WHEN CAN A COURT TAKE ADDITIONAL LIABILITIES UNDER A CFA INTO ACCOUNT IN THE AWARD OF DAMAGES?

Another aspect of the Court of Appeal judgment in Hirachand v Hirachand & Anor [2021] EWCA Civ 1498 was the Court of Appeal’s consideration of whether it was appropriate for the judge to take into account liabilities for costs under a CFA when considering making an award under the Inheritance (Provision for Family and Dependants) Act 1975.

 

THE CASE

The defendant was appealing an award made to the claimants under the Inheritance (Provision for Family and Dependants) Act 1975.  When considering the award to the claimants the judge had allowed an additional amount to cover the additional legal costs that the claimants would have to pay their lawyers under the terms of a conditional fee agreement.

THE COURT OF APPEAL’S CONSIDERATION OF THIS ISSUE: THE GOSNELL APPROACH WAS THE CORRECT APPROACH

King LJ considered the previous first instance cases on this topic and held that, in some cases under the Act, it was appropriate for the court to take into account the liabilities under the CFA.

    1. The judge was referred to two cases: Re Clarke [2019] EWHC 1193 Inheritance (Provision for Family and Dependants) Act 1975.  (Re Clarke), a decision of Deputy Master Linwood sitting in the Chancery Division in an Inheritance Act case where he declined to include the success fee in the award, and Bullock v Denton [2020] Lexis Citation 191 (Bullock), an unreported decision of HHJ Gosnell in which he made such provision.
    1. Deputy Master Linwood in Re Clarke, in declining to make any provision for a success fee in his award, held that to do so would be contrary to legislative policy and would put a CFA claimant in a better position in terms of negotiation, due to the risk of a substantial costs burden, and in a better position than a claimant in a personal injuries claim.
    1. In Bullock HHJ Gosnell approached the matter somewhat differently. He took the view [93] that the ‘additional liabilities’ including the success fee fall into a different category from the costs incurred by both sides. Because he, as the judge, had no knowledge of any Part 36 offers, it followed that in calculating quantum he had no way of knowing who was the successful party in Part 36 terms [93]. In contrast, he held that by making an award at all, the judge has decided that no reasonable provision has been made and he therefore knows that the Claimant is succeeding to a greater or lesser extent in the claim and that that ‘success’ will trigger an obligation to pay additional liabilities to the lawyers under the terms of any CFA. HHJ Gosnell went on:

“[94] In my view, I am entitled to take them into account both because they fall within the Claimant’s financial needs under section 3(1)(a) and because they are debts incurred since the death and the court is enjoined to make the assessment at the date of trial not the date of death (section 3(5)). I am sympathetic to the Defendant’s argument that these are not costs that could in law be awarded against the Defendant, but I think that I have to look at the reality of the situation or as Briggs J put it “in the real world”……

“[95] The current issue is different to the one Briggs J wrestled with. In this case I know for sure that the Claimant will have these additional liabilities to pay. In [Lilleyman] the Judge could not know who was paying the costs until after he had handed judgment down. This does not, however, mean that the Defendants have to indemnify the Claimant in relation to all her additional liabilities….”

    1. In the present case the judge preferred the approach of HHJ Gosnell saying:

“58. I think that it would not be fair on C for me to ignore completely her liability to her solicitors. But, I recognise that there is a risk of injustice to the estate, in particular if an appropriate Part 36 offer had been made, of which I am necessarily unaware at this stage of the proceedings. In addition, I flag up that I do not know the precise terms of the agreement and what is the definition of ‘success’. If my award does not bring about the operation of the uplift, I will revisit this element of the award.

59. I cannot see how I can avoid some potential (and it is only potential) injustice to either C or the estate. All I can do is mitigate the potential by taking a cautious approach to this liability.

60. Bearing that approach in mind and knowing what I do of the case, I cannot envisage how it could be reasonably be thought that the chance of failure was a high chance. I propose to allow the figure, as part of C’s needs, of £16,750, which approximates to a 25% uplift.”

    1. The claim is for reasonable financial provision (section 1). Here the applicant is a child of the Deceased and so reasonable financial provision means such financial provision as it ‘would be reasonable in all the circumstances of the case for the applicant to receive for his maintenance’ (section 1(2)(b)).
    1. A succession of cases have emphasised not only that maintenance should not be defined too prescriptively for the purposes of the Inheritance Act, but also that the payment of debts may form a legitimate part of a maintenance award. Most recently, Lord Hughes discussed the concept of maintenance in Ilott v Blue Cross and Others (No 2) [2018] AC 545 (Ilott):

“14.              The concept of maintenance is no doubt broad, but the distinction made by the differing paragraphs of section 1(2) shows that it cannot extend to any or every thing which it would be desirable for the claimant to have. It must import provision to meet the everyday expenses of living. In re Jennings, Deceased [1994] Ch 286 was an example of a case where no need for maintenance existed. The claimant was a married adult son living with his family in comfortable circumstances, on a good income from two businesses. The proposition that it would be reasonable provision for his maintenance to pay off his mortgage was, correctly, firmly rejected – see in particular at 298F. The summary of Browne-Wilkinson J in In re Dennis, Deceased [1981] 2 All ER 140 at 145-146 is helpful and has often been cited with approval:

“The applicant has to show that the will fails to make provision for his maintenance: see In re Coventry (Deceased) … [1980] Ch 461. In that case both Oliver J at first instance and Goff LJ in the Court of Appeal disapproved of the decision in In re Christie (Deceased) … [1979] Ch 168, in which the judge had treated maintenance as being equivalent to providing for the well-being or benefit of the applicant. The word ‘maintenance’ is not as wide as that. The court has, up until now, declined to define the exact meaning of the word ‘maintenance’ and I am certainly not going to depart from that approach. But in my judgment the word ‘maintenance’ connotes only payments which, directly or indirectly, enable the applicant in the future to discharge the cost of his daily living at whatever standard of living is appropriate to him. The provision that is to be made is to meet recurring expenses, being expenses of living of an income nature. This does not mean that the provision need be by way of income payments. The provision can be by way of a lump sum, for example, to buy a house in which the applicant can be housed, thereby relieving him pro tanto of income expenditure. Nor am I suggesting that there may not be cases in which payment of existing debts may not be appropriate as a maintenance payment; for example, to pay the debts of an applicant in order to enable a him to continue to carry on a profit-making business or profession may well be for his maintenance.

(my emphasis)
    1. Having determined that no reasonable provision for maintenance has been made by the Deceased, the judge, in deciding whether to and in what manner to exercise his powers to make orders under section 2 of the Inheritance Act, is required inter alia by section 3(1)(a) of the Inheritance Act to “have regard to…. the financial resources and financial needs which the applicant has or is likely to have in the foreseeable future”. The term ‘financial needs’ is unqualified and unlimited, and given the Supreme Court’s endorsement in Ilott that the payment of debts can form part of a maintenance award, it must undoubtedly be the case that a claimant’s financial need can include the payment of a debt or debts.
    1. In a financial remedy case, the rule as to costs is found in Family Procedure Rules 2010, r.28.3(5) (‘FPR’) which provides that save in certain specified exceptions, the general rule is that ‘the court will not make an order requiring one party to pay the costs of another party’.
    1. As a consequence, when a court is determining quantum in a ‘needs case’ under the Matrimonial Causes Act 1973, the court knows with precision the amount of costs incurred by both sides. That is not the case in a claim made under the Inheritance Act where costs follow the event and where CPR Part 36 provides in broad terms (see CPR 36.17) for the claimant to pay the costs of the defendant where he/she fails to obtain a judgment more advantageous than the defendant’s Part 36 offer. The court does not know what (if any) Part 36 offers have been made until after judgment.
    1. In Lilleyman v Lilleyman [2012] 3 WLR 754, a case in which there were no CFA contractsBriggs J (as he then was) had to consider how to deal with the parties’ contingent liabilities (contingent in the sense that the judge could not know during the trial itself who would be paying the other side’s costs). Briggs J said:

“71. The above summary of the net estate ignores the parties’ agreement that the four legacies of £25,000 each should be paid to Mr Lilleyman’s grandchildren (as at the date of his death) regardless of the outcome of these proceedings. It also ignores the contingent liability for the costs of these proceedings, which I am unable either to quantify or to guess as to their likely incidence, as between the estate and Mrs Lilleyman. Counsel were united in submitting that I have no alternative but to leave the contingent costs liabilities entirely out of account, however unrealistic in the real world that might prove to be”.

    1. Briggs J revisited the issue in his separate costs judgment Lilleyman v Lilleyman (No 2) [2012] 1 WLR 2801(Lilleyman No 2):

“26. I must in concluding express a real sense of unease at the remarkable disparity between the costs regimes enforced, on the one hand for Inheritance Act cases (whether in the Chancery or Family Divisions) and, on the other hand, in financial relief proceedings arising from divorce. In the latter, my understanding is that the emphasis is all on the making of open offers, and that there is limited scope for costs shifting, so that the court is enabled to make financial provision which properly takes into account the parties’ costs liabilities. In sharp contrast, the modern emphasis in Inheritance Act claims, like other ordinary civil litigation, is to encourage without prejudice negotiation and to provide for very substantial costs shifting in favour of the successful party. Yet at their root, both types of proceedings (at least where the claimant is a surviving spouse under the Inheritance Act) are directed towards the same fundamental goal, albeit that the relevant considerations are different, and that there is the important difference that one of the spouses has died, so that his estate stands in his (or her) shoes.

27. I express no view on which of those fundamentally divergent approaches to costs is better calculated to serve the ends of justice, and in particular to promote compromise. I merely observe that the potential for undisclosed negotiations to undermine a judge’s attempt under the Inheritance Act to make appropriate provision for a surviving spouse is a possible disadvantage of the civil litigation costs regime currently applied to such claims, by comparison with the regime applicable to financial provision on divorce. I consider that those fundamental differences in approach to proceedings having the same underlying objective deserve careful and anxious thought.”

    1. A similar provision to that in section 3(1)(a) is to be found at s25(2)(b) of the Matrimonial Causes Act 1973 which requires the court to have regard to “the financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the future.”
    1. Recently in Azarmi-Movafagh v Bassiri-Dezfouli [2021] EWCA Civ 1184 (Bassiri-Dezfouli) the Court of Appeal had to consider [3] the appropriate treatment of outstanding costs incurred by the recipient of a needs award in circumstances where the ‘no order’ principle which applies in financial remedy cases would otherwise have meant that the recipient would have to satisfy their outstanding bill for costs from their needs award.
    1. The Court of Appeal considered the proper approach to costs in needs cases at [46] onwards. This included an analysis of those cases where first instance judges had to determine the financial needs of a party and thereafter to decide whether to include in an award a sum referable to those debts which related exclusively to the costs of the litigation. At [50] the Court of Appeal held that it was in the discretion of the judge to include such provision and noted that even where parties had behaved unreasonably, the courts had in a number of cases nevertheless ordered an additional sum referable to costs in order to ameliorate the impact on the assessed needs of the recipient.
Discussion: Ground 2
    1. In a financial remedy case, outstanding costs which could not otherwise be recovered as a consequence of the ‘no order principle’ are capable of being a debt, the repayment of which is a ‘financial need’ pursuant to s25(2)(b) MCA 1973. In my judgment a success fee, which cannot be recovered by way of a costs order by virtue of section 58A(6) CLSA 1990, is equally capable of being a debt, the satisfaction of which is in whole or part a ‘financial need’ for which the court may in its discretion make provision in its needs based calculation.
    1. Having said that I should make it clear that it will by no means always be appropriate to make such an order. It is unlikely that an award will include a sum representing part of the success fee unless the judge is satisfied that the only way in which the claimant had been able to litigate was by entering into a CFA arrangement and consideration will no doubt be given of the extent to which the claimant has ‘succeeded’ in his or her claim. Further, an order will only be made to the extent necessary in order to ensure reasonable provision is made. It does not mean that there can be no impact whatsoever upon the standard of living that the applicant would otherwise be afforded by the maintenance award. In Bassiri-Dezfouli the Court of Appeal considered between paragraphs [55] – [59] a number of first instance cases where the impact of debts in the form of outstanding costs was ameliorated but not removed entirely by the inclusion of a sum representing part but not all of the outstanding debt.
    1. It is submitted on behalf of the Appellant that the inclusion in the award of all or part of the debt which is represented by the success fee cannot be regarded as “provision that is to be made to meet recurring expenses, being expenses of living of an income nature” as approved by Lord Hughes in Ilott (see [43] above). Ms McDonnell submits that contrary to the Appellant’s argument, the inclusion of the award of £16,750 towards part of the Respondent’s success fee was ‘directed at meeting day to day living expenses’. This, she says, is obvious from the context of the Respondent’s financial circumstances as found by the judge; she has no other means to discharge her debt other than from her income which, on any view, is and will remain very modest. Moreover, Ms McDonnell submits the judge expressly held that if he did not make such an allowance ‘one or more of C’s primary needs will not be met’.
    1. I agree with the analysis of Ms McDonnell, but in any event in my judgment, the Appellant’s argument that a success fee is not a recurring expense falls at the first hurdle as when one reads on from the passage relied upon by Ms Stevens-Hoare taken from the passage In re Dennis incorporated into his judgment by Lord Hughes and highlighted at [43] above, it is quite clear that payment of a debt can form part of a maintenance payment.
    1. It follows that, in my judgment, the judge was right in concluding that an order for maintenance could contain an element referable to a success fee. As already noted, on the facts of this case, the judge concluded that without such a contribution ‘one or more of the claimant’s primary needs would not be met’. As Lord Hughes re-emphasised in Ilott at [24]: ‘The order made by the judge ought to be upset only if he has erred in principle or law’. In my judgment the judge did neither. The judge was entitled to regard the success fee as a debt capable of inclusion in a maintenance award. That being the case, it would be wrong for this court to interfere with the judge’s individual value judgment.
    1. I am conscious, as was the judge, of the difficulty identified by Briggs J in Lilleyman, namely of the potential for undisclosed negotiations to undermine a judge’s efforts to make appropriate provision under the Inheritance Act. The civil litigation costs regime, unlike the approach in financial remedy cases, means that there is the potential for a situation where a claimant is awarded a contribution to her CFA uplift but is subsequently ordered to pay the defendant’s costs of the claim where, for example, the claimant won overall but failed to beat a Part 36 offer. I note however that this is likely to be less of a risk than might be thought at first blush to be the case given that under many CFAs the claimant is obliged to accept any reasonable settlement offer or an offer above a specified threshold or risk the solicitors withdrawing from the CFA. Conversely a success fee is frequently not payable in the event that the claimant, on advice, rejects a Part 36 offer or other relevant settlement offer but subsequently fails to beat that offer at trial.
  1. The judge was alive to this tension and commented that he could not avoid some potential injustice to one side or the other. The judge therefore mitigated that potential injustice by taking a cautious approach towards the success fee liability and made an order which resulted in only a modest contribution of 25% towards payment of the success fee. In my view the judge’s cautious approach to this difficult aspect of maintenance cases where the claim is made on the back of a CFA contract cannot be faulted and only serves to highlight the imperative of the full engagement in the Part 36 process and the importance of the parties making realistic offers in order to settle these difficult and distressing cases.