B e f o r e :
MASTER CAMPBELL, COSTS JUDGE
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Between:
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ROSE FORDE
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Claimant
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- and -
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BIRMINGHAM CITY COUNCIL
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Defendant
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Mr Roger Mallalieu (instructed by McGrath) for the Claimant
Miss Kerry Bretherton (instructed by Mirza Ahmad, Chief Legal Officer) for the Defendant
Hearing dates: 14,15,19 and 21 February 2008
Closing submissions 6 March 2008
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HTML VERSION OF JUDGMENT
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Crown Copyright ©
Master Campbell:
- This judgment concerns further preliminary issues about costs which have arisen during the course of housing repair litigation between Birmingham City Council ("the Council") and its tenants. Although the Claimant in the present case is Miss Rose Forde ("Miss Forde"), in reality the dispute is between the Council and her solicitors, McGrath, about what sums, if any, are payable by the Council to McGrath for costs under the terms of a consent order sealed on 7 June 2006 ("the order"). The reason for this is that the litigation was funded by two Conditional Fee Agreements ("CFAs") made between Miss Forde and McGrath on, respectively, 16 March 2005 ("CFA I") and 5 April 2006 ("CFA II"). For its part, the Council contends that each CFA is unenforceable and that by operation of the indemnity principle, under which costs recoverable by a receiving party are limited to those which he is liable to pay his own solicitor, there are no costs for the Council to indemnify and accordingly its liability for any costs arising under the terms of the order is nil (see Gundry v Sainsbury [1910] KB 645).
- The following are the preliminary issues with which the court was concerned during four days of argument:-
"Issue 1
1.1 Is the second Conditional Fee Agreement unenforceable because it concerns matters contained within the first CFA?
1.2 Was it reasonable for the Claimant to enter into the second Conditional Fee Agreement? If not, what is the effect of this?
1.3 Is the second CFA unenforceable because it is retrospective?
Issue 2
Was there undue influence? If so, what is the effect of that upon:
the first Conditional Fee Agreement
the second Conditional Fee Agreement
the success fee
inter parties costs
Issue 3
If the second Conditional Fee Agreement is enforceable can this agreement be retrospective?
Issue 4
What period is covered by the second Conditional Fee Agreement?
Issue 5
Can the success fee be retrospective?
Issue 6
Is the success fee valid and/or reasonable?
Issue 7
If the second Conditional Fee Agreement is not enforceable at all or for limited periods, is the first Conditional Fee Agreement valid?"
- At the hearing, Mr Roger Mallalieu appeared for Miss Forde and Miss Kerry Bretherton, in succession to Mr Mark Friston, represented the Council. Miss Bretherton relied on a skeleton argument lodged by Mr Friston on 17 June 2007, together with her own skeleton dated 4 January 2008, which raised further issues. On behalf of Miss Forde, Mr Mallalieu lodged a skeleton argument on 17 June 2007 and additionally served a supplemental skeleton on 11 February 2008 in reply to Ms Bretherton's skeleton, to which she responded the following day. In total, the five skeleton arguments ran to 90 pages, in addition to which the parties relied on the following witness statements:-
| 14 June 2007 |
Graham James McGrath (McGrath 1) for Miss Forde |
| 18 July 2007 |
Katherine Sally Priest (Priest 1) for the Council |
| 29 October 2007 |
Katherine Sally Priest (Priest 2) for the Council |
| 29 October 2007 |
Elizabeth Hilary Homfray for the Council |
| 29 October 2007 |
Lisa Catherine Morgan for the Council |
| 21 November 2007 |
Graham James McGrath (McGrath 2) for Miss Forde |
| 18 January 2008 |
Katherine Sally Priest (Priest 3) for the Council. |
- Both Mr McGrath and Ms Priest were cross-examined on their witness statements (who both gave their evidence truthfully and to the best of their knowledge). Mr Mallalieu had no questions for either Miss Homfray or Miss Morgan, but evidence was given by Anthony David Bennett Cox, a Senior Legal Adviser employed by the Legal Services Commission ("LSC") in a witness statement dated 15 February 2008 about which he was questioned by both counsel. I also heard from Ian Heathcock, a senior case worker employed by the LSC, in compliance with a witness summons served on him by the Council on 14 January 2008. The parties had also agreed a paginated bundle of documents, ("the bundle") to which I shall refer. Having heard argument I reserved judgment.
THE FACTS
- Birmingham City Council has a very large housing stock which it rents to tenants of modest means. Historically, the Council has acknowledged that it has had a poor record in housing disrepair and that in many cases, tenants have been compelled to bring claims in order to relieve continuing disrepair. Many tenants have instructed McGrath, an established legal practice which specialises in housing disrepair claims. Litigation between the Council and its tenants can arise if breaches of the terms of the landlords' repairing covenants occur. In this event, it is open to the tenant to claim damages and/or specific performance in the County Court under s.11 of the Landlord and Tenant Act 1985. The tenant can also bring a statutory claim under s.82 of the Environmental Protection Act 1990 in the Magistrates Court. If proved or admitted, the magistrates must make an order requiring the landlord to carry out works to put the property in a fit state and to specify a timetable for doing so.
- In the present case, Miss Forde suffered the effects of disrepair at 120 Quinton Road, Harborne, Birmingham, where she resided under a tenancy commenced in 1996. Between August 2001 and February 2002 she complained, inter alia, about problems with her specially adapted shower unit which had led to penetrating damp affecting the floor and walls in her kitchen and on the ceiling underneath her bathroom. She consulted McGrath Environmental Partnership (an entity in the McGrath group of solicitors) which advised her to issue s.82 proceedings. On 19 June 2004 a nuisance order was made by the Magistrates Court which required Miss Forde to vacate the premises whilst repairs were carried out. Subsequently, she notified the Council of a civil claim pursuant to s.11 and proceedings were issued on 22 February 2006. Terms of settlement were agreed on 8 June 2006 under which the Council would pay Miss Forde £5000 in full and final settlement of her s.11 claim together with her costs of the action to be assessed if not agreed. On 21 September 2006 McGrath served Notice of Commencement of detailed assessment under Civil Procedure Rule ("CPR") 47.6. The firm's bill sought profit costs of £12,671.84 (inclusive of a success fee of £5,430.79), disbursements of £285 and vat of £2217.57, total £15,174.41. It is common ground that the damages have been paid but, pending the assessment, the costs have not.
THE CONDITIONAL FEE AGREEMENTS
- CFA I: McGrath and Miss Forde entered into CFA I on 16 March 2005. The terms relevant to the issues I have to decide are the following:
"2. What is covered by this agreement
(a) proceedings brought by you against your Landlord or former landlord, Birmingham City Council arising from your tenancy and/or occupation of a dwelling house owned by your landlord and based upon breach of contract and/or a tortuous act and/or based on proceedings under the Landlord and Tenant Act 1985 and/or the Defective Premises Act 1972 and/or such other defendant against whom you have a cause of action but not including any claim based upon personal injury
3. What is not covered by this agreement
Any appeal by your opponent against an order made in the County court, except an interim appeal where we advise you in our absolute discretion in writing that it should be opposed because you have a reasonable chance of success.
Any appeal you make against an Order made in the County court, except an interim appeal which we in our absolute discretion advise should be pursued because you have a reasonable chance of success
4. Paying us
If you win your claim you pay our charges and expenses as set out in paragraph 5 below save where 'reduced charges' are due in the circumstances set out below
We may end this agreement before you win or lose. Please see paragraph 9 for details.
Charges and Expenses
Our charges are based on the time we spend dealing with your case.
We are obliged by Law Society Rules to give you the best estimate that we can for our overall charges and expenses.
Our current estimate is that our fees are likely to be between £1,200 and £1,500 if your case does not proceed to trial, and between £1,800 to £2,200 if a trial proves necessary
8. Reduced Charges
[if] you are successful in recovering money from your opponent, but it is not possible to either agree that your opponent will pay your legal costs and expenses or alternatively the court does not make an order that your opponent pays your legal costs and expenses, you will only be liable to pay either the amount we would normally charge you under clause 5 above or the amount calculated in accordance with the formula below, whichever is the lower [original emphasis] figure:
If the amount of compensation recovered is £3000 or less, we will limit our charges to £1,000 plus VAT plus the full amount of any expenses incurred.
If the amount of compensation recovered is more than £3000 then we will limit our charges to no more than one third of the total compensation recovered (to which VAT will be added). Therefore this formula operates as a cap on our charges in these circumstances. Again the full amount of any expenses incurred will also be payable.
9. Ending the Agreement before your claim for compensation ends
(b) paying us if we end this agreement
(i) we can end this agreement if you do not keep to your responsibilities as outlined in clause 11 below
(iii) we can end this agreement if you reject our opinion in relation to the conduct of the case
11. Your responsibilities
YOU MUST
co-operate with us
not ask us to work in an improper or unreasonable way.
13 What happens if you win
You are then liable to pay all our charges and disbursements in accordance with the other clauses of this agreement
..
18 Other points
Immediately before you signed this agreement we verbally explain to you the effect of this agreement and in particular the following
(e) other methods of financing these costs including Private funding, Community Legal Service Funding, legal expenses insurance, Trade Union funding
(f) whether we consider that any particular method or methods of financing any or all of these costs is appropriate. We have advised you that in relation to these proceedings, if they are referred to the Small Claims Track of the County Court, a court would not normally order you to pay your opponent's costs, unless, for example it believed the proceedings were brought, or carried on, unreasonably, frivolously or vexatiously. We believe that the risk of the court making such an order is minimal and that therefore we do not believe that a contract of insurance to cover those risks would be appropriate in these circumstances. We have also advised you that we do not consider that it would be appropriate to insure against your costs and disbursements as the premium is likely to be expensive and would not likely be recoverable if the case is referred to the Small Claims Track. We have further advised that if the case is allocated to the Fast Track or the Multi-track it will be appropriate at that stage to consider either an application for a Legal Services Commission Public Funding Certificate, or, alternatively, After the Expenses insurance, depending upon your financial circumstances at that time."
- Accordingly, CFA I would operate in the following way:
- If Miss Forde's case was a small claim and she recovered damages but without a costs order:-
- if the compensation was £3000 or less, McGrath would charge either their usual costs calculated on an hourly rate or £1000 plus VAT, whichever was lower.
- if the compensation was more than £3000, McGrath's normal fees would be payable save that their charges could not be more than one third of the damages.
- It follows that under these arrangements, if Miss Forde did not recover costs, she would receive a discount in respect of her own costs, capped at either £1,000 plus VAT, or, if her compensation exceeded £3000, at one third of the damages, plus expenses in each case.
- CFA II: McGrath and Miss Forde entered into CFA II on 5 April 2006. The terms relevant to the issues I have to decide are the following:-
"PAYING US
If you win your claim, you pay our basic charges, our disbursements and a success fee [emphasis added]. You are entitled to seek recovery from your opponent of part or all of our basic charges, our disbursements, a success fee and insurance premium as set out in the document 'Conditional Fee Agreements: What you need to know'
The Success Fee
The success fee is set at 100 per cent of basic charges, where the claim includes a trial; or 75 per cent where the claim concludes before a trial has commenced, but after proceedings have been issued, or 50 per cent where the claim concludes before proceedings are issued. In addition 0 per cent relates to the postponement of payment of our fees and expenses and cannot be recovered from your opponent. The success fee inclusive of any additional percentage relating to postponement cannot be more than 100 per cent of the basic charges in total."
- The document "Conditional Fee Agreements: What you need to know" said this where material:-
"What do I pay if I win?
If you win your claim, you pay our basic charges, our disbursements and any success fee. The amount of these is not based on or limited by the compensation. You can claim from your opponent all or part of our basic charges, our disbursements, any success fee and insurance premium
If you receive provisional compensation, we are entitled to payment of our basic charges, our overall disbursements and any success fee at that point
Basic Charges
These are for work done from when you first instructed us and until this Agreement ends. You are agreeing to pay us for work done before the signing of this Agreement in consideration of our continuing to act on you behalf in connection with this case. These basic charges are subject to review.
Success Fee
Any success fee percentage set out in the agreement reflects the following:
(a) the fact that if you lose, we will not earn anything;
(b) our assessment of the risks to your case;
(c) any other appropriate matters;
(d) the fact that if you win we will not be paid our basic charges until the end of the claim;
(e) arrangements with you about paying disbursements.
Dealing with costs if you win
You are liable to pay all our basic charges, our disbursements and any success fee
If the court carries out an assessment and reduces any success fee because the percentage agreed was unreasonable in view of what we knew or should have known when it was agreed, then the amount reduced ceases to be payable unless the court is satisfied that it should continue to be payable.
If we agree with your opponent that any success fee is to be paid at a lower percentage than is set out in this Agreement, then the success fee percentage will be reduced accordingly unless the court is satisfied that the full amount is payable.
As with costs in general, you remain ultimately responsible for paying any success fee.
If your opponent fails to pay
If your opponent does not pay any compensation or charges owed to you, we have the right to take recovery action in your name to enforce a judgment, order or agreement. The charges of this action become part of the basic charges."
- Thus if Miss Forde won her claim, she was potentially liable to pay McGrath's base costs and the success fee from 16 March 2005 when she first instructed the firm notwithstanding that the CFA was signed only on 5 April 2006.
- On Mr Mallalieu's case, additional terms are to be found in a letter written by McGrath to Miss Forde on 29 March 2006 ("the March letter"; bundle p.721-722). The passages relevant to the issues I have to decide are the following:
"Dear Ms Forde
..
We are pleased to tell you that the City Council have now made an offer to settle your case and we enclose a copy of the letter they have sent.
You will see that they are offering to pay you a total of £4,500 in compensation and in addition, are offering to pay your reasonable legal costs
..
We need to see you to discuss with you whether you are going to accept the offer in view of the fact that it is below amounts previously indicated to you, and therefore arrangements have been made for Mr Khan to come to visit you at 3.30pm on Wednesday 5th April 2006
.[original emphasis]
In order to prevent any argument about the Council being liable to pay your legal costs, we intend to take advantage of a change in the Regulations governing "no win no fee" agreements which we explain below.
By way of background we should explain that the regulations under which you signed the Conditional Fee ("No win no Fee") Agreement with us some time ago have changed.
The reason for the change was to make it more difficult for opponents such as your landlord to challenge in court the validity of the old style agreements.
That is particularly important since this firm has been the subject of a serious challenge by your landlord to the validity of the agreement of the sort that you signed with us.
In particular, the landlord has been alleging that we are not allowed to agree with you that we will charge you a reduced amount if we do not succeed in recovering a costs order in your favour.
In order, therefore, to take advantage of the new regulations and to prevent an argument such as this (which has had the effect of causing problems and delay in paying compensation to a number of our other clients) we have prepared an alternative agreement which we would invite you to sign.
A copy of the agreement is enclosed herewith.
The key features are that you are agreeing that all of the legal costs to date will be dealt with under this agreement rather than the original one (unless by some chance the court ruled that this one was not valid in which case we will rely on the original agreement).
The most important apparent effect of that is that this agreement contains a success fee and the old one did not, so on the face of it, you could be worse off.
Because of that theoretical possibility, we have to tell you that you should not sign it unless you are entirely happy with it and you are entitled to take independent legal advice if you wish.
In reality, however, you will not be any worse off because the 'cap' that we put on your costs in the original agreement still applies and the only reason we are inviting you to create a potential further liability is to ensure, as we indicate above, that the City Council pays your legal costs on a proper basis, rather than you.
Javaid Khan will explain all this to you and deal with any questions or concerns you may have.
Yours sincerely
"
- The Council does not accept that the March letter formed part of Miss Forde's agreement with McGrath and contend that CFA II is a comprehensive document which does not need to be read with another document (closing submissions paragraph 10).
THE LAW
- It is necessary to set out the law applicable to both CFA I and CFA II because the provisions that apply are not identical.
- Section 27(1) Access to Justice Act 1999 ("AJA") substituted the following for Section 58 of the Courts and Legal Services Act ("CLSA"):-
"58 (1) A conditional fee agreement which satisfies all conditions applicable to it by virtue of this section shall not be unenforceable by reason only of its being a conditional fee agreement; but
any other conditional fee agreement shall be unenforceable
(2) For the purposes of this section and section 58A
(a) a conditional fee agreement is an agreement with a person providing advocacy or litigation services which provides for his fees and expenses, or any part of them, to be payable only in specified circumstances; and
(b) a conditional fee agreement provides for a success fee if it provides for the amount of any fees to which it applies to be increased, in specified circumstances, above the amount which would be payable if it were not payable only in specified circumstances.
(3) The following conditions are applicable to every conditional fee agreement
(a) it must be in writing;
(b) it must not relate to proceedings which cannot be the subject of an enforceable conditional fee agreement;
(c) it must comply with such requirements (if any) as may be prescribed by the Lord Chancellor."
- Section 58A(3) provides:
"The requirements which the Lord Chancellor may prescribe under Section 58(3)(a) (c)
(a) include requirements for the person providing advocacy or litigation services to have provided prescribed information before the agreement is made; and
(b) may be different for different descriptions of conditional fee agreements (and, in particular, may be different for those which provide for a success fee and those which do not)."
- When CFA I was signed, the relevant requirements mentioned in Section 58A(3) were the Conditional Fee Agreement Regulations (2000) (the 2000 regulations") and they applied to CFAs signed until 31 October 2005.
- Regulation 4 of the Regulations provided as follows:-
"Information to be given before conditional fee agreements made
(1) Before a conditional fee agreement is made the legal representative must
(a) inform the client about the following matters, and
(b) if the client requires any further explanation, advice or other information about any of those matters, provide such further explanation, advice or other information about them as the client may reasonably require."
"(2) Those matters are
(d) whether other methods of financing those costs are available, and, if so, how they apply to the client and the proceedings in question,
(e) whether the legal representative considers that any particular method or methods of financing any or all of those costs is appropriate
"
- Under section 58(4)(a) CLSA (as submitted by s.27 AJA), the following conditions are applicable to a CFA which provides for a success fee:-
"it must relate to proceedings of a description specified by order made by the Lord Chancellor."
- The relevant order was and remains the Conditional Fee Agreements Order 2000. Article 3 of that order specifically excludes statutory claims from the class of claims which may be funded by way of CFAs which provide for a success fee.
- Section 58(4)(b) provides that a CFA with a success fee:
"
must state the percentage by which the amount of fees which would be payable if it were not a conditional fee agreement is to be increased."
- Section 58(4)(c) provides that:-
"the percentage increase must not exceed the percentage specified in relation to the description of proceedings to which the agreements relate by order made by the Lord Chancellor",
- The percentage is specified at Article 4 of the CFA Order 2000 and is 100%.
- The Conditional Fee Agreement (Revocation) Regulations (2005) ("the Revocation Regulations") were implemented on 1 November 2005. They revoked the 2000 Regulations in respect of CFAs made on or after 1 November 2005 but are subject to the Solicitors Practice Rules (Client Care) Amendment Rules (2005).
- It follows that the 2000 Regulations apply to CFA 1 and the Revocation Regulations to CFA II, but s58 CLSA as amended by s 27 AJA, still apply to both.
CROOK v BIRMINGHAM CITY COUNCIL [2007] EWHC 1415 (QB)
- Crook concerned other housing disrepair litigation between the Council its tenants, with particular reference to the enforceability of a CFA made between Mr Crook and McGrath in broadly the same form as CFA I. On appeal from my decision (SCCO CC 0600917), Irwin J, at paragraph 28, held that erroneous advice given by McGrath by letter ("the letter") concerning the Legal Help Scheme breached Regulation 4 but had not had a material effect on the protection afforded to the claimants in that case or on the proper administration of justice (applying the "materiality" test in Hollins v Russell [2003] 1 WLR 2487 see paragraph 68 post. Accordingly, the CFA was enforceable.
- At paragraph 31-32, Irwin J considered whether McGrath had given the claimants adequate information about what costs protection would be available if their cases were to be publicly funded. At paragraph 33, he said this:
"Public funding is extremely unlikely to have been available to any claimant until the case was allocated to the fast track. Save in very exceptional circumstances, as I understand it on the evidence before Master Campbell, public funding would not be granted otherwise. The direct advice was that, if and when the case was allocated to the fast track, the claimants should apply for public funding
34. If in practical terms it is not possible to achieve a public funding certificate before allocation, then advice that it should be sought before that point may be theoretically correct but is liable to divert and delay the conduct of the claimants' case. It is also potentially confusing and even misleading for the client. In any event, the letter did make two key points: firstly, the public funding certificate provides a measure of protection against adverse costs and secondly, that once the case has been allocated to the fast track, the claimants should seek public funding. In my view the Master was right to conclude that on this matter the letter complied with Regulation 4
35. I should record that, had I taken the contrary view and concluded that the letter gave inadequate advice as to the risk of adverse costs orders and what might be done to avoid that risk, then unless the advice was only minimally deficient, I would have regarded it as a material departure for the purposes of the Hollins v Russell materiality test. The impact of an adverse costs order might in a few cases be considerable."
- On 10 July 2007, the Council served notice of appeal against Irwin J's judgment and their application for permission to appeal came before the Court of Appeal on 18 December 2007 (Pill, Thomas LJJ). The Council advanced its case on the ground (inter alia) that Irwin J had fallen into error in stating that public funding would not normally be granted prior to allocation, a point which McGrath, being housing disrepair specialists, could have corrected during the course of argument. The court refused to grant permission to appeal, laying on the Council, the blame for any evidential failings in Crook, that being a matter which could not be remedied in a second appeal (see Miss Bretherton's second skeleton at paragraph 11).
- I shall return to Crook in relation to regulation 4 later in this judgment. However, no issue about the Legal Help Scheme arises in Forde, because Miss Forde (and, as I understand, many other tenant/clients of McGrath), all applied for public funding as soon as the firm was instructed; none made use of Legal Help.
BOWEN v BRIDGEND COUNTY COUNCIL (SCCO 039853- 25 March 2004)
- This decision of Master O'Hare concerned claims for 100% success fees in housing disrepair claims made in CFAs signed in August, September and October 2001- (It did not involve McGrath or the Birmingham City Council). In points of dispute, the Bridgend Council had identified as a preliminary issue, whether the CFAs complied with regulation 4 of the 2000 Regulations. The availability of public funding was also raised in order to challenge the recovery of ATE insurance premiums. Having heard argument, the Master held that the claimants ought to have been told to seek public funding. The claimants' legal representatives had failed to give a tolerable explanation as to the availability of public funding. Accordingly, the CFAs did not comply with regulation 4 of the 2000 Regulations and were unenforceable save in respect of any disbursements paid.
CFA II AND PUBLIC FUNDING
- Following the challenges to CFA I advanced by the Council in Crook and in the light of Master O'Hare's decision in Bowen, I am told that McGrath have adopted a "belt and braces" approach to concurrent housing disrepair claims in which tenants (such as Miss Forde) have instructed them to act on their behalf. The "belt" has been to make an application for public funding in any event (Mr Mallalieu's first skeleton, paragraph 9 and McGrath 1 paragraph 108 and 2 at 154). The "braces" has been to ask tenant/clients such as Miss Forde who signed CFAs in broadly the same form as CFA I, whether they would sign CFA II. This was to be a retrospective CFA entered into in order to counter the Council's assertion that CFA I is unenforceable (see McGrath 2 paragraphs 55 and 72-77 ).
- In the present case, Miss Forde had signed her application for public funding on 16 March 2005 at the outset of her instruction of McGrath, (the same day that she entered into CFA I). In the event, the application was not submitted due to an administrative error and on 20 May 2005 a second application was completed and sent to the LSC under cover of a letter dated 24 May 2005. On 3 June 2005 the application was refused by the LSC case worker on the grounds that:-
"It is considered on the information available that the likely benefits of the proceedings to the client and others do not justify the likely costs, having regard to the prospect of success and all other circumstances."
SUMMARY AND ANALYSIS SO FAR
- It can be seen, therefore, that Crook and Forde differ in the following respects:-
- In Crook there was one CFA with no success fee; in Forde there were two CFAs, one with and one without a success fee.
- The Legal Help Scheme was used in Crook; in Forde it was not.
- No application for public funding was made by Mr Crook in Crook; in Forde, Mrs Forde completed an application at the outset of the instruction to act.
THE SUBMISSIONS FOR THE COUNCIL
- It is convenient to outline the Council's case before turning to Miss Bretherton's detailed submissions.
- The Council submits that neither CFA can be enforced, on account of ( in relation to CFA II):-
- undue influence; Miss Forde signed CFA II against her own rational self interest;
- the absence of consideration for CFA II;
- retrospectivity: a CFA cannot be retrospective so CFA II fails; alternatively, if it can be retrospective, in the present case CFA II cannot survive the failure of the central element of the agreement, namely that the success fee is irrecoverable;
- even if CFA II were to be valid, a retrospective success fee cannot be recovered.
- Even if a retrospective success fee can be recovered, the amount that the court should allow is nil, because Miss Forde's claim was risk free.
- In relation to CFA I:
- CFA I was terminated and replaced by CFA II. Accordingly, if CFA II is unenforceable, CFA I cannot survive to fill the void left by CFA II;
- Advice given to Miss Forde by McGrath prior to signing CFA I that public funding was more usually available after allocation, was wrong advice. As such, it was given in material breach of Regulation 4 of the 2000 Regulations rendering CFA I unenforceable.
- It is convenient to address each of these submissions in turn.
UNDUE INFLUENCE
- For the Council, Miss Bretherton adopted Mr Friston's submission that it was against Miss Forde's rational self interest to have terminated CFA I in order to enter into CFA II. The Council did not suggest there had been any deliberate wrongdoing on McGrath's part, but the transaction from CFA I to CFA II was an unfavourable bargain which, from Miss Forde's point of view, could not be explained by ordinary motives. On the contrary, the altered provisions of CFA II benefited no one except McGrath. This was plain from a number of factors. First, CFA I provided a mechanism for "ring fencing" the client's damages; CFA II did not. Second, no success fee was payable under CFA I, whereas CFA II placed Miss Forde under a liability to pay a minimum retrospective success fee of 50 per cent, which would rise to 100 per cent if the claim went to trial. Third, CFA II imposed a liability, (albeit nil), to pay an irrecoverable postponement element in the success fee. Fourth, CFA II contained a mechanism for costs recovery under "Billing Arrangements" whereby Miss Forde could be required to settle any costs ordered to be paid by the Council in the event that her opponent failed to do so.
- Miss Bretherton drew attention to the fact that undue influence is a ground of relief developed by the courts of equity, the objective of which is to ensure that the influence of one person (here McGrath) over another (here Miss Forde), is not abused. If a party enters into a transaction which calls for explanation, the law will investigate the manner in which the intention to enter the transaction was secured. If the intention was induced by unacceptable means, the law will not permit the transaction to stand (see Hugueinin v Baseley [1807] 14 VES 273, 3000).
- Undue influence can be actual or presumed. The latter arises out of the relationship between two persons where one has acquired over another a measure of influence or ascendancy in which the ascendant person then takes unfair advantage (see Royal Bank of Scotland v Etridge (No.2) [2002] 2 AC 773 at paragraphs 8 to 18). Miss Bretherton contended that a solicitor and client relationship is a prime example (see Willis v Baron [1902] AC 271, H-L) and a client does not have to prove that he reposed trust in his solicitor because an irrebuttable presumption of influence will apply (Etridge at 18). Unlike actual undue influence, where something has to be done to twist the mind of the donor, presumed undue influence is more a case of what has not been done, namely ensuring that independent advice was available to the client (see Daniel v Drew [2005] EWCA 507). For all practical purposes, where, as here, the transaction is between solicitor and client, the solicitor's burden to prove that the transaction was entered into freely, is discharged only if the client has received adequate independent advice (see judgment of Mummery LJ in Pesticcio v Huet [2004] EWCA Civ 372 at paragraphs 1 and 23).
- In the present case, the reason Miss Forde had been given for exchanging CFA I for CFA II was to be found in the March letter (see paragraph 13 ante). Miss Bretherton drew attention to the fact that at the date of the letter, Miss Forde had been on benefits and it was reasonable to assume that if she recovered damages in the region of £5000, for her such a sum would represent a significant amount. However, the inference to be drawn from the March letter was that if she declined to sign CFA II, there would be a delay in receiving her compensation, (a matter that was incorrect as Mr McGrath had accepted in cross examination) and McGrath would refuse to act for her further. On the material before the court, there was no evidence to rebut the presumption of undue influence; in particular no evidence had been adduced about the nature of the advice Mr Khan had given Miss Forde on his visit on 5 April 2006. At the least, Miss Forde should have been told that the transaction was an unfavourable one, that she was under no duty or obligation to assist McGrath by entering into CFA II, that even if she had been willing to help McGrath, she was entitled to insist on the ring fencing of her damages and that she should not be put at risk of assuming any liability for payment of the success fee.
- Miss Bretherton also drew attention to the timing of CFA II, given that on the date Mr Khan had asked Miss Forde to sign the document (5 April 2006), the Council had already offered to pay her a total of £4,500. In a situation such as this where a relationship of trust existed between solicitor and client, a transaction under which the client was to sign a new CFA on more onerous terms than the original CFA, called for an explanation.
- Miss Bretherton accepted that if the Court were to find that CFA II had been procured by undue influence, the effect would be to make the contract voidable rather than void. That said, the equitable doctrine of undue influence existed not only to protect Miss Forde but also to prevent the ascendant person from being able to retain the benefit of a wrongful act (see Allcard v Skinner [1887] 36 ChD 145 at 190). Accordingly, Miss Bretherton submitted that where, as here, the CFA had been procured by undue influence, McGrath should not be permitted to recover any benefit and in so far as Miss Forde had affirmed the agreement, any such affirmation was equally tainted by undue influence. In any event, where a contract is prohibited by the Solicitors Practice Rules (1990), (a contract procured by undue influence would fall into this category by virtue of Rule 1(c)), the law will not allow such a contract to stand (see Mohammed v Alaga & Co (a firm) [2001] 1 WLR 1815. It followed that CFA II was void or, at the very least, unenforceable and by operation of the indemnity principle, the Council was absolved from any responsibility for Miss Forde's costs under the terms of the order.
CONSIDERATION
- Miss Bretherton submitted that CFA II also failed for want of consideration. She drew attention to the definition of "basic charges" (see paragraph 11 above) with particular reference to "our continuing to act". In her submission, the fact of McGrath "continuing to act" under CFA II was a failure of consideration if, as she contended, CFA I had ended on the signing of CFA II; certainly, there was no consideration at all if McGrath was obliged, as a matter of contract, to continue to act under CFA I. Indeed, the adverse effect of CFA II on Miss Forde (the key element being the success fee) if CFA I was replaced, far outweighed the value of the worthless promise of "continuing to act" so that even nominal consideration was absent (see Re Selective Move Ltd [1995] 1 WLR 474 at 480 481).
- It followed that CFA II failed for want of consideration. McGrath would have been obliged to continue to act had CFA I not been replaced by CFA II and the obligation to do so was on terms far more favourable to Miss Forde. CFA II conveyed no practical benefit on her because an offer of settlement was then on the table. This was as clear a case as there could be for saying that there was no benefit or value for the promise.
CFA II RETROSPECTIVE
- Miss Bretherton submitted that insofar as CFA II was expressed to be retrospective, it was invalid because, as a matter of law, either a CFA cannot be retrospective at all, or a CFA containing a retrospective success fee cannot be valid. In the present case, the recoverability of the success fee impacted upon the agreement as a whole because a central feature of CFA II was the retrospective success fee. In Miss Bretherton's submission, CFA II was an entire contract and it was not possible to hive off central a element such as the success fee. Accordingly, if the success fee was irrecoverable, the entire contract failed.
- Miss Bretherton further submitted that a CFA which provides for a retrospective success fee is an abhorrence and is wholly inconsistent with the principles referred to in KU v Liverpool City Council [2005] 1 WLR 2657. In KU, the Court at paragraph 20 had emphasized that hindsight was not permitted when assessing costs. Brooke LJ had drawn attention to s.11.7 of the Costs Practice Directions to CPR 44.5 which states that:-
"When the court is considering factors to be taken into account in assessing an additional liability it will have regard to the facts and circumstances as they reasonably appear to the solicitors or counsel when the funding arrangement was entered into and at the time of any variation of the arrangement."
- It followed that it was not possible to reconcile past risks with a solicitor's current knowledge at the time of a CFA containing a retrospective success fee, in this case CFA II. The Council maintained that a retrospective success fee was self-contradictory and simply impossible. Miss Bretherton relied on King v Telegraph Group Ltd [2005] EWHC 90015 in which Master Hurst at paragraph 89 considered that back-dating a CFA:-
"
seems to me to fly in the face of the CFA Regulations and the CPR
.. It is of great importance that an opposing party should be aware of any additional liability as early as possible. The claimant is, to an extent, protected in that the level of success fee does not have to be disclosed, but, unless and until the defendants are made aware that they are potentially liable for a success fee, this may fundamentally affect the way in which they choose to conduct litigation."
- In the present case, the Council did not know that there was any potential liability for payment of a success fee until 21 September 2006, when notice of commencement was received with the bill of costs and it had become apparent that there were, in fact, two CFAs in place (see Homfray paragraph 14). McGrath had contended that Notice of Funding had been served in respect of CFA I using Form N251 on 15 February 2005 (bundle page 281) but it was common ground that that CFA did not claim a success fee. In any case, on the issue of proceedings, CPR 44.15 places the duty to serve the Court and other parties on the receiving party. That had not happened here. No evidence had been served that the Court had served the Notice of Funding. Miss Homfray's evidence was that the Council had first learned of the success fee upon receipt of the bill. This evidence had not been rebutted. In any event, it would have been impossible for Miss Forde to have notified the Council in February 2006 that a success fee would be claimed because, on that date, no CFA with a success fee existed. In Miss Bretherton's submission, McGrath could not rely on its error in omitting to delete the words "which provide for a success fee" in the Notice of Funding in relation to CFA I, in order to justify the firm's claim for an additional liability in respect of CFA II. Having failed to serve Notice of Funding, the success fee was irrecoverable, but the consequences were not limited to the recovery of the success fee alone and additionally impacted upon the validity of CFA II as a whole.
- Miss Bretherton further challenged the proposition advanced by Mr Mallalieu's that CFA I had continued to apply throughout the period that CFA II was said to have had retrospective force. If that be right, McGrath had thereby purported to contract with Miss Forde in relation to the same subject matter over an identical period of time. In Miss Bretherton's submission, it was not possible to enforce both CFAs without a double charge arising to the client. Accordingly the claim for retrospective fees must fail.
LEVEL OF THE SUCCESS FEE
- If, contrary to Miss Bretherton's primary submission, the success fee claimed in CFA II was recoverable, it was the Council's contention that the level was excessive and ought to be nil. Miss Bretherton drew attention to the fact that the Council had made a firm and realistic offer before CFA II had been signed (and the risk assessment completed) and the nature of the ongoing negotiations were such that it was obvious that a settlement would be reached. The litigation in which Miss Forde was involved was free of risk. Historically, the Council had settled every housing disrepair case in which McGrath had acted on behalf of tenants and the litigation was, in any event, extremely simple. Miss Forde's case was particularly straightforward because she had already obtained a Section 82 conviction against the Council and the only argument left in her case was about the level of compensation she would receive. In Begum v Klari (Times Law Reports 18 March 2005) Brooke LJ had expressed concern about the inflated level of the success fee claimed at 70% in a case where success was a near certainty. The Court of Appeal had reduced the fee to 15%. In the present case, Miss Bretherton submitted that the factors to which she had drawn my attention were compelling, in particular with regard to the settlement negotiations and the proper level of success fee to allow was nil.
VALIDITY OF CFA I
- Miss Bretherton submitted that if her primary submission was correct and CFA II was invalid or did not have retrospective effect, there could be no "fallback" to CFA I. The reasons for this were two-fold; first, it had been the intention of Miss Forde and McGrath that CFA II would replace CFA I; second, there had been a material breach of Regulation 4 (2) (d) and (e) of the 2000 Regulations which rendered CFA I unenforceable. It is appropriate to deal with each of these submissions in turn.
Termination and Replacement
- In Miss Bretherton's submission, it had been the clear intention of Miss Forde and McGrath in entering CFA II, to create new legal relations with additional terms such as the inclusion of the success fee. It followed that the purpose of CFA II was to replace CFA I. Thus, CFA I could not and did not survive to fill the void left by CFA II.
- Miss Bretherton submitted that it was clear from the facts of the case and from Mr McGrath's witness statements and exhibits (which had referred not to a varied agreement but to "separate agreements") that CFA II was to be a fresh agreement and not a variation of CFA I. Whilst she accepted that the March letter stated that the legal costs to date would be dealt with under CFA II rather than under CFA I: "
unless by some chance the court ruled that this one [CFA II] was not valid in which case we will rely on the original agreement
", this was simply an expression of intent which had no contractual force. The truth of the matter was that the only reason that McGrath had insisted on Miss Forde signing CFA II was to avoid the consequences that would follow had CFA I fallen foul of the 2000 Regulations. Accordingly, CFA II was a replacement contract on different terms to those embodied in CFA I and there could be no recourse to it if CFA II failed.
- In any event, the manner in which CFA I had been terminated was unreasonable and it would be unjust and inequitable to allow CFA I to fill the void left by CFA II. To do so would be to permit McGrath to avoid the consequences of their unreasonable refusal to continue to act for Miss Forde unless she agreed to sign CFA II. The terms for payment of McGrath's fees in the event of termination by them were to be found in Clause 9 and/or 11 of CFA I. The contract of retainer evidenced by CFA I was an entire contract and as such, terms for payment could not be enforced until all the obligations which arose under it had been performed. McGrath's refusal to continue to act for Miss Forde constituted a breach of the terms of that (entire) contract.
Regulation 4(2)(d) and (e)
- Miss Bretherton submitted that Crook was not determinative of whether a material breach of the Regulations had occurred in relation to CFA I. This was because the Council, through error, had not advanced proper evidence in relation to the availability of public funding prior to case allocation. For that reason, both I and Irwin J had been led into errors which had not been corrected prior to the handing down of our judgments. At paragraph 33 of Crook Irwin J had said this:
"Public funding is extremely unlikely to have been available to any claimant until the case was allocated to the fast track. Save in very exceptional circumstances, as I understand it and on the evidence before Master Campbell, public funding would not be granted otherwise. The direct advice in the letter [McGraths retainer letter] was that, if and when a case was allocated to the fast track, the claimant should try for public funding."
- At 34, Irwin J had continued:
"In my view the Master was right to conclude that on this matter the letter complied with Regulation 4. It would probably have been better had the letter said something like:
"A public funding certificate provides effective protection, if not complete protection, against an adverse costs order once it has been granted. However, in practical terms you will not be granted a public funding certificate and not achieve costs protection unless and until your case has been allocated to the fast track. That is one of the reasons why we recommend you make such an application if that situation arises.""
- Miss Bretherton took issue with the statement that it was unlikely public funding would be available until case allocation. Insofar as McGrath had told the client in paragraph 18(f) of CFA I that:
"
if the case is allocated to the fast track or the multi track it will be appropriate at that stage to consider an application for a Legal Services Commission public funding certificate,"
that advice was wrong. Moreover since Forde was not a case in which the client had received Legal Help, the letter of advice to clients in Crook which Irwin J had found failed comply with Regulation 4, did not come into play here. Accordingly, Crook was not determinative of the issue; the decision in Crook was based on an error which had gone uncorrected by the Council until it was too late.
- Miss Bretherton continued that the fact that paragraph 18(f) had given incorrect advice was clear by reference to the LSC Funding Code. Paragraph 19.4 of the Code says this:
"Criteria to be applied for full representation
1(a) Cost benefit for all cases under Section 10 of the Code (whether possession or other claims within Section 10) the cost benefit criterion is a general test requiring simply that likely benefits of the proceedings must justify likely costs, having regard to the prospects of success and all the circumstances (criteria 10.3.3 and 10.4.4). Therefore the strict cost benefit ratio in the General Funding Code do not directly apply to housing claims within Section 10, even if the primary claim is for money.
(d) Conditional fees funding will not be refused in any housing case under Section 10 of the Code on the grounds that a CFA is suitable (criterion 10.3.1 10.4.1 disapplying criteria 5.7.1 [this provides that if the nature of the case is suitable for a CFA, Full Representation will be refused])."
- "Cost benefit" is set out in criteria 5.7.3 as follows:
"Cost benefit quantifiable claims
If the claim is primarily a claim for damages by the client and does not have a significant wide public interest, Full Representation will be refused unless the following cost benefit criteria are satisfied:
(1) the prospects of success are very good (80% or more) likely damages must exceed likely costs;
(2) the prospects of success are good (62% to 80%), likely damages must exceed likely costs by a ratio of 2:1;
(3) the prospects of success are moderate (50% to 60%), likely damages must exceed likely costs by a ratio of 4:1."
- In Miss Bretherton's submission, these extracts from the Code made it clear that public funding was available prior to allocation, albeit that it would be refused or withdrawn (as appropriate) "if the case had been or is likely to be allocated to the small claims track" (see the Code at paragraph 5.4.6). Accordingly, insofar as Miss Forde had been advised that public funding was unlikely to be available before allocation, she had been misled.
- In Crook, Irwin J at paragraph 28 had held that it cannot ever be reasonable to give clients wrong advice about the law. In Miss Bretherton's submission this principle applied here in relation to the incorrect advice given to Miss Forde about the availability of public funding before allocation. That advice constituted a breach of the 2000 Regulations and called into question the enforceability of the entire CFA.
- Miss Bretherton rejected the proposition (in so far as it was relied on by Mr Mallalieu), that the fact Miss Forde had, in the event, applied for public funding, was a step capable of remedying incorrect advice previously given. Miss Forde's first application for public funding had been signed on 16 March 2005 but had not been submitted owing to an administrative error. The second application had been made with a covering letter on 24 May 2005 and had referred to the fact that boxes C and D on the application form had been ticked indicating that the prospects were "moderate (50-60%)" and "borderline". The following explanation had also been given:
"We have done so as explained in previous correspondence because, although we regard the clients prospects of recovery of compensation in this matter as being good, with a minimum of 60%, given the uncertainties in this type of litigation, in particular in relation to issues such as notice to the landlord and the possibility that any existing disrepair may have been remedied before allocation to track, it is impossible at this stage for us to certify that this case will be allocated to the fast track
As for as the costs/damages ratio is concerned the figure that we have given for the likely value of the claim is based upon the clients specific and uncorroborated instructions as to the date of notice and assumes for the recovery on that basis.
Given the normal dispute that arises in these cases, however as to the date of the notice, such an approach also pre-supposes that such a case is more likely to go to trial. The estimated costs of trial is therefore calculated on that basis
"
- Page 5 of the second application estimated the costs to settlement or other disposal at £2,500 and costs to trial at £7,500 (the first application put trial costs at £2,500).
- On 3 June 2005 the application had been refused because the case worker at the LSC:
"considered on the information available the likely benefits of the proceedings to the client and others do not justify the likely costs, having regard to the prospects of success and all other circumstances."
- In Miss Bretherton's submission, the form had been completed in such a manner as to doom the application to failure. The covering letter had distorted, albeit accidentally, the provisions of the Code by expressing concern, worry and uncertainty which made refusal inevitable. In fact, there was no basis whatsoever for McGrath having assessed the case as "borderline" within box D. The correct box to have ticked was B because favourable expert evidence had been obtained and a conviction against the Council secured. Moreover, Miss Forde was a tenant with no rent arrears whose credibility had not been challenged during the Section 82 proceedings to which the Council had pleaded guilty. The cost benefit ratio, (that is to say the ratio of costs to settlement), was expressed to be 1.32. That was very low. The application form had actually asked for the figure to settlement ie, the sum of £2,500 rather than the £7,500 provided; this would have given a ratio of 1 to 3.98, and made the grant of public funding more likely (first skeleton, paragraph 60). In Miss Bretherton's submission, making applications for public funding where the forms had been so poorly completed that refusal was inevitable, could not rectify incorrect advice given about the availability of public funding in the first place. Accordingly CFA I failed to comply with Regulation 4(2).
- Miss Bretherton accepted that if I agreed with her submissions about Regulation 4, she would still need to satisfy the court with regard to the materiality test in Hollins v Russell [2003] 1 WLR 2487. At paragraph 107 Brooke LJ had said this:
"Has the particular departure from a Regulation pursuant to Section 58(3)(c) of the 1990 Act or a requirement in Section 58, either on its own or in conjunction with any other departure in this case, had a materially adverse effect either upon the protection afforded to the client or upon the proper administration of justice? If the answer is "yes" the conditions have not been satisfied. If the answer is "no" then the departure is immaterial and (assuming that there is no other reason to conclude otherwise) the conditions have been satisfied."
- In Miss Bretherton's submission, when taken with the errors made on submitting the public funding application, the breach was material and had deprived Miss Forde of costs protection. She contended that public funding has an overwhelming benefit for a client, namely protection against an adverse costs order. Accordingly, advising Miss Forde that the time to apply for public funding was after allocation or alternatively telling her that public funding would not be available before allocation was wrong advice which had adversely affected her prospects of obtaining of public funding and costs protection. McGrath had compounded that wrong advice by completing her public funding forms in a manner that doomed her application to failure, and ensured that she never obtained public funding, still less the cost protection that would accompany it. Accordingly, the materiality test in Hollins v Russell could not avail McGrath.
SUBMISSIONS FOR MISS FORDE
- Before addressing the Council's specific objections to the validity of the CFAs, Mr Mallalieu made a number of general points on behalf of Miss Forde. First, he stressed that CFA II was expressly retrospective and covered work undertaken from the date Miss Forde had first instructed McGrath. Second, CFA II differed from CFA 1 in that it provided for a typical "basic charges plus success fee if you win" approach in respect of which 0 per cent related to postponement. Third, CFA II also contained the provision, (no longer compulsory), that were the success fee to be reduced inter parties on the grounds of reasonableness, the disallowed percentage could not be claimed back from Miss Forde.
- The purpose of CFA II, Mr Mallalieu submitted, was to put the nature of the client/solicitor relationship on a sure footing, firstly by taking advantage of the Revocation Regulations and secondly, as a response to the Council's challenges to McGrath's CFA in Crook (see his first skeleton paragraph 7). This had been made plain to Miss Forde in the March letter and she had received further advice from Mr Khan on this point at their meeting on 5 April 2006. The retainer documentation was embodied in both the CFA and the March letter.
UNDUE INFLUENCE
- Mr Mallalieu dismissed the suggestion that McGrath had exercised undue influence in procuring Miss Forde's agreement to CFA II. He submitted that in a solicitor/client context, undue influence usually concerns cases where, by way of example, a solicitor has received a substantial gift from a client and subsequently a dispute arises as to the circumstances in which the gift was made. The present case was different. McGrath had completed the work that the firm had contracted to undertake under the retainer and Miss Forde had raised no complaint about the competence with which McGrath had handled her affairs, still less had she ever suggested that her agreement to CFA II was the product of undue influence.
- As a matter of law, Mr Mallalieu submitted that there was a two (or possibly three) stage test which the Council must satisfy if undue influence was to be proved; first, did a relationship of trust and confidence exist between McGrath and Miss Forde such as to give rise to a finding or presumption of influence (whether undue or otherwise); second, if so, did the transaction call for an explanation; third, if so, was there a good or satisfactory explanation? (See paragraph 21 Etridge).
- For the purpose of the argument before me, Mr Mallalieu accepted that there was, in the nature of the solicitor/client relationship between McGrath and Miss Forde, an irrebuttable presumption of a relationship of trust and confidence. In other words, the first part of the test was satisfied. That said, Mr Mallalieu submitted (as Lord Clyde had expressed the position in Etridge - see paragraphs 21 and 22) that whilst there was a presumption that trust and confidence had been reposed, there was no presumption that the confidence had been abused. Accordingly, the way in which CFA II had come into being did not call for an explanation. The terms of the retainer were set out in a written contract, the contents of which McGrath (through Mr Khan) had explained to Miss Forde before she signed the document. In these circumstances no further explanation was necessary.
- If, contrary to Mr Mallalieu's primary submission, an explanation was called for, the answer as to whether this was a good one was plainly, "yes". This was not a situation in which the presumption of undue influence (if it had arisen) needed to be rebutted; on the contrary, the issue was whether CFA II "could readily be accounted for by the ordinary motives of ordinary persons in the relationship" (see speech of Lord Nichols at paragraph 13). In the present case, the Council had made repeated attacks on the validity of CFA 1 (see Crook, paragraphs 10 to 14). CFA 1 was in broadly similar terms to the CFAs used in Crook and the related cases. Miss Forde wished McGrath to continue to act for her. In view of this and in the light of the challenges, McGrath and Miss Forde had agreed to put their relationship on a firmer footing through the implementation of CFA II. Accordingly, the circumstances in which this had been done were explicable by entirely ordinary motives.
- In the present case, McGrath had set out its concerns about the challenges in Crook and the need for CFA II in the March letter. I have set out the detail of the letter in paragraph 13 above.
- Mr Mallalieu did not accept that there was any requirement for Miss Forde to have taken independent legal advice before the presumption was rebutted. This was not a case about gifts made of free will. The obvious and sensible reason why the client had accepted CFA II was that she wished to see McGrath paid. She did not want her case to be extended on account of a dispute with the Council as had happened in Crook. On the facts of the case, McGrath's suggestion that Miss Forde should seek independent legal advice was more than sufficient to rebut the presumption.
- Mr Mallalieu further submitted that even if the CFA II was voidable at the instance of Miss Forde, undue influence being an equitable jurisdiction, the ability to avoid the contract was capable of being lost, for example in Miss Forde having affirmed the contract (Mitchell v Homfray (1881) 8 QBD 587 -592 Selborne LC). Moreover in the present case, the right to avoid which Miss Forde was choosing not to exercise, was conditional upon the party wishing to rescind the contract (here the Council) making restitution (See Dunbar Bank v Nadem) [1998] 3 All ER 876). As a court of equity doing justice, if Miss Forde was minded to avoid CFA II, she could be ordered to make restitution which would be via the Council paying the costs.
- Mr Mallalieu further relied on Garbutt v Edwards [2005] EWCA Civ 1206, which addressed the type of situation in which a client might have cause to complain and which might sound on solicitor/client costs or on issues of conduct in relation to a solicitor in the event of complaint by the client.
- Mr Friston had sought to distinguish Garbutt. He had contended that the Council's objection was not about the performance of the contract but the formation of the contract. He had further submitted that to procure a contract of retainer by undue influence was to do so contrary to Rule 1(c) of the Solicitors Practice Rules 1990. In these circumstances Garbutt did not apply but Mohammed v Alaga & Co (a firm) [2000] 1 WLR at 1815 did, so that, where, as here, the contract was one prohibited by the Solicitors Practice Rules 1990 and had been procured by undue influence, the law would not permit that contract to stand.
- Mr Mallalieu took issue with Mr Friston's analysis. He submitted that Garbutt made clear that solicitor/client issues on conduct or other matters in which the client might have just cause for complaint, were not issues upon which the paying party could rely inter parties. At paragraph Arden LJ had said this at paragraph 37:
"It is clear from Note 1 of the Code [Solicitors Costs Information and Client Care Code] will result in a breach of Rule 15 [Solicitors' Practice Rules]. It has to be a serious breach of the Code, alternatively there have to be persistent and material breaches. In my judgment, this Note is an indication that a breach of the Code does not of itself render the contract of retainer unenforceable."
- Even if made out, any undue influence in this case would have made CFA II voidable, which was one step less than being rendered unenforceable and a long distance from the agreement being void ab initio. In Mr Mallalieu's submission, the present facts were on all fours with Garbutt. If the client had chosen to take a point on CFA II which, if established, might have rendered the contract unenforceable, that situation was wholly different from the circumstances which had arisen in Alaga. There was no reason in any event why Miss Forde should be forced to take proceedings against her own solicitors (see Garbutt at paragraph 43). Mr Mallalieu stressed that even if CFA II was voidable, it was only Miss Forde who could avoid the agreement; despite his research, Mr Mallalieu had been unable to find a case in which a third party, such as the Council, had relied successfully on undue influence. Here the only party who had acted unreasonably was the Council and accordingly the doctrine could not assist it.
CONSIDERATION
- Mr Mallalieu rejected the proposition that there was no consideration for CFA II because only part of the work to which CFA I related had been completed. In his submission, where, as here, McGrath's retainer was embodied in CFA 1 and was under challenge, the firm had been entitled to take proper steps to put the retainer on a sure footing. Indeed, the willingness of McGrath to continue to act in circumstances where the firm's entitlement to past and future fees under CFA 1 had been put in doubt, provided ample consideration. In the light of the Council's assertions about CFA I, McGrath would, in any event, have been entitled to terminate that agreement had Miss Forde rejected their advice to sign CFA II. Accordingly there was nothing in the "continuing to act" point advanced on its behalf by Miss Bretherton.
- Mr Mallalieu submitted that, in any case, there was a second form of consideration which could be found in the differences between CFA 1 and CFA II. CFA 1 did not cover an appeal by the Council except an interim appeal and where McGrath had advised in the firm's absolute discretion in writing that it should be opposed because Miss Forde had a reasonable chance of success. CFA II, on the other hand, covered any appeal by the Council and any appeal against an interim order. As a matter of general contract law, Mr Mallalieu submitted that provided there is some consideration, the court will not enquire whether the bargain is good or bad, or whether the benefit of any variation went only to one party. He relied on Chitty on Contracts, 28th edition, paragraph 3-074, which says this:
"(2) Variation which can prejudice or benefit either party
the parties may agree to vary the contract in a way that can prejudice or benefit either party. Here the possible detriment or benefit suffices to provide consideration for the promise of each party
This possibility of benefit and detriment is sufficient
if a variation is, taken as a whole, capable of benefiting either party, the requirement of consideration will be satisfied even though a particular term of the variation is for the sole benefit of one."
- In Mr Mallalieu's submission, Miss Forde, in signing CFA II, had obtained the benefit of the continued and uninterrupted instruction of McGrath in circumstances where the enforceability by either party (and therefore Miss Forde's ability to "force" McGrath to act) of the original CFA and thereby her ability to recover costs in the event of success, had been put in doubt. Accordingly, the Council's submission that CFA II was void for want of consideration was wrong.
CFA II RETROSPECTIVE?
- Mr Mallalieu took issue with the submissions that CFA II could not be retrospective; alternatively, that if it could, any success fee claimed, was irrecoverable.
- Mr Mallalieu submitted that there is nothing in principle to prevent a CFA being retrospective. Section 59(1) Solicitors Act 1974 permits a solicitor:-
"
[to] make an agreement in writing with his client as to his remuneration in respect of any contentious business done or to be done by him
" (emphasis added)
- It followed that the statute did not prevent a contentious business agreement covering work that had already been completed, as was the case here.
- Mr Mallalieu also took issue with the decision in King. In that case, before the date of the retrospective CFA, the solicitors had been at no risk as to their costs in respect of work undertaken from the date on which the agreement was said retrospectively to have begun because the case had been won. Here the position was different. There had yet to be a win and as McGrath had acted throughout under a CFA, their costs for the earlier period were just as much at risk as those for the prospective period.
- As to Master Hurst's remarks that back dating in King "flew in the face of the CPR", Mr Mallalieu pointed out that McGrath was under no obligation under CPR 44.15 to serve Notice of Funding until proceedings had been issued on 21 February 2006. In the event, a notice had been served on 15 February 2006 which referred to CFA 1 and to the fact that it contained a success fee (incorrectly as it turned out). Accordingly, the Council had had all the knowledge to which it had been entitled in relation to its potential exposure for an additional liability at an earlier date than the CPR required. Mr Mallalieu accepted that the quantum of the success fee could be reduced by the court, but that was a far different situation from the position advanced on behalf of the Council that a retrospective CFA with a success fee must be struck down.
- Mr Mallalieu further took issue with the proposition that the success fee should be assessed at nil because the risks of past litigation would always be nil. In Mr Mallalieu's submission, there was no reason why the risks affecting the level of a success fee cannot be assessed at the date from which a retrospective CFA is to start, rather than the date on which it is signed. All that is required under s.11.7, Costs Practice Direction, is that the success fee be assessed in the light of the risk known on the date that it was entered into.
- Finally Mr Mallalieu submitted that there was nothing in the point that if success fee was disallowed, the CFA itself must fail in its entirety. This did not form part of Master Hurst's reasoning in King. On the contrary, the judge had held that whilst the success fee was irrecoverable, the underlying agreement was valid. The CFA simply ratified the retainer and what had gone on before. Moreover, the general principle that there is no reason why a CFA cannot be retrospective, was endorsed by Stanley Burnton J in Holmes v Alfred McAlpine Homes (Yorkshire) Ltd [2006] EWHC 110 (see paragraphs 19 and 23).
LEVEL OF SUCCESS FEE
- Mr Mallalieu submitted that the staged success fees claimed in CFA II (50 per cent if the claim concluded before issue of proceedings, 75 per cent before commencement of trial and 100 per cent if concluded at trial) were reasonable. Mr McGrath had set out the reasons for staging the success fee in his first witness statement. At paragraph 17 he had said this:-
"To establish a claim a tenant has to demonstrate: firstly that they are and have at all times been a tenant, who can benefit from such an Agreement; secondly, they have to demonstrate that the state of repair at the property was not that as required by the Tenancy Agreement and that accordingly the landlord is in breach; thirdly, that the landlord knew (normally because of reports or complaints by the tenant) that the state of the property was such that the landlord was in breach of their repairing obligations; fourthly, that the landlord failed within a reasonable period of time to put things right; fifthly, that the tenant suffered some detriment as a result of that failure, so as to entitle the tenant to compensation for the breach.
18. None of these issues are necessarily straightforward or easy to assess
If all this were not difficult enough, unlike other claims, such as personal injury, the whole basis of a claim can be altered after initial instructions have been taken and indeed at a stage when the case is well progressed towards a possible trial.
45. As is dealt with below, the chief issue in these cases is whether or not the value, or other circumstances of the case, means that it should be allocated to the Fast Track of the county court, with the likelihood of full costs recovery, or whether it should be allocated to the Small Claims Track.
46. A case that from the outset seemed destined for the Fast Track can end up in the Small Claims Track, when the tenant totally unexpectedly moves from the property to other accommodation, thereby removing at a stroke any possibility of seeking an order for specific performance and changing what would otherwise be a guaranteed Fast Track trial into one suitable for the Small Claims Track.
47. Similarly, and quite often cynically, it is open to landlords to seek to influence track allocation following the commencement of a claim, and indeed, following the commencement of proceedings, by carrying out all outstanding items of repair work within their covenants, so as to leave a money claim below that which would normally merit Fast Track allocation
"
- Mr Mallalieu also referred to CPR Part 36; in the event of the Council making an offer which Miss Forde had rejected on McGrath's advice, there would be adverse costs consequences if that offer was not beaten at trial. Moreover, the possibility of not recovering any costs on account of the Council's technical challenges to CFA II was a factor which in the view of Mr McGrath (second witness statement paragraph 83 et seq) justified a success fee of 100 per cent. The fact that the very retainer itself was under challenge was a relevant factor to be reflected in the level of the success fee. For these reasons the staged sums claimed were reasonable.
TERMINATION AND REPLACEMENT?
- Mr Mallalieu took issue with Miss Bretherton's submission that if CFA II was invalid, Miss Forde and McGrath could not fall back on CFA 1 to fill the void. The reason for this was that CFA 1 had not been terminated and replaced by CFA II. On the contrary, CFA 1 had remained as the original agreement until it had been joined by CFA II. This was a re-shaped agreement that did not terminate CFA 1 and contained (in the March letter) an express statement that CFA 1 would survive if CFA II proved to be invalid.
- Mr Mallalieu submitted that this was consistent with the approach adopted by Irwin J in Crook. At paragraph 37 the learned Judge had said this:
"Given that these defendants [the Council] argue that the CBA is unenforceable in any event, I do not see how an allegedly unenforceable after-coming agreement could be held to vitiate an otherwise enforceable CFA."
- It followed that if the Council was correct in its primary submission that CFA II was unenforceable, that agreement could not be held to vitiate CFA 1.
- Mr Mallalieu further relied on Harrington v Wakeling [2007] EWHC 1184 (Ch), to support the proposition that even if (contrary to Mr Mallalieu's primary argument) variation of the retainer by CFA II was flawed, CFA 1 was left untouched. Mr Friston had accepted that this decision provided a precedent for such an analysis (see his skeleton paragraph 29) and Mr Mallalieu relied on paragraph 23 of the Judgment of Mann J which said this:-
"However, I would mention one other point which seems to me to provide the same answer as I have reached to the main point for the purposes of this costs assessment. If the e-mail agreement were illegal, as Mr Bacon submitted, then it would be void and unenforceable. That would not, however, discharge the prior agreement between Mr Connolly and the liquidator (or his predecessor). If the e-mail agreement is good, it varies the original agreement in accordance with its terms, if it is bad it leaves the original agreement unaffected. There seems to me to be no basis for saying it discharges that earlier agreement and fails to replace it with anything else. Accordingly, even if the e-mail agreement were void as being an illegal contingency fee agreement, the former arrangement survives, and the liquidator is still liable for the fees. Those fees can therefore be the subject of the current inter parties assessment."
REGULATION 4(2)(D) AND (E)
- The second limb of the Council's attack on the validity of CFA II turned upon whether there had been compliance with Regulation 4(2)(d) and (e) when CFA 1 had been signed. The nub of Miss Bretherton's submission was that McGrath had given Miss Forde incorrect advice about the time at which it would be appropriate to apply for public funding; recommending that this should not be done until case allocation was simply wrong and a material breach of the Regulation.
- Mr Mallalieu took issue with the assertion that it had been McGrath's practice to advise clients not to apply for public funding until after allocation. The actual position had been set out by Mr McGrath in a witness statement he made in Crook and had exhibited to McGrath 2. At paragraph 115 he had said this:
"Whilst it remained relatively easy to persuade the legal aid authorities to grant a certificate to pursue a claim, it became increasingly common for there to be a limitation placed at the outset that prevented proceedings being issued
117. We then found, that once the stage was reached where proceedings needed to be issued if we were to galvanise the opponent into action and ensure that the clients got justice, applications to legal aid authorities to amend the certificate to allow full proceedings to be issued were routinely refused on the basis that the costs benefit ratio did not make it worthwhile allowing the client to issue proceedings under public funding. By that stage, because of the amount of work that had already been done and because of the effect of the statutory charge, it became frequently very difficult to justify putting any alternative funding in place, given the risks involved in this sort of litigation.
118. In short, our clients were being caught between an opponent who frequently sat back and did nothing and made no attempt to negotiate in accordance with the spirit of CPR and a funding body who were not prepared to fund vigorous litigation that would have forced the opponent to comply and meant cases settled far more quickly and ultimately economically.
119. Against this background we were increasingly coming to the view that best advice to clients may not be to follow the public funding route but go for some private funding arrangement that would remove the limitations imposed by the Legal Services Commission and allow clients to deal with claims quickly and effectively.
120. The tipping point, however, in that process came with the introduction of the Legal Help scheme at the beginning of the year 2000.
121. Whilst the equivalent to the statutory charge continued to apply for some types of cases, in housing cases the statutory charge did not apply if the case was dealt with entirely under Legal Help funding. Legal help did not, however, permit the issue of proceedings, only some preparation of the case and negotiations.
122. If, however, the client was subsequently granted a public funding certificate to pursue litigation then the statutory charge was retrospectively applied to the other work done under Legal Help.
123. Whilst this was not a problem if public funding was granted to allow proceedings to be issued and those proceedings were subsequently successful with costs paid by the opponent, it became a major problem if either the costs were not paid (or ordered to be paid) by the opponents or if the public funding certificate was issued with a limitation which prevented the issue of proceedings and which might well be discharged once proceedings became necessary.
124. In the former, the fact that a public funding certificate had been obtained meant that the statutory charge applied and not only to the work done under the certificate, but also to the work done under Legal Help and accordingly this had the potential to have a serious impact on any damages the client might recover. In the latter the client had the worst of all worlds, since they had no prospect of successfully litigating with public funding, but they were saddled with a very substantial statutory charge which would bite if they were not successful in obtaining a costs order in highly risky litigation.
125. It is against that background that we took the view that the best advice for clients who were eligible to initially advise under Legal Help and then, if attempts to negotiate a settlement failed, to put in place private funding rather than a public funding certificate. In practical terms this meant a CFA."
- It followed that it was not, and had never been, McGrath's advice that public funding was not available before allocation or that, as a matter of general principle, it was unlikely to be given. On the contrary, the recommendation to use a CFA was made not because public funding was unavailable but because a Conditional Fee Agreement was a better option for Miss Forde in the light of the risks to which McGrath considered she might otherwise be exposed.
- That the Council's submission was incorrect was also plain from what he, Mr Mallalieu, had said in Crook during the course of argument. The relevant submissions were to be found in the transcript exhibited as GJM 4 (bundle 620-621):
"Master Campbell: Have you got the references there?
Mr Mallalieu: Master I do, in Maiden the legal application I believe is at 1355 and the refusal from the Legal Services Commission is at 1428. Of course the relevance we draw from that again, it just shows in these cases that public funding is by no means a certainty but of course our case isn't predicated on the basis that we couldn't get public funding. All of these people might not be eligible for it, our case is predicated entirely that it was reasonable advice, that there was an alternative available to them which in the light of the risks to their particular case was better suited to them
So we're not saying that there was a bar to public funding which meant that we had to, or it was reasonable in the absence of public funding to sign them up to a CFA. What we say is it was reasonable advice that this was an alternative method of funding."
- In short, Mr Mallalieu concurred in what I had said at paragraph 38 of my judgment in Crook, namely
"Those cases [Griffiths and Maiden] were indicative that public funding in housing repair cases was by no means assured. In any event, it was McGrath's "best advice" that the alternative funding on offer, namely the CFA, was more suitable."
- The reference to Griffiths and Maiden was to two other Claimants in Crook.
- Mr Mallalieu further relied on what Miss Forde had been advised in paragraph 18 of CFA I. This did not state that the only circumstance in which McGrath would advise Miss Forde to apply for public funding would be in the event of case allocation to the Fast or Multi track. Such advice could only ever have related to a further application because on the date the CFA was signed, 16 March 2005, Miss Forde had already completed a public funding application. Accordingly, it was clear that, contrary to the case now advanced by the Council, Miss Forde had never been told that public funding should not be applied for until case allocation, still less that it was unavailable before allocation. Had the position been otherwise, Miss Forde would not have signed the application forms on 16 March 2005.
- So far as the submission about the manner of completion of the public funding application forms was concerned, Mr Mallalieu argued that whether or not they were "doomed to failure" was irrelevant. The obligation placed upon the solicitor under the 2000 Regulations was to give advice before the client signed. Thus, the enforceability of the CFA fell to be determined at the date of signature. Expressed differently, the way in which a public funding application was completed was not a compliance issue capable of giving rise to a material breach of the CFA Regulations. Even if that were to be incorrect, Mr Mallalieu disputed that there had been anything improper in the way in which McGrath had completed the public funding forms on Miss Forde's behalf. Indeed, what was striking about the forms was the detail into which each had gone. Having ticked both boxes C and D, McGraths had additionally provided a full explanation about why this had been done.
- The forms in question also needed to be considered by reference to the background and to McGrath's explanation to the LSC that public funding applications forms were going to be submitted in all cases, even those where funding might not be granted in view of challenges being made by the Council to their CFAs. This information had been given to Mr Stephen Lissett, a solicitor at the Birmingham Regional Office of the LSC in McGrath's letter to him of 18 May 2004 (Bundle page 637). That letter had been written against the background of Bowen and had warned Mr Lissett that the LSC would be receiving a substantial number of public funding applications, albeit that in many cases, due to the costs benefit ratio, many were likely to be refused. For its part, McGrath had expressed concern that the submission of forms in cases where public funding was unlikely to be granted could harm the firm's good name with the LSC. In these circumstances, McGrath had been at pains to make clear to Mr Lissett that the purpose of the applications was not to put the LSC to trouble and expense in hopeless cases, but had been driven by the decision in Bowen and by the technical challenges taken by the Council in Crook. In Mr Mallalieu's submission, none of these matters could have any bearing on whether there had been compliance with Regulation 4, since it was trite law that enforceability must be determined at the date of the CFA and not by reference to what happened thereafter (see Myatt v National Coal Board [2006] EWCA Civ 1017).
- Mr Mallalieu's submissions can therefore be summarised as follows:
- CFA II was enforceable: it was not tainted by undue influence nor did it fail for want of consideration.
- The terms of CFA II applied retrospectively, including the recoverability of the success fee.
- If that be wrong, CFA I remained to fill any void left by CFA II.
- McGrath did not give Miss Forde incorrect advice about the law, so there could be no breach of Regulation 4.
- If that be wrong, Miss Forde had accepted advice to apply for public funding. Whether or not the application form had been completed in a manner that doomed her request to failure was not a compliance issue under Regulation 4.
DECISION
- Although it is no part of the Council's case that there has been any impropriety by McGrath (Miss Bretherton's skeleton paragraph 58) and indeed Miss Priest has appreciated that Mr McGrath sincerely believes he has treated his clients to their benefit and not disadvantaged them (Priest 2, paragraph 25), the outcome, if Miss Bretherton's submissions succeed, is that the firm will recover no costs whatsoever for their work on Miss Forde's claim, save for £285 disbursements paid. The reason for this is the operation of the indemnity principle. If CFA I and CFA II are unenforceable, then no liability will fall upon Miss Forde to discharge McGrath's profit costs of £15,174.41, which the Council has been ordered to indemnify, subject to assessment and McGrath will have undertaken her case for nothing. Since I understand that Forde is but one of many cases in which tenant/clients of McGrath have instructed the firm under CFAs in the form of CFA I and CFA II, significant sums turn upon the outcome of this decision.
- In her witness statements Miss Priest has set out with clarity the reasons why the Council is concerned about the level of costs claimed by McGrath in Miss Forde's case (and others) in housing disrepair litigation. I hope that the following is a fair summary:
i) In comparison with other firms, very few Section 11 claims brought by McGrath have been publicly funded (Priest 1, paragraph 39 41).
ii) In recent years, claims by McGraths' clients have been funded by CFAs although 70% of tenants are on full housing benefit and would be eligible for Legal Help (at least until October 2007) which would cover letters to the landlord, a surveyor's report, etc (Priest 1, paragraphs 46 47 and 63).
iii) Since each CFA using the CFA II formula provides for a success fee, McGrath can potentially recover more costs under a CFA than under a public funding certificate.
iv) The housing department of the Council has a duty to ensure that money paid to tenants as compensation and to lawyers as legal costs out of the Housing Revenue Account is properly due (Priest 2, paragraph 14).
v) In the past five financial years the Council has paid several million pounds to McGrath (see Priest 2 paragraph 58 bundle page 451).
vi) The issue between the Council and McGrath is about costs and what the Council sees as inflated bills (Priest 2, paragraph 4). In particular, in Forde the Council does not understand how costs of £15,174.41 can have been incurred in a claim that settled immediately after issue for £5,000 (Priest 2, paragraph 38). Had the case been publicly funded, the costs would have been less.
- Thus it is the Council's case that had Miss Forde (and presumably other tenant/clients of McGrath) been given correct advice about the availability of public funding, the Council would not now be faced with bills of costs for work done under CFAs providing for success fees, but would, instead, be paying much more modest claims funded by the Legal Services Commission. For my part, it is not clear why this should be so, since the hours spent and rates charged whether under public funding or CFA would be identical (or virtually identical) save for the success fee. If, as Miss Priest has submitted, McGrath's bills are exaggerated owing to the use of CFAs, in my opinion this is a matter which will be resolved by the District Judge on detailed assessment rather than as a preliminary issue. That said, in the event that Miss Bretherton's submissions prevail, by operation of the indemnity principle, McGrath will not recover anything even the amount that would have been payable had the case been publicly funded. Accordingly, it is all or nothing.
- Having made these general remarks I propose to deal with the Council's submissions in relation to CFA II.
UNDUE INFLUENCE
- The starting point is to be found in Etridge. In his speech at paragraph 6, Lord Nicholls said this:
"The issues raised by these appeals make it necessary to go back to first principles. Undue influence is one of the grounds of relief developed by the courts of equity as a court of conscience. The objective is to ensure that the influence of one person over another is not abused. In every day life people constantly seek to influence the decisions of others. They seek to persuade those with whom they are dealing to enter into transactions, whether great or small. The law has set limits to the means properly employable for this purpose."
- At paragraph 13 Lord Nicholls in his speech continued:
"Whether a transaction was brought about by the exercise of undue influence is a question of fact. Here, as elsewhere, the general principle is that he who asserts a wrong has been committed must prove it. The burden of proving an allegation of undue influence rests upon the person who claims to have been wronged. This is the general rule. The evidence required to discharge the burden of proof depends on the nature of the alleged undue influence, the personality of the parties, their relationship, the extent to which the transaction cannot readily be account for by the ordinary motives of ordinary persons in that relationship, and all the circumstance of the case."
- In the present case, it is not Miss Forde who has asserted that a wrong has been done but the Council, which was not a party to CFA II, the transaction complained of. In these circumstances it is by no means clear to me that the Council has locus standi to advance an argument founded upon undue influence, particularly when Mr Mallalieu has told me that, despite his researches, he has been unable to find a case in which a third party has successfully relied upon this doctrine. That said, Mr Mallalieu did not alert me either to a case which forbade a third party from relying on undue influence and, with the reservation I have expressed, it seems to me that I should address the matter from the point of the view that the Council does have locus standi to advance it, a fortiori where, as here, the Council is being called upon to discharge a burden for which Miss Forde has primary liability.
- It is common ground that in a solicitor client relationship, the law presumes irrebuttably that one party has influence over the other. In these circumstances, the complainant (by whom I mean the Council for this purpose for the reasons I have given) need not prove that it reposed trust and confidence in the other party, here McGrath (Etridge paragraph 18). However it is also necessary for the transaction not to be readily explicable by the relationship of the parties by reference to the ordinary motives by which people may act.
- Miss Bretherton submitted that CFA II did not benefit Miss Forde in any way and advanced four reasons why the transaction was disadvantageous to her, paying particular reference to the claim for a success fee. She further contended that it was fair to infer from the March letter that had Miss Forde refused to sign CFA II, McGrath would have parted company with her before the firm's obligation to conclude the litigation had been fulfilled. For his part, Mr Mallalieu argued that the decision to sign CFA II was fully explainable by "ordinary motives".
- Having weighed the matter, I accept Mr Mallalieu's submission and I am not persuaded that in late March/early April 2006 Miss Forde was, in effect, faced with a "fait accomplit" "sign here, if you do not, we will pull out of your case". My reasons for reaching this conclusion mean it is necessary to look at the background against which CFA II came to be signed.
- Crook had been settled on 6 May 2005 and Master O'Hare had decided Bowen on 23 May 2005. In both cases the validity of the CFAs in question had been subjected to challenges, in addition to which, on 27 October 2005 the Court of Appeal had handed down its decision in Garbutt. Against this background, in my opinion it is unsurprising that McGrath decided to review the terms on which the firm had been instructed in the numerous housing disrepair cases it was handling, even if this meant that clients would be asked to sign a new CFA drafted in the form of CFA II.
- It is accepted by Mr Mallalieu that CFA II contained different terms to those in CFA I, in particular with regard to the success fee. However I consider that Mr Mallalieu is correct in his submission that CFA II must be read with the March letter and that the latter formed part of the retainer. In particular, it is made clear in the letter that Miss Forde would not be any worse off should she sign CFA II "because "the cap" we put on your costs in the original agreement still applies". Since CFA II was entered into under the Revocation Regulations, it was not necessary for Miss Forde to have signed the March letter in order for this to have contractual effect; contrast the position in Utting v McBain [2007] EWCA 3293 (QB), in which Blake J held that an unsigned letter could not form part of a CFA entered into under the 2000 Regulations in the absence of the client's signature. Moreover it is clear that a CFA does not need to be contained in one document (see Jones v Wrexham Borough Council [2007] EWCA Civ 1356 paragraph 88). For these reasons I disagree with Miss Bretherton's closing submissions at paragraph 10 that if McGrath had intended the March letter to form part of the retainer contract, it would have been signed. In my judgment both CFA II and the letter formed the retainer contract.
- It will be recalled, too, that Mr Khan visited Miss Forde on 5 April 2006 in order to take her through CFA II. Miss Bretherton was critical of McGrath's evidence in that no witness statement was served by Mr Khan, nor was any material before the court about what had been discussed at the meeting on 5 April 2006. However the bundle (page 723) does contain Mr Khan's attendance note which says this:
"
After perusal of the file, when I attend [sic] the client I first went through with her the new CFA agreement and in particular I advised the client about the success fee. Once the client I [sic] understood I then asked the client to sign the same which she kindly did. I also signed the agreement in her presence."
- Having heard the evidence of Mr McGrath, Mr Khan's employer, I am satisfied that it is more likely than not that the attendance note is an accurate record of what was discussed at the meeting. Moreover, had Miss Forde subsequently decided that she had been misled by her solicitors, it is reasonable to suppose that the bundle would have contained her letters of protest, but instead I understand that she was fully satisfied with McGrath's handling of her case and in order to assist the firm, has consented to these proceedings, albeit that she will not benefit from them in any way. In my opinion, her conduct in these respects is demonstrative of Miss Forde having affirmed CFA II, notwithstanding that she had the opportunity to be "wise after the event" and to advance an allegation of undue influence had she wished to do so.
- It follows that in my judgment, the case for undue influence fails. I am satisfied that although circumstances arose in which Miss Forde reposed trust and confidence in her solicitors, the nature of the transaction into which she entered (CFA II) was explicable by ordinary motives, namely her wish that McGrath should continue to act on her behalf on terms that would ensure, so far as possible, that the firm would be paid.
CONSIDERATION
- Miss Bretherton submitted that CFA II failed for want of consideration since McGrath was under a contractual obligation to act for Miss Forde until the terms of the retainer had been completed and because the terms on which the firm would be prepared to act further, were far more onerous under CFA II than was the case under CFA I. On behalf of Miss Forde, Mr Mallalieu submitted that the willingness of McGrath to continue to act, notwithstanding the Council's challenges to the CFA, provided sufficient consideration. In any event, provided there is some consideration, the court will not enquire into its adequacy (see Chitty on Contracts, 28th Edition, paragraph 3-074, ante).
- In my judgment, Mr Mallalieu was correct to place emphasis upon the conduct of a firm of solicitors such as McGrath to put the enforceability of the retainer beyond doubt, in circumstances where the entitlement to fees was under challenge. In my opinion, there was nothing improper in McGrath, with Miss Forde's agreement, reshaping the firm's retainer following the revocation of the 2000 Regulations and in order to defeat the challenges in Crook and,/or the problems raised in Bowen, provided that none of the alterations were the product of undue influence. In this respect, I agree with Mr Mallalieu that in McGrath agreeing to continue to represent Miss Forde under CFA II, adequate consideration was given. The fact that the bargain benefited one party more than the other did not render CFA II unenforceable for want of consideration. That this is so is plain from Brennan v Bolt Burdon [2005] EWCA Civ 1017 (upon which both parties relied); in a compromise agreement, the fact that the consideration on each side was not of equal value, did not necessarily mean that the contract of compromise was not a matter of give and take (see judgment of Maurice Kay LJ at 21). Moreover, in dealing with the adequacy of consideration, at paragraph 34 Bodey J said this:
"It is not in my view appropriate to seek to evaluate the adequacy of that consideration given by Islington, on the basis that "it did not give up very much". The consideration which it did give was I think sufficient to create a "give and take" state of affairs, as per any compromise agreement properly so called."
- It follows that Mr Mallalieu having satisfied me that an element of consideration was given for CFA II, in my judgment it does not matter that the new agreement may have benefited McGrath more than Miss Forde (absent undue influence), nor is it necessary for the court to enquire whether the consideration given was adequate:
"
so long as there is some consideration, the courts are not axiomatically concerned with its adequacy." (judgment of Sedley LJ paragraph 55 Brennan).
- For these reasons I reject the Council's submissions on consideration.
CFA II RETROSPECTIVE
- Miss Bretherton's initial submission was that, as a general principle, a CFA cannot be retrospective (see her first skeleton at paragraph 26 and her closing submissions at paragraph 14). I cannot accept that submission. Disregarding, for a moment, whether or not a success fee can be claimed retrospectively, it is clear from Holmes v Alfred McAlpine Homes (Yorkshire) Ltd [2006] EWHC 110 that such an agreement can be valid. At paragraph 23 Stanley Burnton J said this:
"If it is agreed that a written agreement should apply to work done before it is entered into, it should be correctly dated with the date on which it is signed and expressed to have retrospective effect, i.e. to apply to work done before its date
"
- Whether or not a success fee can be recovered retrospectively is more difficult. The first question is is the extent to which, if at all, the success fee is recoverable for the period pre-issue of proceedings. Had CFA I provided for a success fee, I would have agreed with Mr Mallalieu that notice of funding would not have been required for this to be recoverable during any protocol period or pre-issue. The reason for this is that CPR 44.15(1) does not require a party to provide information about a funding arrangement until the issue of proceedings. However, it is common ground that no success fee was sought under CFA I, so the point does not arise in respect of that agreement, notwithstanding that notice of funding was served on 15 February 2006.
- So far as the period post issue is concerned, it is common ground that no notice under CPR 44.15 was served when proceedings began, or within seven days thereafter as required by the rule. Mr Mallalieu has attempted to meet this point by arguing that the Council had knowledge of the fact that an additional liability would be sought following the service of the notice to that effect on 15 February 2006 in respect of CFA I. I cannot accept that submission. I agree with Miss Bretherton that McGrath should not be permitted to benefit from the firm's omission to delete the words "which provide for a success fee" in relation to CFA I in order to claim a retrospective success fee under CFA II from that date.
- Mr Mallalieu's argument has a further problem which is that CPR 44.15(2) applies; this provides as follows:
"Where the funding arrangement had (sic) changed and the information a party has previously provided in accordance with paragraph (1) is no longer accurate, that party must file notice of change and serve it on all other parties within seven days."
- In the present case, the information previously provided related to CFA I. Accordingly, when CFA II was signed, the funding arrangement changed and in my opinion CPR 44.15(2) obliged McGrath to serve a fresh notice in respect of the new agreement but it is common ground that no further N251 has been served. It follows that in my judgment, the success fee is irrecoverable for want of the required notice under CPR 44.15(2) and if McGrath wishes to pursue its claim for a success fee, the firm must apply for relief from sanctions under CPR 3.9 on account of the omission to comply with the rule.
- Had, in fact, a form N251 been served for CFA II, I would still have held that any success fee claimed for the retrospective period from 16 March 2005 until the date of the Notice (assuming that this was after issue), was irrecoverable for the reasons given in King at paragraph 89; only base costs would have been payable. That leaves open the question of what would have happened had CFA II been signed before issue and had the litigation been settled without proceedings. Section 19.2 Costs Practice Direction states at (3) that there is no requirement in the PD for the provision of information about funding arrangements before the commencement of proceedings. No one suggested that the pre-action protocol required this to be done in the present case. It follows that a curious situation would have arisen had McGrath settled the case after signing CFA II but before issue because the time for serving Form N251 would not have been reached. It would seem that in those circumstances a retrospective success fee would have been recoverable, but because, in the event, proceedings were issued and no notice under CPR 44.15 was given, McGrath's claim for a success fee has been lost.
- For these reasons I accept Miss Bretherton's submission that the success fee is irrecoverable but I do not share her view that it follows that CFA II must fail too. As Master Hurst made clear in King, a backdated CFA can serve to satisfy the court that a proper retainer was in place between the client and the solicitor before the CFA was signed, ie by his or her signature to the CFA, the client is ratifying what has gone on before. In these circumstances the fact that the success fee cannot be recovered is not fatal to the validity and enforceability of CFA II as a whole and the agreement can thus run from 16 March 2005.
LEVEL OF SUCCESS FEE
- Lest I am mistaken and/or there is a successful application for relief from sanctions it is appropriate that I should state the success fee that I would allow on detailed assessment.
- In principle, a success fee can be staged -see for example CPR 45. Accordingly in the present case, there is no objection to CFA II staging the success fee as to 50% if the claim concludes before the issue of proceedings, 75% before commencement of trial and 100% if concluded at trial. That said, in Miss Bretherton's submission, the prospect of Miss Forde not recovering costs was so remote as to be discounted; the case was risk free and the success fee should be assessed at nil. In riposte, Mr Mallalieu has drawn attention to matters which concerned McGrath prior to concluding the risk assessment (see paragraph 17 of McGrath 1), which in his submission, justified the figures claimed.
- Having given due weight to these submissions, I consider that there is much in the argument advanced by Miss Bretherton that at the date of signature of CFA II, the litigation was relatively free of risk. It will be remembered that by 5 April 2006, not only had Miss Forde obtained a conviction under Section 82 against the Council but also a firm offer of £4,500 was on the table. In Begum Brooke LJ stated no claim is entirely without risk but that where success was a near certainty, a 15% success fee was appropriate. In contrast to Begum, in the present case, the success fee has been staged. Using the ready reckoner, I consider that a fair assessment of the risks if the claim had concluded before the issue of proceedings, were that there was a 90% chance of winning, giving a success fee of 10%. I am not persuaded that a significantly higher sum is warranted just because proceedings were issued. Having failed to settle during the protocol period, limited grounds might be advanced for saying that the Council must have considered that the prospects of a successful defence were much higher than 43%, (a 57% chance of winning would reflect a 75% success fee under the ready reckoner). In my judgment, however, the likelihood of Miss Forde losing would still have been slim. Left to me, I would assess prospects of winning up to trial at 83% giving a success fee of 20%. Had the matter actually concluded at trial, the position would have been different as McGrath could then have argued with justification that the Council had clearly considered it would win, so the success fee should be 100% reflecting 50/50 prospects of success.
VALIDITY OF CFA I
- In view of my decision that CFA II is enforceable and not tainted by undue influence, nor defective for want of consideration, it is not strictly necessary for me to adjudicate upon the validity of CFA I. Lest I am mistaken and the matter goes further, however, it is appropriate that I should address the Council's submissions about CFA I, not least in order to do justice to Miss Bretherton's careful and detailed researches. It follows that the next section of this judgment is predicated on the assumption that CFA II is unenforceable.
- At the heart of McGrath's argument in respect of CFA I lies the assertion that the agreement remained alive to fill any void left by CFA II should that be found to be unenforceable; in other words, CFA I was not terminated when Miss Forde signed CFA II, nor did CFA II replace CFA I. Both documents continued to exist side by side but CFA I would only be relied upon in the event that CFA II failed for any reason. That situation, Mr Mallalieu submitted, was covered by the reservation in the March letter, namely McGrath would have relied on "the original agreement" if the court ruled that CFA II was invalid.
- Miss Bretherton challenged that contention. She submitted that if Mr McGrath's argument were to be accepted, McGrath would have contracted with Miss Forde in CFA II with respect to subject matter covered under CFA I. Since plainly Miss Forde could not be charged under CFA I and CFA II without a double charge arising, it was impossible for both CFAs to be valid and enforceable. Moreover there was no evidence to support the proposition that Miss Forde had committed any breach of CFA I which would have entitled McGrath to terminate the agreement.
- In my judgment, regard must again be given to the circumstances in which CFA II came into existence, with particular reference to the March letter. Whilst it is correct that McGrath did state that the firm would rely on the original agreement if the court "by some chance" ruled that CFA I was invalid, in my opinion that did not, of itself, adequately explain to Miss Forde that CFA I was not being terminated and replaced but, on the contrary, was to continue alongside CFA II. In my view, the only reasonable inference that can be drawn from the March letter is that McGrath was taking the opportunity to replace CFA I with CFA II in order to make use of the advantageous changes to the CFA Regulations. Had that not been the case, it would be difficult to explain why McGrath had referred in the March letter to "an alternative agreement". Had the position been as contended for by Mr Mallalieu, in my opinion wording such as "a co-existing agreement" or "concurrent agreement" would have been used. It follows and expressed in common parlance, that the "have your cake and eat it" argument fails. I agree with Miss Bretherton's submissions that CFA I was terminated and replaced by CFA II and in these circumstances there can be no fallback position to CFA I in the event of the failure of CFA II.
- I am not persuaded that Mr Mallalieu's submission with regard to what Irwin J had said in Crook at paragraph 37 has any bearing on the point. In Crook, there was a contentious business agreement, the purpose of which was to create an additional basis of liability upon the client to pay McGrath's charges and expenses in relation to work already done and work to be done in the future. The position in the present case is different; CFA II as the "after-coming agreement" (as Irwin J had described the CBA in Crook) is not being relied upon or used by the Council vitiate CFA I. On the contrary, in my judgment, it is the Council's case that Miss Forde and McGrath terminated the first agreement and replaced it with the second. Accordingly, the Council is not purporting to use an unenforceable CFA to vitiate an otherwise enforceable CFA, so the point fails.
- Nor I am persuaded that Harrington v Wakeley assists McGrath. In that case, there was no element of futurity, in that at the date of the material agreement, the result of the action in question was known. Accordingly, the entitlement to recovery of the Solicitor's fees did not depend upon something fortunate occurring in the action in the future (see judgment paragraphs 21-22). The position here is different. On the date that CFA II was signed, the litigation was still live and it follows that the factor that Mann J found persuasive in Harrington is absent here. For that reason, I am unable to accept Mr Mallalieu's submission.
REGULATION 4(2)(d) AND (e)
- In view of my finding that CFA I did not survive once CFA II was signed, it is not strictly necessary for me to decide whether CFA I was unenforceable owing to a material breach of Regulation 4. Lest I am mistaken and the matter goes further, it is again appropriate that I should address this submission, which pre-supposes that CFA I could, after all, be relied upon to fill any gap left by CFA II.
- The starting point is Regulation 4 which, for convenience, I repeat:
"(1) Before a conditional fee agreement is made the legal representative must
(a) inform the client about the following matters
(d) whether other methods of financing [the] costs are available, and, if so, how they apply to the client in the proceedings in question;
(e) whether the legal representative considers that any particular method or methods of financing any or all of those costs is appropriate."
- As I have said, Miss Bretherton submitted that the advice McGrath gave Miss Forde was incorrect and breached Regulation 4 and had the point been argued before Irwin J in Crook, the outcome of the appeal was likely to have been different (see Priest 3, paragraph 29).
- The difficulties with that submission are, in my judgment, two-fold. Firstly, I do not accept, irrespective of whether there were shortcomings in the judgments in Crook, that McGrath did advise Miss Forde that public funding would not be granted until allocation. I agree with Mr Mallalieu's submission that McGrath had weighed up the merits and de-merits of her case and had advised Miss Forde that a CFA represented a better option than public funding. In my view, the words complained of by the Council in paragraph 18(f) of CFA I ("we have further advised that if the claim is allocated to the Fast Track or the Multi track it will be appropriate at that stage to consider either an application for a Legal Services Commission public funding certificate or alternatively After the Event insurance") are insufficient to constitute "incorrect advice" for the purposes of Regulation 4. The paragraph must be read as a whole and with paragraph 18(e). When that is done, it is evident that the client is given advice in the round, not only that public funding might be a method of paying for the case but also that ATE (for example) could be a candidate. It follows that I do not consider that incorrect advice was given in relation to public funding. Moreover, it is plain from the evidence of Mr Heathcock and Mr Cox that if public funding had been granted before allocation, it would have been withdrawn and the certificate discharged had the claim been allocated to the small claims track at the allocation stage. That would have generated its own problems for the client in terms of the statutory charge if damages had been recovered, whereas under the CFA, these would be ring-fenced. In these circumstances, I consider McGrath's view that the most suitable funding option was to commence the claim under a CFA using CFA I and, if appropriate, to review funding options (including public funding and ATE) at the allocation stage was balanced and measured advice: as such, it does not merit the level of obloquy levelled upon it by the Council in the witness statements of Miss Priest (see in particular Priest 3 paragraphs 20 to 24), still less does it conflict with the requirements of Regulation 4. For these reasons I disagree with Miss Bretherton's submissions.
- Secondly, in contrast to Mr Crook in Crook, Miss Forde applied for public funding and was rejected. That, to my mind, must limit to a very considerable extent the effectiveness of the Council's contention in this respect; after all, having signed and submitted the application form, Miss Forde must plainly have received advice about public funding which was sufficient to persuade her that it was worthwhile applying. Miss Bretherton's response is that the application forms were completed in such a way as to doom them to failure and that a defective application cannot be used or relied upon to justify incorrect advice having been given in the first place. I disagree. What Regulation 4 requires the legal representative to do is to inform the client whether other methods of funding are available and whether any particular method is appropriate. In my opinion, no part of Regulation 4 requires the legal representative to complete public funding application forms to any particular standard. Miss Bretherton and indeed Miss Priest were very careful to distance themselves from any suggest of impropriety on the part of McGrath, in particular that the forms had been deliberately completed in each case in a manner which made refusal certain. On the contrary, their criticisms appeared to be directed at the level of detail into which McGraths had gone, with particular reference to the fact that two boxes had been ticked about merits.
- Telling evidence on this point came also from Mr Cox and, to a lesser extent, Mr Heathcock. What both said in terms was that the application for public funding in each case would be determined by reference to the Code and the criteria. It followed that if a legal representative "over-egged" the merits on an application form (to adopt the description used by Mr Cox in cross examination) that would be no guarantee of success because the case worker would apply the Code and the criteria. I infer from that that if an application form was unintentionally "under egged" by ticking box D as appears to the Council's suggestion in this case, then that would not guarantee that the application would be unsuccessful either because the case worker, again, would base his decision not on what the form said but by reference to the Code and criteria. Mr Cox confirmed this to be the position in answer to the following question which I put to him during cross examination:
"Q. At the end of the day it is going to be a matter for the judgment of the caseworker, is it not, applying the criteria?
Mr Cox: Exactly."
- Mr Heathcock's evidence was effectively the same. He said that the case worker would base his decision upon a consideration of "all the circumstances, fairly and impartially, having regard to the Funding Code" (see transcript page 25 lines 5-16).
- These facts lead me to conclude the following: McGrath did not give incorrect advice to Miss Forde in CFA I which gave rise to a breach of Regulation 4. Such advice as was given about public funding, satisfied Miss Forde to the extent that she submitted an application for public funding albeit in the knowledge that it might not be granted. In any event, the skill and competence (or lack of it) and the manner in which the application forms were completed could not have any bearing on whether McGrath complied with Regulation 4. Accordingly, I am not persuaded that CFA I is unenforceable for want of compliance with the 2000 Regulations.
- If I am mistaken on these points, Miss Bretherton accepts that to make her submission good, she must satisfy the court that the breach or breaches were material having regard to the test in Hollins v Russell. She submitted, in this context, that public funding has an overwhelming benefit for a client, namely costs protection against an adverse costs order. In the present case, the incorrect advice that public funding was unlikely to be available until allocation, coupled with completion of her public funding forms in a manner which made rejection inevitable, had had a materially adverse effect upon the protection to which Miss Forde was entitled.
- Mr Mallalieu took issue with this submission. He argued that Miss Forde was at least as well, if not better protected under a CFA than would have been the case under public funding. Mr Mallalieu also adopted paragraph 51 of my judgment in Crook in which I had noted that the CFA regime can provide a client with access to justice where public funding is sometimes unavailable, for example upon allocation of a case to the small claims court. He further submitted that there was no evidence that the CFA had added any additional or disproportionate costs to the overall claim.
- In reaching my decision on this point, it is appropriate to emphasise that the application of the materiality test would only arise if my primary finding is incorrect and that McGrath had, after all, given Miss Forde erroneous advice as to the law, namely that public funding would not be available before allocation and/or that the error had been compounded by the "doomed to fail" applications for public funding.
- In Crook, Irwin J stated that "it cannot ever be "reasonable" for a lawyer to give wrong advice on the law" (paragraph 28). In these circumstances I would hold that telling Miss Forde that the appropriate stage at which to apply for a public funding certificate would be upon allocation to the fast track, was wrong advice, incapable of being saved by the materiality test. Public funding is available before allocation and will not be refused in a housing disrepair case under Section 10 of the Code on the grounds that a CFA would be suitable (see paragraph 60 ante). Accordingly, had erroneous advice been given in the nature contended for by Miss Bretherton, I agree that Miss Forde might well have been denied costs protection for the period before allocation with potentially adverse costs consequences for her. To that extent I accept Miss Bretherton's submission.
FORMAL DECISION
- My findings on the preliminary issues are as follows:
Issue 1
- 1 No.
- 2 Yes.
- 3 No.
Issue 2
No, accordingly (1) to (4) do not require answers.
Issue 3
Yes.
Issue 4
From 16 March 2005
Issue 5
No (on these facts)
Issue 6
Invalid and not reasonable.
Issue 7
No.
- It follows, in the result, that McGrath can recover (subject to assessment) the base costs claimed in CFA II but without a success fee.
- It is appropriate that I should express my gratitude to Counsel and their Instructing Solicitors for the thoroughness of their submissions. If the parties wish to avoid further costs, I am content for any submissions about the costs of the preliminary issues to be dealt with on paper, likewise any applications for permission to appeal.
