Success Fees: Are You at Risk?
Whilst you want to maximise the
percentage uplift that you can recover, it is essential to minimise the
risks of losing your success fee altogether!
Since the introduction of the Jackson Report
1,
success fees have come under increasing scrutiny from various different
fronts with debates reigning in both legal and political forums
cumulating in a high degree of media interest. Amongst the extensive
recommendations contained within Lord Justice Jackson's Report are major
reforms to Conditional Fee Agreements and the recoverability of success
fees. The review of Civil Litigation costs and ensuing political debate
has cumulated in the Legal Aid, Sentencing and Punishment of Offenders
Bill which recently
2 passed its second reading in the House of Commons
3. The Bill will now be considered and scrutinised by a Public Bill Committee and there is currently a call for written evidence
4.
If the Bill is enacted, it will likely result in, inter alia, a massive
overhaul to the funding of Civil Litigation as we know it.
There has been a great deal of support
5
for the Jackson Report's recommendations and it is clear that a number
in the Judiciary appear keen for some form of implementation, which can
be adduced from Judgments of recent cases such as Sousa v. London
Borough of Waltham Forest Council [2011]
6.
With success fees becoming progressively criticised and the provisions
within the Legal Aid, Sentencing and Punishment of Offenders Bill hot
topic, it is increasingly important to ensure that you comply with the
regulatory requirements to allow for maximal recovery of your success
fee.
Conditional Fee Agreements,
particularly for the impecunious, provide Clients with a method of
funding which allows them access to Justice but with an arguably limited
personal liability for costs
7.
With the possibility of not being paid in the event of failure, the
Client's Solicitor is undoubtedly taking on board a risk. However, this
risk is somewhat compensated for by the ability to apply a success fee
which is recoverable from the Paying Party at the conclusion of the
case. Thus, it is necessary to carefully consider the claim at the
outset to weigh up the relevant factors prior to incurring the risk.
Consequently, following the conclusion of a lengthy contentious action
with all its inherent risks
8,
it can be particularly disheartening for the Receiving Party to be
faced with the prospect of losing their additional liabilities due to a
potential oversight in failing to follow the Rules9.
Consideration must be given to Rule
44.3B of the Civil Procedure Rules which provides various sanctions
which can prevent a Receiving Party recovering their additional
liabilities. Of particular concern to the recoverability of the success
fee are 44.3B(1)(c) and (d)
10, which state:-
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“43.B
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(1) Unless the Court orders otherwise, a party may not recover as an additional liability -
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...
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(c)
any additional liability for any period during which that party failed
to provide information about a funding arrangement in accordance with a
rule, practice direction or court order;
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(d) any percentage increase where that party has failed to comply with -
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i. a requirement in the Cost Practice Direction; or
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ii. a Court Order,
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to
disclose in any assessment proceedings the reasons for setting the
percentage increase at the level stated in the conditional fee
agreement;
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...”
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Whilst these sanctions might seem
somewhat harsh, from the Receiving Party's point of view, had they known
the extent of their liabilities whilst the substantive claim was
ongoing, they might have changed their position by settling sooner or
even by fighting on.
If you want to avoid arguments that
the above sanctions ought to be imposed, it is essential that you give
your opponent notice of your funding position in accordance with the
Rules at the various stages before, during and after issue of
proceedings.
Steps Required Prior to Issuing Proceedings
The Rules in relation to notification
of the funding position changed with the introduction of the Practice
Direction for Pre Action Conduct
11.
The requirements under the Practice Direction for Pre Action Conduct
only apply to funding arrangements entered into from 1st October 2009
12.
For funding arrangements entered into
before the 1st October 2009, there is no requirement to inform your
opponent of the details of your Client's funding until issue of the
Claim Form
13.
However, if your funding arrangement changed after the 1st October 2009,
for instance, you obtained After the Event Insurance, notification
would need to be provided in accordance with the current rules.
For funding arrangements entered into
from the 1st October 2009, it is necessary to provide your opponent
with notice of your funding arrangement as soon as possible and in any
event within 7 days of entering the funding arrangement. It is important
to note that where the funding arrangement has been entered prior to
the letter of claim, notice should be provided within the letter of
claim
14.
If you change your funding arrangement, it is prudent to provide notice within 7 days of the change.
What information must be provided?
Section 19.4 of the Cost Practice Direction details the information
which must be provided to your opponent. In relation to success fees,
you must inform your opponent of the fact that you have entered into a
CFA which provides for a success fee (or CCFA if applicable) and state
the date of the agreement identifying the claim to which it related (if
it is a CCFA, you must also provide information regarding the relevant
body and set out the date and terms of the undertaking)
15
. You do not need to inform your opponent of the level of the success fee agreed with the Client.
Steps Required Post Issue of Proceedings
Where a funding arrangement has been entered prior to the issue of proceedings, it is necessary to file a Notice of Funding
16
with the Court on issue of the Claim Form. The Notice of Funding should be served on every other party with the Claim Form
17.
If you are the Defendant and have
entered into a funding arrangement before filing any document, then
Notice must be provided to the Court with the first document filed, e.g.
Acknowledgement of Service
18. Notice should also be served on every other party.
If you enter into a funding
arrangement after the issue of the Claim Form, then you must file and
service a Notice of Funding within 7 days of entering the arrangement
19.
In accordance with Rule 44.15(2) of
the CPR, if there is any change to the funding arrangement, then notice
of the change must be filed and served on all parties within 7 days
20.
It is important to remember that where an Allocation Questionnaire
and/or Listing Questionnaire have been filed, a new estimate of costs
must be filed with the notice of the change of funding
21.
Steps Required following Conclusion of Substantive Claim
The sanctions under Rule 44.3B(d)
tend to kick in where you are at the stage of serving your Bill of Costs
and only concerns recovery of the success fee. Try not to get caught
out; the Rules concerning Service of the Bill and disclosure of
documents such as the Conditional Fee Agreement, changed from 6th April
2010.
Where the Conditional Fee Agreement
(or CCFA) was entered into before 1st November 2005, a statement of
reasons for the percentage increase should be given on Service of the
Bill (regardless of whether or not the success fee is fixed under Part
45, Sections II to V of the CPR)
22.
Where the Conditional Fee Agreement
was entered into on or after 1st November 2005 and the success fee is
not fixed under Part 45, Sections II to V of the CPR, a Statement of
Reasons for the percentage increase or a copy of the risk assessment
prepared at the time the Agreement was entered into should be provided
on Service of the Bill of Costs23.
Watch out for the Paying Party
attempting argue that Rule 44.3B(c) should also apply at this stage.
Section 32.5(1)(d) provides that where the Conditional Fee Agreement is
not disclosed, a statement providing the relevant information (as set
out within the aforementioned Section) should be served with the Bill of
Costs. Were this argument to succeed, the sanction should only apply to
the costs incurred from service of the Bill up to the time the
information was provided, therefore only likely to affect any success
fee claimed on your Assessment costs.
All May Not Be Lost!
If you have failed to provide notice
of your success fees as required under any Rule, Practice Direction or
Court Order – don't Panic! You may still be able to recover your
additional liabilities by making an Application for Relief from
Sanctions
24.
Applications for Relief from
Sanctions under Rule 44.3B should be made as quickly as possible after
being made aware of the default and Counsel must be served with a copy
of the Application if their success fee could be affected by the outcome
25.
When hearing an Application for Relief from Sanctions, the Court will
consider all the circumstances set out in Rule 3.9(1) and the evidence
filed
26.
Whether an Application for Relief
from Sanctions will be successful depends on the circumstances of the
case. The following cases are useful to consider when contemplating an
Application under Rule 3.9 as they illustrate the Court's inherent
discretion and possible outcomes:
Wilkins v. Plymouth Community Services (2003) CLY 337
There had been a failure
to provide notice of the Conditional Fee Agreement and insurance. It
was held that the relief was sought by the Claimant and not their
Solicitor and that if any sanction were imposed then an exercise would
need to be undertaken to differentiate between the success fee
applicable to work before the notice was given and that to later work.
It was held by the Court that to undertake any such exercise would be an
unjustifiable expense and that the relatively modest mistake by the
Solicitor should not deprive the client of her uplift.
Hardcastle & Hardcastle v. Leeds & Holbeck Building Society (2003)
Whilst this case considered the matter of providing notice of funding prior to the issue of proceedings, it also gave useful insight on the issue of prejudice to the Defendant. The Judgment indicated that because the Defendant had totally rejected the claim and due to the fact that there was nothing to suggest that the Defendant would have changed their position had notice been provided, there had been no prejudice to the Defendant.
Montlake & Ors (As Trustees of WASPS Football Club) v. Lambert Smith Hampton Group Limited [2004] EWHC 1503 (Comm)
Whilst there had been a failure to serve a Notice of Funding in Form N251, the Claimant's Solicitors had informed the Defendant in the letter of claim that matter was to be funded by way of Conditional Fee Agreement. Furthermore, the Court had been informed of the existence of the Agreement at the first Case Management Conference. The Court decided that the Defendant had not been prejudiced by the Claimant's failure to provide funding information and also there was no need to stipulate that there was not an insurance policy. Relief from Sanctions was granted.
Connor v. Birmingham City Council (2005)
Whilst the Defendant was aware of the fact that there was a Conditional Fee Agreement, no Notice of Funding was provided. The Claimant only made an Application for Relief from Sanctions orally at the Detailed Assessment Hearing. The Application failed and the Claimant appealed. On appeal, the Court held the the failure to provide Notice of Funding was more than merely a technical failure. Furthermore, the case of Montlake was distinguished on the basis that the Application in Montlake has been made as soon as the error had been spotted.
Supperstone v. Hurst [2008] EWHC 735 (CH)
In this case, notice of
the additional liabilities was considered to have been inadequately
given by being out of time and made via e-mail. Relief from Sanctions
was ultimately granted. The case is commonly used by those opposed to
the Application, because it suggests that Relief from Sanctions will
usually be refused where a party does not have a good explanation or the
other side has been prejudiced by the failure
27.
It has been argued that the case advocates the 'test' and correct
approach to take in Applications for Relief from Sanctions. The 'test'
has been supported in cases such as Kutsi (see below), and distinguished
in Robinson-Tait (also see below).
Kutsi (Widow and Administratrix of the
Estate of Engin Kutsi) v. North Middlesex University Hospital NHS Trust
[2008] EWHC 90119 (Costs)
Primarily concerned with
a failure to provide notice of the After the Event insurance policy
rather then the Conditional Fee Agreement. The Claimant only informed
the Defendant of the existence of the insurance premium
28
during the costs negotiations. The Court held that there was no good
reason in this case for the omission and it was in the interests of the
administration of justice to refuse the request for relief. It was
confirmed that the 'test' in Supperstone is not a cumulative test but
rather a test in the alternative, i.e. even if there is a good reason
for the failure to provide notice, relief will be refused if the other
side suffers prejudice by the failure. Equally, if no prejudice has been
suffered by the Defendant, relief will still be refused if no good
explanation can be provided for the omissions.
Robinson-Tait & Anor v. Cataldo & Anor [2010], EWHC 90166 (Costs)
Multiple Conditional Fee
Agreements were entered and information was provided to the Defendant
of the latest Agreements to be entered, but no information was provided
in respect of the previous 2 Agreements or of the After the Event
Insurance premium. Formal notice in the form of an N251 was not provided
to the Defendant, although evidence was provided that the Defendant had
been aware of the existence of the previous Conditional Fee Agreements
and the insurance policy. Relief from Sanctions was granted on the basis
that there had been no prejudice to the Defendant in the failure to
receive formal notice, because they had been made aware of the funding
position throughout the case. The Court found that the failures to
comply were of a minor nature which had no substantial effect on the
Defendant. Interestingly this case distinguishes Supperstone and
provides that all the information/factors ought to be taken into
consideration, not just whether a good explanation has been provided or
prejudice caused.
Haydon v. Strudwick [2010] EWHC 90164 (Costs)
Information was
contained within the letter of claim indicating the existence of a
Conditional Fee Agreement. Further information was provided in relation
to the Conditional Fee Agreement within the Particulars of Claim (which
was never questioned by the Defendant at the time). Additionally, when
the Claimant changed from a minor to a patient, the Defendant was
informed of the new Agreement. The Claimant's Solicitors failed to
provide any specific notice of the After the Event Insurance policy
29.
Of particular note is the fact that the Defendant conceded that they
would not have acted differently had a Notice of Funding been provided
at the appropriate time. Relief was granted in respect of the success
fee, however, the Insurance premium was not allowed to be recovered.
1 Published 14th January 2010 following a year long review of the cost of civil litigation
2 On 29th June 2011
3 With a vote of 295 to the Ayes and 212 to the Noes
4 The Committee will stop receiving written evidence at the end of the Committee stage on 13th October 2011. See http://www.parliament.uk/business/news/2011/june/second-reading-of-legal-aid-sentencing-and-punishment-of-offenders-bill/ for more information.
5 Although it shouldn't be forgotten that there is also quite a backlash to the recommendations, see for example AJAG (Access to Justice Action Group)
6 EWCA Civ 194; where Lord Justice Ward stated in the Judgment at Paragraph 39: “Let Lord Justice Jackson's reforms be enacted sooner rather than later.”
7 Especially where After the Event Insurance has been taken out
8 See Lord Woolf's remarks in Callery v. Gray (No.1) [2001] EWCA Civ. 1117 at para 103 where he stated: “We do not consider that it can ever be said that a case is without risk”. Also see the case of Haines v. Sarner [2005] EWHC 90009 (Costs)
9 Specifically, the Civil Procedure Rules
10 Whilst this article does not deal with the recoverability of After the Event Insurance, heed should certainly be taken to 44.3B(1)(e) in respect of any insurance premium
11 The requirements for funding arrangements entered into prior to 3rd July 2000 are not covered within this article – for more information on these see Sections 19.1(3) and 57.9 of the Cost Practice Direction
12 See Section 19.6 of the Cost Practice Direction. For definition of applicable 'funding arrangements' see Rule 43.2(1)(k) of the CPR
13 e..g see the Judgment of Costs Judge, Master Campbell in Metcalfe v. Clipston [2004] EWHC 9005 (Costs)
14 See Paragraph 9.3 of the Practice Direction – Pre Action Conduct
15 Just don't forget about providing information about insurance premiums!!!
16 The notice should contain the information set out in Form N251
17 See Section 19.2(2) of the Cost Practice Direction
18 See Section 19.2(3) of the Cost Practice Direction
19 See Section 19.2(4) of the Cost Practice Direction
20 See Section 19.3(2) of the Cost Practice Direction for the exception to the rule
21 Rule 44.15(3)
22 For further information see Section 32.5(1)(b) of the Cost Practice Direction, Regulation 3(1)(a) of the Conditional Fee Agreements Regulations 2000 and Regulation 5(1)(c) of the Collective Conditional Fee Agreements Regulations 2000
23 See Section 32.5(1)(c) of the Cost Practice Direction
24 In accordance with Rule 3.9 of the CPR
25 See Section 10 of the Costs Practice Direction
26 See the Judgment of Master O'Hare in Robinson-Tait & anor v. Cataldo & anor [2010] EWHC 90166 (Costs)
27 See the Judgment of the Honourable Mr Justice Floyd at para 39
28 Which, it should be noted, was in the sum of £80,325.00!
29 It was held that, without more, the term “additional liabilities” could not be used as conclusive evidence of referring to both the success fee and ATE premium