UK: Court Of Appeal - Checking The Spiralling Costs Of Claimants’ Solicitors?

The rules relating to Conditional Fee Agreements ("CFAs") entered into post 1 November 2005 have now been relaxed. A distinction has to be drawn between CFAs entered into after this date, when the CFA (Revocation) Regulations apply, and those entered into prior to that date when the old regulations apply and where technical challenges are still possible.

The paying party should check the CFA and ask detailed questions as to whether the claimant’s solicitor has complied with the rules.

Did they undertake a reasonable investigation into the possibility that the client has before-the-event ("BTE") insurance? In deciding what questions should be asked by the claimant’s solicitor, the Court of Appeal in Myatt v National Coal and Garrett v Halton Borough Council (2006) gave some useful guidance as to the extent of the inquiry required. It will depend on the circumstances, including:

• the nature of the client – does he have a real knowledge and understanding of insurance matters?;

• the circumstances in which the solicitor was instructed (did they meet the client?);

• the nature of the claim – is it likely that a standard insurance policy will cover it?;

• the cost of the ATE premium; and

• if the claim had been referred to solicitors on a panel, the fact that the referring body has already investigated the question of the availability of BTE.

In Myatt, the solicitors failed to ask the correct questions or to investigate sufficiently whether or not the client had a BTE policy in existence. Although there was no BTE which would provide cover for the claim, this was held to be a material breach of the regulations (there does not have to be actual prejudice suffered) and the CFA was unenforceable.

Similarly, enquiries should be made to ensure that the solicitor has informed the client if he had an interest in recommending a particular ATE insurance. The Court of Appeal held in Garrett that if a solicitor is obliged to recommend a particular insurance product as a result of being a member of a panel, it is not sufficient to tell the client that the firm is on the panel. In this case, the solicitor failed adequately to explain what was involved in panel membership and its significance. This was held to be a material breach of the regulations and the CFA was unenforceable.

If a CFA does not comply with the rules and is unenforceable then, under the indemnity principle, the defendant is not obliged to pay costs that would otherwise have been payable under the CFA.

The outcome of these appeals is of considerable importance, since thousands of CFAs were entered into before 1 November 2005 in respect of claims where costs have still to be resolved. Where there is a genuine concern that the regulations may not have been complied with, defendants can still raise technical challenges.

The courts will focus on the advice that was given by the solicitor and other relevant circumstances which existed at the date of the CFA, and make a judgement as to whether the departure from the requirement in question had a materially adverse effect on the protection afforded to the client.

Documents, or other evidence showing that the regulations have been complied with, should be requested by the paying party as soon as the costs are submitted for consideration, and before further costs of detailed assessment are incurred. A refusal or failure to disclose this evidence should be drawn to the costs officer’s attention.

Since 1 November 2005, new regulations apply. To comply, a CFA must now be in writing and must specify the success fee (which must not exceed 100 per cent). Failure to advise a client on alternative funding arrangements and providing disclosure about having a financial interest in a particular insurance product is a breach of the Solicitors’ Practice Rules 1999. This is a matter between the solicitor and his client, and the CFA will still be enforceable.

Challenges to CFAs under the new rules would seem to be restricted to arguments of the level of success fee and reasonableness of the ATE premium.

For the first time since Callery v Gray (2001), the Court of Appeal has considered the reasonableness of ATE premiums in Rogers v Merthyr Tydfil County Borough Council (2006). The fact that the ATE premium was large compared with the damages recovered did not necessarily mean that it was disproportionate. In this case, a premium of £4,860 was allowed where damages were agreed at £3,000.

The Court had no problem with staged premiums and indicated that a party who has an ATE insurance policy with staged premiums should inform the defendant of that, and should set out accurately the trigger moments when the second or later stages will be reached. This will allow defendants to consider tactically if, and when, to make settlement offers to avoid paying the later stage premium. If there is an issue over the size of a second or third premium, then the claimant’s solicitors will be expected to explain in a brief note, for the purposes of assessment, how they have chosen the particular ATE product and the basis on which the premium is rated – whether block rated or individually.

District judges and costs judges do not have the expertise to judge the reasonableness of a premium except in very broad brush terms. Challenges to small- or medium-size premiums will become more difficult.

There is still very little judicial guidance on the appropriate level of success fees. The Court of Appeal in Callery gave guidance in 2001 on this issue, but there have been no other Court of Appeal decisions on the point. Callery established that the reasonableness of the success fee has to be assessed at the time the CFA was agreed. It is permissible for any CFA to include a twostage success fee, and this is to be encouraged. The Court cannot impose a two-stage success fee.

For pre-1 November 2005 CFAs, the conjoined appeals of Myatt and Garrett will be useful in challenging CFAs. If the claimant’s solicitor fails to comply with the regulations, no costs will be payable. Under the new rules, the possibility of such technical challenges are gone, and defendants are left with challenges to the level of success fees and ATE premiums. Paying parties will have to hope that the scope of predictive costs and fixed success fees are broadened to check the everincreasing costs of claimants’ solicitors. The Civil Justice Council is currently engaged in considering fixed success fees in public liability cases and to produce guidelines or fixed ATE premiums.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.