UK: The Future Of The CFA

Last Updated: 18 August 2011
Article by Katie Papworth

The future of the conditional fee agreement ('CFA') was recently challenged by the Court of Appeal in the case of Sousa –v- London Borough of Waltham Forest Council [2011] EWCA Civ 194. The issue of litigation funding has been a hot topic since the Jackson Report in early 2010. On 30 March 2011, the government announced that it plans to implement Jackson's proposals, when parliamentary time allows, and to abolish the recoverability of CFA success fees entirely. In the meantime, this decision provides important clarification on the operation of CFAs.

Background

If a client instructs a lawyer under a CFA, it does so on the understanding that it will pay different amounts for the legal services depending on the outcome of the case. Generally, if the client loses the case, it will not be liable to pay for the fees which are subject to the CFA. However, if the client wins the case, it will be liable to pay all fees and expenses and the pre-agreed 'success' element of the fee which is usually a percentage increase. Lord Jackson has proposed that success fees and after the event insurance ('ATE') premiums (including self insurance provided by membership organisations) should cease to be recoverable from the other side so as to shift the responsibility for controlling costs back to claimants and encourage potential litigants to be more cautious about proceeding through the Court process.

As reported in the Insurance Lawyer in March 2011, the well published case of MGN Ltd –v- United Kingdom, lead many to believe that the beginning of the end of recoverable success fees and ATE premiums was nigh and that the judiciary would move towards Jackson's proposals in advance of a change in legislation. However, this recent case provides more clarity about the situation.

The facts

The facts in this case are straight forward:

  • Mr. Sousa made a claim under his home insurance policy for subsidence and damage to his property caused by a tree which was owned by the London Borough of Waltham Forest;
  • After paying the claim, the insurer exercised its right of subrogation and required Mr. Sousa to pursue a claim against the London Borough, instructing a specific firm of lawyers with which the insurer had a collective CFA;
  • The claim was settled, resulting in the London Borough making a payment to Mr. Sousa and agreeing to pay his costs but not the success fee. The London Borough argued that a court had the discretion to rule on the recoverability of the success fee and that, in accordance with Civil Procedure Rule 44, must take all circumstances into account when deciding whether costs were reasonable and proportionate. Given that Mr. Sousa had the benefit of a costs indemnity from his insurers, the London Borough argued that it was not reasonable for him to litigate with the benefit of a CFA.

First instance

At first instance, the District Judge held that the success fee was not payable based on the fact that the reality of the situation was that Mr. Sousa was never at risk of costs and therefore it was unreasonable for him to rely on the CFA. Whilst this decision was a County Court decision, the case was often referred to in costs proceedings and was a useful decision for those defendants facing subrogated claims. The insurers appealed the decision.

The High Court

The circuit judge allowed the appeal relying on the principle of subrogation which is to allow an insurer to 'step into the shoes' of the insured. Accordingly, if the London Borough did not have to pay the success fee element of the costs, the insurers would be left in a worse position than Mr. Sousa would have been had he been bringing the claim in person. This decision was again appealed by the London Borough.

The Court of Appeal

The Court of Appeal dismissed the London Borough's appeal allowing Mr. Sousa to recover his costs including the success fee. In reaching its decision, the Court of Appeal stated that, although Mr. Sousa was not a party to the CFA, in pursuing the subrogated claim at his insurer's request, it is inferred that he had ratified the insurer's instructions to the solicitor in respect of bringing the proceedings in his name and therefore it should also be inferred that he had ratified the agreement to enter into a CFA and therefore the court should treat the CFA as Mr. Sousa's CFA. Further, the Court of Appeal held that (applying the House of Lords' decision in Campbell v Mirror Group) CFAs should be open to everyone, irrespective of means and that therefore it was reasonable for an insurer to enter into the CFA.

Comment

The Court of Appeal's decision is relevant to any subrogated claim. It reaffirms the principle of subrogation that an insurer should enjoy the same rights as the insured and also that in stepping into the shoes of an insured, the insurer should be treated the same as any litigant. Accordingly, the decision will be welcomed by insurers. Indeed, many costs negotiations were held up by the Sousa case and they will no doubt now be concluded in the insurers' favour.

However, despite the favourable decision for the insurers, the Court of Appeal did, in reaching the decision, endorse Jackson's recommendation that the recoverability of success fees should be abolished, citing the fact that insurers can bring tree root claims using CFAs and adding to the burden of local authorities and the tax payer as 'absurd'. The judgment therefore confirms an indication of judicial support for Jackson's reforms but that the current system will continue to operate until a change in legislation has been passed. Indeed, Lord Justice Ward in his judgment of the Sousa case said he hoped that the reforms be enacted 'sooner rather than later'.

Under the government's proposals an insurer will still be entitled to take out a CFA, and therefore limit their exposure to costs prior to the conclusion of the case. They will, however, have to bear the success fee as this will no longer be recoverable from the losing party and therefore it is clear that, despite this recent decision, the end of the recoverability of success fees is in sight.

The contents of this article are intended as guidelines for clients and other readers. It is not a substitute for considered advice on specific issues. Consequently, we cannot accept any responsibility for this information or for any errors or omissions.

Thomas Eggar LLP is a limited liability partnership registered in England and Wales under registered number OC326278 whose registered office is at The Corn Exchange, Baffin's Lane, Chichester, West Sussex, PO19 1GE (VAT number 991259583). The word 'partner' refers to a member of the LLP, or an employee or consultant with equivalent standing and qualifications. A list of the members of the LLP is displayed at the above address, together with a list of those non-members who are designated as partners. Regulated by the Solicitors Regulation Authority. Lexcel and Investors in People accredited.

Thomas Eggar LLP is not authorised by the Financial Services Authority. However, we are included on the register maintained by the Financial Services Authority so that we can carry on insurance mediation activity which is broadly the advising on, selling and administering of insurance contracts. This part of our business, including arrangements for complaints and redress if something goes wrong, is regulated by the Solicitors Regulation Authority. The register can be accessed via the Financial Services Authority website. We can also provide certain further limited investment services to clients if those services are incidental to the professional services we have been engaged to provide as solicitors.

Thesis Asset Management plc, our associated financial services company, provides a comprehensive range of investment services and advice. Thesis is owned by members of Thomas Eggar LLP but is independent of and separate to it. No lawyer connected with Thomas Eggar LLP provides services through Thesis as a practicing lawyer regulated by the Solicitors Regulation Authority. Thesis is authorised and regulated by the Financial Services Authority. Thesis has its own framework of investor protection and professional indemnity cover but Thesis clients do not enjoy the statutory protection of solicitors' clients.

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