Reed v Marriott (Solicitors Regulation Authority)

SIR ANTHONY MAY: With the wholesale reduction in the availability of legal aid for personal injury claims after 1 April 2000, there were substantial changes in the way in which such claims were conducted and defended. These included the advent of conditional fee agreements; an increase in legal expenses insurance both before and after the event; organisations who made a business of conducting large numbers of low value claims; and fixed recoverable costs written into the Civil Procedure Rules for some such smaller claims in road traffic accident cases under Part 45 of the Civil Procedure Rules. Norwich Union Insurance Limited were heavily engaged in the insurance market for such matters, and they made arrangements for handling the consequent claims by or against those whom they insured.

Mrs Reed, the appellant, is a solicitor, who became concerned with such arrangements with Norwich Union. In September 2001 she entered into negotiations with Hill House Hammond, insurance brokers owned by Norwich Union, and with Norwich Union themselves. She was to claim in subsequent litigation that she, Norwich Union and Hill House Hammond embarked on a joint venture, as she referred to it, and made an oral agreement in November 2002 under which 80 per cent of an anticipated number of about 4,000 claims a year would be referred to her firm for at least five years. Mrs Reed pleaded that Norwich Union wanted to receive money for such referrals. The oral agreement progressed to become four written agreements dated 6 May 2003. For these purposes, Norwich Union had put in place two wholly owned subsidiaries: BTE Lawline Limited ("BTE") and Evident Legal Services Limited ("Evident"). Mrs Reed pleaded that the written agreements were deliberately phrased so that an uninformed observer would not understand the true relationship.

The panel agreement was made between BTE and Reeds Solicitors. Under it, BTE agreed to refer personal injury claims to Reeds, who agreed to provide client claims services. The agreement obliged Reeds to subcontract some of that work to Evident, including appointing medical agents, road traffic investigators and forensic accountants. The services agreement was made between Reeds and Evident. It required Reeds to instruct Evident to provide certain services in each matter that was referred to it by BTE. Evident had the sole discretion as to which agents were preferred. Evident were entitled to subcontract any of its work to third parties of its choice. They were paid the cost of disbursements at a reasonable rate. They were entitled to charge hourly rates for cases where the damages were more than £10,000.

In particulars of claim filed by Mrs Reed in litigation with Norwich Union, she had acknowledged that the services agreement was a device to enable her firm to make payments to Norwich Union for each referral in a way which was deliberately difficult to understand. She herself asserted that, under this agreement, she was obliged to pay two thirds of the fees she recovered from successful claimants to Evident for work it did not do. By the consultancy agreement Mrs Reed was retained by BTE and Evident as consultant to provide guidance and advice for an initial and then annual fee. Under the loan facility agreement, BTE provided an overdraft facility of £1 million to fund Reeds' work in progress. Reeds were entitled to draw up to £350 in advance for each qualifying legal claim.

These agreements and their operation gave rise to proceedings against Mrs Reed before the Solicitors' Disciplinary Tribunal. On 18 July 2008 the Tribunal found against her on eight of thirteen allegations which she faced. They imposed a composite fine of £10,000. She appeals against these findings.

By allegation 1, it was alleged and found that between 6 May 2003 and 9 March 2004 she entered into an arrangement to pay fees to Evident in return for referral of clients in breach of section 2(3) of the Solicitors' Introduction and Referral Code.

By allegation 4, it was alleged that she failed to disclose to clients that a payment was being made and that she concealed a payment of a referral fee contrary to sections 2A(3) and 2A(4)(a) of the Code. The difference between these two allegations derives from the fact that there was a change in the relevant provisions of the Code from 10 March 2004.

By allegations 2, 5 and 6 it was alleged and found that Mrs Reed agreed to refer all clients to Evident regardless of whether this was appropriate or in the best interests of the individual client, contrary to sections 2(5) and 2(7) of the Code before 10 March 2004 under Rule 1 of the Solicitors' Practice Rules, and section 2A(4)(c) after that date, and that she shared fees and agreed to share fees with Evident contrary to Rule 7 of the rules.

By allegation 7, it was alleged and found that she entered into an agreement with Evident, whose business was to support personal injury claims, contrary to Rule 9 of the Rules.

By allegation 8, it was alleged and found that she permitted her firm to be dependent on Norwich Union companies for funding, and allowed those companies to impose restrictions on her practice, thereby impairing the independence and integrity of the firm, contrary to Rule 1 of the Rules.

By allegation 13, it was alleged and found that she failed to ensure that the best interests of clients were preserved in every case. Mr Treverton-Jones QC submits on her behalf that this adds nothing substantial to the other allegations.

The relevant Rules and parts of the Code are set out in extenso in paragraphs 3 to 7 of the Tribunal's findings, and may be briefly summarised as follows. There was an outright ban on the payment of referral fees by solicitors until 8 March 2004. That comes from Solicitors' Practice Rule 3 and the Code. There was a ban on fee sharing between solicitors and non-solicitors except in certain defined circumstances (Solicitors' Practice Rule 7). There was a ban on solicitors making arrangements for the introduction of clients with claims assessors, whose business was to make, support or prosecute personal injury claims, and whose solicitors all received contingency fees (Solicitors' Practice Rule 9). After 8 March 2004, solicitors were permitted to pay referral fees to introducers provided that the arrangements were fully transparent; that is to say they were disclosed to clients at an early stage.

Mr Treverton-Jones says that the rationale for the ban on referral fees and fee sharing was concerned that solicitors would sacrifice their independence to the introducer or fee sharer, and might prefer the commercial interests of the introducer or the fee sharer to those of their client.

It appears that the contractual structure between Norwich Union and its companies and Mrs Reed was intended to enable the Norwich Union Group to extract profit from the handling of personal injury claims without offending Solicitors' Rules against referral fees and fee sharing. Mrs Reed gave evidence to the Tribunal that she was fully aware of the relevant rules and parts of the Code. She maintained that the scheme legitimately avoided these rules because the referrer of the work to the firm, BTE, was not paid at all, and the payments to Evident were not referral fees but payment for work genuinely undertaken. She was aware that Norwich Union had taken counsel's advice about the scheme. She had not been provided with a copy of what was said to have been oral evidence. She had not herself taken independent advice. Her evidence was that the interests of the clients were always considered to be paramount, and their claims were properly handled. She said that routine work was subcontracted to Evident. This was an efficient way of dealing with these matters. The payments to Evident were for works done and were not referral fees. This was routine subcontracting in the best interests of the client. The contractual arrangements did not involve fee sharing. Evident were paid at an hourly rate, but in fixed cost cases the rate had to take account of the fixed costs regime, and so an hourly rate was inappropriate.

The case against Mrs Reed was that the scheme she had devised was a sophisticated but illegitimate circumvention of the Code. In reality, the payments to Evident were or included referral fees. The firm used Evident to do solicitors' work at an inflated price. The firm also contracted away its independence of choice in the client's best interest, and became over-dependent on Norwich Union to the detriment of their professional independence.

Among the Tribunal's findings were that Mrs Reed was a straightforward and honest witness. The scheme negotiated by her and Norwich Union and its companies was carefully thought through on each side. Her argument was that BTE and Evident were separate legal entities, and that BTE referred cases without payment, while Evident received payment for work which it undertook. The Tribunal recognised Mrs Reed's technical argument and accepted that it was her genuinely held belief that the scheme did not put her in breach of the Rules and the Code.

The Tribunal found allegation 1 substantiated because the true situation was that Norwich Union referred cases and gained payment for doing so. The reality was that Norwich Union were referring clients to Mrs Reed, and ultimately received payment by way of profits generated, either as payment for work undertaken by Evident or because Mrs Reed was sharing her fee with Evident.

The Tribunal found allegation 4 substantiated. When it became acceptable to pay referral fees, details had to be given to the client. Mrs Reed continued to believe that she was not paying referral fees. The Tribunal did not agree. She was not open and frank with her clients in this respect.

The Tribunal found allegations 2 and 5 substantiated. If a solicitor ties himself to a single provider of services, the services might not be in the best interests of every client. There was an implicit finding that Evident were asked to provide services for every client irrespective of the individual need for those services, and the Service Agreement provided that Evident had control of the agents they used when the firm should have retained that independence unhampered.

The Tribunal found allegation 6 substantiated. Mrs Reed did share fees with Evident. The fee was calculated as a proportion of the firm's fee. This did not sit well with the explanation that payments to Evident were in respect of work which they undertook, which would vary from case to case. The firm's invoices were marked to say that its costs were to be divided between the firm and Evident.

The Tribunal found allegation 7 substantiated. BTE was admittedly a claims assessor, and it was not correct to draw a distinction between Norwich Union and its companies. The.

Tribunal found allegation 8 substantiated. The firm was dependent on Norwich Union, as became evident from the cash flow difficulties when Norwich Union withdrew from the scheme.

Finally, the Tribunal found allegation 13 substantiated. Mrs Reed had reservations about the quality of the evidence sought by Evident so that she was not ensuring that the best interests of her client were preserved in every case.

The Tribunal accepted generally that Mrs Reed had been genuinely mistaken, and that she had made a serious error of judgment in entering into the scheme with Norwich Union. They set the fine at a level which reflected the seriousness of the breaches but took account of all the surrounding and mitigating circumstances.

It was and is submitted that the scheme was not a sham, as the Solicitors Regulation Authority accepted in a letter of 11 April 2008. It achieved the necessary aim that services of value were provided so that it did not constitute a referral fee arrangement. It was accepted that the case against Mrs Reed depended heavily on two unfortunately worded documents, which came to light in the litigation with Norwich Union.

As to allegations 1 and 4, it is submitted that the Tribunal were not entitled to look behind the contractual arrangements with separate companies to conclude that the true situation was that Norwich Union referred cases to Mrs Reed and gained payment for doing so. This was inconsistent with the acceptance that the scheme was not a sham. Norwich Union was not itself a legal entity. BTE referred the cases. It received no payment. Evident did receive payment, but only for work which they did. Evident did not refer the cases. The argument was not merely technical. Absent a sham, which was disavowed, the Tribunal had to take the separate entities for what they were. The court does not, it is submitted, lift the corporate veil unless there has been something in the nature of dishonesty or fraud.

As to allegations 2 and 5, it is submitted that the mere existence of the agreement between the firm and Evident did not establish that the services provided were not in the client's best interest. Contracting out services is routine, and it was for the Solicitors Regulation Authority to show that the arrangement was not in fact in the client's best interests. The possibilities alluded to by the Tribunal were not established to have occurred.

As to allegation 6, the basis for payment was set out in schedule 3 of the Services Agreement, which provided for Evident to be paid a fixed or proportionately calculated fee. It was not possible for them to be paid an invoiced amount for what they in fact did because the firm itself was, in the main, in receipt of fixed costs. Any agreement had to take account of this. If, however, there was a technical breach, Mrs Reed did not deserve to be punished for such a technical breach which the Rule was never intended to cover.

As to allegation 7, Rule 9 provides, under the rubric "Claims assessors":

Solicitors' Practice Rule 18 defines contingency fees as-

It is submitted that Evident were not claims assessors within the meaning of the rule. It was not legitimate for the Tribunal to hold that Evident supported personal injury claims and that the rule was broken because BTE was a claims assessor. It is accepted, however, that if BTE and Evident can be treated as one, the Tribunal were correct to conclude that there was a breach of Rule 9. It is accepted that Evident supported personal injury claims and received contingency fees because they received no fee in unsuccessful cases. They did not, however, introduce the clients, BTE did.

It was further submitted that in the modern world where the extent of champerty is attenuated the Tribunal should have regarded any breach of Rule 9 as not serious, and certainly not as conduct unbefitting a solicitor.

As to allegation 8, it is submitted that no adverse consequence was shown from dependence on Norwich Union for any of Mrs Reeds' clients. There was no evidence that the obligation to use Evident compromised any client's best interest. Solicitors have to fund work in progress by some means when fees are paid only at the end of the case.

As to allegation 13, it was unfair to draw the conclusion that Mrs Reed had reservations about the quality of evidence produced by Evident from her acceptance in cross-examination that if a report was not good enough she would go back and get it amended. This was, in any event, a sweep-up allegation covering the same period as allegations 1 and 2.

As to penalty, this is said to have been excessive, but it is not sought to reduce it in this court if no part of the rest of the appeal succeeds.

It is submitted on behalf of the respondent that the Tribunal correctly looked at the substance of the scheme, which entailed two specially incorporated wholly owned subsidiaries of Norwich Union Limited. In the context of the Solicitors' Rules and the Code it was entirely appropriate to treat these as a single unit. It is submitted that the finding that Mrs Reed genuinely believed that the scheme was legitimate, and that she was not dishonest, prevents the court from looking at the reality.

Reference is made to the authority of Smith, Stone and Knight Limited v Birmingham [1939] 4 All ER 116, where protection of a separate corporate identity was circumvented because the subsidiary was the agent, employee or tool of the parent. Here the two subsidiaries, BTE and Evident, were plainly the tools of Norwich Union. They were entirely within Norwich Union's control. They were set up as vehicles to implement the oral agreement, and Mrs Reed had herself correctly described the purpose of the relationship in each of the four letters which she wrote on 1 June 2004 in the following terms:

As to allegations 2 and 5, it is submitted that Mrs Reed had agreed to refer all clients to Evident whether this was appropriate and in their best interests or not. These facts could scarcely be gainsaid. It was not necessary to refer to individual cases in which the client's best interests were compromised. The scheme itself by its terms surrendered a significant part of the firm's independence.

As to allegation 6, Mrs Reed did agree to share fees with Evident, see Schedule 3 of the Services Agreement, and Rule 7 was broken. They were not paid with reference to the work they did, and were sometimes paid a percentage of the damages.

As to allegation 7, the Tribunal's finding was based on the correct earlier finding that it was right to regard both BTE and Evident as Norwich Union tools.

As to allegation 8, the fact that the funding arrangements may be commonplace and that funders often exercise some control does not negate overreliance on Norwich Union. The allegation did not depend on reference to specific cases.

It is accepted that allegation 13 is something of a sweep-up, covering much the same ground as allegation 2.

In my view, the heart of the appellant's case in this appeal is that she genuinely believed that the scheme which she entered into with Norwich Union did not offend the Rules and the Code because the legal entity to whom she made payments was not technically the same entity as that which referred the work, and because the payments were for services provided and did not constitute fee sharing. Her case is put as one where the formal separation should be adhered to because she was not dishonest. It is put in terms of lifting or not lifting the corporate veil.

In my judgment, that is not quite the right question. The question for allegation 1 turns on the construction and application of the pre-March 2004 section 2(3) of the Code, which provides that solicitors must not reward introducers by payment of a commission or otherwise, and for allegation 6 on the construction and application of Rule 7, which, with irrelevant exceptions, forbids fee sharing. These are the two central questions from which I think most of the rest follows.

As to the second of them, the Tribunal were, in my judgment, fully entitled to conclude that the basis of payment to Evident in Schedule 3 of the Services Agreement constituted fee sharing because some payments at least were made with reference to the damages recovered, and because they were structured to be payable irrespective of the actual services which Evident provided. It was a means of channeling back to Evident and thereby to Norwich Union part of Mrs Reed's fee remuneration, and this allegation is not answered, in my view, by pointing out that some of the costs which Mrs Reed was to receive were themselves fixed. The findings which the Tribunal made corresponded with damaging assertions made by or on behalf of Mrs Reed in her pleadings and skeleton for the Norwich Union litigation, and in the June 2004 letters to which I have referred.

As to the first main question, the meaning and application of Rule 2(3) of the Code has to be seen in its context and with reference objectively to its aim. Referral fees were seen as objectionable because they tended to forge a commercial link of reliance between the solicitor and the referrer which was seen as inimical to the solicitor's independence and integrity; to the client's freedom to instruct a solicitor of his or her choice; and the solicitor's duty to act in the client's best interest. In that context, constructing a scheme which notionally separated the introducer from the person receiving payment by establishing two wholly owned subsidiaries went nowhere to dispel the perceived vice which the section of the Code was designed to prevent.

The fact that Mrs Reed may have believed that the Scheme legitimately avoided the literal prescription of the rule is nowhere in point. It did nothing to counter the fact that she was paying one wholly owned subsidiary of Norwich Union Limited a commission for another wholly owned subsidiary of Norwich Union Limited to refer clients to her. The true introducer in the terms of Rule 2(3) was Norwich Union Insurance Limited, and the true person being rewarded was Norwich Union Insurance Limited. It was, as she herself wrote on 1 June 2004, merely a device to obscure the fact that a Norwich Union company was to receive payment in return for making referrals.

This means, in my judgment, that all of allegations 1, 4 and 6 were established. It also means that allegation 7 was established because Mr Treverton-Jones accepts that technically it was if his main argument fails.

Allegation 8 was also established on this analysis and on the facts found by the Tribunal, and it is agreed that allegation 13 was a sweeping-up which follows from what had gone before.

As to allegations 2 and 5, I am satisfied that the terms of the Service Agreement materially impaired Mrs Reed's independent ability to make professional decisions in the best interests of her client. The allegations did not depend on showing that the interests of individual clients were harmed.

In short, each of the allegations which succeeded against Mrs Reed was a manifestation of the single essential point that the scheme which she entered into with Norwich Union was a device to obscure the reality that a Norwich Union company was to receive payment in return for making referrals and that Mrs Reed bargained away in material respects her professional independence to act in the best interests of her client, and that she became over-reliant on a single client to the detriment of her independence.

For these reasons I would dismiss this appeal.

MR JUSTICE BLAKE: I agree.

MR CUNNINGHAM: My Lord, I would invite your Lordships formally to dismiss the appeal. I ask for my client's costs of the appeal, my Lord, for the obvious reasons. My Lord, if your Lordship is with me on that, then I am going to make an application for a payment on account.

SIR ANTHONY MAY: Yes. Mr Treverton-Jones, you cannot say anything about the costs?

MR TREVERTON-JONES: My Lord, no.

SIR ANTHONY MAY: We have a schedule, but do I understand that you are not asking us to assess them today?

MR CUNNINGHAM: Can I tell your Lordship the position? The costs below remain to be assessed. So there is going be an assessment. We infer your Lordship's view would be that as there is going to be an assessment they should all be assessed in one go. Our interim remedy is to seek to persuade your Lordship to order a payment on account of the composite costs. If your Lordship has not got a schedule -- Mr Marriott had a schedule, but only one of the costs below. But I can tell your Lordship our side's costs below were £47,000 or thereabouts.

SIR ANTHONY MAY: Did you get a payment on account?

MR CUNNINGHAM: No, my Lord.

SIR ANTHONY MAY: No.

MR CUNNINGHAM: We agreed to stay that. So there was no refusal of the payment on account.

SIR ANTHONY MAY: My Lord and I discussed very briefly before we came in whether we might be persuaded to do a summary assessment and we were rather inclined to say no to that.

MR CUNNINGHAM: I anticipated that.

SIR ANTHONY MAY: We need not perhaps explain why. So you are not asking for a summary assessment; you are asking for a payment on account. How much do you want?

MR CUNNINGHAM: My Lord, the global figure is £47,000 below, and it is fair to reduce the schedule your Lordship is looking at, because there is no tomorrow, to about £40,000. So the global figure is £87,000.

SIR ANTHONY MAY: That does not answer the question.

MR CUNNINGHAM: No. I never know whether there is a rule of thumb, and if there is, what it is. My Lord, my very recent experience is that 50 per cent is what is often ordered on an account basis.

SIR ANTHONY MAY: So you are asking for £20,000?

MR CUNNINGHAM: No, my Lord, half of £87,000, which is £43,000-odd.

SIR ANTHONY MAY: I understand that, but we are only concerned with the costs here.

MR CUNNINGHAM: My Lord, it would be my submission that your Lordship has jurisdiction in respect of the costs below, and, my Lord, that the proper course is to make an order embracing both in relation to the account.

SIR ANTHONY MAY: Well there we are; that is your submission. Yes, Mr Treverton-Jones?

MR TREVERTON-JONES: My Lord, it is very unusual -- no application for a payment on account below -- asking this court on appeal to give a payment on account that this court may not even have seen. I cannot resist an application for payment on account of the costs of the appeal and I do not. I would not oppose an application for payment on account in the sum of £20,000. My Lord, that is within a whisker of what my learned friend is asking for.

SIR ANTHONY MAY: He is not, he is asking for 40 something.

MR TREVERTON-JONES: If we were to bring him back to reality, he would be asking for £23,000, I think.

SIR ANTHONY MAY: I have to say, this is purely conversational, Mr Cunningham says he does not quite know what the practice is, I will tell you what my thought process often is, and that is that you should structure a payment on account as best you can, so as it is not in any circumstances going to be excessive upon an assessment, but so that it is large enough to induce the parties to compromise the balance because that is in both parties' interests. That tends to militate at something between 50 per cent and slightly more.

MR TREVERTON-JONES: My Lord, £20,000 would in fact be slightly more than 50 per cent, because if one takes off from the 46 about 7, which represents the money that will not be spent tomorrow, £20,000 would represent, I would have thought, almost exactly the figure that your Lordship had in mind.

SIR ANTHONY MAY: Thank you.

We are not persuaded to include in our thought process the costs below, which we have not seen and which we think it is questionable whether we have jurisdiction over, and we are going to order the appellant to pay the respondent's costs to be assessed, and to make a payment of £25,000 on account in 28 days.

MR TREVERTON-JONES: My Lord, yes.

SIR ANTHONY MAY: Thank you very much.