Suinner v FBN Bank (UK) Limited

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In the case of Suinner v FBN Bank (UK) Ltd [SCCO] 22/2/07 the Claimant instructed Sherringtons solicitors to act for him in relation to an EL matter under a Conditional Fee Agreement (CFA). The CFA recommended that the Claimant take out an after-the-event (ATE) insurance policy with Costsupport. The CFA stated that: “This is because” but was then blank where the reasons for the recommendation should have appeared. This prima facie amounted to a breach of Regulation 4(2)(e)(i) which requires the legal representative to inform the client before a CFA is entered into:

“(e) whether the legal representative considers that any particular method or methods of financing any or all of those costs is appropriate and, if he considers that a contract of insurance is appropriate or recommends a particular such contract –

(i) his reasons for doing so, and
(ii) whether he has an interest in doing so.”

Whether the breach was material became obvious from the nature of the ATE policy that had been recommended. The policy premium was calculated as being a percentage (20%) of the damages recovered. This is an unusual method of calculation and had been the subject of previous judicial consideration by the Senior Costs Judge, Master Hurst, in Pirie v Ayling [2003] EWHC 9006 (Costs). He concluded that although such a method was lawful, it was inherently flawed and substantially reduced the amount claimed. What was significant about this decision, which was made prior to Mr Suinner instructing Sherringtons in his claim, was that the Claimant’s solicitors in Pirie were also Sherringtons. (Coincidentally, Simon Gibbs who appeared for the Defendant here also acted for the Defendant in that case.) Therefore at the time that they were recommending that Mr Suinner obtained a policy with Costsupport they were already aware that the premium calculation was inherently flawed and was unlikely to be recovered in full at detailed assessment.

Mr Suinner’s claim was pitched at one stage as being in the region of £150,000. If damages had been recovered at that level the premium would have been £30,000. A premium that high would have been grossly excessive for an EL claim of this nature and well in excess of equivalent policies available at the time. Further, the Costsupport policy only provided an indemnity of £10,000. If the matter had proceeded to trial the cover would have proved entirely insufficient. Indeed, that is precisely what happened when the Claimant lost at trial on the Defendant’s Part 36 offer. The Defendant’s costs for the relevant post-Part 36 period were claimed in excess of £18,000.

It was argued for the Defendant that the failure to give any reasons for recommending the Costsupport policy was particularly serious in light of the policy that was being recommended. The failure to explain that it would be highly unlikely that the premium would be recovered at much more than a fraction of its full amount, meaning that the Claimant would be liable for the shortfall, and the failure to explain that the level of indemnity was likely to prove insufficient meant that the Claimant was unable to make an informed decision as to the suitability of the policy at the time of entering into the agreement. Reliance was placed on the following passage from Garrett v Halton Borough Council [2006] EWCA Civ 1017:

“101. At para 90 of Hollins v Russell, the court recorded the submission of Mr Drabble that the statutory regulation had two distinct aims. The second, he submitted, was “to protect the client – to ensure so far as possible that she understands what she is letting herself in for and is able to make an informed choice amongst the funding options available to her”. The court seems to have accepted this submission. We certainly would. In our judgment, by informing Ms Garrett that they were on the Ainsworth panel, the Websters representative did not disclose the real financial interest they had in recommending the NIG policy.”

As such, it was clear that not only had there been a breach of the Regulations but that such a breach was material. The Court accepted these submissions and all the Claimant’s costs incurred under the CFA were disallowed (having been claimed at over £10,000).

In the case of Brady v Rec-Tech Leisure Ltd (Tunbridge Wells County Court, 24/4/07), the Claimant, through her litigation friend, instructed Branton Edwards solicitors (now Branton Bridge) to act under a CFA. The case had been referred to Branton Edwards through Result Management Ltd (Result), a claims management company. The CFA recommended that the Claimant obtain an ATE policy with NIG or IOMA. The CFA stated that Branton Edwards had no interest in recommending the policy. In fact, the policy that was being recommended was issued by Result with the insurers being either NIG or IOMA. In a covering letter sent to the Claimant’s litigation friend the following information was provided:

“Result

Please note that Tim Branton and David Edwards who are Partners in the firm of Branton Edwards have a financial interest in Result Management Limited. We confirm that Branton Edwards receives no financial benefit from the arrangements for the funding and insurance of you case.”

During the detailed assessment proceedings it emerged that the two partners, at the relevant time, each owned 50% of Result and that for each policy issued Result received a commission of £300 out of a premium of £900. Branton Edwards was the only firm who received referrals from Result. There were no other “panel” members.

It was argued for the Defendant that in truth the solicitors did have a financial interest by virtue of the commission payments received by Result, which in turn was owned by the partners, and by virtue of the fact that the firm had a financial interest in the success of Result to ensure the continued stream of referrals. It was further argued that the information given to the Claimant’s litigation friend failed to properly advise of these interests as required by Regulation 4(2)(e)(ii) (see above). The litigation friend was not properly informed of the relationship between NIG/IOMA and Result or of what that interest actually was – the payment of a £300 commission. As such, she was unable to make an informed decision as per paragraph 101 of Garrett.

District Judge Lethem, sitting as Regional Costs Judge, accepted the Defendant’s submissions and ruled the CFA to be invalid resulting in a saving to the Defendant of approximately £20,000. Of wider significance, he accepted the Defendant’s arguments over those of the Claimant in that the Regulations required a claimant to be informed as to what the actual interest was. It was not sufficient to simply inform a claimant whether or not there was an interest. This was the effect of reading Regulation 4(2)(e)(ii) together with 4(2)(e)(i). The requirement to explain why a policy is being recommended (Regulation 4(2)(e)(i)) must therefore include the details of what that interest is under Regulation 4(2)(ii). DJ Lethem accepted that this was the effect of the Court of Appeal’s decision at paragraph 101 of Garrett with the reference to the failure by the solicitors there to “disclose the real financial interest”.

It seems probable that the defective wording used in this case was also used in other CFA cases run by this firm during this period.

These two cases show that successful challenges continue to be available for claims where the old CFA Regulations apply. Although the volume of these claims is reducing over time, the outstanding cases are by their nature likely to be those where the level of costs is relatively high. Such claims are those where a careful consideration of the merits of a technical challenge is most justified. Gibbs Wyatt Stone remains committed to providing its clients with the best possible advice and advocacy in this area of the law.

Lamont v Burton

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The Court of Appeal’s decision last week in Lamont v Burton [2007] EWCA Civ 429 is likely to have serious costs implications for defendants and impact on the way personal injury claims are conducted.

The case concerned the application of the fixed success fee regime under Part 45. Although the case itself concerned an RTA the Court recognised that it had equal relevance to EL and EL disease claims that are also subject to fixed success fees.

The claim related to an accident on 10th September 2004 being conducted under a CFA and was therefore subject to the fixed success fees allowed for under CPR 45.15:

“…the percentage increase which is to be allowed in relation to solicitors’ fees is:

(a) 100% where the claim concludes at trial; or

(b) 12.5% where –

(i) the claim concludes before a trial has commenced; or

(ii) the dispute is settled before a claim is issued.”

The Defendant admitted liability early and subsequently made a Part 36 payment in the sum of £1,800 which was not accepted. The matter proceeded to a disposal hearing where the Court awarded damages of £1,774.32. The Claimant was therefore awarded his costs only up to the last date he could have accepted the Part 36 payment without needing the Court’s permission and was ordered to pay the Defendant’s costs from that date onwards.

As the matter had concluded at “trial” the Claimant sought a 100% success fee on his costs.

The Defendant argued before the trial judge, and on appeal, that the Claimant should have accepted the Part 36 payment within the time for acceptance; and that had he done so, the claim would have concluded before trial, so that the percentage increase for solicitors’ fees prescribed by CPR 45.16(b)(i) would have been 12.5%. Accordingly, it was argued that the trial judge should have exercised his discretion to allow the Claimant an uplift of 12.5% rather than the 100% claimed.

This argument was rejected by the trial judge and by the Court of Appeal on the grounds that the wording of CPR 45 is mandatory as to what success fee should be allowed and the Court has no discretion, either directly or indirectly, to award a different amount to that provided for by the rules. The wide discretion as to the order that a court can make under CPR 44(3) does not extend to making an order which circumvents CPR 45.

The Court of Appeal observed:

“Section III of Part 45 contains a carefully balanced scheme for the award of success fees in road traffic accident cases. The object of the scheme is to provide certainty and avoid litigation over the amount of success fees to be allowed to successful parties. … It is inherent in the scheme that in some individual cases, the success fee will be unreasonably high and in others unreasonably low. But that is the price that has to be paid for achieving certainty and avoiding litigation over the amount of success fees. Rule 44 cannot be invoked to circumvent the careful structure of rule 45 and to undermine its objective of achieving certainty.

One issue not considered in the judgment is the effect of CPR 44.3B which states:

“(1) A party may not recover as an additional liability –

(c) any additional liability for any period in the proceedings during which he failed to provide information about a funding arrangement in accordance with a rule, practice direction or court order;

(d) any percentage increase where a party has failed to comply with –

(i) a requirement in the costs practice direction; or

(ii) a court order,

to disclose in any assessment proceedings the reasons for setting the percentage increase at the level stated in the conditional fee agreement.”

Do either, or both, of these rules apply to Part 45? Is the combined effect of 44.3B(1)(c) or 43.3B(1)(d) and Part 45 that although the percentage success fee that applies is fixed the period that it will be recoverable for, or whether it is recoverable at all, still requires appropriate disclosure? Alternatively, do neither of these sections apply where the success fee is fixed? Is the success fee recoverable regardless because of the mandatory nature of Part 45?

The possible impact of Lamont on future litigation tactics is significant. The following two examples give an indication of the potential issues:

Example 1

A Claimant is involved in a fast-track RTA conducted under a CFA. A month before trial the Defendant makes a Part 36 offer of £10,000 which represents a reasonable settlement. The Claimant’s solicitors have incurred base profit costs to date of £6,000. To take the matter to trial will require a further £1,000 base profit costs to be incurred by the solicitors. The Claimant’s counsel’s trial costs will be fixed at £500. The Claimant solicitors will recover the following costs if they advise the Claimant to accept the offer now:

Base profit costs – £6,000
Success fee (12.5%) – £750
Total recovered – £6,750

If the solicitors advise the Claimant to reject the offer, and the offer is not beaten, they will recover the following:

Base profit costs – £6,000
Success fee (100%) – £6,000
Total recovered – £12,000

This example ignores VAT and other disbursements. Of course, the solicitors will have “lost” £1,000 of profit costs (assuming the Claimant is not liable for the shortfall) and the £500 brief fee. In addition, there will be an adverse costs order in respect of the Defendant’s costs. Assuming that these are at the same as those of the Claimant (ie profit costs of £1,000 and counsel’s fees of £500) and assuming that the solicitors are prepared to cover the third party costs themselves this still results in a balance in their favour of £9,000 (ie £12,000 less £1,500 own “lost” costs and less £1,500 third party costs). This is £2,250 more than if they had advised their client to accept the “reasonable” offer.

Example 2

A Claimant is involved in a high value EL claim conducted under a CFA. A month before trial the Defendant makes a Part 36 offer of £100,000 which represents a reasonable settlement. The Claimant’s solicitors have incurred base profit costs to date of £50,000. To take the matter to trial will require further costs of £20,000 to be incurred, to include profit costs, counsel’s fees and disbursements by the Claimant. The Claimant solicitors will recover the following costs if they advise the Claimant to accept the offer now:

Base profit costs – £60,000
Success fee (25%) – £15,000
Total recovered – £75,000

If the solicitors advise the Claimant to reject the offer, and the offer is not beaten, they will recover the following:

Base profit costs – £60,000
Success fee (100%) – £60,000
Total recovered – £120,000

This example ignores VAT. The solicitors will have “lost” £20,000 own costs and disbursement (assuming the Claimant is not liable for the shortfall). In addition, there will be an adverse costs order in respect of the Defendant’s costs. Again, assuming that these are at the same as those of the Claimant (ie £20,000) and assuming that the solicitors are prepared to cover the third party costs themselves this still results in a balance in their favour of £80,000 (ie £120,000 less £20,000 own “lost” costs and less £20,000 third party costs). This is £5,000 more than if they had advised their client to accept the “reasonable” offer.

Of course, different examples will produce an endless number of different outcomes but the potential problems are obvious. This will often create a clear conflict of interest between a claimant’s and a solicitor’s interests. Further, a claimant solicitor only needs to succeed on a small number of cases at trial to significantly adjust the figures in their favour. Different potential conflicts arise because of the various fixed success fees that counsel in entitled to depending on the stage a case settles.

Evidence has already emerged that there has been a 37% increase in claimant solicitors issuing proceedings in low-value road traffic accident cases so as to avoid the fixed-fee payment scheme (according to a study for the Civil Justice Council). It will therefore hardly be surprising if the decision in Lamont has a significant impact on the advice given to claimants as to whether to accept late Part 36 offers. It will become increasingly important for defendants to make reasonable offers at as an early a stage as possible to give some protection. Extreme caution is needed before proceeding to trial simply on quantum.

The Court of Appeal did recognise that their interpretation of the rules was not without problems:

“…although we accept that there may well be a case for deciding that, where a claimant fails to better a Part 36 offer or payment, he should be allowed the same success fee that he would have recovered if he had accepted the offer. For the reasons that we have given, that is not the effect of the rules in their present form. It will be a matter for the Rule Committee and the Civil Justice Council to consider whether to amend Part 45 to make special provision to deal with the Part 36 issue.”

Where, for a variety of reasons, a defendant has not made a strong Part 36 offer at an early stage the only option appears to be to make an overly generous offer in settlement. If accepted, any overpayment on damages is likely to be less than the higher success fee that would otherwise be recoverable. If the offer is generous enough, then the Claimant’s solicitor may be vulnerable to a claim in negligence by his client if he does not recommended acceptance. However, whether paid out in increased damages or success fees it will produce the same result – greater cost to defendants.

This case highlights a potentially much bigger danger to defendants that does not yet seem to have been widely appreciated. The fixed success fees apply regardless of the stage at which the CFA is entered into. There is therefore nothing within the rules that prevents a claimant solicitor waiting until liability has been admitted and then entering into a CFA and claiming the fixed success fee. In RTA cases to which the fixed-fee scheme applies the success fee will apply to the full fixed fee. In other cases it will only apply to work conducted after the CFA is entered into but this is likely to represent the majority of the work if liability is admitted at an early stage and the solicitors promptly enter into a CFA. There appears to be a very real danger that even where claimant solicitors are accepting referrals under BTE insurance policies they will now routinely enter into CFAs from the stage that liability is admitted leading to significant additional costs liabilities to defendants with no corresponding risks to themselves.

The problems with the rules that this decision has highlighted requires urgent attention.

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