Utting v McBain

This is an appeal by the claimant (“Mr Utting”) from a decision of Costs Officer Lambert dated 18 April 2007 in which he disallowed all the costs claimed in a bill served under the terms of a consent order made by Master Whitaker on 15 January 2007.

The order says this:

“BY CONSENT

IT IS ORDERED:

1.

The Claimant’s Bill of Costs arising from the accident that occurred on the 5^th May 2000 be the subject of a detailed assessment on the standard rate basis to be assessed if not agreed, such assessment to take place at the Supreme Court Costs Office.

2.

The costs of the Part 8 Proceedings also be the subject of a detailed assessment on the standard basis to be assessed by the Supreme Court Costs Office if not agreed and paid by the Defendants to the Claimant.”

The short point which arises on the appeal is whether the Costs Officer was correct to find that a Conditional Fee Agreement (“CFA”) between Mr Utting (signed on his behalf by his mother and litigation friend Miss Allum) and his solicitors, Jeffrey Green Russell (“JGR”) dated 15 August 2001, fails to comply with Regulation 3(1)(b) the CFA Regulations 2000 and is, accordingly, unenforceable. If so, it is agreed that the consequences of that failure are that JGR’s costs in parts 2, 3and 4 of the bill (when the CFA was in force) must be disallowed on account of the indemnity principle which provides that only those costs which a client is contractually liable to pay his solicitor can be recovered from an opponent ordered to pay costs in litigation (see Gundry v Sainsbury (1910) KB 645). If the CFA is unenforceable as the Costs Officer found, there are no costs due to JGR to indemnify and the respondent’s liability is nil.

The appeal is a re-hearing under Civil Procedure Rule (“CPR”) 47.23. Accordingly, I permitted evidence in the form of a witness statement made on 18 May 2007 by Christopher George Turner of JGR, a Fellow of the Institute of Legal Executives to be admitted for Mr Utting. During the course of the hearing in which Mr Utting was represented by Mr James of counsel and the respondent by Mrs Butler-Cole of counsel, Mr Turner attended for cross-examination. At the conclusion of the hearing I reserved judgment.

On 5 May 2000, Mr Utting, then aged 13, was run over by the respondent. Through Miss Allum, he brought proceedings against the respondent funded by the CFA to which I have referred. The action was compromised under the order of 15 January 2007 on terms that Mr Utting would receive £500,000 damages and his costs. On 24 January 2007 proceedings for detailed assessment were commenced under CPR 47.14. In his bill, which was balloted to Costs Officer Lambert, Mr Utting sought costs of £82,619.94. Of that sum, £38,632.15 (inclusive of VAT) was attributable to parts 2, 3 and 4.

At the hearing of the detailed assessment the respondent contended that the CFA failed to comply with Regulation 3(1)(b) of the CFA Regulations 2000 and was unenforceable. With that submission Costs Officer Lambert agreed. Accordingly, none of the £38,632.15 was payable by the respondent.

Regulation 3 of the CFA Regulations 2000 which were applicable to CFAs made before 1 November 2005, says this:

“3.

Requirements for contents of Conditional Fee Agreements providing for success fees

(1)

A Conditional Fee Agreement which provides for a success fee - (a) must briefly specify the reasons for setting the percentage increase at the level stated in the agreement, and (b) must specify how much of the percentage increase, if any, relates to the costs to the legal representative of the postponement of the payment of his fees and expenses; …

(3)

In this regulation ‘percentage increase’ means the percentage by which the amount of the fees which would be payable if the agreement were not a Conditional Fee Agreement is to be increased under the agreement.”

The terms of the CFA relevant to the issues which arise on this appeal are the following:

“This agreement is a binding legal contract between you and your solicitor. Before you sign please read everything carefully …

Words like ‘our disbursements’, ‘basic charges’, ‘win’ and ‘lose’, are explained in condition 3 of the Law Society Conditions which you should also read carefully …

What is covered by this agreement

● Your claim for damages for personal injury suffered to your son, David, on 5 May 2000 …

Paying us

If you win your claim, you pay our basic charges, our disbursements and a success fee. The amount of these is not based on or limited by the damages. You are entitled to seek recovery from your opponent of part or all of our basic charges, our disbursements, a success fee and insurance premium. Please also see conditions 4 and 6.

It may be that your opponent makes a part 36 offer or payment which you reject and, on our advice, your claim for damages goes ahead to trial where you recover damages that are less than that offer or payment. We will not add our success fee to the basic charges for the work done after we receive notice of the offer or payment.

If you receive interim damages, we may require you to pay our disbursements at that point and a reasonable amount for our future disbursements …

If you win but on the way lose an interim hearing, you may be required to pay your opponent’s charges of that hearing…

If you end this agreement before you win or lose, you pay our basic charges…

Success Fee

This is 100 per cent of our basic charges.

The reasons for calculating the success fee at this level are set out in Schedule 1 to this agreement.

You cannot recover from your opponent the part of the success fee that relates to the costs to us of postponing receipt of our charges and disbursements (as set out at paragraphs (a) and (b) at Schedule 1. This part of the success fee remains payable by you.

Schedule 1

The success fee is set at 100 per cent of the basic charges and cannot be more than 100 per cent of the basic charges. The percentage reflects the following:

(a)

the fact that if you win we will not be paid our basic charges until the end of the claim;

(b)

our arrangements with you about paying disbursements;

(c)

the fact that if you lose we will not earn anything;

(d)

our assessment of the risks of your case …

Schedule 2

3.

Explanation of words used

(b)

Basic charges: Our charges for the legal work we do on your claim for damages…

(l)

Success Fee: Percentage of basic charges….

4.

What happens if you win?

- You will not be entitled to recover from your opponent the part of the success fee that relates to the cost to us of postponing receipt of our charges and our disbursements. This remains payable by you.

The issue that arises on this appeal is whether the CFA complies with Regulation 3(1)(b) insofar as the cost to JGR of the postponing receipt of their fees is concerned. This amount is potentially recoverable from Mr Utting but not from the Defendant – see under “Success Fee” and condition 4 of Schedule 2 above.

Mr James acknowledges that the level of any charge for postponing receipt of JGR’s fees, is not set out in the CFA. This is clear from paragraph 13 of Mr Turner’s witness statement which says this:-

“I accept that nothing is said in the agreement about deferment of payment and what percentage, if any, the client will be liable for.”

The reason for this, Mr James submits, is that Regulation 3(1)(b) requires the solicitor to specify the element that relates to postponement, only if there is one. Here, there is no charge for postponement. Accordingly, the absence of such a sum being identified, is not a breach of Regulation 3(1)(b).

In this respect Mr James submits that the words “if any” in the Regulation are crucial. They mean that the obligation to identify how much of the success fee represents the cost of postponement only applies if there is such an element. Where, as here, there is no charge for postponement, Regulation 3(1)(b) is not engaged. In this context, he further relies on Stephenson v Leathbound (2005) 40 EG 184 which concerns what information, if any, is to be given under s 21 Leasehold Reform, Housing and Urban Development Act 1993.

Mr James, adopting the skeleton argument of his predecessor, Mr Nicholas Bacon of Counsel, recognises that in Brennan v Associated Asphalt [2005] EWHC 90052, the Senior Costs Judge reached the opposite view and at paragraph 29 had said this:

“In my judgment Regulation 3(1) of the 2000 Regulations is perfectly clear. The CFA must specify how much of the percentage increase relates to the cost of postponement. In my view the words “if any” do not mean that if the deferral element is nil there is no need to mention it. Those words are there to ensure that the client is left in no doubt as to the position even if the deferral element in nil”.

Mr James submits that Brennan is distinguishable. At the material time, Mr Utting had been an infant and JGR had undertaken not to charge Miss Allum (as his litigation friend) any costs beyond those that were recovered from the Respondent. Such arrangements are, he submits, very common because any settlement of the claim would have required the Court’s approval, not only as to damages but also as to costs (see CPR 21.10). The CPR further recognises that a solicitor may agree in an infant/patient case not to claim from the infant/patient client any costs beyond those recovered from the paying party (see CPR 48.5(3)) and the Costs Practice Direction at Section 51.1(b)). From the outset, JGR had agreed not to charge Miss Allum any costs beyond those recovered from the Respondent. That had been made plain in a letter also dated 15 August 2001 but written before the CFA was signed, which said this:-

“Dear Kathleen

David’s accident

There is another matter that I wish to raise with you and that concerns the funding of the claim that I am making on David’s behalf …

I am happy to recommend that you enter into a Conditional Fee Agreement with this firm, that is a “no win no fee” agreement. Under such an agreement you do not pay any costs even on conclusion of the case because the costs, together with the success fee written into the agreement are all recoverable. This was not the position in August last year.

I am enclosing such an agreement for your consideration together with notes of advice. The advantage of this agreement means that you are not liable for any costs whatever happens and on conclusion of the case - assuming of course David recovers damages – then my firm recovers the costs that have been incurred together with the success fee from the insurance company …

Yours sincerely

CHRISTOPHER TURNER”.

Mr James argues that the letter is a waiver by JGR to any contractual right that the firm had to claim any further costs from Mr Utting save those recovered from the Respondent. Although not part of the CFA (and thus there was no requirement for it to be signed by the client under Regulation 5), the letter makes it clear to him that there would be no charge for postponement. Accordingly there could be no scope for any confusion on Mr Utting’s part.

Mr James further draws attention to the decision of Tichband v Hurdman, a case addressed by the Court of Appeal in Hollins v Russell [2003] 1 WLR 2487. In Tichband, the Court did not declare the CFA unenforceable owing to an ambiguity between clauses 32 and 33 of the CFA (which said that none of the success fee was attributable to postponement in paying the fees ) and the risk assessment (which attributed 5% to postponment). On the contrary, the Court had held that clauses 32 and 33 prevailed over the risk assessment and concluded at paragraph 134 that:

“The reality therefore is that, despite what is said in the risk assessment calculation none of the recoverable success fees is attributable to the postponement in payment of a solicitor’s fees”.

Accordingly the CFA complied with Regulation 3 (1)(b) and was enforceable. Mr James submits that the same rationale applies here.

Lastly, Mr James relies on what he contends is an analogy between Regulation 4(2)(c) (which deals with insurance) and Regulation 3(1)(b). In Dunn v Ward (also heard as part of the appeal in Hollins), the Court held that a solicitor who has no interest in recommending an insurance policy is not required, in those circumstances, to inform the client of that fact. In Mr James’ submission, by analogy, there is no requirement for a solicitor who is not charging a postponement element such as JGR, to tell his client that none of the success fee relates to deferred receipt in payment.

If Mr James is wrong in his primary submissions, he contends that under the materiality test in Hollins, the Court cannnot declare the CFA unenforceable unless the breach of Regulation 3 has had an adverse effect on the protection afforded to the client or upon the proper administration of justice (see Hollins paragraph 107). In Mr James’s submission, any failure to inform the client that the charge for postponing receipt of their fees was nil, is not a material breach; on the contrary, it is a “very small matter”, (skeleton paragraph 24 iii) which the law does not care about (see Hollins paragraphs 50 and 226). Moreover, in Brennan, the Senior Costs Judge had found that the failure to specify a postponement element meant that nothing in respect of this would ever have been recoverable from the client and accordingly the materiality test had been satisfied.

Nor would any such breach have had an adverse effect on the administration of justice. In fact, the letter of 15 August 2001 was good for the administration of justice because it ensured that a minor such as Mr Utting did not have to pay any costs out of his damages.

In Mrs Butler-Cole’s submission, the combination of the definition of “success fee” in the CFA, together with paragraphs 1(a) and (b) and condition 4 of schedule 2 mean that part of the 100% success fee must relate to the postponement of the receipt of fees but the actual level of the percentage is not quantified. As such, the CFA is in breach of Regulation 3(1)(b) and is unenforceable.

Mrs Butler-Cole further submits that the argument advanced by Mr James that that part of the percentage increase which concerns deferment need only to be stated if it exceeds 0%, is simply wrong. She contends that the reason for that is that where, as here, postponement is stated to be a reason for setting the success fee at 100%, that amount, even if it is nil , must be stated in order to comply with Regulation 3(1)(b). That did not happen. Accordingly (and relying on the decision of the Senior Costs Judge in Brennan (see paragraph 13 above)), the CFA is unenforceable and the Respondent is absolved from any liability for any of Mr Utting’s costs that would otherwise be payable to JGR.

Mrs Butler-Cole further submits that there is no contemporaneous evidence that the charge for postponement in the success fee was to be 0% of the success fee. Nowhere in the CFA or in the documents is it stated that the cost of postponing receipt of JGW’s fees is nil. Mr Bacon’s skeleton did not assert that the letter of 15 August 2001 was a waiver; on the contrary, it is clear from Mr Turner’s evidence given in cross-examination, that circumstances did exist in which Mr Utting would become liable to pay costs to JGR. Such a liability would have arisen, for example, had he rejected a payment into court against JGR’s advice or had he or lost an interim hearing or had he ended the CFA early in which case JGR could have called on him to pay their base costs.. Accordingly, it is impossible to read into the letter that all costs are waived, still less that the postponement element is nil. The meaning which Mr James wishes the letter to have is that the charge for postponement is zero but that JGR could still make a charge in certain other circumstances. Plainly that is inconsistent with his primary submission that the letter amounts to a waiver. Mrs Butler-Cole disputes, in any event, that the agreement complies with the Regulation 5 since Mr Utting did not sign the letter of 15 August 2001 and, as the Court found in Fenton v Holmes [2006] ALL ER (D) 12, that too is a material breach of the Regulations.

Mrs Butler-Cole disagrees with Mr James’ submission in respect of the comparison between Regulation 3 and Regulation 4. In Dunn v Ward (also decided in Hollins) the Court of Appeal had held that if a solicitor had no interest in recommending a particular insurance contract (by way of after- the –event insurance (“ATE”)), it was unnecessary for the client to be told that fact because it would be of no consequence to him. Here the position is different. The element relating to postponement had an influence on the level of the success fee and accordingly it was necessary, in contrast to Regulation 4(2)(e), to say how much that was, in percentage terms. The CFA did not do that. Accordingly the Determining Officer had been right to hold that the CFA was unenforceable.

So far as the materiality test is concerned, Mrs Butler-Cole submits that the fact that there may never have been an intention to charge anything for postponement and that Mr Utting has not lost out, is irrelevant. She points out that the test is not one of prejudice to the client (see Garrett v Halton BC [2006] EWCA Civ 1017). At paragraph 19, Dyson LJ said this:

“If paras 106 and 107 [of Hollins] are read as a whole, the court was saying that, if there has been a failure of substantial compliance or a material departure from what is required by the Regulations, that failure or departure of itself has a material adverse effect on the protection afforded to the client or upon the proper administration of justice”.

It follows, Mrs Butler-Cole submits, that the fact Mr Utting in this case had not been prejudiced by the failure to comply with Regulation 3(1)(b) had no bearing on the materiality of the breach. In short, the breach was not “a very small matter” but one which constituted a failure of substantial compliance and/or a material departure from what is required by the Regulations. As such it was a failure which had had a materially adverse effect on the protection to which Mr Utting was entitled thereby rendering the CFA unenforceable under Garrett. Since Garrett had been decided after Brennan, the latter is no longer authoritative on this point.

So far as the administration of justice is concerned, Mrs Butler-Cole submits the breach falls within the umbrella of Jones v Caradon Catnic Limited [2005] EWCA Civ 1821, (where the CFA was found to be unenforceable because it had claimed a success fee of 120%, even though the Solicitors subsequently limited their claim to 100% (the maximum permitted)-see judgment of Laws LJ). As such, she contends that the breach is so material that it constitutes a failure of substantial compliance and accordingly the materiality test cannot avail Mr Utting or JGR.

The issue which arises on this appeal is whether the Costs Officer was correct to hold that the CFA is unenforceable. Put shortly, is Mr James right in his submission that that part of the success fee which relates to the charge for postponing receipt of JGR’s fees needs only to be stated if it exceeds 0% (the case here, he submits) or is Mrs Butler-Cole correct that the percentage in question must be stated, irrespective of whether it is nil or a higher figure? If she is right, can the materiality test rescue the CFA?

The first difficulty for Mr James is that his submission that the words “if any” in the Regulation oblige the solicitors to identify how much of the success fee relates to the costs of funding only if there is such an element, was expressly rejected by the Senior Costs Judge in Brennan. Whilst that decision is not binding , I agree with the Senior Costs Judge that the words “if any” do not mean that if the deferral element is nil, there is no need to mention it. On the contrary, to my mind the words “if any” mean that the client must be told how much of the success fee represents the costs of funding, even if the amount is nil. It is common ground that Mr Utting was not given that information ( see Mr Turner’s witness statement paragraph 13) and as a consequence, the CFA is prima facie unenforceable. Stephenson does not assist in this respect as I agree with Mrs Butler-Cole that the case is not comparable with the position here. In Stephenson, the words “if any” mean “state which of the proposals you agree with (if any) and state those proposals you do not agree with (if any)” so there is no scope left for any confusion.

The next proposition advanced by Mr James is that Mr Utting was an infant acting through his litigation friend, and that from the outset JGR had agreed not to charge any costs beyond those recovered from the Respondent and that that had been made clear in the letter of 15 August 2001. In my opinion, Mr Utting’s infancy makes no difference. The contract of retainer is the CFA, the raison d’etre of which is to permit JGR in a winning case to recover both their base costs and a success fee under the regulatory framework then applicable to CFAs. For such recovery to be lawful, the CFA must be compliant with the 2000 Regulations and in my judgment, any defect or non-compliance cannot be made good by some form of written assurance such as the letter of 15 August, that the solicitors will not look to Mr Utting for the cost of postponing receipt of their fees. Mr James asserts that the letter was a waiver, but as Mrs Butler-Cole observes, a waiver of what- just the postponement element but not the base costs had Mr Utting ended the CFA prematurely or had he instructed other solicitors under the paragraph headed “paying us”? I agree with her that if the CFA was to act as a waiver of the postponement element this should have been set out expressly in the letter.

If, contrary to Mr James’s case, the letter of 15 August did form part of the CFA, the problem would not have been solved since the CFA would then have been unenforceable for want of the Appellant’s signature (see Fenton v Holmes [2007] ALL ER (d) 12). In either eventuality, the CFA is defective and, subject to the materiality test, is unenforceable.

I derive no assistance from Tichband cited in Mr Bacon’s skeleton argument. In Tichband, the risk assessment had stated that 5% of the success fee related to postponement. However Clause 32 had said that “none of the success fee is attributable to the postponement in paying our fees”. Having decided that this clause prevailed over the risk assessment, the Court of Appeal held that, on its true construction, the CFA complied with the Regulations. I consider that the position here is different because there is no conflict between the risk assessment and what it is said in the CFA itself; the shortcoming in the CFA is that, in contrast to Tichband, nowhere in the agreement does it state how much of the success fee is attributable to the cost of JGR postponing receipt of their fees.

So far as Regulation 3(1)(b) and Regulation 4(2)(c) are concerned, I disagree with Mr James that there is an analogy to be drawn. In Dunn v Ward, the client did not buy ATE insurance. Therefore it was irrelevant for him to know whether or not the Solicitors had an interest in selling him the policy. Here the position is different because Mr Utting did have an interest in knowing whether, if he won his case, how much of his damages would be used to pay the postponement charge.

Can the materiality test save the CFA? In my judgment, the Costs Officer was also correct to find that the materiality test in Hollins cannot do so. Mr Bacon’s skeleton argument (paragraph 25) relies on the Senior Costs Judge’s finding in Brennan that the breach was not material but Brennan was decided before Garrett. Whether the breach has had a prejudicial effect on the client is not a determinative factor in assessing whether that breach was material see Garrett paragraph 19. As the court additionally stated in Garrett at paragraph 32:-

“In our view, it is fallacious to say that a breach is trivial or not material because it does not cause loss to the client in the particular case. The scheme has the wider purpose of providing for client protection (as well as the proper administration of justice).”

In other words, the fact that Mr Utting may not have suffered any prejudice at all is irrelevant and that where, as here, the client recovers damages and is happy with his solicitor’s work, this matters not in determining whether the breach is material. For these reasons, I agree with Mrs Butler-Cole that Brennan is distinguishable on this point and I prefer her arguments. In my judgment the failure was one of substantial compliance and in omitting to mention the level of the postponement charge, a material departure occurred from what the Regulations then in force required; moreover that failure or departure had a materially adverse effect on the protection afforded to Mr Utting and, applying Caradon Catnic, also on the proper administration of justice.

The ramifications of this decision are that JGR will receive no part of their base costs or success fee claimed in parts 2, 3 and 4 of the bill amounting to £38,632.15. That that is a harsh result was not a matter that went unnoticed by the Court of Appeal in Garrett-see paragraphs 27, 30 and 32. At 92, Dyson LJ also said this:

“Nor do we accept that the 2000 Regulations should be construed narrowly because of their potentially draconian effect on solicitors. The purpose of the 2000 Regulations is to protect clients not the financial interests of solicitors.”

The appeal is dismissed. The Costs Officer reached the correct decision on the material before him. Subject to any submissions that the parties wish to make, Mr Utting must pay the costs of the appeal, to be assessed if not agreed. If he seeks permission to appeal, any application may be made on paper. Given that I have not followed Brennan so far as the materiality test is concerned and that the result provides the Respondent with a windfall in circumstances where Mr Utting has no complaint whatsoever about Mr Turner’s dedicated work on his behalf, I consider that requirements of rule 52.3(6)(b) (“compelling reason”) are met.