Ghannouchi v Houni Ltd & Ors

The Claimant is a Tunisian and the leader of An Nahda, a moderate Islamist political movement which represents the principal focus of independent opposition to the regime currently holding power in Tunisia. He has been granted political asylum to remain in the UK. On 3 January 2002 the issue of Al Arab published an article which alleged that the Claimant and the An Nahda movement were closely and strongly linked to the terrorist organisation Al Qaeda and its leader Osama Bin Laden and to Tariq Al Maaroufi, an international terrorist. The defence pleaded justification and qualified privilege and, in mitigation, a plea of general bad reputation. The plea of justification covered aspects of the Claimant’s life in many countries. The Defendants served ten supplementary lists of documents. Much of the documentation which was disclosed was in French or Arabic. The Defendants failed to provide proper disclosure of documents relating to the circulation and readership of that edition of Al Arab.

The trial was due to start on 17 March 2003. In early February 2003 the Defendants sought an extension of time for exchanging witness statements. At a hearing before Mr Justice Gray on 26 February 2003 the Defendants gave no indication that they did not intend to rely upon their defences. Accordingly the Claimant prepared fully for trial. This included finalising the Claimant’s 71 page statement and proofing several witnesses who were abroad and who required visas to attend the trial. On 14 February 2003 the Defendants served only one short witness statement by the Second Defendant which did not contain any evidence going to support either the plea of justification, or the plea of qualified privilege, or the plea of general bad reputation. The Defendants’ expert’s report contained no sustainable evidence to support their case. The Defendants continued to raise issues. On 6 March the Claimant gave notice of his intention to apply for orders striking out the pleas of justification and qualified privilege. These applications and an application for an order striking out the plea of general bad reputation were listed for hearing before Mr Justice Gray on 13 March 2003.

At 7.45 pm on 12 March (two working days before the commencement of the trial) the Defendants gave notice by way of their skeleton arguments that they were withdrawing the pleas of justification, qualified privilege and general bad reputation and would be seeking permission to amend the defence so as to incorporate a revised plea solely in mitigation of damages. The Defendants’ application was refused and judgment was then entered for the Claimant on the issue of liability only, with damages to be assessed by a jury.

The trial took place on 18-21 March 2003. The jury awarded the Claimant £61,000 damages. The costs issue was held over. It was resolved by agreement.

On 27 March Mr Justice Gray ordered the Defendants to pay the Claimant’s costs of the applications and of the action to be the subject of detailed assessment on the standard basis if not agreed. The Defendants were also ordered to pay the sum of £140,000 on account of costs. The Defendants were at that stage represented by Farrer & Co.

Peter Carter Ruck & Partners ("Carter-Rucks") acted under a conditional fee agreement ("CFA") dated 4 February 2002 which provided for a success fee of 100%. A copy of the risk assessment was filed in the Supreme Court Costs Office. Neither Leading Counsel nor Junior Counsel were prepared to conduct the case under a CFA.

The bill was duly served with a notice of commencement of assessment of bill of costs claiming £1,366,465.81. It included work by specialist Arab speaking para-legals of 745 hours to translate and summarise many of the Defendants’ publications. That amounted to some £111,810 in costs. The total profit costs were £511,065 and the disbursements were £134,961.54, making the total costs for the purpose of the proportionality issue of £646,026.54. The success fee element was £511,065.

In their Points of Dispute the Defendants raised issues on the validity of the CFA and whether there had been compliance with the indemnity principle. Three issues were raised but only two were pursued. One issue concerning costs of interlocutory hearings was rightly withdrawn.

The Defendants raised these issues:

The Law Society sought and was given permission by me to make written submissions. They submitted a skeleton argument dated 17 November 2003 and replied to the Defendants’ skeleton argument dated 12 December 2003. They were prepared by Mr David Holland. Mr Morgan did not accept that the Law Society was an independent, impartial observer. It was seeking to defend its model CFA and had a financial reason for supporting the Claimant’s submissions. The Law Society was concerned because the points raised by the Defendants involved the interpretation of Regulation 3(2)(c) of the Regulations. The passage in the Claimant’s CFA dated 4 February 2002, which was said to comply with that Regulation, was identical to the equivalent passage in the Law Society’s July 2000 model CFA ("the model agreement"). This model was the Law Society’s latest form of agreement and it was very widely used by solicitors throughout the country. Although the model agreement was stated to be for personal injury claims (and widely used in that field) the Law Society believed that the agreement, or adaptations of it containing passages identical to those under challenge here, were widely used in other forms of litigation. If the court held that the CFA in this case was unenforceable on this ground there would be very serious consequences for thousands of solicitors in hundreds of thousands of cases.

The Law Society accepted that the Defendants were entitled to take advantage of the indemnity principle. However in doing so the Law Society noted that in the Hollins v Russell cases the Court of Appeal had expressed its antipathy to such challenges. Both the Claimant and the Law Society considered the challenge by the Defendants to be misconceived. It was based on a misreading of the Regulation and, if there was a technical breach, the agreement still satisfied the Regulations within the meaning of Section 58(1) Access to Justice Act 1999 following the Court of Appeal judgment in Hollins v Russell.

Mr Morgan submitted that the issue was just as important for the Defendants as it was for the thousands of other parties in cases in which these paragraphs have been used. He accepted that the wording of the July 2000 model agreement contained the same wording as the earlier hastily prepared draft model agreement so far as the issues raised in the present case were concerned.

Mr Bacon relied upon Regulation 2 as well as Regulation 3 of the Regulations. It is therefore necessary to set out both Regulations in full. They read as follows:

Mr Morgan relied upon paragraph 105 of the Hollins v Russell judgment where the Court of Appeal considered and approved the judgment of Lord Bingham in R (Quintavalle) v Secretary of State for Health [2003] 2 WLR 692, and the final sentence at paragraph 105 which reads as follows:

Both Mr Morgan and Mr Bacon relied upon paragraph 107 which reads as follows:

In R (Quintavalle) v Secretary of State for Health, the House of Lords held that Section 1(1) of the Human Fertilization and Embryology Act 1990 must be given a purposive construction and must be interpreted in the context of the Act as a whole and the circumstances leading to the Act. In Hollins v Russell the Court of Appeal did not use a purposive approach to enable a construction which the words did not bear, nor did it use that approach to by-pass the traditional approach to statutory construction of construing an Act as a whole. The same was the case for a statutory instrument. In support of this proposition he relied upon paragraph 1484 of Halsburys Laws of England 4^th Edition re-issued Volume 44(1) (1955) which reads as follows:

Mr Morgan submitted that the language of Regulation 3(2)(c) and 3(2)(b) were strikingly different. There was a clear distinction between 3(2)(b), which concerned fees which had been assessed, and 3(2)(c), which concerned fees which were agreed. If that difference in language had not been intended to produce a different result it would have been very easy and natural to have used the same language. The wording of 3(2)(c) was not "an elegant variation" on 3(2)(b). It was clearly intended to deal with two separate situations in different ways. The construction by the Claimant and by the Law Society depended upon two features of analysis, namely:

The words "subject to the percentage increase" must mean something else. Regulation 3(2)(b) referred to the success fee and 3(2)(c) referred to the solicitor’s profit costs and to counsel’s fees, namely the totality of the professional fees on the CFA terms. The Law Society’s submission that the words "the amount" in 3(2)(c) referred back to 3(2)(b) could not be correct because it ignored the words "in respect of those fees" in 3(2)(c) which were intended to qualify "the amount". If the Regulation had the meaning given to it by the Law Society, the Regulation would have to read as follows:

The effect of Regulation 3(2)(c) was that the solicitors were only entitled to recover the costs agreed inter partes and they could not recover any remaining element of the bills they had rendered to the client. He accepted that this did not apply where, for example, the receiving party was only entitled to recover say 75% of the costs. Mr Morgan submitted that parties rarely negotiated success fees as an independent element of the negotiations. Where the fees of solicitors or counsel which had been subject to a percentage increase (the success fee) were reduced the benefit of the whole of that reduction was passed on to the client unless the court ordered otherwise.

Mr Morgan submitted that the draftsman was providing for the lesser of two evils, namely depriving the client of the protection and making the solicitors justify to the court any reduction in base costs where a reduction was agreed. Therefore the draftsman provided for the more common situation where an overall reduction in fees subject to the percentage increase (profit costs or counsel’s fees) were agreed. The fact that the solicitor was worse off when compared with 3(2)(b) was not part of the policy of Parliament in relation to solicitors who entered into CFAs.

Mr Morgan did not accept the Law Society’s submission that this interpretation would constitute a breach of the indemnity principle because it would amount to legislating for a CFA lite before it came into operation in June 2003. (See paragraph 17 of the Law Society’s skeleton argument, paragraph 13 of the Defendants’ skeleton argument and paragraph 17 of the Law Society reply.) By including the proviso the drafter of the Regulations had provided a let out which did not create the problem envisaged by the Law Society. He did not accept the Law Society’s reliance on Awwad v Geraghty because the contractual agreement had been made against a statutory background not intended to come within a statutory regime. Here the Regulation expressly empowered the court to do otherwise.

Mr Morgan submitted that the same analysis applied to Regulation 3(2)(b) and to 3(2)(c). In the latter the solicitor was agreeing to accept the reduced figure unless the court ordered otherwise. He noted that in paragraph 17(b) of their reply the Law Society did not accept that submission.

Mr Morgan also submitted that while the Rule Committee had power to disapply the indemnity principle, the indemnity principle had only been disapplied in limited circumstances in June 2003. In his TAG (Tranche 2) judgment the Senior Costs Judge, Master Hurst, decided that CFAs made in accordance with the Regulations would not offend the indemnity principle because, even without the 2003 amendments, there was nothing in the 2000 Regulations or the indemnity principle which prohibited a solicitor/client agreement that the solicitor would be paid only what he recovered from the other side. He relied upon paragraph 380-385 of that decision. The proviso in 3(2)(b) and 3(2)(c) created a presumption but not a binding agreement.

Mr Morgan derived no benefit from page 513 Cook on Costs and a passage in the Consultation Paper "Simplifying CFAs" June 2000 at paragraph 70. The reference in Cook might only be to 3(2)(b).

Mr Morgan submitted that in addition to establishing there had been a breach of the Regulations he must also persuade the court that there had been a breach which had a materially adverse affect on the protection afforded to the client or to the administration of justice. The latter was secondary to the former. He set out various examples in paragraph 16 of his skeleton argument. He submitted that the Claimant had been materially prejudiced. He had been promised by the Regulations an agreement which said if there was a reduction by agreement in profit costs (or in the case of counsel, counsel’s fees) he would get the benefit of it unless the court ordered otherwise. However the CFA said that if the success fee was reduced by assessment he would get the benefit of that, but the solicitors would look to him for the shortfall on base costs.

Here the bill was for over £1 million and the issues involved many thousands of pounds. The difference between the success fee alone and the profit costs under such an agreement would be substantial. On the submission by the Law Society and the Claimant, the Claimant would be at risk of having to pay the shortfall on base costs up to the conclusion of the detailed assessment because, at any stage, there might be a settlement.

Mr Morgan submitted that the validity of the CFA must be judged at the time it was entered into. That was the date on which a contract must be considered for enforceability. The Law Society’s issue as to when the materiality of the breach was to be judged was not significant because it was always open to the parties to agree costs at any stage. The materially adverse effect continued throughout the case and was highlighted when costs came to be assessed.

Mr Morgan submitted that Mr Bacon had not explained what the reduction in the success fee was. It was not possible in a global settlement to identify what the reduction, if any, was on the success fee. It was unlikely that solicitors would fall back on a CFA without a success fee. The solicitors could still apply to the court for a higher success fee.

I also understood Mr Morgan to rely on 3(2)(a) and to submit that (a)(i) was a reference to base costs and success fee. Thus the reference in the indented section in 3(2)(c) had to be back to the previous use of the word "fees", ie fees subject to the percentage increase. He submitted that 3(2)(c) could read:

Mr Bacon’s starting point was paragraph 73 of the Hollins v Russell judgment where the Court of Appeal made observations about satellite litigation. The final sentence reads as follows:

That observation was reflective of the comments by Lord Justice Brooke at the hearing on costs. Mr Morgan submitted that the issue there was the production of attendance notes and not the raising of challenges on the indemnity principle. I prefer Mr Morgan’s submission on this small point.

Mr Bacon also relied on paragraph 104 in the Hollins v Russell judgment, and in particular to the sentence in the Quintavalle judgment of Lord Bingham which reads:

He submitted that Mr Morgan was relying on a literal interpretation to make the Regulation unenforceable rather than placing an interpretation on the words which reflected the true intention of the Regulations as they were made. The Regulations were made under Section 27 of the Administration of Justice Act 1999 which amended the Courts and Legal Services Act 1990. The intention of the Regulations were set out in paragraph 17 of the Hollins v Russell judgment, which reads as follows:

The Regulations must be construed with that intention. Mr Morgan was seeking to make a distinction between the recoverability of the success fee where there was a detailed assessment and the consequences where there was a settlement of costs. In the former Mr Morgan accepted that the Regulations meant that a client was not required to pay the shortfall in the recovery of the success fee unless the court ordered otherwise. In those circumstances the solicitor could charge the client the full base fees even though he did not recover all of them from the paying party. Settlements were to be encouraged. However on Mr Morgan’s submission, the solicitor must forego the right to claim from the client the base costs which he did not recover in the settlement. That proposition ran counter to introducing new or better ways of providing legal services or a wider choice of people providing it.

Mr Bacon noted that Mr Morgan’s reliance upon Halsbury’s Laws rested upon his interpretation of the words being correct. In his submission the words throughout Regulation 3 and its sub-sections were constant if read purposively. A distinction had clearly been made between Regulation 3, which concerned the requirements for the contents of CFAs providing for success fees, and Regulation 2 which provided for the contents of CFAs generally. The provisions of Regulation 3 were not rehearsed in Regulation 2. There was no provision there about a solicitor not being able to recover from the client any unrecovered base costs, nor was there any provision that if the solicitor agreed to accept base costs under a CFA at less than the base costs he had charged his client, he was limited to the amounts he had accepted from the other side. If there was the consistency on which Mr Morgan relied these provisions would have been included. Yet there was no provision to penalise the solicitors so that they could not recover any shortfall on base costs.

Mr Bacon submitted that Regulation 3 was solely concerned with success fees which were defined in Regulation 3(5). Regulation 3(2)(a) provided for the disclosure of the reasons for setting the success fee on the base costs. Therefore the reference to "any fees subject to the increase" must be a reference to base costs and not the base costs and success fee as submitted by Mr Morgan since it was the only fee which could be subject to an increase. Mr Morgan had to rely on his interpretation in order to deploy his submissions.

In Regulation 3(2)(b)(i) the reference to "any such fees" must be a reference to a success fee. In (2)(b)(ii) the reference to "any amount" and "that amount" must be a reference to the success fee. Thus all the references in Regulation 3 (which concerns success fees) were to success fees and their recoverability. There must be provision for disclosure of the basis for the success fee and, where costs were assessed, the amount of the success fee that was disallowed was not payable by the client unless the court decided otherwise.

On Regulation 3(2)(c) Mr Morgan had submitted that, instead of dealing exclusively with the success fee, the Regulations dealt with base costs and success fees. Mr Bacon submitted that Regulation 3(2)(c) must be read by reference to the introductory words of sub-paragraph (ii) which made specific reference to the success fee or percentage increase. He submitted that Regulation 3(2)(c) provided that if the legal representative agreed with the person who was liable as a consequence of an order (by the court or by agreement, etc) to pay base costs to which a success fee was added, that a lower success fee than the amount payable under the CFA was to be paid instead, then the amount of the success fee payable under the CFA was to be reduced accordingly. It mirrored the effect of 3(2)(b) in the context of a settlement as opposed to a detailed assessment. The reference to "in respect of those fees" was a clear reference to success fees which was the subject matter of this particular Regulation.

On the basis that his submission was correct, further consideration of the indemnity principle was not necessary. There was symmetry between what was settled and what went to detailed assessment. The effect of any reduction in the success fee was the same. Protection was afforded to the client because there was provision for the court to allow a higher success fee as between the solicitor and client than that allowed on detailed assessment or agreed. He referred to CPR 44.20.8 and CPD 20.8 which provided for the court to deal with any disallowed part of the success fee either at that hearing or at an adjourned hearing.

Mr Bacon submitted that if Mr Morgan’s submission was correct, many problems would arise. Solicitors would be disinclined to settle costs but would proceed to a detailed assessment. They may well decide not to enter into CFAs which provided for a success fee. Where there was a CFA without a success fee the solicitors were not precluded from recovering from the client the shortfall on costs not recovered or agreed. Mr Morgan’s interpretation of "a lower amount" could not mean base costs and success fee. It sat uncomfortably with the preceding words "the legal representative agrees … to pay fees subject to the percentage increase", ie a fee subject to another fee. On Mr Morgan’s interpretation it was necessary to add words to the sub-paragraph, namely "to pay fees subject to the percentage increase (namely base costs and success fee) that a lower amount (namely base costs and success fee)". This would involve construing "amount" as "amounts". That was inconsistent with "fees" in 3(2)(a). The words were in effect the same and referred to base costs. Mr Morgan’s interpretation gave rise to draconian consequences. If there was an order for only partial recovery of costs (for example a percentage costs order) because the client had not succeeded on certain heads of claim, the solicitor would be penalised by any settlement of costs. The reason for the percentage order might be because the Judge disbelieved the client’s evidence.

Mr Bacon drew comfort from paragraph 29(1) and (2) of the Personal Injury Bar Association’s CFA (CPR Volume 2 page 1664) which had been drawn in the same way to reflect the intention of the Law Society’s model agreement. The clause made reference to a challenge to the success fee. There was no reference to base costs. On Mr Morgan’s submission counsel’s base costs would not be recoverable.

Paragraph 5 of the Collective Conditional Fee Agreement Regulations (CPR Volume 2, page 1630) was the equivalent of the CFA Regulation 3(2)(c). Regulation 5(2)(a), (b) and (c) mirrored paragraphs 3(2)(a), (b) and (c) of the Law Society’s model agreement.

In relation to the point in time when the validity of the CFA should be determined, Mr Bacon relied upon paragraphs 107 and 109 of the Hollins v Russell judgment. Paragraph 109 reads as follows:

He submitted that the Court of Appeal determined that it was at the conclusion of the case, at the detailed assessment stage, that the court had to consider whether or not there had been a breach of the Regulations. (See the reference to Costs Judge in paragraph 105.) On that basis, in this case, looking at it objectively, there had been no materially adverse effect on the protection afforded to the client or upon the administration of justice.

Mr Bacon pointed out that in paragraph 21 of their reply the Law Society had noted that Regulation 3(2)(c) did not apply in this case because the costs were being dealt with by detailed assessment and not by settlement. He also prayed in aid the Law Society’s submission on the TAG issue at paragraph 17(c) of their reply.

Regulations 4 and 5 of the Regulations read as follows:

Mr Morgan submitted that the CFA should not be interpreted from the standpoint of a lawyer but from the standpoint of the recipient of such a document. It was not only the contract but also the written explanation which was required by Regulation 4(3) read with 4(5). In the absence of the details of any oral explanation, the agreement constituted the explanation for the purpose of Regulation 4(5). It was therefore necessary to look at it in detail. He did not take issue with the first three paragraphs which envisaged recovery from the other party of disbursements, basic charges and success fee. The fourth paragraph looked at the resolution of the claim by detailed assessment and by agreement. The first sentence provided in effect for the recovery of basic charges, disbursements and percentage increase, whereas the second sentence was limited to basic charges and disbursements. On the Law Society’s analysis the sentence would have to read:

Mr Morgan accepted that a lawyer would understand from sub-paragraph 6 and 7 (as required by Regulation 3(2)(b) and (c)) that the success fee would be brought into the equation. That was not a clear explanation to the client of the effect of the agreement since it would be necessary to read these words into the agreement. Sub-paragraph 4 was misleading if the intention was that the CFA was to be the written explanation. Sub-paragraph 4 ought to make it clear that when it said "if the amount agreed or allowed by the court does not cover our basic charges and disbursements" it was talking only about basic charges and disbursements and nothing else.

It was inappropriate where the document was intended to constitute the written explanation in accordance with the Regulations. If there had been a clear oral explanation there could not be a materially adverse effect on the client. Without such an explanation the burden then fell on the receiving party to produce evidence of the oral explanation to satisfy the court that there had been no materially adverse effect (see Hazlett v Sefton Borough Council). Here the written explanation was not good and the oral explanation was unlikely to be good unless the court could be satisfied it was. The issues before the court were different to those in Dunn v Ward where the court was concerned with more general arguments.

Mr Bacon submitted that Clause 4 of the CFA should be considered as a whole and not on a sub-paragraph by sub-paragraph basis. Mr Morgan’s point appeared to be that what the client was being told was that if the amount agreed or determined on assessment including success fees did not cover the basic charges and disbursements, then the client was liable to pay the difference. On page 1 of the CFA the client was told that, if he won the case, he was liable to pay his solicitor’s disbursements, basic charges and a success fee and he may be able to recover these items from his opponent. There was no guarantee on recovery. Paragraph 4 of the conditions amplified what happened when the client won. While the sub-paragraph dealt with basic charges and disbursements, sub-paragraphs 6, 7 and 8 dealt with disclosure, detailed assessment and settlement of costs by agreement subject to any court order on the success fee. Thus sub-paragraph 4 dealt with basic costs and disbursements, while sub-paragraphs 6 and 7 dealt with the success fee. On that basis the client would realise that the CFA did not provide for the interpretation submitted by Mr Morgan.

Mr Bacon relied upon paragraphs 145-153 of the Hollins v Russell judgment and especially paragraph 150 in which Lord Justice Brooke found the Law Society model agreement to provide a very clear explanation of the effect of the CFA which did not breach the Regulations. In the alternative Mr Bacon relied upon the Hollins v Russell test that the explanation which had been given in writing was sufficient and the client had not been materially affected by some unspecified omission.

On the oral explanation, the Law Society and the client relied upon the terms of the CFA where the client confirmed by his signature on page 3 that he had had a written and oral explanation of the CFA and the circumstances in which he would have to pay costs.

There is a serious difference of interpretation between the receiving party and the Law Society on the one part and the Defendants on the other. It arises from the difference in wording used in Regulation 3(2)(b) and (c). Mr Morgan submits that the different wording is deliberate. It distinguishes between the situation where the court makes a ruling that the level of the success fee has been set too high and where the parties reach an agreement. Mr Bacon and Mr Holland submit that the intention of the two paragraphs is the same, although they accept the wording is strikingly different.

I accept Mr Bacon’s submission that Regulation 2 does not provide for the base costs to be limited to costs agreed inter partes unless the court is satisfied that they should continue to be paid. There is no penalty therefore of the nature submitted by Mr Morgan where there is a settlement under 3(2)(c). I also accept Mr Bacon’s submission that the purpose of Regulation 3 is to deal with the success fee element of the CFA. However the heading to that Regulation does not contain a specific limitation. I take into account the judgment in Quintavalle that the statutory instrument must be given a purposive meaning. In particular I take into account the quotation by Lord Bingham quoted in paragraph 104 of the Hollins judgment. I also accept Mr Morgan’s submission that paragraph 1484 of Halsburys Laws of England can apply where there is ambiguity in construction of an Act of Parliament or a statutory instrument.

In Regulation 3 there are many references to "percentage increase". It appears in all these sub-paragraphs. 3(2)(b) deals with the situation where there is a detailed assessment. It is clearly assumed that the paying party is represented. He is the person who is described in 3(2)(c) as:

It is also apparent that 3(2)(b) is solely concerned with the percentage increase. It provides that where the court does not apply the level of the success fee in the CFA on the ground that it was set at a level which was unreasonable in view of the facts which were or should have been known to the legal representative, the reduced level only is payable unless the court is satisfied that the full success fee is payable as between solicitor and client.

3(2)(c) also contains a provision for the court to permit a greater sum to be recovered between solicitor and client than has been the subject of the agreement. However in the circumstances where there has been a settlement of costs, there will rarely have been any intervention by the court. There is an obligation on the part of the solicitors to explain the costs consequences of any settlement to the client. There is also a professional requirement to keep a client informed of costs which should include costs estimates.

The issue between the parties is whether the element of costs which can be further recovered is limited to the unrecovered part of the success fee (as submitted by the Claimant and the Law Society) or whether it is the unrecovered base costs as well as the unrecovered part of the success fee (as submitted by Mr Morgan).

Mr Morgan has submitted that the Claimant can only succeed if 3(2)(c) is rewritten as set out in paragraph 18. That involved omitting the reference to fees and substituting a reference to percentage increases in place of fees. That sub-paragraph was not "an elegant variation" on 3(2)(b). An important part of Mr Morgan’s submission is his reliance on the words "any fees" and "any such fees" in 3(2)(a) and (b) meaning the base costs and the success fee. This supports his submission that 3(2)(c)(ii) deals with base costs and the success fee and not only the success fee as submitted by Mr Bacon.

I accept the point made by both counsel that there is a significant difference in wording. I have taken careful note of the submissions by Mr Bacon that if the Regulation had intended to impose a more draconian consequence contended for by Mr Morgan the drafter would have made the position clearer. I do not accept Mr Morgan’s submission that the draftsman was necessarily providing for the lesser of two evils, namely depriving the client of protection or making the solicitors justify to the court any reduction in base cases where a reduction has been agreed. I consider the draftsman took both these points into account.

The two sub-paragraphs deal with two different situations. In the first the court hears submissions and makes a ruling on the level of the success fee. By that stage the court will have heard submissions on the level of the base costs and all the other issues raised in the points of dispute. It would have formed a view and then made a ruling on the level of the success fee to be paid by the "person liable as a result of the proceedings to pay fees subject to the percentage increase". The draftsman approached the alternative situation by identifying:

Mr Bacon has relied in part upon the accolade given by the Court of Appeal to the Law Society’s CFA as being a model of clarity. In fact the court was not there concerned with this particular point. He has also relied upon the stance taken by the Court of Appeal in discouraging paying parties from raising issues of non compliance. I have taken into account Mr Bacon’s point that the courts encourage settlements. It supports his submission that the Regulation ought not to provide for an adverse consequence to solicitors where there is a settlement. I have also taken into account his submission that the point raised by Mr Morgan cannot have been considered by the draftsman of the Personal Injury Bar Association CFA or the Collective Conditional Fee Agreement Regulations or indeed the author of Cook on Costs.

An important plank in Mr Morgan’s submission is that the words "any fees" and "any such fees" in Regulation 3(2)(a) and (b) means base costs and success fees. In my judgment these words refer to the base costs only. This is apparent from 3(2) which is concerned with the provision for disclosure and the reasons for the percentage increase and from 3(2)(b)(i) which refers back to such fees.

There is an attractive approach to interpret 3(2)(c) on the basis that the words "a lower amount than the amount payable in accordance with the conditional fee agreement" and "the amount payable under the conditional fee agreement in respect of these fees" refer solely to the success fee. That is supported by a view that there is a reference to "amount" and not to "amounts". That approach can at best be described as superficially attractive. It fails to take into account the points which I will mention shortly.

It is with considerable reluctance that I have come to the conclusion that Mr Morgan’s submissions must prevail. In making this observation I reflect upon the adverse effect the decision may have upon the hundreds of thousands of occasions on which the Law Society’s model agreement has been used or adapted. I accept Mr Morgan’s submission that a purposive construction must be given to the statutory instrument and that the extract from Halsbury’s Laws carries great weight.

I have set out above the contrasting situation where the matter is adjudicated upon by the court and where there is a settlement. I have taken into account Mr Morgan’s point that it is likely that the negotiations do not necessarily focus specifically on the level of the success fee. Where a receiving party is in receipt of funding from the Legal Services Commission, and there is agreement on between the partes costs, it is necessary for the court to consider whether any costs not recovered from the paying party may qualify for transfer across to the legal aid column. Such costs would be subject to the statutory charge. It may be that the draftsman of 3(2)(c) had this situation in mind when framing this part of the Regulations.

I have not been persuaded that it is appropriate to read additional words into the Regulation on the line suggested by Mr Morgan in order to find in favour of the Claimant. I am now of the firm view that there is a clear distinction and purpose between the two sub-paragraphs. The court exercises its supervisory power in relation to many issues including the percentage increase. It can also, if called upon to do so, exercise it further on any application that may be made under the provisos to 3(2)(b) and (c).

It is clear to me that the sole reference in 3(2)(c) to "percentage increase" is to the party liable to pay base costs to which the success fee is to be added. The draftsman has made a distinction between costs which are assessed and costs where there is a settlement. Unfortunately the wording itself has given rise to concern as to its meaning.

I accept Mr Morgan’s submission that the words "those fees" in the context of "the amount payable under the conditional fee agreement" can only refer to base costs and the success fee. I do not accept his submission that it refers back to "fees" which are "subject to the percentage increase". In my judgment the reference there is to the base costs to which the percentage increase is to be added. I do accept his submission that there is a striking difference in the wording and that the reference to "lower amount" cannot be read as a reference only to "percentage increase". The references are to what is payable under the CFA namely base costs and percentage increase and are not limited to percentage increase. I am unable to accept Mr Bacon’s submission that the word "amount" in 3(2)(c) refers back to "amount" in 3(2)(b) because the fees to which it refers are those payable in accordance with the CFA.

I also accept Mr Morgan’s point that the indemnity principle has not been infringed because the Regulations expressly empowers the court to award more to the solicitor than has been recovered or agreed.

I accept Mr Bacon’s submission that the Court of Appeal discourages challenges. This is a challenge the Defendants have properly brought because they have identified an important issue on the Claimant’s CFA. I do not accept Mr Bacon’s submission that for Mr Morgan to succeed, it is necessary to add to 3(2)(c) words "namely base costs and success fee" after "to pay fees subject to the percentage increase" and "that a lower amount". The passage there is a reference to the person liable to pay the base costs to which the percentage increase is to be added.

The Claimants’ CFA does not comply with Regulation 3(2)(c). It is therefore necessary for me to consider whether Mr Morgan has succeeded in establishing that there has been a breach which has a materially adverse effect on the protection afforded to the Claimant or the administration of justice. I deal with this point under the Regulation 4 issue.

Mr Morgan has submitted that clause 4 does not adequately explain the client’s position where he wins. His principal complaint is that sub-paragraph 4 of clause 4 is inconsistent with the paragraph headed "Paying us" on page 1 of the CFA. That paragraph and the relevant paragraph of Clause 4 reads as follows:

I have held that Mr Morgan is correct in his submission that Regulation 3(2)(c) does not have the meaning ascribed to it by the Law Society and the Claimant. Mr Morgan had made a number of points on clause 4 of the agreement and Mr Bacon has made detailed submissions in reply. The paragraph headed "Paying us" must be read subject to the full details which appear in Conditions 4 and 6. In my judgment the sole issue to be considered is Mr Morgan’s submission on sub-paragraph 4. From the decision I have given it is clear that the wording does not comply with the Regulation to the extent that it does not make clear to the Claimant that he does not have to pay the shortfall in base costs as well as the shortfall on the success fee where there has been an agreement on costs. Sub clause 7 does refer to the reduction in the success fee where costs have been agreed and the fact that the full success fee is not payable unless the court is satisfied that the full amount is payable. Sub clauses 4 and 7 read together therefore fail to provide a safeguard for the client in respect of the base costs which are not recovered under the agreement. Condition 4 amplifies and sets limitations on the recovery of the disbursements, basic charges and success fee. It is not appropriate to focus on sub clause 4 and thereby to say there is a limitation on the liability of the Claimant only for the difference between disbursements and base costs and what is allowed/assessed inter partes. Condition 4 also makes provision in respect of the success fee where there has been a detailed assessment or a settlement. My judgment provides greater protection for the Claimant than is afforded by the CFA.

Mr Morgan has submitted that it would be necessary for the Claimant to satisfy the court that there could not be a materially adverse effect on the client because there has not been a sufficient explanation. I accept and prefer Mr Bacon’s submission that in signing the agreement the client is confirming his understanding and acceptance of the oral explanation. The Court of Appeal has commented on the clarity of the agreement. Apart from this one point I cannot identify any other inconsistency or obscurity in the agreement or its meaning. Subject to this one point, the points which Mr Morgan raises are similar to those mentioned by the Court of Appeal in paragraph 109 of the judgment in Hollins. There is no ground for raising a suspicion of confusion on the part of the Claimant. In any event no reliance can be placed by Mr Morgan on the settlement of costs issue because in the events which have transpired the costs were the subject of detailed assessment.

There is one final issue raised by Mr Morgan on whether, if his submissions were correct, the CFA is enforceable. I accept his submission that in the Hollins judgment the Court of Appeal did not decide there were no circumstances in which a breach of the Regulations would render a CFA unenforceable. Mr Morgan’s submission is that the Claimant is at risk to pay the shortfall in the base costs but not the shortfall in the success fee. In my judgment the client is on notice under the CFA that he must pay the difference between the amount agreed or allowed by the court and the solicitors basic charges and disbursements. He will also know that, in both situations, the solicitors cannot recover the shortfall on the success fee without applying to the court. A solicitor is under an obligation to explain the effect on costs of any settlement. In the present case the client had made an offer to settle the action which was not taken up by the Defendants. The court is entitled to infer that at that stage an explanation was given on the costs consequences of any offer being accepted or rejected.

I also take account of the point made by the Law Society that there was no settlement of the costs and that the court has been asked to make a ruling on the level of the success fee which is the subject of a separate judgment. On this narrow submission there has been no materially adverse effect upon the protection afforded to the client or upon the proper administration of justice.

On the wider issue it is necessary to consider whether, in view of my finding, there has been a materially adverse effect upon the protection afforded to the client or upon the proper administration of justice. In my judgment the answer is "no". When discussing the terms of settlement the solicitor is obliged to explain the costs consequences. There is a clear explanation of what happened where there is a detailed assessment. There is a clear opportunity to refer the issue of the success fee to the court in any detailed assessment or settlement. The effect of my ruling is that the Claimant is in a better position because any unrecovered amount of his base costs can only be recovered if the court is satisfied that the full amount should continue to be payable under the CFA. The court is the guardian available to protect the Claimant in respect of any further recovery of base costs and success fee where there has been a settlement and the further recovery of the success fee where there has been a reduction at a detailed assessment.

Mr Morgan has submitted that the validity of the CFA must be judged at the date it was entered into. Mr Bacon submits it is at the date of the detailed assessment. I prefer Mr Bacon’s submission. It is clear from paragraphs 107 and 109 of the Hollins judgment that it is a matter for the Costs Judge to determine the issues under the CFA and that by the time the client has achieved success it is unlikely that minor shortcomings will amount to a material breach of the requirement or mean that the applicable conditions have not been sufficiently met.

In the present case there is the benefit to the Claimant from my interpretation of 3(2)(c). It is necessary for solicitors to apply to the court if they wish to recover from their client any shortfall in base costs and success fee where there has been a settlement on costs. The matter was determined at detailed assessment. There has been the opportunity to discuss costs implications in relation to any settlement. These points support my conclusion that the particular departure from the Regulation has not had a materially adverse effect on the protection afforded to the client or upon the proper administration of justice.