Thornley v Lang

This is an appeal from a judgment of Field J., sitting, unusually, in Newcastle upon Tyne County Court dated 25 February 2003. The judge dismissed an appeal from a decision of District Judge Bullock in costs only proceedings, upholding a finding that the costs payable by the defendant to the claimant should include a 20% success fee. Permission for a second appeal was granted because an issue of principle is raised in relation to the effect of section 58 of the Courts and Legal Services Act 1990 (‘section 58’) where a trade union funds legal services provided to one of its members.

The background facts were shortly stated by the judge as follows:

Until this case reached our court the defendant’s insurers, who have been conducting the litigation on his behalf, accepted that they were liable to pay the claimant’s costs, shorn of the 20% success fee. So far as the success fee was concerned, they contended that the claimant had incurred no liability to pay this to his solicitors and, accordingly, had no right to recover it as part of his costs. Before us Mr McLaren QC for the defendant accepts that the ground upon which he objects to recovery of the success fee would apply with equal force to the balance of the claimant’s costs, albeit that the defendant’s insurers do not seek to avoid paying this.

The legal services provided to the claimant were rendered pursuant to a CCFA, concluded between his union and his solicitors. Hitherto the defendant’s insurers have been prepared to accept, for the purposes of this case, that this CCFA satisfied the requirements of section 58 and the relevant statutory regulations. Before us Mr McLaren has sought to withdraw this concession. Miss Guggenheim objects to this. We uphold her objection. It is too late at this stage to raise issues as to the validity of the CCFA.

Section 51 of the Supreme Court Act 1981 gives the court power, subject to any relevant statutory provisions and to the rules of court, to determine by whom and to what extent legal costs are to be paid. There is, however, a well established principle, known as the indemnity principle, that governs the basis upon which a court can properly make an award of costs. Subject to any statutory exceptions, an award of costs can only be made in order to indemnify a litigant against legal costs and expenses that he has paid, or become liable to pay.

It is common for a potential litigant to enter into an agreement with a third party under which the third party agrees to fund any costs of litigation that may be incurred by the potential litigant. Pursuant to such agreements trade unions, bodies such as the Royal Automobile Club, and insurance companies customarily instruct solicitors to act for their members or assured. When defeated by such a litigant, unsuccessful parties have, on occasion, invoked the indemnity principle in an attempt to avoid paying costs. The argument advanced has been that the successful litigant is not liable for his costs and, therefore, has no right to recover them. The courts have had no truck with such arguments. They have defeated them by finding that, in the circumstances under consideration, the litigant comes under an independent obligation, albeit one that is unlikely to be enforced, to pay the fees of the solicitor who is acting for him.

The leading case is Adams v London Improved Motor Coach Builders, Ltd. [1921] 1 KB 495. The plaintiff’s trade union instructed solicitors to act for him in a claim for wrongful dismissal. He made no express agreement to retain them, but permitted them to act for him. The claim succeeded and he sought to recover the solicitors’ costs from the defendant. The defendant resisted the claim, contending that it was the union, and not the plaintiff, who was liable for these costs. Bankes LJ held at p. 501:

In Davies v Taylor [1974] AC 225 the issue was whether a defendant, whose legal costs had been borne by insurers, could bring himself within section 1 of the Legal Aid Act 1964, which gave the court power to order “costs incurred by” a successful litigant to be paid out of the legal aid fund. The House of Lords, approving Adams, held in favour of the claimant. In the leading speech, Viscount Dilhorne said at p. 230:

Where a trade union or an insurance company or a motoring organisation instructs a solicitor to act for a litigant and agrees to pay his costs, it is not easy to justify a finding that the litigant comes under an independent obligation to pay the solicitor. In Lewis v Averay (No 2) [1973] 1 WLR 510 the successful defendant had enjoyed the benefit of legal services funded by the Automobile Association, of which he was a member. Lord Denning MR, with whom the other members of the court agreed, considered it just and equitable that the defendant should recover his costs from the legal aid fund in order to be in a position to reimburse the Automobile Association. It is not satisfactory that the right to recover costs in such circumstances should turn on the question of whether the litigant has a legal liability to pay such costs, albeit it that such liability is little more than notional. Miss Guggenheim has, however, been constrained by the authorities to seek to demonstrate that the claimant came under a binding obligation to pay his solicitors. To that end it has been necessary to consider the formal requirements imposed by Section 58 and the relevant regulations.

Sections 58 and 58A of the Courts and Legal Services Act 1990, as amended by section 27 of the Access to Justice Act 1999, provide:

Pursuant to section 58(3)(c) the Lord Chancellor made, on 9 March 2000 the Conditional Fee Agreements Regulations 2000 (‘the CFA Regulations’). These lay down extremely detailed requirements for the form and content of conditional fee agreements (‘CFAs’), particularly those that provide for success fees. The Lord Chancellor followed these, on 7 November 2000, with the Collective Conditional Fee Agreements Regulations 2000 (‘the CCFA Regulations’). These lay down much less exacting requirements for the form and content of CCFAs. Regulation 3 defines a CCFA as follows:

Regulation 7 provides:

Thus the two sets of regulations set out to establish two mutually exclusive sets of requirements for CFAs and CCFAs respectively. There is an obvious reason why those governing CCFAs are less exacting than those governing CFAs. A prime object of the regulations governing CFAs is to provide protection for the lay client who is contemplating entering into a CFA. CCFAs involve bulk users of legal services who are less vulnerable. Often these will be contracting to purchase, at their own expense, legal services to be provided to litigants. In those circumstances, the litigants will not be exposed to significant risk of liability to pay for the legal services provided to them.

Sections 58 and 58A and the regulations to which we have referred above are intended to give effect to fundamental changes to the manner in which litigation is funded in this country. The history of these changes, and their objects, have recently been described in detail by this court in the first part of its judgment in Bradley Hollins v Rev SH Russell [2003] EWCA Civ 718.

Because the defendant’s insurers indicated that they were prepared to proceed on the basis that the CCFA was binding in law, little attention has been paid to the precise terms of the CCFA. The judge recorded that the union had agreed that it would pay to the claimant’s solicitors a 20% success fee. How and when this agreement was reached is not recorded, nor is there any finding that it was communicated to, let alone agreed by, the claimant. What is clear is that, once the union had instructed their solicitors to act for the claimant, the solicitors sent to the claimant a client care letter, which included the following statement:

Mr McLaren has accepted that, but for the formal requirements imposed by s.58 and the CFA Regulations 2000, a binding obligation would have been imposed on the claimant to pay the solicitors who were acting for him in the circumstances that we have just described. He was plainly right to do so. Adams demonstrates that all that was required was that he should acquiesce in the instruction of these solicitors on his behalf by his union. The facts of this case are stronger, for he did so after receiving the client care letter which informed him that this would involve a liability to pay these costs.

Mr McLaren accepts that, had a binding obligation arisen in these circumstances, it would have been an obligation to pay the solicitors on the terms agreed with the union – that is on a conditional fee basis with 20% uplift. Mr McLaren submits, however, that no enforceable obligation was undertaken. He contends that the mechanism which might have given rise to such an obligation was, on analysis, an individual CFA agreed between the claimant and his solicitors. While such an agreement was reached, it is not enforceable because it does not satisfy the requirements of the CFA Regulations. This is not an attractive submission. The requirements of those Regulations are designed to protect those who enter into CFAs and are of no legitimate concern to defendants. Furthermore, where legal services are provided to a litigant under a CCFA by a trade union or other body, there is normally little need for such protection. Mr McLaren accepts that the manifest object of having a different regime for CCFAs from that applying to CFAs was to simplify the formalities of supplying legal services pursuant to the former. He submits, however, that because the Regulations have been made in haste they are subject to a defect which no legitimate purposive construction can remedy. If costs incurred pursuant to a CCFA are to be recoverable, the individual who receives the legal services in question must enter into a CFA which satisfies the requirements of s.58 and the CFA Regulations.

Field J accepted similar submissions. He held that “any agreement relied on as satisfying the indemnity principle is bound to be a conditional fee agreement caught by s. 58 and the Conditional Fee Agreement Regulations.” He went on to hold, however:

Field J was only concerned with an attack on the 20% success fee. While the provisions to which he refers undoubtedly evidence derogation from the indemnity principle, we do not consider they enable a litigant to recover costs payable under a CFA which is unenforceable because it does not comply with s.58 or the CFA Regulations in a material respect – as to which see part 5 of the judgment in Hollins v Russell. While Miss Guggenheim has sought to uphold Field J’s reasoning set out above, her energies have primarily been directed to a challenge, pursuant to a Respondent’s Notice, to the judge’s conclusion that the claimant could only become subject to a binding obligation to pay his solicitors if he complied with the CFA Regulations.

We have concluded that Miss Guggenheim’s challenge is well founded. The agreement under which the union agreed with their solicitors that they should represent the claimant was a CCFA. For the purposes of these proceedings it is presumed to have been a valid CCFA that complied with the CCFA Regulations. The union so agreed with the authority of the claimant. An alternative view is that the claimant ratified the agreement reached by the union on his behalf by availing himself of the services of the solicitors. On either footing, the contract pursuant to which he came under a liability to pay the solicitors for their services was a CCFA. As such, it was not subject to the CFA Regulations.

For these reasons the claimant is able to establish the necessary liability on his part to pay for the legal services provided to him. He is thus in a position to recover these as costs without infringing the indemnity principle. For these reasons, which differ from those of the judge, this appeal is dismissed.