Cavaliere v Legal Services Commission

With the benefit of legal aid, in 1994, this Claimant commenced proceedings for damages against Ezra Attia and Associates Ltd (“Attia”) alleging breach of contract and negligence in the execution of a building works supervision contract. In May 1995, however, Attia entered into a creditor’s voluntary liquidation and thereafter, on 29^th August 1996, the Claimant entered judgment against Attia for damages to be assessed and costs to be taxed. Three years later, damages were assessed at £807,623 and on l1th May 2000, the costs were taxed at £46,752.68. Thus, ignoring interest, the Claimant had the benefit of a judgment for a sum exceeding £850,000; had those sums been paid, it is not challenged that the Legal Services Commission (as the successor to the Legal Aid Board) had the benefit of the statutory charge which arose by virtue of section 16(6) of the Legal Aid Act 1988.

Given that Attia was in liquidation, it is not surprising that the Claimant looked to its insurers to satisfy the judgment which she had obtained utilising the provisions of the Third Parties (Rights Against Insurers) Act 1930 (“the 1930 Act”) Although I have not seen all the correspondence, there was clearly an argument as to the extent to which the professional indemnity policy covered the services in respect of which damages were awarded (and, in particular, building supervision rather than interior design); furthermore, and in any event, the policy had a limit of liability amounting to £250,000. Nevertheless, on 26^th May 2000, there was a meeting between solicitors acting for Equitas Ltd (“Equitas”) who were standing in the shoes of Lloyd’s Underwriters and the Claimant’s solicitors as a result of which the threatened action was compromised in terms reflected in a letter dated 21^st June 2000:

That sum was remitted to the Claimant’s solicitors who wrote to the Legal Services Commission explaining that “there is and was no prospect of recovery of either the judgment sum or costs from [Attia]” but that a “fresh claim was pursued on behalf of Mrs Cavaliere against the insurers” under 1930 Act which had been settled for £165,000. The solicitors argued that in the light of the fact that the damages were recovered as a separate claim against a third party and bearing in mind that the Claimant was not legally aided in respect of that claim, the statutory charge would not attach to the damages recovered; they sought confirmation of their views. In the event, the Legal Services Commission took the view that the charge did attach to the sum of £165,000 and these proceedings have been instituted for the purpose of obtaining a declaration that the Claimant is entitled to the entirety of the monies recovered from Equitas and that the Legal Services Commission is not entitled to a statutory charge on those monies. Pending resolution of this issue, the taxed costs which would be due to be refunded (£46,222.27) are held by the solicitors subject to an undertaking.

The argument advanced by Mr Algazy on behalf of the Claimant is very simple and is based on the statutory regime. Thus, section 16(6) of the Legal Aid Act 1988 provides that it applies to “any property which is recovered or preserved for [the assisted person] in the proceedings”. It is common ground that this statutory charge (which is a first charge on any property which is recovered or preserved) bites on the judgment debt which itself is a chose in action. He argues, however, that the money recovered from the insurers after threatened proceedings under the 1930 Act has not been recovered or preserved in the relevant proceedings which are, of course, the proceedings against Attia for breach of contract and negligence. Neither did the proceedings threatened against Equitas constitute enforcement of the judgment (which would have permitted the Legal Services Commission to take such proceedings in its own name as may be necessary or give effect to the order see Reg. 91(1) of the Civil Aid (General) Regulations 1989). In the circumstances, it is submitted that there is simply no statutory basis for imposing any charge on the money recovered from Equitas and thus no justification for doing so.

Mr Algazy does not shrink from the consequences of this argument. When pressed, he argued that even if the Claimant had recovered the judgment debt in full from Equitas (including the costs) there would be no obligation to account back to the Legal Services Commission for the costs save only, perhaps, on the basis of unjust enrichment. Thus, the ultimate effect of this argument is that if Attia had not entered into a creditors voluntary liquidation prior to the judgment and had been indemnified by its insurers even in part, whatever sum was payable would be subject to the charge; because the Claimant was obliged to use the 1930 Act, the charge was ineffective.

Although the Legal Services Commission initially sought to argue that the right to enforce the judgment by pursuing Equitas was part of the proceedings to which the original legal aid certificate related (so that the agreed payment of £165,000 was itself directly subject to the statutory charge), by amendment to the Defence and subsequently in argument, the matter was put rather differently. Mr Morgan first suggested that although a claim against Equitas was not covered by the certificate “on a common sense basis, it is perfectly sensible to say that the Claimant recovered £165,000 in the proceedings against Attia because the £165,000 represents payment of the judgment which was undoubtedly obtained in those proceedings”.

I am not persuaded by this argument, common sense or not. All that the Claimant recovered against Attia was a judgment. With the benefit of that judgment, the Claimant then successfully claimed upon Attia’s professional indemnity policy relying on the 1930 Act under which, by section 1(1), the rights of the insured against the insurer were transferred and vested in the person (in this case the Claimant) to whom a liability was incurred. If unsecured money was available in the liquidation of Attia, the Claimant had not lost the benefit of the judgment and could undoubtedly have proved for the balance.

That is not to say that the judgment is merely part of the history of the action under the 1930 Act. Having regard to the terms of the policy of insurance (only to indemnify in relation to “sums which the insured may become legally liable to pay”), the liability of Attia had to be determined before the Act could be used: see Post Office v. Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363. It is thus an essential prerequisite of the threatened direct cause of action against Equitas.

I accept Mr Algazy’s submission that the statutory regime set out in the Legal Aid Act 1988 and the regulations made thereunder does not specifically provide for the transfer of the statutory charge in circumstances such as these. What I do not accept, however, is that as a consequence, the statutory charge can therefore simply be ignored. Howsoever it has arisen (and as is common ground), the chose in action which is the judgment is impressed by a first charge in favour of the Legal Services Commission in relation to the costs incurred in pursuing the Attia action and obtaining the judgment in the first place.

What is the effect of the statutory charge? For these purposes, the fact that it has a statutory origin is, in my judgment, irrelevant; to identify the consequences, it is necessary to consider the framework of the law in relation to charges generally. Thus, in Durham Brothers v. Robertson [1898] 1 QB 765, a firm of builders charged the proceeds of sale of property becoming due from the Defendant with moneys advanced by the Plaintiffs. In an action to recover the debt directly from the Defendant, Chitty LJ explained (at page 769):

What is the position here, where the action is not being pursued against the debtor but rather using the statutory rights of subrogation described in the 1930 Act? Mr Morgan argues that any sum recovered must be impressed with the same trust as was the chose in action. He relies on the observation of Aldous LJ in James v Williams [1999] 3 All ER 309 at 315e:

It is no part of my purpose to seek to define the limits of the doctrine of constructive trusts and neither do I do so. In my judgment, however, it is difficult to see a more appropriate case in which to apply the doctrine. After all, the charge in relation to the costs expended by the Legal Services Commission ranks first in relation to any money recovered under the judgrnent without which it would not have been possible to obtain the settlement from Equitas. There is no discernible reason why the liquidation of Attia should impact on the obligations of the Claimant to the Legal Services Commission or provide her with an uncovenanted benefit namely the ability to avoid reimbursing the Commission with the costs incurred and paid in order to obtain the judgment. Accepting £165,000 from Equitas in settlement of their liability to Attia reduced Attia’s liability under the judgment and I see no justification for allowing the Claimant to assert full beneficial ownership of that sum: in my view, it would be inequitable for her to do so and so I conclude that a constructive trust does attach to that sum.

I must deal with one further argument advanced by Mr Algazy. He relied on Watkinson v. Legal Aid Board [1991] 1 WLR 419 which concerned a matrimonial case in which an application had been made for a variation of maintenance using a legal aid certificate granted for the purposes of an earlier similar hearing and which was amended to extend to this application. In the event, the application was compromised on the basis of a lump sum payment which extinguished the right to further periodical payments. The Court of Appeal held that the statutory charge covered the costs incurred both in that application and the earlier application under the same certificate. In the context of that case, Lord Donaldson MR observed (at 425E):

Clearly, Lord Donaldson was not seeking to deal with the situation where property sought with the benefit of legal aid has only been recovered after the discharge of the certificate: Regulation 85 of the Civil Legal Aid (General) Regulations 1989 specifically provides that where a certificate has been revoked or discharged, the statutory charge shall apply to any property recovered or preserved as a result of the person whose certificate has been revoked or discharged continues to take or defend the proceedings to which the certificate related. He was referring to the situation obtaining in matrimonial cases where there may well have been earlier albeit similar applications for ancillary relief. Here, the money recovered from Equitas represents part payment towards the judgment which is specifically impressed with the statutory charge; the dictum, therefore, does not assist the Claimant.

In the circumstances, I do not accept that the Claimant is entitled to a declaration that she is entitled to the entirety of the monies recovered from Equitas and that the Legal Services Commission is not entitled to a statutory charge on those monies. On the contrary, without defining the rights of the Commission as constituting a statutory charge, I take the view that she holds £46,222.27 (which is the agreed sum paid out by the Legal Services Commission in relation to the litigation against Attia) on trust for the Commission who are entitled to payment of that sum which is presently held by agreement by the Claimant’s solicitors.

I end with one further observation. Although I have considerable sympathy for the Claimant who has the benefit of a large judgment which will be substantially unsatisfied because of Attia’s liquidation (and who has behaved entirely properly throughout this litigation seeking only to advance what was perceived to be the effect of the statutory regime), I do not regret my conclusion. If it had been correct to decide that the Claimant could have the benefit of substantial public funds to recover even part of her loss without having to repay the sums advanced, I would have done so but the intended operation of legal aid is clear. It is intended to help those who lose cases but only to make loans to those who win them: see the explanation provided by Sir John Donaldson MR in Davies v. Eli Lilly [1987] 1 WLR 1136 (at page 1140). Thus, and to that extent, this outcome coincides with the general scheme of publicly funded legal assistance.