July 2011 e-News Conditional fee agreements feature in all of this month’s case law: an invalid CFA relieves a client from paying his solicitors at all; two cases concerned with interest on costs where the case has been run on a CFA and a high value clinical negligence claim that ends with a small award of damages and an adverse costs order. We also take a brief look at the forthcoming changes to the SRA Code of Conduct. • • • • • •

Langsam v Beachcroft LLP & others – invalid CFA for failure to explain it Southern Counties Fresh Foods Ltd v RWM Purchaser Ltd – interest on costs Yao Essaie Motto & others v Trafigura Ltd – interest on costs Medway Primary Care Trust and Ashiq Hussain v Sebastian Marcus – high value claim with low value success = adverse costs order SRA moves to outcomes focused regulation from October 2011

Failure to explain the effect of a replacement CFA makes the CFA invalid – Alexander Langsam v Beachcroft LLP; Paul Murray; Simon Hodson [2011] EWHC 1451 (Ch) The claimant’s solicitors brought a counter claim seeking fees under a CFA that was entered into before the CFA Regulations were revoked and which replaced an earlier CFA. Under the first CFA (CFA 1) the firm capped the total fees it could charge against each of six headings of work. CFA 2 contained no such cap. The claimant said that the change relating to the cap was never explained and indeed he had been told he would be no worse off under CFA 2 than under the original agreement. The firm’s reasons for not explaining the change was that CFA 2 was designed to remove the client’s liability for own costs if the claim failed and that if it succeeded he would not be liable beyond recovered costs. Global sum: The client’s opponent agreed to make an “all in” payment of £1m. The client then argued that this did not amount to the opponent being “ordered or agreed to pay” costs which would trigger the client’s liability under CFA. It was held that the opponents were not ordered to pay Mr Langsam’s costs because they had agreed to pay a sum that was inclusive of costs. The condition for Beachcroft to recover its costs was therefore satisfied.

Result: Reg 4(3) CFA Regulations 2000 required that before a conditional fee agreement is made the legal representative must explain its effect to the client. Here the important explanation that had to be given to the client, who was already party to an existing CFA, was as to the changes that the new CFA introduced. The fact that there were no longer any caps on Beachcroft’s basic charges was not explained, either orally or in writing. This was a potentially material change. The CFA was therefore unenforceable. Interest on costs incurred before a CFA entered into – Southern Counties Fresh Foods Ltd sub nom Cobden Investments Ltd v RWM Purchaser Ltd This is an example of interest on costs where there had been a CFA but the client had actually paid substantial costs prior to the CFA and some further costs after the CFA was in place. Held: The general rule is that a receiving party is entitled to interest on his costs from the date of the judgment for costs, interest being paid at the judgment rate. The Court has a discretion to allow the receiving party interest on costs prior to the date of the costs order in order to compensate for being out of pocket when they had paid costs as the case ran along (see Fosse Motor Engineers Ltd and Others v Conde Nast and National Magazine Distributors and Others [2008] EWHC 2527 (QB) in which reference is made to Bim Kemi AB v Blackburn Chemicals Limited [2003] EWCA Civ 889). Although the Claimant’s case had been run pursuant to CFAs since 19 June 2007, the Claimant incurred and paid substantial costs prior to that date (and after that date in respect of some expert fees). Throughout that time the Claimant had been deprived of the use of that money. Having awarded 50% of the claimant’s costs, Warren J awarded interest on that 50%. Interest on costs where client funded under a CFA – Yao Essaie Motto & ors v Trafigura Ltd and Trafigura Beheer BV [2011] EWHC 90206 (Costs) Where there is a CFA, from what point should interest on costs run? There are two possible answers: The incipitur rule (meaning “when entered”), so from the date of compromise of the action, or allocatur rule (meaning “it is allowed”) so from the date that costs are assessed. Were the clients liable to the solicitor for interest on costs? There were three categories of CFA used. Category 1 referred to the Law Society document “What you need to know about a CFA”. That document states that solicitors can retain any interest on costs. In the absence of any evidence that the contents of the Law Society document or its import was brought to the attention of the Claimants, Master Hurst found on the balance of probabilities that the question of interest was never discussed in relation to that category of CFAs. Accordingly the Claimants had no obligation as to interest.

The remaining categories of CFA contained no express terms as to interest. It was submitted that there was an implied obligation upon the Claimants to account to the legal representatives for any interest recovered. Master Hurst held that applying the general law of contract to implying terms, there was no necessity for any term to be implied into the CFAs. The CFAs operated satisfactorily in their present form. Result: The incipitur rule still applies, but the court has the power to order that the date from which interest shall begin to run shall be a different date. This departs from two unreported County Court decisions that are taken to have applied the allocatur rule to CFAs - Gray v Toner (11 November 2010, His Honour Judge Stewart QC), and Bridle v Ikhlas (22 February 2011, His Honour Judge Charles Harris QC). The appropriate order was that interest at the judgment rate should run from the date when an interim or final costs certificate is issued by this court. Comment: So, if the CFA had said that interest belonged to the solicitor would it have been ordered to run from the date of judgment (the compromise agreement in this case) or only from the date of an interim or final costs certificate? The implication perhaps is that yes, interest would be awarded from judgment. That would mean because the CFA made the client liable for such interest it would go to offset the cost to the solicitor of waiting for payment even though the client is not out of pocket because they only pay costs once recovered from their opponent. At [121 Master Hurst accepts that the position of a third party (here the solicitor) in funding the case may be relevant. Costs consequences of losing on a high value claim but winning a small value issue – Medway Primary Care Trust and Ashiq Hussain v Sebastian Marcus The respondent had brought a clinical negligence claim seeking damages in respect of an amputation with quantum agreed at £525,000. The appellants successfully defended on grounds of causation. The respondent succeeded only to the extent of £2,000 in respect of pain and suffering for a limited period of time following a breach of duty. The trial judge nonetheless awarded the respondent 50% of his entire costs. The Court of Appeal by a majority (Jackson LJ dissenting) held that the judge had been wrong in principle to award costs to the respondent and it awarded 75% of the appellants’ costs. The reasoning of the majority was that the respondent had plainly lost on the issue that went to trial and in respect of which the costs had been incurred – namely causation. It followed that the appellants had been the successful parties and the starting point therefore was a costs order in their favour.

One issue that features in the judgments of both the majority and the dissenting judgment of Jackson LJ was the absence of a Part 36 offer. The majority took the view that this absence did not justify any reduction of the costs to be awarded. But the appellants could have made a Calderbank offer in respect of the pain and suffering claim with proportionate costs for that claim. Jackson LJ disagreed and said that a Claderbank offer would have been of no benefit to the claimant without an offer in respect of his substantial costs of the main claim. Such an offer therefore would have given the defendants no costs protection. As to Part 36 he rejected the argument that a Part 36 offer of £3000 in this case would have led to disastrous costs consequences – i.e. that the claimant would get his costs of the main issue. On the contrary, the claimant would only get such costs as were reasonable and proportionate – seemingly meaning that they would be confined to the pain and suffering claim. Jackson LJ dissented also on the approach to costs orders where a claimant has succeeded on a minor claim but lost the main claim. In those circumstances Jackson LJ states that the starting point is that the claimant recovers costs. There would then be a reduction in costs awarded to reflect the lost issue applying CPR 44.3(2)(a). Comment: This is a significant example of the inadequacy of the Jackson reforms. A claimant in this position post Jackson will be seeking a solicitor to run a case on a CFA the success fee for which cannot exceed 25% of general damages. The claimant’s base costs in this case were in the order of £250,000. A success fee limited to 25% of general damages assuming a 100% success fee to be justified would require general damages of £1m. As with many clinical negligence claims the level of damages reflects future care costs not general damages. Code of Conduct replacement - SRA’s new Handbook This Handbook sets out the standards and requirements that the SRA expects its regulated community to achieve and observe, for the benefit of the clients they serve and in the public interest. The Legal Services Board (LSB) approved the Handbook on 13 June 2011. In due course the SRA will update its website to reflect the new status of the Handbook and to incorporate a number of LSB-approved changes to the published draft. The Handbook is being introduced on a phased basis, beginning in August 2011. The key implementation date is 6 October 2011. The new approach to regulation is outcomes-focused and risk-based so that clients receive services in a way that best suits their own needs.

The handbook can be found here: http://www.sra.org.uk/solicitors/handbook/handbook-home.page

The Legal Compliance Bulletin published by the Law Society has a July bumper edition covering the main changes. If you don’t already subscribe to it you can obtain the bumper edition for £150 which includes six hours of free CPD: http://www.lawsocietyshop.org.uk/ecom_lawsoc/public/saleproduct.jsf?productCod e=20405022&ref=000275

LawAssist e-News The LawAssist e_News series is produced in conjunction with our consultant David Chalk, Head of Research and Knowledge Exchange, Faculty of Business, Law and Sport at the University of Winchester [email protected]

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