
- I do not think that it is an answer to my criticism of this Notice of Funding to say, as Mr. Bacon does, that the Judge had the CFA and that nobody could therefore be misled. A Judge has plenty to do without scouring documents to see what points might be available to a party which does not have them. A party’s duty to the court is not fulfilled by placing a document in a very large file, refusing to give it to the other side, and giving the file to the court. That is why the normal practice requires disclosure of the CFA at the assessment stage.
- This position is compounded by the way in which an important meeting of 4th September 2009 was dealt with. I have set out part of the attendance note at paragraph 7 above. A note was made justifying the presence of two fee earners at the meeting for various reasons. HP was there, among other things, to advise on funding issues because at this stage the CFA had not been signed. The attendance note specifically refers to advice being given about the CFA. A claim for costs in relation to that meeting was made in the Bill. The narrative part of the Bill contains two claims totalling £792 in basic charges for this meeting. The partner’s (HP) contribution is summarised as follows:-
“Discuss care arrangements and impact it has in advantages or disadvantages for uninsured or untraced route, in detail explain Newcombe’s current view on care, go through other aspects of care and interaction of claimant, discuss results of investigations with police, funding issues…”
“Investigating liability and possibility of getting claim under uninsured scheme, to see claimant in light of most recent MIB report which suggested lower level of awareness than was apparent.”
- The CFA was first signed on a date after this meeting and returned to the solicitors by post, but it was not signed properly. This required a letter of 13th October and occupied part of a further meeting at the home of the litigation friend on 21st October 2009. That meeting is described in the Bill as “Take witness statement and discuss in detail numerous problems with carers – 2 hours 12 minutes.” The attendance note confirms that this work was done, but the significant feature is that there is no mention in the Bill of the work done in order to secure the execution of the CFA. There is a reference to “funding issues” in the entry for 4th September 2009 but that is all. The Bill provides no information at all about how and when the CFA was executed.
- The result of the Notice of Funding, the refusal to disclose the CFA until compelled to do so by the Judge, and the omission of any reference to it in the Bill was to leave the MIB in ignorance of the fact that a year’s worth of costs had been incurred before the solicitors had been contractually obliged to take the risk of conducting the case to a conclusion potentially without payment. It seems to me that this is a more serious state of affairs than the Judge appreciated and that had he been able to spend the time on the question which has been available to me in appellate proceedings, he would have appreciated that the interests of justice were not all stacked on one side of the scales. This was a factor that he could, and should, have weighed in the balance. If I am right that he found that the Notice of Funding did not comply with the Practice Direction because it did not give the date of the CFA, he should have turned his mind to the question of relief from sanction and carried out a rather more structured assessment of that than he did.
- I therefore set aside his decision (as I have interpreted it to be) that the court should simply “otherwise order” for the purposes of CPR rule 44.3B(1) without considering any further sanction for non-compliance with the Practice Direction. If relief from sanction is granted to allow success fees in respect of some or all of the costs of the action, consideration on the merits is required to decide what success fee should be allowed in respect of the costs incurred before the date of the CFA, as opposed to the 67% which I have allowed for the costs generally. The Judge was belatedly able to carry out that function and allowed a reduced success fee for that period of 40%.
RELIEF FROM SANCTIONS
The judge then went on to consider the claimant’s application for relief from sanctions
- I approach the relief from sanction in accordance with the guidance given by the Court of Appeal in Denton and others v. TH White  1 WLR 3926. For the reasons given above, I consider that there was a breach of the Practice Direction and that it was significant. I consider that it occurred because the solicitor who gave Notice of Funding thought that the start date of the CFA was all that the MIB was entitled to know and I also consider that the solicitors did not want to reveal the fact that the date of the agreement and its start date were nearly a year apart. I infer this from the Notice of Funding, the refusal to disclose the CFA, and the way in which the bill was drafted in that regard. I have made no finding of sharp practice and I am sure that the solicitors acted as they did because they thought it was appropriate to do so. I do not agree. It seems to me to be quite obvious that a rule which requires a party to disclose the date of an agreement requires disclosure of the date when the agreement was made. If the party wishes to derive a benefit from the fact that it was to be effective before it was made then by one means or another that fact must be made plain to the paying party and not withheld. The best means would be disclosure of the facts in the Notice of Funding, but the very least the Rules require is accurate disclosure of the date of the agreement and a bill of costs which makes it clear that a success fee is being claimed on costs incurred before that date. Neither of these things happened in this case and that was an error by the solicitors the effect of which would have been to increase their financial return from the case had not the Judge intervened as he did.
- The third stage of the Denton v. White approach requires me to evaluate all the circumstances of the case so as to enable me to deal justly with the case, including the need for litigation to be conducted efficiently and at proportionate cost and to enforce compliance with rules practice directions and orders. I have sought to set out the material factors above, and my conclusions about them. In my judgment, the rules as to disclosure of funding arrangements were of particular importance in promoting the efficient conduct of litigation at proportionate cost. CFAs were designed in such a way that individual successful cases were conducted at disproportionate cost in order to facilitate access to justice by funding other cases which failed. An unsuccessful defendant was required in part to fund the cost of pursuing other, successful, defendants in other cases. That situation came with certain strings attached, imposed by the rules. A breach which had the effect potentially of increasing recovery is a significant matter. On the other hand, the MIB in this case did know from the start of proceedings that there was a CFA with a success fee and that it went back to November 2008. I do not think that they would have conducted the litigation in any different way until right at the end if they had thought that the date of the CFA was October 2009. The overall efficiency of the litigation was not affected but the efficiency and potentially the accuracy of the assessment of costs was. I should therefore grant relief from sanction in that I allow the success fee at 67% from 21st October 2009 which is the full level which I have determined it should be. In relation to the period 6th November 2008 to 21st October 2009 I grant relief from sanctions and allow a success fee at 50% of the level which would otherwise have been appropriate. The Judge determined that this was 40% and the success fee allowed therefore in respect of the early costs will be 20%. I have been tempted to disallow it in its entirety, but I consider that this would be disproportionate if the 40% level is right. I also would not wish to inhibit the access to justice of gravely injured and vulnerable people by imposing a sanction at too great a level. Retrospective CFAs should attract a degree of scepticism for the reasons I have given above. They produce reward for a risk which was only being run to an extent which could be fully controlled by the solicitor. I accept, however, that they are not contrary to public policy per se. In this regard, I have taken into account the decision of Christopher Clarke J, as he then was, in Forde v. Birmingham City Council  1 WLR 2732, paragraph 150.
“In some, perhaps many, circumstances a retrospective success fee, or its amount, may be unreasonable, either as between the parties or as between solicitor and client. But this will not always be so. The court has, in my opinion, enough weapons in its armoury, in the form of the criteria applicable on a detailed assessment and the provisions of the Costs Practice Direction and the Practice Direction on Protocols, to disallow or reduce retrospective fees that are unreasonable, as in this case.”
- There is no appeal against the assessment of the success fee pre-CFA at 40% in this case by either side. I myself may have made a different and lower assessment had I been conducting it. It appears to me that my sanction in relation to the breach of the Practice Direction (whose significance is reinforced by the passage just cited) should be proportionate to that assessment rather than to the lower assessment which I may have made myself. This is why I have allowed what still seems to me to be a generous success fee for costs incurred during a time when the solicitors did not feel able to commit themselves to conduct the matter to trial.
- The appeal is therefore allowed to the extent that the success fee in respect of cost from 6th November 2008 to 21st October 2009 will be 20% and not 40%. The success fee for costs after 21st October 2009 will be 67% and not 75%.
THE JUDGMENT ON COSTS OF THE APPEAL
There is a short supplementary report in relation to the costs of the appeal.
- This is a judgment on the costs of an appeal by the MIB, and an application by the claimant for relief from sanction. The judgment on the substantive appeal and application has been handed down today, after being circulated in draft and I have received written submissions about the costs order I should make from both parties. Both parties have indicated that they are content for me to decide the costs issues without a hearing taking into account those submissions. This is my decision.
- The first question is to identify the successful party. The appeal was brought by the MIB who sought to an order that the success fee should be fixed at 5% on the issue as to the construction of the CFA, or disallowed altogether on the date issue. I held that the success fee of the claimant’s solicitors should be 20% for the first year of their retainer and 67% after that. This represented success for the MIB on its fall back position on the overall success fee level and success on the date issue, followed by a grant to the solicitors of relief from sanctions.
- The MIB therefore lost on one major legal argument concerning the construction of the CFA which I held was limited to the claim under the Uninsured Drivers Agreement. They won on the date issue, but did not succeed in defeating the whole claim to a success fee because I allowed a reduced fee for the period during which the CFA was retrospective. They won in their short, free standing submission that a success fee in excess of that warranted by the solicitors risk assessment could not be justified, at least on the grounds given by the Judge. Overall, they are better off as a result of having brought the appeal, but not nearly as much better off as they would have been had all their arguments succeeded. I consider that the MIB is the successful party and start from the proposition that the general rule is that they should have their costs of the appeal.
- I do propose to make a discount from that order for costs to reflect the failure on the construction issue in relation to the CFA. If the appeal had been limited to the risk assessment issue and the date issue it would have been shorter and, I expect, cheaper. I do not see why the claimant (or his solicitors) should bear the costs of lirigating that issue on which they won, without some adjustment in their favour.
- The next question is the relevance of an offer in the form of a Part 36 offer which was made on 3rd February 2015. The claimant’s solicitors offered to accept a success fee of 40% for the period before the date of the execution of the CFA, and 67% thereafter. In the result, they failed to hold the success fee of 40% for the early part but the MIB failed to beat the 67% in the second part. The offer letter demanded the costs if the offer were successful, although it would result in a reduction of the sum recoverable under the first instance judgment. The offer therefore has no formal effect. The MIB beat it both as to the sum recoverable and, in my judgment, as to the costs incurred to the date of the offer, However, I understand that the MIB failed to engage in negotiation after that letter and this is only explicable by their commitment to litigating the issue on which they lost. This is a relevant matter which should also be reflected in the costs order which I make. I propose to treat it as evidence of the importance to the MIB of the issue on which they lost, which I consider supports the discount from the costs which I propose to order.
- I therefore rule that the claimant will pay the costs of the appeal, to be the subject of a detailed assessment if not agreed, and subject to a 30% discount. In this context, I have taken into account my belief that the date issue is of importance beyond its arithmetical result in this case, and that although I made no finding of sharp practice I did find that the use of the wrong date on the agreement was a clear error which, had it gone unnoticed, would have financially benefited the solicitors who made it.
- The costs of the application for relief from sanctions are small, because it was served so late. Nevertheless, I consider that in principle they must be paid by the claimant (or his solicitors) because it was their default in giving an erroneous date on the Notice of Funding which required the application. This was a significant error for the reasons which I have explained. I therefore order the claimant (or his solicitors) to pay the costs of the application for relief from sanctions and I assess that 20% of the costs of the hearing were attributable to that application, in addition to the other pre-hearing aspects of it.”