UK: Court of Appeal Clamps Down on CFA Challenges

Article by Rosemary Gare and Iain Newton

In its judgment in six separate appeals handed down on 22 May 2003¹ the Court of Appeal sought to stem the tide of satellite litigation arising out of Conditional Fee Agreements ("CFAs"), which many have perceived as threatening the viability of such a funding regime for civil litigation. Brooke LJ referred in the judgment to an existing state of "trench warfare" between solicitors representing claimants and defendants' insurers. The court appears to ascribe much of the blame for the current situation to challenges to CFAs founded upon minor technical breaches of the regulations. Accordingly, it has now sought to curtail the scope for such challenges in future.

The technical challenges to CFAs have generally been founded upon s58 Courts and Legal Services Act 1990.Subsection 1 states: "a [CFA ] which satisfies all of the conditions applicable to it by virtue of this section shall not be unenforceable by reason only of it being a [CFA ];but … any other [CFA ] shall be unenforceable". Paying parties have relied upon this wording to contend that any breach of any one condition rendered the entire CFA unenforceable.

The court has now rejected such a strict interpretation of the statute and has preferred a more purposive approach, finding that "in general, conditions are sufficiently met where there has been substantial compliance with, or in other words no material departure from, what is required". To assess such sufficiency, the court has directed that costs judges should ask themselves the following question:

If the answer is yes, the conditions have not been met and the CFA is unenforceable. If the answer is no, the departure is immaterial and the conditions are satisfied.

The court seems to have sought to diminish the possibility of the battleground for satellite litigation shifting from technical challenges to issues of client protection and the administration of justice, by indicating that it is most unlikely that any minor shortcoming in a CFA, or the procedures leading up to it, would amount to a material breach of the requirements. The court has given a very clear indication that only substantive and real challenges to the enforceability of CFAs should be entertained in future. Indeed, it has set down guidelines that the judge conducting an assessment where such a challenge has arisen should first consider the position as between the receiving party client and his solicitor. If the judge considers that the client would have just cause for complaint because some requirement introduced for his protection has not been satisfied, or that the CFA otherwise offends public policy, the CFA would be unenforceable and the indemnity principle would operate in favour of the paying party to deprive the solicitor of his costs and any success fee.

However, the court has held that, even if the CFA is unenforceable, the receiving party would be able to recover from the paying party disbursements that had already been financed and any After The Event ("ATE") insurance premium, neither of which are dependent upon the existence of a CFA.

The issue of whether a paying party can obtain disclosure of a CFA is closely linked to the technical challenges mounted to CFAs. Receiving parties, with some reason, often perceive requests for disclosure to be a "fishing expedition" by paying parties seeking grounds for such a challenge. The court considered the question of whether disclosure of a CFA and related material could and should be ordered at the point in proceedings where costs fell to be assessed. It concluded that disclosure could not be ordered but that, in such circumstances, the receiving party should be required to elect whether to disclose the CFA, or to seek to prove its entitlement to the costs claimed by some other means. The court identified the practical difficulties for a receiving party choosing the second option. It indicated that it should become normal practice for a CFA to be disclosed for the purposes of costs proceedings in which a success fee was claimed.

The court recognised the concerns expressed about disclosure of CFAs containing confidential information, but concluded that these could be addressed by removing the sensitive parts of the document before disclosure. By contrast, the court determined that attendance notes and other correspondence regarding CFAs should not ordinarily be disclosed. However, the judge conducting the assessment could require disclosure of such material if a genuine issue was raised. The court defined a "genuine issue" as one in which there was a real chance that the CFA was unenforceable as a result of a failure to satisfy the applicable conditions.

The court sought to apply the general principles outlined above to the individual appeals before it. In each, the breaches that the paying party had sought to rely upon to render the CFA unenforceable were found not to be material. Where errors or omissions in particular CFAs had been identified, the court stressed that the document needed to be considered as a whole and an analysis of the respective positions of the receiving party and his solicitor undertaken.

In those appeals where compliance with Regulation 4 (the requirement to explain the CFA and its ramifications to the client and to highlight possible alternative funding arrangements)was an issue, the court dismissed the challenges that were brought. In particular, the court upheld the judgment of Chief Master Hurst in the first tranche of The Accident Group ("TAG")test cases². The paying parties contended that the manner in which the TAG scheme operated constituted a breach of Regulation 4. An employee of TAG was responsible for meeting clients, explaining the scheme and signing them up to the CFA. The regulations require this to be done by a "legal representative". However, neither the client nor the TAG employee had any contact with a solicitor during this process. The issue was whether the solicitor's responsibilities could properly be delegated to the TAG employee. The court held that, in principle, they could be delegated, provided that, in doing so, the solicitor did not abandon the supervisory responsibilities that were required of him by the Solicitors' Practice Rules and the Guide to Professional Conduct.

It remains to be seen whether the Court of Appeal's approach will significantly reduce the incidence of challenges to CFAs by paying parties. Certainly, it is likely to lower the prospect of mounting a successful challenge to having to pay a party's costs on the grounds of a purely technical non compliance with the regulations. Given the number and intensity of such disputes to date, the line of attack may simply alter. However, the court has stressed the importance it attaches to the CFA funding system operating effectively. It clearly perceives a danger to the fundamental viability of the CFA regime, and the access to justice it affords, if the present situation is not addressed. In Callery v Gray³ the House of Lords identified that the responsibility for monitoring and controlling the development of the CFA regime lay with the Court of Appeal. In its recent judgment in these appeals, the Court of Appeal has demonstrated its willingness to shoulder that burden. It is likely that it will have to continue to do so as other CFA issues, perhaps most importantly the appropriate levels of success fees for different types of litigation, are brought before it.