Conditional fee agreements
Garbutt v Edwards [2005] EWCA Civ 1206


The beginning of November saw the coming into force of a radical revision to the statutory rules governing conditional fee agreements (CFAs). In a rather late bid to end the 'costs war', which most observers regarded as having been reduced to a few minor skirmishes by a combination of the Civil Justice Council-mediated fixed-costs regime of part 45 of the Civil Procedure Rules (CPR), and the decision of the Court of Appeal in Hollins v Russell [2003] 1 WLR 2487, the government has revoked all the CFA regulations and replaced them with &150; nothing. The statutory instrument that achieves this is the Conditional Fee Agreements Regulations 2005 (SI 2005/2305).


This decision represents a U-turn in earlier government thinking. Most of the contents of the now revoked Conditional Fee Agreements Regulations 2000 and Collective Conditional Fee Agreements (CCFA) 2000, together with the amendments thereto, had a consumer-protection motivation. When the original regulations were passed, notable voices (the Law Society and the Senior Costs Judge) pointed out that there was sufficient consumer protection in the Law Society's costs information and client-care code, and suggested that further protection in the regulations was unnecessary. These views were ignored, with disastrous consequences in a statutory scheme so ill thought-out that it was, and still is, enacted that any CFA that did not satisfy the statutory conditions was unenforceable (see section 58(1) of the Courts and Legal Services Act 1990).



Be that as it may, the light has now been seen and the old regulations abolished, leaving consumer protection to the Law Society under a soon-to-be revised code.


However, it is not necessary for firms to rush to make new CFAs with existing clients or new CCFAs with their institutional (usually trade union) clients. The revocation of the regulations is not retrospective. The new regulations only apply to agreements made on or after 1 November 2005. Nor is it necessary to prepare new draft agreements for future use to comply with the regime &150; any agreement that complied with the old regime will comply with the new.


That said, firms may wish to simplify their agreements in a way made possible by the new regime. The Law Society has done so and has produced a one-page agreement to demonstrate the possibilities, though it rather gives the game away by providing that the agreement has to be read with its explanatory leaflet, which is about as long as the old agreement.


Firms may also want to remove the fetters that the old regulations imposed on them, such as requiring it to be a term of the agreement that, unless the court otherwise ordered, a legal representative had to pass on to his client any reduction in success fee imposed on assessment, on the ground that the original success fee was too high, having regard to what the legal representative knew or ought to have known at the time the agreement was made. Whether this would make for good public relations is a matter of some doubt.


Concerns have been raised whether CCFAs can be made under the new regime, since there is no statutory provision for a CCFA any more and the Act itself requires the agreement itself to state the success fee (see section 58(4)(b)).


In my view, CCFAs will survive the new regime fairly easily, provided that they are properly drafted &150; section 58(4)(b) applied just as much while the CCFAs were in force, and the Lord Chancellor was not given regulation-making power either to override that section or to extend the regime beyond the framework of the principal Act. Accordingly, if they are illegal now, they were illegal under the old regime.


The 2003 amendments that brought in the 'CFA lite' regime - under which a client was liable to pay his legal representative only to the extent that sums were recovered from his opponent, whether by way of costs or otherwise - have also been revoked. Nevertheless, this should not limit the availability of a CFA lite for those who want to make one (CPR 43.2(3), which disapplied the indemnity principle in such cases, has been retained).


However, it is important to remember that the formal requirements of the Act, as opposed to the regulations, continue to apply. Accordingly, a CFA or CCFA must still be in writing, cannot be made for family or criminal proceedings (save statutory nuisances) and cannot provide for a success fee exceeding 100%.


The most interesting issue for most observers has been whether, by revoking the regulations and transferring consumer protection to the Law Society's code, the government had simply created the ideal conditions for 'Costs War II' by enabling liability insurers to argue that costs judges and district judges should take into account breaches of the code in exactly the same way as they used to take account of breaches of the regulations.


By a piece of timing that was not entirely accidental, the Court of Appeal handed down a judgment with an important bearing on this question just five days before the regime came into force.


Garbutt was not a CFA case but it did turn on the application of the Law Society's code (see [2005] Gazette, 3 November, 3). The paying party alleged that his opponent had not received a costs estimate from his solicitor, contrary to the requirements of the code.


He argued that, as the code has the force of statute (which was common ground), a solicitor who acted in breach of the code was not entitled to recover any costs at all from his client and, by the application of the indemnity principle, his opponent was equally relieved of any costs liability.


He pointed out that if this were not the case, a bizarre and unjust result would follow - a solicitor who tried to comply with the code and gave an estimate that turned out to be too low would be limited to costs within 15% or so of his estimate (see Wong v Vizards [1997] 2 Costs LR 46), whereas a solicitor who ignored the code entirely suffered no penalty at all.


The appeal court rejected this argument and held that non-observance of the code did not automatically render the retainer illegal so as to result in no costs being payable.


Mr Edwards made an alternative submission to the effect that even if this drastic consequence did not follow, the court nevertheless had a discretion to disallow an element of the receiving party's costs where there had been a failure to comply with the code by not giving an estimate. While the court did not accept that submission in its full breadth, it did hold that it was open to a costs/district judge to reduce costs where the costs claimed would have been significantly lower if there had been an estimate at the time that one should have been given. This possibility might give rise to an application for disclosure of the receiving party's documents.


In determining any such application, the costs/district judge would have to be satisfied by the paying party that the dispute was not a 'sham or fanciful dispute', and due weight should be given to the solicitor's signature on the bill. In terms of the case law, any such application for disclosure would be governed by Bailey v IBC Vehicles [1998] 3 All ER 570, rather than the regime for disclosure of CFAs in Hollins.


Where does this leave Costs War II? It is probably too early to say. We know that the appeal court wants the CFA regime to work and is resistant to technical challenges.


However, it is significant that in Garbutt, it was not decided that enforcement of the code was a matter exclusively for the Law Society, but instead it was held that an established breach of the code could in certain circumstances be taken into account by the costs/district judge.


It seems to follow that each case will be considered on its own facts, but that a paying party who wants to take a point on the code is going to face an uphill struggle.


Jeremy Morgan represented the defendants in Garbutt v Edwards