For retainers entered into on and after 1 April 2013, success fees have been, in the vast majority of cases, unrecoverable inter partes. For this reason, it is easy to think that there is less need to be rigorous in compliance with the letter of the rules relating to CFAs as, the thinking goes, they will never be tested. Unfortunately such an attitude can have dire consequences, and could even lead to all of the costs claimed being disallowed.Read More »
The recent case of Engeham –v- London & Quadrant Housing Ltd & Academy of Plumbing Ltd[i] represents good news for Claimant lawyers conducting work under Conditional Fee Agreements (CFA’s). In this case the Claimant was successful but the party who the Claimant was successful against was not named in the CFA. The CFA simply named one Defendant. At first instance it was held that no costs were recoverable as the CFA did not cover a claim against the ‘paying’ Defendant.
On Appeal (HHJ Mitchell) the decision was reversed. The case thereafter proceeded to the Court of Appeal which upheld the decision of HHJ Mitchell. It was determined that the definition of win in relation to the CFA should not be restricted to ‘who pays’. The meaning of win should be widely construed. The Claimant had clearly won the case and the Defendant had agreed to pay the Claimant’s costs.
This is positive news as only early this year Deputy Master Friston in the case of Hailey v Assurance Mutuelle Des Motards (relating to the same issue detailed above) ruled that costs were not recoverable by virtue of the indemnity principle. There have been other cases in the past where the same outcome was reached. This was therefore a real tool in the armoury of Defendants when challenging costs conducted under a CFA.
This is a very sensible decision but does cause some tension with the indemnity principle. The indemnity principle is well established law. In Hailey there was no liability for the Claimant to pay his Solicitors’ costs, as success under the CFA was not achieved because the case was successful against a Defendant not named in the CFA. Although the decision is fair and sensible, it clearly conflicts with the indemnity principle.
Despite this Judgment when drafting CFAs Claimant Solicitors should refrain from naming the Defendant/s in the CFA. CFAs should be drafted stating that the agreement covers “your claim against the Defendant or Defendants”. Furthermore, it is always sensible for the definition of success not to be simply based on the recovery of damages, but should also include “or where you derive any benefit from pursuing the claim”.
So, an early Christmas present for Claimant Solicitors, and a lump of coal for Defendant Solicitors!
Andrew McAulay is a Partner and head of the Costs and Litigation Funding department at Clarion Solicitors. You can contact him at firstname.lastname@example.org, or the Clarion Costs Team on 0113 2460622.
[i] Currently unreported and available only from subscription-based websites. We will endeavour to add a link as soon as it becomes publically available.
Most lawyers will likely be familiar with the unexpected judgment provided by the Supreme Court in the case of Coventry and others v Lawrence and another (No 2)  UKSC 46 concerning the recovery of success fees and ATE premiums. The Supreme Court found that the recovery of additional liabilities from defendants may breach the European Convention on Human Rights. The ramifications are potentially both huge and costly.
Before we consider what might happen it is useful to consider what has already happened.
At its simplest the Coventry case was a claim for nuisance by the owners of a bungalow against the occupiers of a stadium 850 yards away which was used for motor racing and resultantly caused lots of noise. The Claimant’s initially won the claim then lost at the Court of Appeal before winning in the Supreme Court where an injunction against the defendants and damages totalling £20,700.00 were ordered. The Claimants got an order that 60% of their costs should be paid by the defendants.
This led to a second issue to be considered in relation to the level of costs sought. The Supreme Court recorded that the claimants had base courts that amounted to £398,000.00 together with a 100% success fee and an ATE premium of circa £350,000.00. In essence the total costs claimed exceeded £1,000,000.00 and the defendant would have been liable for 60% of the costs claimed which would amount to over £640,000.00, 32 times larger than the damages awarded. This was before appeal costs were even taken into consideration.
The lead judgment of Lord Neuberger summed up the all of costs claimed as being “disturbing” and “highly regrettable”. The case in this respect was clearly highly unusual.
The Arguments – For and Against
On the day of the hearing it was argued for the defendants before the Supreme Court that the extent of their costs liability infringed the defendants’ rights under the European Convention on Human Rights (ECHR) to both a fair trial under Article 6, and to peaceful enjoyment of possessions under Article 1 to the 1st protocol. The defendants specifically referred to the judgments of MGN Limited –v- United Kingdom (2011) and Dombo Beheer BV v Netherlands (1994) in that article 6 would be infringed if the court required the defendants to pay 60% of the success fee and the ATE Premium.
In MGN v UK, the Strasbourg Court held that there was a violation of article 10 (freedom of expression) in respect of the payment of additional liabilities. In this case, however, the violation occurred given the wealth of Naomi Campbell (the Claimant in the original claim against MGN) who it was argued did not need a CFA as she could have utilised alternative means of funding. It was indeed noted by the Court that the law had a legitimate aim of achieving the widest public access to legal services for civil litigation. It was found in this case that the requirement to pay success fees was disproportionate. The Supreme Court commented on Coventry that “in the present case, by contrast, article 10 does not apply and it is apparent that the [claimants] needed the protection of a conditional fee agreement and recoverable ATE premium in order to be able to bring their claim.”
The case of Dombo Beheer BV v Netherlands dealt with the issue of article 6 specifically. In the case of Dombo Beheer BV it effectively provided that one side in a trial should not have an unfair advantage. The Supreme Court stated that it was “by no means clear that the general observation [held in Dombo Beheer BV] would necessarily support the defendants’ argument.” If the claimants did not have access to legal representation by way of a CFA then arguably the claimants right to a fair trial could itself be undermined.
The Supreme Court went on to refer to the case of Callery v Gray  where the House of Lords “effectively confirmed that, subject to reasonableness, success fees and ATE premiums were recoverable”. It was further noted that in Campbell v MGN Ltd (No 2)  that whilst the House of Lords determined that the recovery of additional liabilities (in line with the 1999 Act costs recovery regime) did not infringe article 10, the Strasbourg Court found that it did. The Supreme Court therefore found that the issue of whether the 1999 Act costs regime and specifically the right to recover any success fee and ATE premium from the unsuccessful defendant infringed the EHCR should be open for the Supreme Court to reconsider.
The case was adjourned in order to allow the UK government to present its case to the Court before any ruling was made.
The main counter argument will be based around the principle of ‘Access to Justice’. Indeed the Supreme Court refers to this explicitly and even accepted that the Claimants needed a Conditional Fee Agreement which provided for the recovery of a success fee and ATE premium in order to bring the claim.
The Supreme Court’s key issue appears to be that the Court has no way in which to reign in any additional liabilities claimed. Whilst the court can state that the base costs are disproportionate and too high the same cannot be said for the success fee or the ATE premium. This is because the CPR and 1999 Act have the effect of requiring the defendants to pay any success fee and ATE premium in full, subject to the same having been reasonable but irrespective of proportionality. Indeed the Costs Practice Direction (CPD) 11.5 further states that “in deciding whether the costs claimed are reasonable and (on a standard basis assessment) proportionate, the court will consider the amount of any additional liability separately from the base costs”. CPD 11.9 adds further to this that “a percentage increase will not be reduced simply on the ground that, when added to base costs which are reasonable and (where relevant) proportionate, the total appears disproportionate.” It certainly seems that far from the tentative arguments put forward by the defendants resonating with Lord Neuberger it is in fact the astonishing level of “very disturbing” costs claimed that struck a chord. It is important to note at this stage that the level of any success fee (where the success fee isn’t fixed) / ATE premium can be reduced / challenged at assessment.
We are faced with the question of whether the recoverability of additional liabilities really ever solved the issue of ‘access to justice’ for all? The fact that Woolf’s reforms were replaced by the Jackson reforms would seem to indicate that Woolf’s reforms were not perfect. Clearly additional liabilities formed part of an attractive proposition to lawyers allowing them to take on cases which they may not have otherwise done so but it equally lead to some exuberant cost claims. It is accepted that many claims are no longer as lucrative as they once were with profit margins dropping as a result of Jackson’s reforms. Indeed there is now an on-going debate about whether Jackson is actually undermining access to justice, granted this is another matter but it is interrelated in the greater context of Coventry, that been would a declaration of incompatibility be at logger heads with access to justice? Would the inability to recover a success and ATE Premium have prevented the claimants from bringing their claim?
What happens next?
It is unclear what will happen next and what any longstanding implications may be.
On the most simplistic level a seven judge Supreme Court will hear the matter on February 9th and 10th 2015; the ‘costs D-day’.
Any decision would only apply to CFAs entered into before 1 April 2013. If it is determined that the relevant UK legislation was incompatible with the ECHR and / or Article 1 First Protocol then the government could face significant claims by defendants for the return of additional liabilities that they were unlawfully forced to pay. Exact figures aren’t know but its feeling would no doubt be felt at next year’s general elections as the next government could be faced with a legal bill running into billions of pounds.
The Human Rights Act 1998 section 4 (6) states that a declaration of incompatibility does not “affect the validity, continuing operation or enforcement of the provision in respect of which it is given and is not binding on the parties to the proceedings in which it is made.” Significantly, it appears that a declaration of incompatibility would have no material effect on the legality of the recoverability of additional liabilities for pre-Jackson CFAs.
What happens to the recovery of additional liabilities now?
For post 1 April 2013 CFAs there will be no change, as post-LASPO retainers abolished the recoverability of additional liabilities from a defendant. There may, however, be potential issues relating to pre 31 March 2013 CFAs.
I have seen defendants already seeking to rely upon the uncertainty of the Coventry case to argue that assessments should be adjourned until the Supreme Court’s ruling is given. There is nothing to support that the court would adjourn any assessment hearing but equally it is not 100% clear that the court wouldn’t order an adjournment.
It is my opinion that any additional liabilities will continue to be recoverable in the interim period. There is existing law for the court to apply and even in the event that the recovery of additional liabilities is found to be unlawful any remedy would be against the UK government so the question will be why should a defendant refuse to pay?
A paying party may wish to reference Coventry to create uncertainty and risk. In claims which carry an unfixed success fee or a high value ATE Premium it could potentially lead to some claimants taking a ‘deal’ or discount but I simply cannot see the court taking the position that an assessment should be adjourned, particularly given that the wording of the Human Rights Act 1998 section 4 (6) seems to effectively guarantee the recovery of additional liabilities even if the same has to remedied by the government.
It is regrettable that the Supreme Court is looking at this issue now. Jackson has sought in many respects to deal with the issues that the Supreme Court has found to be so glaring with the abolishment of the recovery of success fees and ATE premiums from defendants and the introduction of costs budgeting and the new stricter test for proportionality.
There is already talk of extending fixed costs to claims up to £250,000.00 (which in my opinion in turn opens the doors for fixed costs to be extended to all claims) and it is clear that there is an agenda to stamp out excessive costs claims. It is just a shame that this is now happening ‘after the event’.
I would welcome people to share their own experiences with Coventry, have you found defendants referencing the case and are you concerned about the potential retrospective abolishment of the recovery of additional liabilities?
As the ‘costs D-day’ draws closer I thought this excerpt from Lord Neuberger’s judgment drives home why the Supreme Court is considering the issue of the recoverability of additional liabilities;
“The fact that it can cost two citizens £400,000 in legal fees and disbursements to establish and enforce their right to live in peace in their home is on any view highly regrettable. The point is reinforced when one takes into account the value of their home,
which is less than £300,000 (coupled with the effect of the nuisance on that value,
£74,000 at the most)
These figures are very disturbing.”
If you have any questions or queries in relation to this blog please contact Sean Linley (email@example.com and 0113 336 3327) or the Clarion Costs Team on 0113 2460622.