REUTERS | Navesh Chitrakar

Conditional fee agreements and the sin of addition: no longer a sin

The indemnity principle is the kernel of costs recovery. A party ordered to pay costs is required to reimburse no more than the sum that the receiving party is liable to pay their own solicitors. If the contract of retainer between the receiving party and their own solicitor is unenforceable for any reason, then by operation of the indemnity principle, there are no costs for the paying party to indemnify, so their liability under the costs order is nil (see Harold v Smith (1860) and Gundry v Sainsbury (1910)).

Within the world of conditional fee agreements (CFAs), a telling example of the indemnity principle at work is Radford v Frade in which, between the parties, costs were claimed at £805,000. The CFA covered “procedural issues” such as service and jurisdiction. It did not encompass work that the solicitors successfully went on to undertake, namely obtaining summary judgment on the clients’ counterclaim and striking out the claim. Nonetheless, when the defendants won, they included the costs of that work within their bill in the expectation that the losing claimants would pay up.

No such luck. Warby J held that:

“It is common ground that the CFA did not extend to work on the defence of the claim, or the counterclaim. It did not, on its true construction, extend to work on the much later application to strike out or for summary judgment”.

Thus by operation of the indemnity principle, there were no costs of the counterclaim and strike out for the claimants to indemnify, so their liability for those costs was nil. Disaster for the solicitors and counsel who had acted successfully in the case, mostly, as it turned out, for nothing.

That deals with the scope of the work under the CFA. What about the names of the parties in the case? Does it make a difference if the party ordered to pay costs is (or is not) named in the receiving party’s CFA?

Hitherto it has been uncontroversial that wording such as “acting in your claim for damages for personal injuries arising out of the road traffic accident at Hyde Park Corner London SW1 on 4 July 2016” would not create any indemnity principle issues.

The same could not necessarily be said if the receiving party had committed “the sin of addition”!

Suppose the words “against Fred Bloggs” had been written after “4 July 2016” and two years later, the claim has just succeeded with costs, not against Fred Bloggs but against Joe Soap, a motorcycle messenger whose negligent driving had compelled Fred to swerve, with Joe having thereby caused the accident. The issue would then arise: having named only Fred in the CFA, can any costs be recovered from the un-named Joe?

Over the years, the lower courts have been divided on the issue. In Law v Liverpool City Council and Berrybridge, HHJ Stewart (as Stewart J then was) had held that a contract (there the CFA) which had covered a claim against the council could not possibly be construed as a contract bring a claim against Berrybridge. Accordingly, no costs were allowed in respect of the claim against Berrybridge. Contrast Scott v Transport for London (TFL), where the CFA had only covered “your claim against Lambeth Council for personal injury” but had been held to be wide enough to permit costs to be recovered from TFL, even though TFL had not been named in the CFA. Had there been a requirement to name the correct defendant, the CFA regulations would have said so (per HHJ Hollis).

Then there was Engeham v London & Quadrant (L & Q), which appeared to put the point beyond peradventure. Below, the court had held that as the CFA had named only L & Q, it had been limited in its operation only to the claim against that defendant. That was because of the express words of limitation in the “What is covered by this agreement” clause, namely “Your claim against the defendant L & Q”, were words which were not wide enough to encompass an action against anybody else, notably the second defendant against whom the costs order had been made. Whilst that part of the judgment was not appealed, the Court of Appeal held that Ms Engeham had been right not to seek to challenge that conclusion (see paragraph 10 of the judgment of Floyd LJ with which Dyson MR and Simon LJ agreed). The judge below had been correct to hold that the only costs which she could recover related to the action against L & Q.

All clear now?

Far from it. Just handed down we have Malone v Birmingham Community NHS Trust, another Court of Appeal decision, but this time by a two judge court (Hamblen and Patten LJJ).

In Malone, the CFA named “Home Office” as the potential defendant in his claim for damages arising out of a failure to diagnose that he had testicular cancer when a prisoner at HMP Birmingham. The critical wording was expressed thus:

“What is covered by this agreement

All work conducted on your behalf following your instructions provided on [sic] regarding your claim against Home Office for damages for personal injury suffered in 2010.”

In fact, at the material time, healthcare services had been provided by two NHS trusts, including Birmingham Community NHS Trust, which subsequently became the defendant in the action in which the costs order against it had been made.

“Not us Guvnor, we were not mentioned in the CFA: the contract of retainer only covers the claim against the Home Office; on Engeham principles and by operation of the indemnity principle, our liability for the costs is nil”, went the trust’s successful argument below.

Both before the regional costs judge and on appeal to HHJ Curran, the court had held that as the CFA had made a “positive choice” to specify the defendant as “Home Office”, it could not be construed so as to apply to a claim against any other defendant. It followed that, by the sin of addition, the solicitors’ had forfeited their right to recover any of their costs from the unnamed trust.

That gave the appearance of being wholly on all fours with the decision in Engeham, but the Court of Appeal took a different view. As was the case in Engeham, the Lord Justices were enjoined with deciding whether the critical wording in the CFA limited its scope to a claim against the Home Office which had had no responsibility for operating prisons for years. In taking a different view, they observed that the CFA had been entered into at an early stage before the commencement of proceedings when there was uncertainty as to the appropriate defendant. That had made it less likely that the reference to “Home Office” had been intended to limit the CFA to a claim against that entity. The proper party to be sued was one of the main questions which the solicitor was being asked to determine.

As a matter of language, Hamblen LJ expressed the position thus:

“… The most natural reading of the critical wording is that the CFA covers “all work conducted” on the claimant’s behalf, which follows from the “instructions provided” in respect of his claim “against Home Office” . In other words, as [counsel] submits, the reference to “Home Office” is descriptive of the instructions received rather than of the work done. It relates to past work rather than future work.”

Hamblen LJ continued that whilst no great care had been taken in relation to the drafting of the critical words, if the intention had been to define and limit the coverage of the CFA to claims against a particular defendant, greater care and precision would have been expected and, in particular, that the named defendant would not have been an entity which was obviously inappropriate. It followed that the trust’s argument that a “positive choice” had been made to specify a particular defendant and to limit the claim so it could not be construed to apply to any other (unnamed) defendant, went down with all hands. The trust had to pay up.

From that outcome, it appears that sloppy drafting won the day: more than that, in distinguishing Law v Liverpool Council, the court observed that in that case, that there had been no careless drafting, that the words used, “Your claim against Liverpool City Council”, had been more specific and restrictive and that the named defendant had remained a party to the action up to and including settlement. That can be contrasted that with the situation in Malone, where the solicitors had been careless. The logical inference to draw from that is that careful drafting was a feature which weighed against the solicitors in Law, whereas in Malone, the solicitors’ carelessness appears to have been the decisive factor in their favour and from which they benefited financially, a somewhat bizarre result.

Where does that leave the legal profession? It looks like the court will strive to uphold the validity of a CFA even if, as was commented upon in Malone, “no great care has been taken in relation to the drafting of the critical wording” and even if it demonstrates poor quality drafting, little attention to detail, and, indeed, even if the critical wording consists of only one sentence which contains three manifest mistakes. In Malone, they were that the date of instructions had been omitted, as had the definite article before “Home Office”, with the description of the claim as being against “Home Office” being totally inaccurate.

A rare case it is when careless solicitors have not only got away with it, but been rewarded into the bargain. Malone appears to be one such example, which is all the more surprising since the decision in Engeham was in the court bundle of authorities and yet was not mentioned anywhere in the Malone judgment. It seems, therefore, that the “sin of addition” is a sin no more, unless or until another court decides that the three judge decision in Engeham is to be preferred to the two judge decision in Malone.

Next stop the Supreme Court to find out?

Kain Knight Colin Campbell

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