Cassidy v Stephensons & Anor

The Claimant is the sister of the late Paul Nevitt. He suffered from severe learning difficulties, but managed to lead a reasonably independent life with some support from her. She became his legal guardian in 1995. By that time he had been diagnosed as suffering from diabetes mellitus. This condition necessitates regular eye examination since it can lead, without treatment, to diabetic retinopathy and blindness. Sadly, that is what happened, and in the summer of 1998 the Claimant consulted Lloyd Jones Associates, a firm of solicitors, regarding a claim for clinical negligence in relation to his treatment over the period 1994 to 1998.

In September 1998 a Legal Aid Certificate was issued to pursue the claim. Paul Nevitt died in December 2000 (from unrelated causes) and the Certificate was discharged in consequence. By this time a new regime had come into being for public funding, and a Certificate could only be granted to a firm, which held the requisite franchise. It was thus that the Claimant came to consult the First Defendant to whom a Community Legal Service (CLS) Funding Certificate was issued in July 2003. The scope of the Certificate was “As claimant to be represented in an action for clinical negligence”. The Certificate was, very much in accordance with standard practice, limited, but the scope and financial limit were extended from time to time. Following a favourable advice from counsel, who put the prospects of success at between 60% and 80%, the institution of proceedings was authorised.

The claim form against five Defendants was issued in the Leigh County Court on 18 December 2003, just under two weeks before the primary limitation period expired. However, it had not been possible to draft the Particulars of Claim as further medical evidence was awaited. Disastrously, the First Defendant decided, for this reason, to delay serving the claim form. In April 2004, just before the four month period for service expired, it obtained a without notice extension for service of the claim form until 16 August 2004. This triggered applications by the defendants to set that order aside. Those applications were granted in October 2004. His Honour Judge Stewart QC dismissed an appeal on behalf of the Claimant in February 2005. Accordingly the clinical negligence claim foundered. The Claimant was advised to obtain independent advice, and did so.

Horton v Sadler [2006] UKHL 27 had not been heard by the House of Lords at that time, so as the law stood that was the end of the claim. After the judgment in Horton the Claimant’s present legal advisers asked the First Defendant if it wished the Claimant (with an indemnity as to costs) to issue a fresh claim and seek the exercise of discretion to proceed out of time under section 33 Limitation Act 1980. The First Defendant did not require her to do so.

At some point (I do not know when) the First Defendant lodged a claim with the Second Defendant for costs and disbursements incurred under the Certificate. The Second Defendant paid out £22150.65 including substantial disbursements and counsel’s fees. I am given to understand that there are procedures available to the Second Defendant which can lead to disallowance of the claim, but the Second Defendant chose not to invoke these procedures. In passing, I express some surprise at that decision. Had the Claimant been a fee-paying client, I cannot conceive that the First Defendant would have dared to render a bill to her. However, the fact that the Second Defendant chose to make the payment is not relevant to the issue before me.

The Claimant obtained public funding for a professional negligence claim against the First Defendant. Its insurer conceded liability, and negotiations took place about the amount of compensation. That, of course, involved not only consideration of the likely award, which the clinical negligence claim might have achieved, but also the assessment of the extent of the loss of the chance to obtain that award. Agreement was eventually reached as evidenced by correspondence which took place in 2007. The insurer agreed to pay the Claimant £30000, to indemnify her in respect of costs (and any interest), which she had been ordered to pay to one of the defendants in the claim, and to pay her costs of pursuing the professional negligence claim. £30000 represented somewhere between 70% (Claimant’s valuation) and 80% (insurer’s valuation) of the clinical negligence claim.

One specific matter was excluded from the agreement. The Claimant asked for an indemnity in respect of any costs which the Legal Aid Board and/or the Second Defendant had paid to either Lloyd Jones Associates or the First Defendant, in the event that the Second Defendant was entitled to exercise its statutory charge over the settlement money in respect of those costs. The First Defendant declined to give such an indemnity, and suggested that the statutory charge did not bite in that respect. On being approached by the Claimant, the Second Defendant took the contrary view. The Claimant was stuck in the middle, and she therefore issued the present claim in the Warrington County Court seeking a declaration from the First Defendant that it indemnify her in respect of any liability she might have to the Second Defendant for the costs incurred by Lloyd Jones Associates and/or the First Defendant, and, in the alternative, a declaration against the Second Defendant that the statutory charge did not bite. By order dated 4 February 2009 Deputy District Judge Dawson directed that the issue of whether the statutory charge attached be tried as a preliminary issue. He also directed that the claim be transferred to the High Court in Manchester. I apprehend that he did so on the basis that an issue of principle arose on which there was no direct authority. It was thus that I came to hear the preliminary issue.

In the event that I were to rule that the statutory charge did bite, there would be a further issue to be resolved at a later date between the Claimant and the First Defendant, namely whether the Claimant was entitled to a full or only a partial indemnity.

The issue involves interpretation of section 10(7) Access to Justice Act 1999 (the 1999 Act), which provides:

Except so far as regulations otherwise provide, where services have been funded by the Commission for an individual as part of the Community Legal Service—

(a)

sums expended by the Commission in funding the services (except to the extent that they are recovered under section 11), and

(b)

other sums payable by the individual by virtue of regulations under this section,

shall constitute a first charge on any property recovered or preserved by him (whether for himself or any other person) in any proceedings or in any compromise or settlement of any dispute in connection with which the services were provided.

It was the 1999 Act which introduced a new regime of public funding. The Second Defendant replaced the Legal Aid Board. The Criminal Defence Service was established. The Community Legal Service was available for certain civil work. Budgets were not open-ended but fixed.

It is relevant to look at the previous history of the statutory charge under what is still often described as “legal aid”. It begins with the Legal Aid and Advice Act 1949. Section 3(4) and (5) provided:

(4)

Except so far as regulations otherwise provide, any sums remaining unpaid on account of a person’s contribution to the legal aid fund in respect of any proceedings, and, if the total contribution is less than the net liability of that fund on his account, a sum equal to the deficiency shall be a first charge for the benefit of the legal aid fund on any property (wherever situated) which is recovered or preserved for him in the proceedings.

(5)

The reference in subsection (4) above to property recovered or preserved for any person shall include his rights under any compromise arrived at to avoid or bring to an end proceedings and any sums recovered by virtue of an order for costs made in his favour in the proceedings.

These provisions were replicated in section 9 of the Legal Aid Act 1974 (The 1974 Act). That Act was in turn replaced by the Legal Aid Act 1988 (The 1988 Act). The wording is very similar but not exactly the same. Section 16(6) and (7) read:

(6)

Except so far as regulations otherwise provide–

(a)

any sums remaining unpaid on account of a person´s contribution in respect of the sums payable by the Board in respect of any proceedings, and

(b)

a sum equal to any deficiency by reason of his total contribution being less than the net liability of the Board on his account,

shall be a first charge for the benefit of the Board on any property which is recovered or preserved for him in the proceedings.

(7)

For the purposes of subsection (6) above it is immaterial what the nature of the property is and where it is situated and the property within the charge includes the rights of a person under any compromise or settlement arrived at to avoid the proceedings or bring them to an end and any sums recovered by virtue of an order for costs made in his favour in the proceedings (not being sums payable to the Board under subsection (5) above). [I note in passing that subsection (5) is not applicable here]

It is common ground between counsel that Lloyd Jones Associates were operating under the 1988 Act, and that the wording of section 16(6) and (7) is such as to preclude the statutory charge biting on the settlement in respect of their charges. The issue therefore narrows to the sums paid to the First Defendant.

Mr Otwal contended that the 1999 Act was not a consolidating Act and that the wording of Section 10(7) is manifestly wider than the wording of Section 16(6) and (7) of the 1988 Act. He drew attention to the repeated use of “any” as distinct from “the”. While the cause of action was different, the dispute, which was the subject of the settlement, arose in connection with the services provided under the clinical negligence claim. Alternatively, he argued that the settlement was impressed with a constructive trust, and the situation was analogous to that in Cavaliere v Legal Services Commission [2003] EWHC 323 (QB), a decision of Leveson J (as he then was).

Whilst the Claimant was largely indifferent to the outcome, Mr Knifton lent support to Mr Otwal. He too referred to the width of the wording of section 10(7) and to Cavaliere. He also suggested that if the Claimant had been fee-paying she would be entitled to recover any costs she had paid to the First Defendant, and that, if the statutory charge did not attach, the perverse result would be that the First Defendant would recover sums to which it would not otherwise be entitled.

Mr Carpenter contended that the effect of section 10(7) was plain: it involved three elements; first, property must have been recovered or preserved, secondly this recovery or preservation must have been through proceedings or a compromise or settlement of a dispute, and thirdly, the funded services must have been provided in connection with those proceedings or dispute. The £30000 had not been recovered in connection with the clinical negligence proceedings. Mr Otwal’s interpretation involved a strained construction of the section. In the alternative, he argued that the wording was ambiguous and that, following Pepper v Hart [1993] AC 593, it was permissible to consider the parliamentary debate on the section. The statement of Lord Falconer during the report stage made it abundantly clear that no substantive change to the law was envisaged. As to constructive trust, Cavaliere was entirely distinguishable.

It is appropriate to refer to the authorities to which I was taken. The starting point is Davies v Eli Lilly& Co [1987] 1 WLR 1136 (the Opren litigation) and the judgment of Sir John Donaldson MR, particularly at pages 1140B to 1141A. I do not propose to set out this lengthy extract verbatim. It is there to be read if necessary. The key features are simple: if the legally aided plaintiff loses, he gets a grant from the state. If he wins, the effect of the statutory charge is that he gets a loan.

In Hanlon v The Law Society [1981] AC 124 the House of Lords had to consider the impact of the statutory charge under the 1974 Act in matrimonial proceedings. It was held that the costs in respect of which the statutory charge bit were the costs of the whole divorce proceedings and not just the financial relief aspect – see, for example, Lord Scarman at page 186. He also expressed the view that in most cases a reference to the legal aid certificate would determine the extent of the charge. He identified two cases where this would not be appropriate – the inclusion in the certificate of proceedings which ought not to have been included such as proceedings for which legal aid was not available and the inclusion in one certificate of two sets of proceedings for which separate certificates should have been issued. Neither of those exceptions arise in the case before me. I have already recorded the scope of the certificate issued to the First Defendant.

Also in Hanlon the House of Lords held that for property to be recovered or transferred its ownership or transfer had to have actually been in issue in the proceedings. Lord Simon of Glaisdale opined that the expression “property recovered or preserved” should not be given a liberal construction and should not be extended beyond the ordinary sense which was appropriate in the context. Lord Scarman said: “A person recovers or preserves in legal proceedings only what is in issue between the parties: and one discovers what was in issue by looking to the pleadings and the evidence.”

In Morgan v Legal Aid Board [2000] 1 WLR 1657 the claimants owned two pieces of land, which were charged to a bank to secure the liabilities of the partnership business. The partnership was dissolved and replaced by a limited company to which the claimants granted tenancies over the land. The bank demanded payment of the money owed to it and issued proceedings for the debt to be met by (i) a counterclaim and (ii) a separate action seeking a declaration that the tenancies had been validly granted. A compromise was reached under which the claimants were to pay some money to the bank, which agreed to discharge its mortgages to enable the claimants to raise the necessary funds. The Legal Aid Board, while accepting that the statutory charge did not arise under section 16(6) of the 1988 Act because the land had not been in issue in the proceedings, contended that it bit on the land because section 16(7) of the 1988 Act conferred a charge over all the assets which were included in the compromise. Neuburger J (as he then was) rejected this argument. He held that on its true construction, s16(7), in so far as it dealt with compromises or settlements, was essentially directed towards extending the scope of s 16(6) to substitutions, i.e. to property which was included in the terms of the settlement and which, while not in issue itself, in some way represented or replaced property or rights in issue. Accordingly, where a legally aided person settled an action, the court had to look at all the terms of the settlement, and in some cases the negotiations leading up to the settlement, consider what property could be said to have been preserved or recovered by the legally aided party, and then ask whether that property was either in issue in the proceedings, or could be said to have been substituted in some way for rights, property or claims which were in issue in the proceedings. In his view the release of the land was no more than “an inevitable by-product” of the settlement.

It is common ground between counsel that under the 1988 Act the charge would not have bitten in respect of the First Defendant’s costs (just as it did not bite as regards the costs of Lloyd Jones Associates) because “the” proceedings under section 16(6) and (7) can only be the clinical negligence proceedings. As Mr Carpenter pointed out, the legal aid scheme had been in force for some 50 years before the advent of the Legal Services Commission, and, while the wording of section 10(7) is different and could be construed rather more widely (particularly the final part), to my mind it would require clearer words than those used to change the position. I agree with Mr Carpenter that a more obvious interpretation is that the services were provided in connection with the clinical negligence claim, and the dispute must relate to that and not to the professional negligence claim, where no services were provided under the Certificate issued to the First Defendant. His interpretation also seems to me to coincide with the approach in the cases cited under the earlier legislation.

If I am wrong about that, then the wording is in my view ambiguous, and it is therefore permissible to refer to the parliamentary debate. The draft Bill contained in Clause 10 two sub-clauses (7) and (8) addressing this topic. Among the amendments moved at report stage were items 81 and 82. Lord Falconer took them together and thanked Lord Simon of Glaisdale for pointing out the opportunity to shorten the statute by merging the two sub-clauses. He continued:

“The tail of Clause 10(7) and Clause 10(8) are, in substance, drawn from the current Legal Aid Act 1988. They define the scope of the legal aid statutory charge, which allows the Legal Aid Board to recover any outstanding costs from the property recovered or preserved as a result of their case by litigants who received legal aid. Let me make it clear, for the record, that the Government intend the charge created in this Bill in relation to funding provided by the community legal service fund to have exactly the same scope as the legal aid statutory charge has now. These amendments are aimed solely at brevity; they in no way represent a change in substance.”

It is difficult to think of a clearer statement than that.

By way of elaboration Lord Falconer continued:

“They are possible because of certain other differences in the drafting of the Bill and the 1988 Act. In the 1988 Act the equivalent words to what is now Clause 10(8)(a) are necessary for two reasons. First, they make it clear that the statutory charge bites on cases settled before proceedings are issued. The appearance in Clause 10(7) of the words “or dispute”, which do not appear in the current Act, mean that Clause 10(8) is no longer necessary for that purpose

Secondly, Clause 10(8)(a) serves to make clear that the charge bites on any property contained in a compromise or settlement, regardless of whether that was the property originally at issue in the proceedings. This is necessary because case law has established that the words “recovered or preserved in proceedings” relate only to property formally at issue in the case. Amendment No 81, which inserts additional words in Clause 10(7), is intended to preserve this position.”

The last sentence imports some ambiguity in that “this” could relate to the first sentence of the paragraph or the second. I reject Mr Otwal’s suggestion that Lord Falconer stated the law incorrectly. I agree with Mr Carpenter that the second sentence refers to Hanlon and “this” must relate to the first sentence.

That is I think sufficient to dispose of the construction argument, but, in so far as is necessary, I also endorse Mr Carpenter’s submission that to accept Mr Otwal’s construction would lead to uncertainty and complexity and undermine the simplicity of the basic concept of the scheme. As he put it in his skeleton: “Instead of a lost case being lost for all time, it would enter a state of limbo until such time as it was clear that no further claim connected with the lost claim could or would be brought. If a further claim was brought, in relation to each claim there would have to be an argument about whether the claim was sufficiently connected for the statutory charge to bite.”

Mr Carpenter also gave examples of unfairness, which would arise if Mr Otwal’s interpretation was correct. I refer to just one. The claimant is injured in a road traffic claim. He is taken to hospital and treated negligently. He pursues the clinical negligence claim first with the benefit of CLS funding. It subsequently becomes apparent that the claim is not in fact well-founded. He proceeds with the claim against the negligent driver. The clinical negligence claim has been lost, so the claimant has received a grant, not a loan. The public funding scheme does not contemplate that the Second Defendant will be able to look to the damages the claimant recovers against the driver to meet the costs it has paid in connection with the clinical negligence claim.

Mr Knifton postulated that if Mr Carpenter’s argument was taken to its logical conclusion, then if the claim had failed after Horton was decided, and the Claimant had issued a fresh claim, had obtained discretion under section 33 and then settled the clinical negligence claim, the statutory charge would not bite on the costs of the earlier proceedings. However, in my view, it would bite if the existing certificate had been amended to cover the second claim. If a fresh certificate had been issued, then I express no final view, since the point does not arise for resolution before me. It may be that a construction of s10(7) would permit the charge to bite in those particular circumstances, because the subject matter of the dispute (i.e. were the doctors negligent?) would still be the same.

Mr Carpenter also drew attention to the Community Legal Service (Costs) Regulations 2000, and, in particular, Regulation 18(1) which (subject to other paragraphs and regulations which are inapplicable in this case) provides:

“all money payable to or recovered by a client in connection with a dispute by way of damages, costs or otherwise, whether or not proceedings were begun, and whether under an order of the court or an agreement or otherwise, shall be paid to the client's solicitor, and only the client's solicitor shall be capable of giving a good discharge for that money.”

He submitted, and I agree, that if Mr Otwal’s submission was correct, then the Claimant would be incapable of giving a valid receipt for the damages in the professional negligence claim.

I turn then to the constructive trust argument based on Cavaliere. In that case, the legally-aided claimant brought an action against a company (Attia) for damages in connection with a building contract. Attia went into a creditors’ voluntary liquidation. The claimant subsequently obtained judgment for damages to be assessed, and in due course (after some considerable delay) the damages were assessed as were the costs after a further delay. She then looked to Attia’s insurers under the Third Parties (Rights against Insurers) Act 1930. She did not have the benefit of a legal aid certificate for this claim. She did not actually issue proceedings against the insurers because a compromise was agreed. The claimant’s solicitors contended that the statutory charge did not bite because the money was recovered as a separate claim from a third party and the claimant was not legally aided for that claim. Leveson J accepted that the statutory charge did not bite directly on the money recovered under the provisions of the 1988 Act. However, he held that that the judgment was an essential pre-requisite of the cause of action against the insurer. That judgment was a chose in action and, having been obtained in proceedings brought with the benefit of legal aid, was impressed with a first charge in favour of the Commission. The payment by the insurer reduced Attia’s liability under the judgment, and it would be inequitable to permit the claimant to avoid reimbursing the Commission with the costs incurred to obtain that judgment.

Mr Otwal and Mr Knifton suggested that the situation before me was analogous. I am unable to agree, and am with Mr Carpenter. It is readily distinguishable. In Cavaliere the claimant obtained payment from a third party in substitution for Attia and in direct diminution of the judgment debt. Mr Otwal contended that the judgment of His Honour Judge Stewart QC provided the Claimant with the cause of action against the First Defendant and therefore constituted a valuable chose in action. In my view this cannot be right. The cause of action against the First Defendant accrued when the four month period for service expired. This is clear from such authorities as Khan v RM Falvey [2002] EWCA Civ 400 and Hatton v Chafes [2003] EWCA Civ 341. The effect of Judge Stewart’s judgment was merely to crystallise the loss. It conferred no valuable right on the Claimant unlike the judgment against Attia. As Mr Carpenter submitted, the original defendants to the clinical negligence claim assumed no liability to the Claimant, so there was no question of any payment by the First Defendant being in substitution for, or going to reduce the liability of, those defendants.

Accordingly, the Claimant is entitled to a declaration that any sums paid by the Second Defendant in respect of costs incurred by the First Defendant and Lloyd Jones Associates are not charged against the sums paid to the Claimant by the First Defendant under the compromise agreement made in 2007. As to costs, my provisional view is that the Second Defendant should pay the costs both of the Claimant and the First Defendant.

I invite the Claimant’s legal advisers to lodge an agreed form of order which can be pronounced when this judgment is handed down. I also confirm that it is not necessary for the legal advisers to attend court when the judgment is handed down, unless there remain issues outstanding between the parties.

As mentioned at paragraph 7 above, I was told that there has been no decided authority on the point since the passing of the 1999 Act, and this case has been treated as a point of principle. Mr Carpenter indicated that, if I found against the First Defendant, he would be seeking permission to appeal. Although Mr Otwal was less clear as to the Second Defendant’s position, I deem it appropriate to give permission to appeal. The appeal court to be specified in the order is, of course, the Court of Appeal.