Accident Group Test Cases Sharratt v London Central Bus Company

Section 29 of the Access to Justice Act 1999 provides that

With the effective withdrawal of legal aid for small claims for personal injuries it was inevitable, and seems to have been intended, that such claims would in future be financed by conditional fee agreements [CFAs]. Such agreements were unlikely to be attractive to individual solicitors, at least without the imposing of success fees that made the deal unattractive to claimants. To meet this need, or opportunity, there has been created a new form of machinery, that handles small cases for a large number of claimants, and takes advantage of the accruing economies of scale.

One such organisation was “Claims Direct”, which provided “after the event” [ATE] insurance to existing claimants to indemnify them should their claims be dismissed or discontinued. Accordingly, in the event of a claim succeeding, with a normal order for recovery of claimant’s costs, section 29 prima facie provides for the inclusion of the premium charged for that insurance, or at least some part of that premium, within those recoverable costs. In the Claims Direct litigation [2003] EWCA Civ 136 this court gave guidance as to the assessment of what part of a premium paid to such an organisation can be properly regarded as paid for insurance against the risk to which section 29 refers. The present litigation concerns a scheme that was in many respects the same as the Claims Direct scheme. This scheme was operated by The Accident Group Ltd [TAG]. The newly controverted issue in the present case was the appropriate factual analysis to be adopted in separating premium qualifying under section 29 from non-qualifying premium.

The present litigation in form consists of a series of test cases, in which individual claimants seek to recover from defendants premiums paid to TAG. Reference to the facts and circumstances of those individual cases proved illuminating at various stages of the argument. However, it would be artificial not to recognise that what is effectively at issue in this case is the nature, terms and reasonableness of the TAG scheme itself. As it is put in §5 of the appellants’ skeleton, “the driving force behind the support….for this appeal has been a steering committee of TAG scheme insurers and finance providers”; just as the counterparties to the appeal are the liability insurers from whom section 29 recoveries are sought.

The case was conducted over a substantial period before Senior Costs Judge Hurst, who had the benefit of a very large amount of written material and of oral evidence, as well as his own experience of involvement in the Claims Direct case. He reached conclusions contrary to the interests of the TAG parties, and the latter now appeal to this court, with the permission of the judge. Before addressing the issues in the case it is necessary to give an account of the TAG scheme. A very full account, with verbatim quotation from many of the documents, is to be found in the judgment of the Senior Costs Judge. Mr Dutton QC, for the claimants, paid a very proper tribute to that exposition, and I would commend it to anyone who feels the need for a more detailed account than that which follows. I shall here only give enough of the bones of the scheme to enable the points in issue to be understood. I only refer to differences in the arrangements from year to year when such differences are material.

TAG went into administration in May 2003, in circumstances that are not the concern of this court. While it was still operating, it was a claims management company, similar to Claims Direct, that sold “one stop” services to members of the public who had or thought they might have personal injury claims. The scheme was vigorously marketed by a salesforce of some 75 people, for instance by means of direct approach to members of the public in shopping malls and similar places, and many thousands of persons were attracted to it.

The potential client filled in a simple application form, the purpose of which was first to establish the contractual relationship between the client and TAG, and second to enable TAG to decide whether to accept the case. The client undertook to enter into a “legal expenses policy” which provided for

a guarantee of a minimum sum of £500 damages after deduction of any obligation under the loan to be retained by the client if successful in his claim [this arrangement being known in this case as “ring fencing”]; and

if the claim was unsuccessful an indemnity against liability to pay the client’s own disbursements and counsel’s fees, the other side’s legal costs, and any outstanding balance on the client’s loan.

The loan referred to was arranged under an agreement to take out a bank loan that the client was required to enter into at the same time as signing the application form. The loan was available to him because of block arrangements negotiated by TAG with particular banks. If TAG decided not to proceed with the case, the loan was simply cancelled. If TAG proceeded with the case, its fee or premium was debited to the loan account, on the basis that the fee would either be recouped from any damages that the client was eventually awarded, or repaid under the TAG insurance if the claim failed. There were certain other transactions put through the loan account, to which I shall refer below. Although the loan account was in the client’s name, and on its face not subject to any restriction, Mr Dutton confirmed that the client had no control at all over the handling of the account, which was managed by TAG in accordance with the provisions of the scheme.

Some application forms would be rejected on sight. The remainder were passed to an organisation called Accident Investigation Limited [AIL] for investigation. AIL was a sister company of TAG, operating out of the same premises as TAG. It received a fixed fee of £310 plus VAT for every case referred to it. The legal status of this fee, and the role and status of AIL itself, are strongly in dispute in these proceedings. AIL then passed the papers to a “vetting solicitor” who formed a view as to whether the claim had a more than 50% chance of success and whether the apparent value of the injuries was more than £1500. If the claim thus qualified, he would then refer it to one of the solicitors on the TAG “panel”. The solicitor had 48 hours to decide whether to take the case. If he accepted it, the client’s insurance became operative, the solicitor issued him with a CFA, and the case thereafter proceeded as a normal piece of litigation. To obtain access to membership of the panel the solicitor had to enter into detailed, standard form, agreements, not only with TAG, but also with the funding banks and with AIL.

At each stage of the process, if either TAG or the solicitor decided not to accept the claim the bank loan and other arrangements were simply cancelled.

The charge made to clients by TAG, described as a “premium”, in the two years with which we are concerned was £840 (£800 plus insurance premium tax) in 2000 and £997.50 (£950 plus IPT) in 2001. The ATE insurance that formed part of the TAG service was arranged by TAG with a number of Lloyds insurers in 2000, and in 2001 with Lloyds insurers and an organisation called NIG. Out of the sum charged to clients by TAG, in 2000 £320 was paid over to underwriters, leaving £480 with TAG. In 2001, £300 was paid to NIG and £650 remained with TAG. In respect of Lloyds in 2001 underwriters succeeded in negotiating to raise the insurers’ share of the client’s payment to TAG to £550.

The principal task of the Senior Costs Judge was to determine how much of the “premium” charged by TAG to the client was premium in respect of the risk referred to in section 29. He also had to decide two other issues. First, whether the AIL fee was recoverable from the paying party as a disbursement, or otherwise. That question not only affects the amount of costs recoverable by the client, but also, if the fee is irrecoverable, affects the calculation of the section 29 premium. Second, once the section 29 premium has been calculated, the costs judge has then to consider whether that amount is properly chargeable to the paying party as reasonable and proportionate under CPR 44.4. The Senior Costs Judge applied that provision to reduce the amount for which the paying party was liable only in the case of the premium assessed for the Lloyds insurances in 2001. Both of these matters were strongly contested, and it will be convenient to take them at the end of this judgment.

The claimant appellants contested both the general approach of the Senior Costs Judge and particular decisions that he made within the approach that he adopted. I take those in turn.

The approach of the Senior Costs Judge was to start with the sums paid over to underwriters. From those he deducted (assessed) sums or percentages attributable to risks that did not fall under section 29. He then added back commissions paid by the underwriters, which was accepted to be a proper element in the “premium”; and also a sum in respect of “cost of insurance services”, an element that will have to be explained hereafter. This was called, for ease of reference only, the “deconstructionist” approach. It is a more elaborate and worked-out version of the method suggested by this court in Callery v Gray (No2) [2001] 1 WLR 2142 [12] and Claims Direct §§ 87-88.

The appellants argue that this approach is wrong in principle. The main complaint was in respect of the percentages assessed in respect of costs attributable to the insurance of risks falling outside section 29. The defendants adduced evidence from an actuary, a Mr Cowley, who, working on information obtained from TAG, assessed the percentages which the average costs of providing various items of cover that did not qualify under section 29 bore to the total average cost per claim. These percentages were then applied by the Senior Costs Judge to the amount paid over to underwriters to identify the proper section 29 premium. The appellants said that this method was inappropriate and unfair. The Senior Costs Judge should have started with the amount actually paid to TAG by the client, and deducted the Cowley percentages from that sum.

The appellants did not argue before the Senior Costs Judge in favour of this approach, or against the “deconstructionist” approach, even though they must have been aware, from the Claims Direct case, that the latter approach was likely to be adopted. Nor was this complaint, put as a matter of principle or logic, apparent from the original Grounds of Appeal, and we had to grant an application to amend the Grounds de bene esse to permit the point to be ventilated at all. However, even without the benefit of the view of the Senior Costs Judge upon the argument, I have no hesitation in rejecting it out of hand.

The Senior Costs Judge at § 258 adopted the definition of “premium” in § 72 of MacGillivray 9 ^th edition:

Further, I do not understand the particular complaint of the appellants, that Mr Cowley’s percentages were applied to premiums charged by underwriters that had been arrived at without market experience and which his own figures showed to be inadequate for the management of the underwriters’ business. The first of these factors is unfortunate, but cannot affect the analysis of what percentage of whatever premium was charged was attributable to non-qualifying risks. The second is also unfortunate, but the issue before the Senior Costs Judge was nothing to do with the profitability of the underwriters’ business, but rather with how much of their income could be attributed to section 29 business.

I will therefore proceed on the same, deconstructionist, basis as was adopted by the Senior Costs Judge, and deal with the complaints made by the appellants within that approach.

It is agreed that two items must be deducted from the premium in any event, as not falling within section 29. Those are “ring fencing” (see § 7(i) above), valued at £10; and the cost of insuring the return of the premium, valued on the basis used by Mr Cowley at 15%. It was also agreed that if (as the Senior Costs Judge found, and for reasons set out below I agree) the AIL fee was irrecoverable by the claimant because it had been an unlawful referral fee, the part of the premium attributable to such irrecoverability could not be included in the qualifying premium under section 29. Mr Cowley attributed 18% of the premium to that risk. Although these percentages were considerably debated before the Senior Costs Judge, I did not understand them to be challenged, as figures, before us; but in any event they were subjected to close scrutiny by the Senior Costs Judge on the basis of evidence that he heard and which was cross-examined before him, and it would need very strong grounds indeed for this court to re-open them.

Accordingly, the matters that remain in controversy in the main part of the appeal are as follows.

In 2002 TAG, in order to persuade the Lloyds syndicate to make available extra capacity, made an extra allocation to the syndicate, from clients’ fees paid in 2002, of £150 per new policy, in order to offset losses suffered by the syndicate on the 2000 year. TAG argued that this amount should be allocated amongst the policies for 2000, and so lead to an increase in (recoverable) premiums for those years. One of the witnesses before the Senior Costs Judge, adopting phraseology that does not appear to have been used contemporaneously between the parties, called the 2002 payment a “Loss Experience Adjustment Premium”, and the question therefore became known in the appeal as the “LEAP” issue.

The Senior Costs Judge added back a sum for “cost of insurance services”, but limited the sum to £30, on the basis that that sum had been allowed in similar circumstances in Claims Direct . The appellants contended that a much larger sum, representing the actual value to the insurers of the services provided to them by TAG, was justified by the evidence that had been before the Senior Costs Judge.

I have summarised this issue in § 21(i) above. Before us, the appellants advanced various elaborate arguments as to how the sum paid in 2002 could be attributed to individual client accounts for the year 2000. Such reconstruction was indeed necessary, because the underwriting evidence was that the extra payment was simply required by the underwriters to make good their general deficiency on the 2000 contract. Attribution to individual clients was never undertaken or contemplated.

The Senior Costs Judge rejected the argument that LEAP should in some way be added to recoverable premiums for the year 2000, and he was right to do so. The question for him was what premium had been paid by the client, who is the recovering party in the costs application. No 2000 client paid a penny more for his insurance because of LEAP. What did happen was that the clients’ agent, after the event, was persuaded to make a commercial payment to underwriters in order to obtain extra capacity, not for 2000 clients but for 2002 clients. That payment no more formed part of the premium actually paid by the 2000 clients, and was no more a proper charge on the paying party in those clients’ cases, than if a successful claimant who had obtained and paid for an expert’s report decided after the event that the expert had undercharged for his services, and sought to recover an ex gratia addition from the paying party.

It is also perhaps unnecessary to add that, even if LEAP were analysed as an element in the 2000 premium, that element in the 2000 client’s costs would inevitably be disallowed under CPR 44.4.

That this claim was made at all illustrates the reality of these proceedings, to which I have already referred in §4 above. We were frequently reminded during the appellants’ submissions that the appellants are the individual claimants in the test cases, seeking to recover what they have properly spent. But LEAP was nothing to do with any individual claimant, and was not spent or contributed by individual claimants. LEAP was paid by TAG to further its business. It is of course in TAG’s interest to place responsibility for LEAP on individual paying parties, because payment of the successful client’s costs reduces the balance on his loan account, and thus reduces the risk to TAG under the ATE; but, assuming that TAG honours its liabilities, that does not affect the position of any individual client.

The agreements between TAG and underwriters recited a wide range of “insurance services” that were to be provided by TAG to underwriters. These were largely concerned with ensuring that only suitable claims were accepted, and then ensuring that claims were properly processed and pursued. Mr Dutton urged that such services were of the greatest importance to insurers; it had been recognised in Claims Direct that the cost of such services was a proper addition to premium; and in contrast to Claims Direct , where the court had attributed to such costs what seemed to be a pro forma sum of £30, in this case the Senior Costs Judge had evidence of actual cost, which he should have applied.

There is no cross-appeal against the Senior Costs Judge’s decision that an allowance should in principle be made under this head, but it would be wrong if I did not express my considerable doubts on that point. In Claims Direct this court, although as we have seen entertaining such an allowance, said at §89:

However, it is not necessary to pursue these matters further, because the premise of the appellants’ argument, that there is in the present case evidence of actual cost on which the Senior Costs Judge should have acted, is not fulfilled. The appellants relied on two witnesses. First, Mr Blair, the finance director of TAG’s parent company, who said that TAG spent “hundreds of pounds” per case in providing the “insurance services”. The Senior Costs Judge found that evidence of no assistance to him, and he was justified in so finding. Mr Blair appears to have made no attempt to isolate and quantify those “insurance services”, if any, that are a proper addition to a premium that qualifies under section 29. Second, the evidence of Mr Primer, managing agent of one of the Lloyds syndicates, was equally that the cost of undertaking insurance services ran into hundreds of pounds. This evidence however equally suffered from the difficulty that it made no attempt to isolate the items chargeable to section 29 premium.

The difficulty of the evidence is demonstrated by the failure of the appellants to provide detailed figures to the Senior Costs Judge. According to § 329 of his judgment, various figures up to £150 were suggested. Before us, the appellants argued that the whole of the amount retained by TAG, less the irrecoverable items of ring fencing, cost of funding and insurance against irrecoverability of the AIL fee, should be attributed to the recoverable premium. That would lead to a figure (for Lloyds 2000 as a representative year) of £216.95. That approach was on the basis that the evidence of Blair and Primer showed the total value to the underwriters of the insurance services to be greater than the amount retained by TAG. For the reasons already indicated, that point is not made good.

In the absence of any evidence on which he could properly act, the Senior Costs Judge had no alternative to, and perhaps was somewhat generous in accepting, the £30 attributed to similar services in Claims Direct . There is no basis upon which this court can interfere with his conclusion.

The Senior Costs Judge mentioned various cross-checks that reinforced his view that the figures that he had isolated for section 29 premium were justified. I do not go into these, because the issue at that stage was simply and only the identification of the section 29 premium, which was justifiably arrived at by the method just set out. The Senior Costs Judge did, however, apply CPR 44.4 in the case of the premium for the Lloyds year 2001, where, in a second judgment in July 2003 he reduced the figure initially arrived at of £608 to £525, both figures including IPT. It was pointed out to the Senior Costs Judge, and he appears in §28 of his second judgment to have accepted and thought relevant, that other such premiums so far approved were £357.50 in Callery v Gray and £621.13 in Claims Direct , the latter premium however being reasonably larger because it covered both sides’ costs.

Prominent in discussion of this issue was CPD §11.10:

I have already indicated that the first of these arguments is not available to the appellants. The first question is what in fact was the premium insuring against the risk that section 29 refers to. That other forms of insurance might have been more expensive; or that the claimants got a good deal; or that the insurers lost money on the transactions; are none of them to the point.

So far as Lloyds 2001 is concerned, there are a series of reasons why the approach of the Senior Costs Judge cannot be faulted, quite apart from the striking global comparison with other actual rather than hypothetical premiums: see §31 above. Mr McCulloch had asserted appropriate success fees of between 18.5% and 31.5%. The Senior Costs Judge described these as wholly unrealistic for straightforward cases like the test cases before him, and applied instead the 5% uplift envisaged by this court in Halloran v Delaney [2003] 1 WLR 28[35]. Mr Dutton made no attempt to support Mr McCulloch’s figures. In their place, he argued that further work by the Civil Justice Council since the date of the decision of the Senior Costs Judge had demonstrated that an agreed rate of uplift for straightforward cases was 12.5%, and that figure should be used in assessing the reasonableness of the premium under the machinery envisaged by CPD § 11.10. When applied to the solicitors’ profits costs in any of the test cases, with the addition of assumed costs of alternative insurance, figures significantly in excess of £608 were achieved.

We permitted material vouching for the origins and status of the 12.5% figure to be put before us, but none of it or of the argument that it was said to support was of any assistance to us. In the first place, we are concerned with an appeal from a decision of the Senior Costs Judge in relation to insurances entered into in 2000 and 2001. If at the time of his decision 5% was indeed the “going rate”, it is impossible to see how he can have been wrong to adopt it.

There is, however, a more fundamental difficulty about the appellants’ argument. Percentage uplifts mean nothing without reference to the nature of the figure to which the percentage is to be applied. Mr McCulloch applied his percentages to the solicitors’ actual profit costs. So did the Senior Costs Judge. He illustrated his method in § 232 of his first judgment by saying that

These calculations perhaps do no more than demonstrate that a broad judgement such as is conferred on the Costs Judge by CPR 44.4 and by §11 of the CPD cannot be exercised with mathematical nicety. What they certainly do not demonstrate is that there is any ground for challenging the decision of the Senior Costs Judge to reduce on taxation the assessed premium for the Lloyds 2001 year.

The Senior Costs Judge made the following findings with regard to the AIL scheme:

The panel solicitors were required, as a term of their agreement with TAG, to enter into an agreement with AIL under which the panel solicitor appointed AIL as its agent for the purposes of investigating, collating and assessing information with regard to claims. The panel solicitor also agreed to pay the AIL fee [of £310 plus VAT]. At this point the client would almost certainly be unknown to the solicitor, nor would there be any retainer in place [Senior Costs Judge, § 340]

Although the solicitor was contractually liable to pay the fee, actual payment to AIL was achieved by the fee being removed from the client’s loan account

In 2000 the agreement between TAG and the client only referred to “investigation fees” in those general terms. The client knew nothing of AIL, or of what its fee in fact would be [Senior Costs Judge, § 352]. In 2001 the agreement recited that the client wished AIL to investigate and obtain further information about the claim, and agreed to pay AIL’s fee, which was quantified. That did not create any obligation on the part of the client to AIL, because AIL’s only contract was with the solicitors [Senior Costs Judge, §§ 358-360]

The work that was done by AIL was done by AIL as agent for the panel solicitor to enable the panel solicitor to see whether or not he wished to take on the case [Senior Costs Judge, § 354]

The appellants agreed that the work done by AIL in any given case occupied no more than one hour [Senior Costs Judge, § 373]

If the AIL fee was a referral fee, it was not properly payable by the solicitors; not therefore chargeable to their clients; and a fortiori not recoverable from the paying party; by reason of rule 2(3) of the Solicitors Introduction and Referral Code, which reads:

Mr McCulloch, the panel solicitor who gave evidence to the Senior Costs Judge, said that he did not regard the AIL fee as a referral fee, but as the price for investigation of the claims. Mr Dutton argued that, in the face of that evidence, it was difficult or impossible for the Senior Costs Judge to have found that the fee was indeed a referral fee. I am unable to agree. First, in determining the nature of a contractual arrangement, the court has to consider the objective nature of the arrangements, and not just the parties’ assertions about the object of the arrangements. Second, Mr McCulloch, although acknowledging that contractually the solicitor was liable to pay AIL, regarded the liability as being in reality that of the client. He so said in a passage of his evidence quoted by the Senior Costs Judge at § 212, on the ground that the fee was “discharged by the client directly out of his or her loan account”. That was despite the client having no control at all over dealings with his loan account: see §8 above. The assertion that the obligation to AIL was that of the client (which was persisted in by Mr McCulloch in an witness statement made by him in this appeal) was contrary to the findings of the Senior Costs Judge (see § 38(iii) above), and casts considerable doubt on whether Mr McCulloch truly understood the nature of the arrangements.

The Senior Costs Judge was justified in finding that the AIL fee was a referral fee. In my view the factors pointing strongly in that direction were as follows:

The fee was compulsory for any solicitor wishing to be sent cases by TAG. It was not open to him to make other arrangements for investigation work.

The amount of the fee was standard in all cases.

A “block” fee such as referred to in (ii) above will not always indicate that the fee is not being charged, or not wholly charged, for the work to which it purports to relate, but in the present case the amount of the fee far outstripped any reasonable charge for the work done or purportedly done. The amount in commonsense must have included a referral element. I do not accept what appeared to be the submission of the appellants that provided some element of a fee relates to matters other than referral the fee as a whole cannot be a referral fee. That argument is particularly unpersuasive where, as on the figures adopted by the appellants themselves (see § 38(v) above), much less than half of the fee was attributable to that work

That very large fee was payable to a sister company of the introducer. We were told by the respondents, without challenge, that the whole of AIL’s income came from fees from panel solicitors, and was then paid over by AIL to TAG as “adminstrative services and management charges”. In those circumstances, it was little short of extraordinary for the appellants to argue, as apparently they did before the Senior Costs Judge (see § 344 of his judgment), that the AIL fee cannot have been an introduction fee because TAG, and not AIL, was the introducer.

The Senior Costs Judge was well aware of the seriousness of his finding, as am I; but for the reasons given it was inevitable. Claimants have been made liable for the amount of the AIL fee through deductions from the loan account over which they had no control, even though the contractual responsibility for the AIL fee rested with the panel solicitor, and it was illegal for the panel solicitor to pass on that responsibility to his client. I hope that we will be told that steps have now been taken by panel solicitors to regularise their clients’ position.

Even if the AIL fee had not been a referral fee, it could only be charged to the paying party if it was a cost for which the client was responsible, or a disbursement made on his behalf. Analysis of this issue before the Senior Costs Judge was made more difficult by the appellants’ continued insistence that the fee was a direct responsibility of the client, and not a payment on his behalf by his solicitor. On the facts as found by the Senior Costs Judge, the payment could not have been a disbursement, because the work to which it allegedly related was completed before the solicitor’s retainer came into existence; was in reality undertaken on the solicitor’s own account to enable him to decide whether to risk the case at all; and was only vaguely referred to in the documentation given to the client either before or after the retainer came into being.

Mr Dutton argued that a sum paid by the solicitor prior to the retainer, for the purpose of investigating his potential client’s case, could be a disbursement, at least if thereafter ratified by the client. As it was put in §92 of the appellants’ skeleton before this court (not settled by Mr Dutton):

Mr Dutton also argued that, even if the AIL fee was not a disbursement, it was a “charge” for which the client himself was responsible, and thus formed a legitimate item of costs under the definition in CPR 43.2(1)(a). I very much doubt whether anything remotely like the present case was in the mind of the draftsman of that rule. But the argument fails in any event because, as the Senior Costs Judge found (and however much the appellants still resist that finding), it was not the client but the solicitor who was responsible for AIL’s fee. The fee could therefore only come into the category of client ’s costs as a disbursement.

I would therefore uphold the decision of the Senior Costs Judge in its entirety. While I understand why the Senior Costs Judge gave permission to appeal, and did so without limitation, this court has had to reconsider a series of matters that are questions neither of law nor of principle, but rather issues of fact or judgement on which the court is likely to be slow to differ from the assessment of the very expert tribunal below. If in future similar cases should come before the costs judges, they, and this court, are likely, when considering applications for permission to appeal, to need to see detailed Grounds, and to require specific demonstration that those Grounds do indeed raise matters of principle suitable for the consideration of this court.

I agree.

I also agree.