JN Dairies Ltd v Johal Dairies Ltd & Anor

This judgment is concerned with one issue: Whether the Claimant should recover success fees charged by its solicitors and counsel in respect of work done before the conditional fee agreements which created the liability to pay such fees were entered into.

Both the Claimant and the First Defendant are wholesale dairy companies. The Second Defendant was a driver employed by the Claimant until November 2008. The Claimant’s case was that, shortly after his employment had been terminated, the Second Defendant returned to the Claimant’s warehouse in Wolverhampton and took a number of invoices. These gave details of the Claimant’s customers, their orders and the prices that they paid. The Defendants then used that information to seek to solicit the Claimant’s customers.

Following a recommendation the Claimant instructed lawyers based in the Bristol office of Burges Salmon. Proceedings were commenced in the Birmingham District Registry and an application was made for an interlocutory injunction. The Court declined to grant the injunction but directed the speedy trial of preliminary issues. Meanwhile the Second Defendant had disappeared to India.

Those preliminary issues, effectively all of the issues relating to liability, were tried by HH Judge Cooke, sitting as a Judge of the Chancery Division, over 8 days in March 2009. The Claimant succeeded and the First Defendant was ordered to pay the Claimant’s costs of the preliminary issues with £200,000 to be paid on account of those costs.

The First Defendant sought to appeal. Following a contested hearing in November 2009 the Court of Appeal (Pill LJ and Sir John Chadwick) granted permission. In essence the grounds of appeal were that the trial judge had closed his mind to the First Defendant’s case and that the trial and the judgment were unfair. Following a 2 day hearing in March 2010 the appeal was dismissed. The First Defendant was ordered to pay the Claimant’s costs of the appeal. An order for payment on account of those costs was made in the sum of £250,000. This judgment arises out of the detailed assessment of the Claimant’s costs of the appeal.

Up to February 2010, the month before the appeal was heard, the Claimant was charged by its solicitors on a conventional basis. It is clear from the 7^th witness statement of Mr James Sutherland and the 1^st witness statement of Mr William Neville, the Claimant’s solicitors, that funding the claim became a problem. At the outset the Claimant had agreed to pay its solicitors £3,500 plus value added tax per month. But by the end of the trial of the preliminary issues the costs incurred far exceeded those monthly payments on account. The sum of £200,000 paid by the First Defendant following the trial of the preliminary issues paid off much of the deficit, but, by then, further work was being done in relation to the appeal and in relation to quantum.

So, following negotiations which are described in the witness statements, the Claimant entered into a conditional fee agreement with Burges Salmon on 8^th February 2010. That agreement covers:

Any work we carry out or Expenses we incur both before and after the date of the Agreement in relation to the Claim …

[cl 1.1(a)]

The Claim is defined in the agreement as “resisting your Opponent’s appeal”. In the event of a win, the Claimant was liable to pay the solicitors’ basic costs and a success fee of 100 per cent, of which 5 per cent related to the cost to the solicitors of funding the claim.

The same day the solicitors entered into conditional fee agreements with leading and junior counsel. Each of the agreements describes itself as a “part-conditional fee arrangement”. Clause 5 of leading counsel’s agreement provides:

The Base Rate for Counsel’s fees to which the Uplift for the Uplifted Rate is to be applied is as follows:

(a)

as regards all work other than Court appearances, in accordance with his hourly rate applicable to the type of work involved in the Action, currently £650 plus VAT per hour;

(b)

as regards refreshers, in accordance with his daily rate for the type of work involved in the Appeal, currently £5,000 plus VAT per day;

(c)

subject to paragraph (e) below the Brief for the Appeal will be £80,000 plus VAT and be deemed delivered as of the 2^nd of January 2010. This fee will include all work after the 2^nd of January. All work prior to this date will be charged for, based on the hourly rate specified in subclause (a) above …

The agreed uplift, payable in the event of the Claimant’s success, was 100 per cent. Unusually, the agreement provided that leading counsel would be paid £20,000 even if the First Defendant’s appeal were successful. This was apparently designed to pay his chambers’ expenses.

Junior counsel’s conditional fee agreement was in similar terms. The figures were, of course, different; and it was provided that junior counsel would be paid £40,000 within one week of the date of the agreement, which he would keep if the First Defendant’s appeal were successful.

An issue arose during the course of submissions as to whether counsels’ conditional fee agreements actually created a liability to pay success fees on work done before the date of the agreements.

It seems to me that the creation of the liability could have been expressed more clearly, particularly given its unusual nature. However the final words of sub-clause 5(c) provide that work done before 2^nd January 2010 will be charged for “based on the hourly rate specified in subclause (a) above” and the hourly rate provided for in sub-clause 5(a) is one of the base rates “to which the Uplift for the Uplifted Rate is to be applied”.

It seems to me that the obvious intention was that counsels’ fees for work already done in relation to the action (defined in clause 4 as the appeal) would be payable only in the event of success and, in the event of success, would attract the “uplift”.

The First Defendant concedes that, following the decision of Christopher Clarke J in Forde v Birmingham City Council [2009] 1 WLR 2732, a retrospective success fee is not contrary to public policy:

150.

In respectful disagreement with Master Campbell and Master Hurst, I do not regard it as necessary to hold that a retrospective success fee is per se contrary to public policy. There is, in my view, insufficient warrant for effectively precluding solicitor and client from making such an agreement. In some, perhaps many, circumstances a retrospective success fee, or its amount, may be unreasonable, either as between the parties or as between solicitor and client. But this will not always be so. The court has, in my opinion, enough weapons in its armoury, in the form of the criteria applicable on a detailed assessment and the provisions of the Costs Practice Direction and the Practice Direction on Protocols, to disallow or reduce retrospective fees that are unreasonable, as in this case.

The First Defendant argues that it is unreasonable for the Claimant to seek to recover from it success fees on work that had been done under the original, conventional retainer. On behalf of the First Defendant, Mr Browne QC calculated that the retrospective success fees claimed amounted to over £295,000. The success fees on the solicitors’ profit costs for work done on the appeal before the conditional fee agreement was entered into came to over £60,000. The success fees on counsels’ fees for work done on the appeal before the conditional fee agreements were entered into came to a total of over £234,000. That included success fees on counsels’ brief fees of £105,000, on the basis that they had been incurred before the agreements were entered into.

Mr Browne pointed to the rules which require a party who incurs an additional liability to give notice of that to the other party: CPR 44.3B and 44.15. Such notice, in the case of success fees, will generally be prospective – warning the other party of the increased future costs which may be sought from them. He reminded me of the caution urged by the Senior Costs Judge in Musa King v Telegraph Group Ltd [2005] EWHC 90015 (Costs):

89.

Although there is no prohibition in the legislation against backdating a success fee, such backdating seems to me to fly in the face of the CFA Regulations and the Civil Procedure Rules. As Mr Morgan has pointed out the solicitors are placed under a strict duty to explain the position to their client, which they did not do until shortly before the CFA was signed. The solicitors do not assume any risks under the CFA until it is signed (although they may well have been at the normal commercial risk of not being paid prior to that point). The solicitors are under no duty to give notice of funding until the CFA has been signed. It is of great importance that an opposing party should be aware of any additional liability as early as possible. The claimant is, to an extent, protected in that the level of the success fee does not have to be disclosed, but, unless and until the defendants are made aware that they are potentially liable for a success fee this may fundamentally affect the way in which they choose to conduct the litigation.

Here, said Mr Browne, the Claimant had taken on an additional liability to pay £295,000 in respect of work which had already been done, without informing the First Defendant. Notice of additional liabilities, in form N251, was given to the First Defendant shortly after 8^th February 2010. But the First Defendant could reasonably assume that this related to prospective liabilities – success fees on work to be done in the future. No notice was given that the Claimant’s costs, if successful, had jumped overnight by £295,000.

Mr Browne pointed to the further unreasonableness in relation to the retrospective success fees payable to counsel. Counsel had not assumed the same degree of risk as the solicitors, for they had guaranteed fees – win or lose – of £40,000 and £20,000 respectively.

Finally Mr Browne relied on the comments made by Stanley Burnton LJ on the hearing of the appeal in this case:

We would add that the mark up of 100% which has been claimed in this case would appear to the Court, provisionally of course, since we have not heard argument on it, to be very greatly excessive, as is the contention that the mark up should be applicable to costs incurred before the Notice of the CFA was given to the Appellant.

On behalf of the Claimant, Mr Shenton submitted that but for the conditional fee agreements the Claimant could not have continued to fund the proceedings. These arrangements represented a huge risk for both the solicitors and counsel. They were agreeing to forego, in the event of failure, not only the value of the work that they were to do on the appeal, but also the value of the work that they had already done (other than the guaranteed payments to counsel).

On the other hand the First Defendant had suffered no prejudice by the success fees being retrospective rather than prospective. There was nothing to suggest that the First Defendant would have reacted differently if it had been given notice of the retrospective success fees when the conditional fee agreements were entered into – or, indeed, at any time after the appellant’s notice was served. This was hard fought litigation and the costs of fighting it did not appear to be uppermost in the First Defendant’s mind. When notice of funding was given, the First Defendant “did not blink”.

Mr Shenton pointed to other retrospective additional liabilities which could be recovered without prior notice: after the event insurance premiums would cover liability for costs incurred before the inception of the policy; success fees in conditional fee agreements entered into in cases which settled before the issue of proceedings (in the days when the pre-action protocol did not make the provision of information about funding arrangements mandatory). In the latter case, a defendant could settle the claim and incur a liability for costs wholly oblivious of the claimant’s additional liabilities.

Mr Shenton took me to various passages in Forde which, he suggested, indicated that Christopher Clarke J would have allowed a success fee but for the fact that, on the appeal, the claimant had abandoned it.

CPR 44.4(1) provides that “the court will not … allow costs which have been unreasonably incurred or are unreasonable in amount”. CPR 44.4(2) provides that where, as here, the costs are to be assessed on the standard basis, “the court will … resolve any doubt which it may have as to whether costs were reasonably incurred or reasonable and proportionate in amount in favour of the paying party”.

While it may or may not have been reasonable as between Burges Salmon and the Claimant and as between Burges Salmon and leading and junior counsel to enter into bargains which amount to “double or quits” in respect of work already done, in my judgment it was not reasonable as between the parties. It was not reasonable to incur, overnight, a liability to pay significant sums – to pay almost twice as much as would otherwise have been payable had these arrangements not been entered into. Mr Browne exemplified that unreasonableness in relation to leading counsel’s brief fee for the permission to appeal hearing in November 2009. Counsel had charged £17,500 plus value added tax. That is the sum, subject to reasonableness, for which the First Defendant would be liable in the event of an adverse costs order. How could it be reasonable simply to double that liability three months later?

While one can appreciate the Claimant’s concerns as to the increasing costs of this litigation, up until the conditional fee agreements were entered into the Claimant’s solicitors were willing to do a substantial amount of work on the appeal and incur significant disbursements by way of counsel’s fees on a conventional retainer basis, against the monthly payments of £3,500.

Each case must be decided on its own facts. However I am not aware of any case in which a court has allowed retrospective success fees of this order. Indeed those cases which have been reported suggest significant judicial reluctance: Master Hurst in Musa King and Master Campbell, at first instance, in Forde. And, to my eye, Christopher Clarke J was not as enthusiastic about a retrospective success fee in that case as Mr Shenton suggested:

150.

… The court has, in my opinion, enough weapons in its armoury, in the form of the criteria applicable on a detailed assessment and the provisions of the Costs Practice Direction and the Practice Direction on Protocols, to disallow or reduce retrospective fees that are unreasonable, as in this case. (emphasis added)

Accordingly the success fees on work done before the conditional fee agreements were entered into are not allowed, on the ground that they were not reasonably incurred. That applies to work done by both solicitors and counsel.

However it seems to me that counsels’ brief fees for the full appeal hearing were not incurred before the conditional fee agreements were entered into and that the success fees payable on parts of those brief fees are not retrospective. They are not therefore disallowed in full by reason of this decision. It is clear from the documents that I have seen and from Mr Sutherland’s 7^th witness statement that the solicitors did not incur any liability for counsels’ brief fees (for the full appeal hearing) before the conditional fee agreements were entered into.

The deemed date of delivery provided for by clause 5(c) of the agreements did not back-date the liability for the brief fees. It merely identified the work which had already been done but which would be included in the agreed fees.

To the extent that part of the work included in the agreed fees would attract success fees which are retrospective (fees for work done between 2^nd January 2010 and 8^th February 2010), then the success fees on that part should be disallowed for the same reason as the success fees on work done by counsel before 2^nd January 2010 and the success fees on work done by the solicitors before 8^th February 2010 should be disallowed – they are retrospective and were not reasonably incurred.

As counsels’ clerk had billed on a conventional basis for work done before 8^th February 2010, it would seem appropriate to deduct the amounts billed for work done between 2^nd January and 8^th February from the brief fees and (subject to the reasonableness of the amount of the success fees) allow success fees on the balances.