Fact CFA may have been illegal did not prevent claim over costs negotiation

The fact that a conditional fee agreement (CFA) may have been illegal did not prevent a claim by a law firm over the conduct of a solicitor who had left to set up his own practice but given the firm a lien over the file.

In FPH Law (a firm) v Brown (t/a Integrum Law) [2018] EWCA Civ 1629, Martyn Brown acted for Paul Douglas on a personal injury claim against his employer, Jarvis PLC, under a CFA.

It was issued in 2006 and was ongoing in 2009 when Mr Brown left to set up his own firm. The case was among those that went with him – and a new CFA was signed – but he agreed to preserve a lien on those files for the purposes of recovering whatever fees and disbursements were properly recoverable by the claimant firm.

Mr Brown gave a number of undertakings in respect of those files, including to provide brief, three-monthly updates and “reasonable information about any significant developments”, such as offers to settle.

In 2011, the case settled and Jarvis agreed to pay costs, which would subject to detailed assessment if they could not be agreed.

Mr Brown served a bill of costs for £84,000, of which nearly £60,000 was due to FPH. Jarvis’s solicitors countered with an offer for £55,000 and also made technical challenges to the validity of the CFA. Shortly after, they increased the offer to £64,000 and repeated their concern about the validity of the CFA.

Mr Brown then notified FPH that he had rejected the offers and suggested a counter-offer of £77,000 with a view to settlement at £73,000, but he made no reference to the challenge to the CFA’s validity. FPH agreed to this.

In the event, he counter-offered for £78,000, and Jarvis’s solicitors increased their offer to £70,000.

Lord Justice Coulson said: “There, for reasons which are wholly unexplained, the matter rested… The defendant failed to effect a settlement of the costs dispute. Instead, the defendant allowed the dispute with Jarvis’s solicitors to continue to formal pleadings and a final determination. The claimant had no involvement in any of this.”

At the detailed assessment, District Judge Smedley ruled that the CFA was unenforceable because of its non-compliance with regulations 4(2)(c) and 4(2)(e)(ii) of the old CFA Regulations and disallowed all the claimant’s profit costs. He made an adverse costs order in the sum of £5,000.

Coulson J said the precise reasoning of the district judge was “not easy to discern”, but that the two breaches were failures to provide Mr Douglas with certain information at the time that the CFA was entered into, rather than the terms of the CFA itself.

The claimant FPH brought proceedings against Mr Brown for damages for breach of his undertaking to keep them informed about Jarvis’s solicitors’ responses in the costs settlement negotiations.

They alleged that, if they had known that a point was being taken about the validity of the CFA, they would have instructed the defendant to accept the £70,000 which had been offered.

In response, Mr Brown sought to rely on the invalidity of the CFA as a complete defence to the claim, alleging that, because the claimant could not have recovered any costs from Mr Douglas under the terms of the invalid CFA, they could not seek to recover such costs from the defendant by way of damages.

In 2015, Deputy Master Partridge ordered that this be determined as a preliminary issue.

It went before Mrs Justice Slade, who ruled that the enforceability of any compromise of the costs claimed by Mr Douglas was to be assessed at the date it would or could have been entered into, had the defendant performed his obligations pursuant to the undertakings.

She said: “On the basis that the defendant was negotiating with the solicitors for Jarvis PLC in good faith and that there was a dispute over the enforceability of the CFA, a compromise of the claim for costs would be enforceable.”

Conversely, if the defendant had known that the CFA was invalid, and there had been a compromise, Jarvis could subsequently have set aside and recovered any sums paid under such a compromise.

She concluded: “Whether the failure to comply with regulation 4 rendered the CFA unenforceable, as found by DJ Smedley, was also illegal… does not affect the claim for breach of contract which is to be determined on the facts of the date of the alleged breach.”

Slade J went on to say that the assessment of quantum of damages for the loss of the chance of a compromise of the claim for costs might be affected by the decision that the CFA was unenforceable, but this would be determined at a trial.

Coulson LJ said he agreed with the High Court judge’s decision: “Since this is a claim for breach of contract, the focus must be on putting the claimant in the position they would have been in if the contract (more specifically, the undertakings) had been performed.

“The breach occurred at a time (April/May 2011) when a challenge had been indicated as to the enforceability of the CFA, but that argument had not yet been formalised, let alone finally determined. If the defendant had complied with its contractual obligations, it might be said that there would never have been a determination of the enforceability or otherwise of the CFA in any event…

“Whether or not there was force in the argument [that the CFA was unenforceable] was a matter to be carefully considered (in this case by both the claimant and the defendant) so that it could be given the appropriate value in the negotiations.

“That did not happen here because the claimant did not know that the point was being taken. It is that, therefore, that lies at the heart of the claim for a loss of a chance. But it does not affect the validity or the bona fides of any compromise that might have been reached.”

Coulson LJ rejected the defendant’s attempt to distinguish the case from the Court of Appeal decision in Binder v Alachouzos [1972] 2 QB 151, which held that a compromise of claims which had been made under contracts which were said to be illegal was still an enforceable compromise.

The defendant had argued that, if the Binder principle applied to CFAs, it would act as an incentive for solicitors not to keep records of advice given and other matters of that sort, so that they could later take advantage of such omissions to argue that a particular CFA was enforceable.

Coulson LJ said the contrary would actually be the case. “It is in every solicitor’s interest to ensure that each CFA into which it enters has been properly drafted and has been agreed after the correct advice has been given (and recorded in writing).

“It is, with respect, nonsense to suggest that a solicitor would knowingly fail to keep the necessary records, in order to have a better chance later of arguing that a particular CFA was legal or enforceable. And to what possible end could such a strategy go, other than to demonstrate his or her own bad faith?”

Andrew Williams (instructed by Martyn Brown) for the defendant/appellant; Nicholas Jackson (instructed by Irving Solicitors) for the claimant/respondent.

 

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Costs News
Published date
26 Jul 2018

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