Jones v Wrexham Borough Council

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The central issue in Jones v Wrexham Borough Council [2007] EWCA Civ 1356 concerned the, on first sight somewhat esoteric, issue of whether a pre-November 2005 CFA amounted to a “CFA Lite”. A “CFA Lite” is defined by regulation 3A of the Conditional Fee Agreement (Miscellaneous Amendments) Regulations 2003 as being a CFA where, with limited exceptions, “the client is liable to pay his legal representative’s fees and expenses only to the extent the sums are recovered in respect of the relevant proceedings, whether by way of costs or otherwise”.

The importance of whether the agreement was to be so treated rested with the fact that Regulation 4 of the Conditional Fee Agreement Regulations 2000, which required solicitors to inform clients as to whether they had an interest in recommending a particular ATE policy, amongst other things, did not apply to “CFA Lite” agreements. If the agreement was therefore caught by Regulation 3A then it did not impact on the validity of the CFA as what information was given to the client.

The Claimant, at the same time as being sent the CFA, was sent a client care letter. This letter purported to explain the effect of the CFA. There were a number of sections within the client care letter that were not entirely at one with the actual wording of the CFA. The Claimant’s solicitors sought to argue that taken as a whole, the effect of the agreement with the Claimant was such that he would not be liable (save for the allowable limited exceptions) for any own-side costs whatever the result of the proceedings save to the extent they would be recovered from the other side or covered by his ATE insurance policy.

The Court decided that there was no reason why a court could not look at the whole package produced by the solicitor: the CFA agreement, the client care letter explaining the effect of the agreement and the ATE policy. Having done that, the Court accepted that the agreement fell within Regulation 3A. This aspect of the decision causes some potential difficulties:

1. Insofar as there was a conflict between the information contained in the client care letter and the CFA, why should the former have precedence in resolving such conflicts, which was the approach adopted by the Court?

2. In future, in detailed assessment proceedings, should defendants automatically ask for client care letters and copies of full ATE policies to determine the true effect of the CFA? Will Claimants agree to such requests? Will Claimants wait until the matter reaches court and then produce such documents to try to rescue otherwise defective CFAs? Is this decision likely to lead to further uncertainty and satellite litigation in an already troubled area?

Given the above, it was not necessary for the Court to rule on whether the CFA would have been defective if it had not been held to be a “CFA Lite”. However, they chose to do so and the decision gives helpful guidance. The issue was whether there would have been a breach of Regulation 4(2)(e)(ii) of the Conditional Fee Agreement Regulations 2000, which required a solicitor to inform a client whether he had an interest in recommending a particular ATE policy. Here the claim had been referred through a claims management company Claims Bureau UK (CBUK). The solicitors advised the client that an ATE policy with CBUK was appropriate and asserted that they had no interest in recommending the policy. In fact, the ATE policy pre-dated the date when the CFA was entered into by the client. The Court held that the requirement to give the proper advice under Regulation 4(2)(e)(ii) applied equally where there was already an existing policy in place.

The Claimant sought to distinguish the facts in this case from those in Garrett v Halton Borough Council [2006] EWCA Civ 1017 on the basis that here there was no term established that if the solicitors did not recommend the policy their membership of the CBUK panel would be terminated. Under the terms of the CBUK operations manual the solicitors were required to recommend this policy. The Court held that:

“66. … It is an obvious inference not requiring any evidence that, if solicitors ignored the operation manual and recommended a different policy from CBUK, involving cancellation of the policy already entered into with CBUK, considerable damage would be done to the solicitor’s business relationship with CBUK. An insurer in the position of CBUK in addition to receiving premiums under the policy received fees for doing the work that solicitors would otherwise do and would not view lightly a solicitor on the panel advising clients to go to different insurers.

67. In my view, Mr Bacon simply cannot distinguish this case from Garrett. The decision in Garrett was not, at least so far as the Court of Appeal was concerned, based simply on the fact that there was a term under which membership of the panel could be terminated. The language of the judgment is in general terms saying as follows (paragraph 97):

“There was a close relationship between Websters and Ainsworth. Websters were dependent on Ainsworth for referrals of cases, although it is unclear to what extent. As Mr Morgan point out, cases are the life blood of solicitors. Profit generated by cases is likely to be of greater significance to solicitors than commissions paid on insurance premiums, paid for ATEs in connection with CFAs. The indirect financial interest of maintaining a flow of work through membership of a panel of solicitors is greater than the direct financial interest in commissions paid for insurance premiums. The advice to use the Ainsworth insurance product came in a CFA that it had apparently supplied to its panel solicitors and which bore its livery.”

In my view, the solicitors in this case clearly had an interest. It is not suggested that the fact that in some part of the CFA they disclosed that they were on the panel would be sufficient, having regard to the absolute terms in which they suggested they had no interest.”

As such, if this had not been a “CFA Lite” the agreement would have been held to be invalid. This aspect of the decision is extremely useful to Defendants. It considerably widens the scope of claims management schemes to which there will be a declarable “interest”.

The main issue considered in Crane v Canons Leisure [2007] EWCA Civ 1352 was whether the work performed by external costs draftsmen should attract a success fee. The claim had been conducted under a CCFA and, come the detailed assessment proceedings, the successful Claimant’s solicitors outsourced the work to external costs draftsmen. The Claimant’s solicitors then sought to treat the work performed by the draftsmen as forming part of their own profit costs such as to attract a success fee. The Defendant argued that the work should be treated as being a disbursement to which no success fee could be added. There was no dispute that if the work had been performed by internal costs draftsmen it would have formed part of the solicitors’ own profit costs and attract a success fee. There was also no dispute that the external costs draftsmen here would not recover the success fee themselves, this would go to the solicitors.

The decision depended on a construction of the CCFA and the definitions therein of “Base charges” as being “charges for work done by or on behalf of the Solicitors” and of “Disbursements” which were defined as “expenses which the Solicitors incur on the member’s behalf in the course of an action”.

By a two-to-one majority the Court of Appeal held that the work was to be treated as being part of the base charges and therefore attracted a success fee. In reaching this conclusion, the Court was required to make two findings:

1. That there was nothing to prevent a solicitor from delegating their own work to third parties and then charge the client a different amount, whether higher or lower, to that which they agree to pay the subcontractor. So long as the solicitor remains responsible for the work and it is work of the nature of “solicitors’ work” then it can be treated as forming part of the base costs. This part of the decision is of wider application as it gives general guidance as to the distinction between base costs and disbursements.

2. That the CCFA treated the work performed by the external draftsmen as falling within the definition of “Base charges” as opposed to “Disbursements”. This is an issue of construction and there may therefore be other CFAs/CCFAs where a different conclusion could be reached. It is interesting to note that the wording of both the old and new Law Society’s Model Conditional Fee Agreements defines “Basic charges” as being “our charges for the legal work we [emphasis added] do on your claim for damages” and deals with “Advocacy” on the basis that “the cost of advocacy and any other work by us [emphasis added], or by any solicitor agent on our behalf, forms part of our basic charges”. Would the same conclusion have been reached if one of these CFAs had been used? Although this decision is likely to be leapt on by claimants’ representatives as providing a definitive answer to the question as to whether a success fee can be charged on external draftsmen’s fees, the issue may not be quite so clear cut.

This decision does raise a number of issues of concern for defendants:

1. The potential adverse costs to which a defendant may be exposed in detailed assessment proceedings is considerably higher in light of this decision. A large number of claimant solicitors outsource costs work to external costs draftsmen and such work is now, potentially, likely to attract a success fee. (There is also a linked, and worrying, issue as to whether cases to which the fixed success fee regime now applies would have the 100% trial figure triggered, to the costs of the substantive action and/or the assessment costs, if the matter proceeds to detailed assessment. For the purposes of the rules, a “trial” is defined as including “the contested hearing of any issue ordered to be tried separately”, which could be treated as including detailed assessment.) This additional success fee to which defendants may be exposed, combined with the recent increase in the court fees for detailed assessment, highlights the importance of defendants making early and realistic settlement offers in relation to costs.

2. Given the Court of Appeal has given the go ahead to solicitors to outsource work at a lower charge, and then claim the work at a higher rate, what does the future hold? Is it easy to imagine some of the more imaginative schemes that will be set up to generate additional revenue for claimant solicitors. Will success fees now be claimed on work done by medical agencies?

3. Difficulties are likely to begin to emerge in trying to quantify the value of work done. For example, if a solicitor in Liverpool outsources work of a fee earning nature to a firm in India, what hourly rate is appropriate, even assuming that the paying party discovers what has been done?

Secondly, the Court was asked to reduce or disallow the success fee in relation to the detailed assessment proceedings on the basis that the risks attributable to detailed assessment are entirely distinct to those relevant to the substantive claim. The Court rejected these submissions and, following earlier decisions, held that there was no duty for a solicitor to set different success fees to different parts of a claim and that, unless the CFA itself was staged, the courts had no power to impose different success fees for different periods. Whatever success fee was reasonable at the outset would apply throughout, including to any detailed assessment proceedings.

In our last two Costs Law Updates we reported the decisions in Myers v Bonnington Cavendish Hotel) Ltd [2007] EWHC 90077 (Costs) and McFayden v Liverpool CC (Liverpool County Court, 9/5/07). These cases also concerned alleged breaches of Regulation 4(2)(e)(ii) where the Claimant’s solicitors had recommended an ATE policy but had failed to notify the client that they had an interest in recommending the policy because they were obliged to recommend the policy as part of their membership of the Accident Line Protect scheme, a scheme which also produced referrals to the solicitors. A further decision concerning the same scheme has recently been handed down in Elstone v Knowles [2007] EWHC 90089 (Costs). It is worth comparing the outcomes of these different cases:

Myers v Bonnington (Cavendish Hotel) Ltd

There had been a breach of the Regulations due to the failure to make it clear to the client that there was an obligation on the solicitors to recommend the particular policy. However, even if the client had been informed of the interest it would have made no difference to him. Further, the interest not declared was de minimis, and the breach was therefore not material, as the referrals from Accident Line represented only 0.3% of the firm’s total income. The CFA was held to be valid.

McFayden v Liverpool CC

The Court found there was a declarable interest in that the insurance policy was recommended as a result of membership of the Accident Line panel, the solicitors received benefits from such membership and the client had no choice other than to insure with this scheme if the solicitors accepted the case on a CFA basis. These interests were not notified and the breach was material as the client was placed in a “no choice” position. The CFA was held to be invalid.

Elstone v Knowles

The evidence before the Judge as to the Accident Line scheme was limited. Based on the available evidence, it was held that the scheme was based primarily on the facility to insure clients through a delegated authority scheme. The referrals that a firm might receive were seen as additional benefits as opposed to being primary. The solicitors would have still chosen to insure through the scheme even if there had been no referrals. As such, the spectre of termination of panel membership would not arise. Therefore, there was no disclosable interest and no breach. However, if there had been a breach, it would have been material as the value of the referrals represented approximately 5% of the firms’ income. The CFA was held to be valid.

The fact that the Courts can reach such different conclusions on exactly the same scheme explains why much of the costs satellite litigation continues relatively unabated. It will be interesting to see the how the scheme is viewed in light of the tightening-up of what amounts to a disclosable interest in Jones v Wrexham Borough Council.

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