Ruling by example



The ghost of Admiral Byng, who was shot on the quarterdeck 'pour encourager les autres' for failing to drive the French from Minorca, hovered over the Court of Appeal this month when it handed down the most important decision on conditional feeagreements (CFAs) since Hollins v Russell (2003) 1 WLR 2487.



This time, it is solicitors who have acted in breach of the CFA Regulations 2000 who face the firing squad. In Garrett v HaltonBC and Myatt v National Coal Board (2006) EWCA Civ 1017, defendants were using the indemnity principle to challenge the enforceability of CFAs based on breaches of regulations 4(2)(c) and 4(2)(e)(ii).



The major issue in the appeals was the meaning of paragraph 107 of the judgment in Hollins, where the Court of Appeal had suggested a question for district judges and costs judges to ask themselves when confronted with an indemnity principle challenge to the enforceability of a CFA. The question to be posed was: 'Has the particular departure from a regulation pursuant to section 58(3)(c) of the 1990 Act or a requirement in section 58, either on its own or in conjunction with any such departure in this case, had a materially adverse effect either upon the protection afforded to the client or upon the proper administration of justice?'



The claimants, supported by the Law Society, argued that this question carried with it two connotations. The first was that the issue of whether the CFA was enforceable had to be determined not by reference to the situation at the time when the CFA was made, but retrospectively by reference to the situation that obtained at the time of the detailed or other assessment of costs.



The second connotation, closely related to the first, was that the question required consideration of the actual consequences for the client or the administration of justice. Therefore, if - looking back from the time of a detailed assessment - the client had suffered no actual detriment as a result of his solicitor's failure to comply with the rules, and if there had been no actual detriment to the administration of justice, there was no material breach of the statutory provisions.



The Court of Appeal rejected the Law Society's argument that Hollins itself had determined these two issues in favour of claimants' solicitors. Neither issue had arisen on the facts of the various cases decided under the Hollins umbrella and, taken as a whole, the language of the judgment did not support the Society's interpretation.



Nor, considering the matter afresh, could the court uphold the claimants' or the Law Society's submissions on these two issues. The language of section 58 of the Courts and Legal Services Act 1990 was clear and uncompromising. Although Parliament might have chosen language that gave the court more flexibility in deciding whether a CFA was enforceable, it had chosen not to do so. The statutory conditions were for the protection of solicitors' clients, and Parliament considered that the need to safeguard the interests of clients was so important that it should be secured by providing that, if any of the conditions were not satisfied, the CFA would be unenforceable and the solicitor would not be paid.



This was the approach of punishing solicitors 'pour encourager les autres'. It was tough, but not irrational. The only mitigation of this approach was that, as was made clear in Hollins, literal but trivial and immaterial departures from the statutory requirements did not amount to a failure to satisfy the statutory conditions.



The case of Myatt concerned regulation 4(2)(c), which requires the solicitor to inform the client of whether he considers that the client's costs risk is insured under an existing contract of insurance, normally a before-the-event (BTE) policy.



The facts of the case were that the solicitors had agreed to act for four ex-miners with potential claims for damages for noise-induced hearing loss against their former employers. They had made certain inquiries of their clients over the telephone designed to elicit whether BTE cover was available, but in each case they had been told that it was not. They had not asked to see any policy documents, and there was an issue as to the effect of the questions that they had asked.



The Court of Appeal upheld the costs judge who had concluded that the clients had not been asked the question: 'Do you have a policy of legal expenses insurance, either free-standing or attached to a house or motor policy or credit card?', rather the question: 'Do you have a policy of legal expenses insurance that would cover a claim for noise-induced hearing loss against your former employer, either free-standing or attached to a house or motor policy or credit card?'



It was conceded on the appeal that the latter question was too restrictive to satisfy the regulation, as it imposed on unsophisticated clients too great a burden of understanding the often complex terms of insurance policies. Accordingly, the appeal was dismissed. The fact that evidence adduced on appeal showed that none of the clients had had BTE cover for an industrial disease claim made no difference.



The court gave general guidance on the scope of the solicitor's duty under regulation 4(2)(c). It upheld the Law Society's argument that there was no logical necessity to apply the test laid down in Sarwar v Alam (2002) 1 WLR 125. The overall test was that there was an implied obligation on a solicitor to take reasonable steps to ascertain what BTE cover the client has, and that what is reasonable will depend on all the circumstances of the case.



Relevant factors would be the nature of the client, the circumstances in which the solicitor is instructed, the nature of the claim, the cost of the after-the-event (ATE) premium if one had to be purchased, and whether a referring body had already investigated the availability of BTE. The client did not, in every case, have to send the solicitor the relevant policy document merely because he said that he had a home, credit card or motor insurance or was a trade union member.



The regulation involved in Garrett was 4(2)(e)(ii), which requires the solicitor who recommends a particular policy of insurance to declare any interest he may have in doing so.



A claims management company had referred the case to the solicitor and it was found to have been a term of the solicitors' panel membership that they should recommend the policy of insurance promoted by the claims management company, with exclusion from the panel as a sanction for failure to comply. The solicitors had declared that they had no interest in recommending the policy on the basis that they got no commission for doing so. They had declared their panel membership, but without saying what that entailed.



The court upheld the decisions below that the link between recommending the insurance policy and panel membership was an interest that should have been disclosed. It rejected an argument put forward by the Law Society, which was avowedly appearing in its trade union - and not its regulatory - capacity, that a solicitor complied with regulation 4(2)(e)(i) simply by stating that he had no interest, even if he had. It rejected an argument put forward by the solicitors that by informing the client that they were on the claims management company's panel, they had disclosed their interest. Merely disclosing panel membership did not disclose the interest, as most laypersons would be likely to think that panel membership was a mark of quality control.



Therefore, both appeals were dismissed. Permission to appeal to the House of Lords is not being sought in Myatt; in Garrett, the claimant's solicitors are currently considering the position.



What are the effects of this decision? Firstly, the court has made it clear that the decision in Hollins is confined to failures to comply with the statute that are trivial when judged against the statutory language, regardless of whether there are serious consequences for the client. The effect of this is that there remains mileage for paying parties in considering whether their opponents have failed to comply. The principal barrier they will face is the difficulty of getting information from their opponents as to the steps they have taken to comply, on which the judgment in Hollins is unaffected by this decision.



Secondly, in regulation 4(2)(c) cases, the Sarwar test does not apply automatically and a flexible test has been put forward. The difficulty of the flexible test, of which the court was conscious when it promulgated it, is that it encourages disputes as to what was reasonable on the facts of a specific case. Once again, the paying party's difficulty will lie in finding out what steps have been taken. Here, although it is not necessary to show that the client actually had a BTE policy in order to establish material breach of the regulation, presumably the existence of such a policy would generally serve to establish a 'genuine issue' as to compliance, which, even on the restrictive Hollins approach, would require investigation.



Thirdly, in regulation 4(2)(e) cases, the existence of membership of a referrer's panel with a requirement to recommend a particular policy, and the implications of that membership on the solicitor's freedom to recommend a policy, will have to have been disclosed to the client.



Fourthly, although paying parties may have difficulty in establishing breaches of the regulations, receiving parties' solicitors will now have to review all cases that might be affected by these decisions to see whether they can properly sign a bill certifying compliance with the regulations. If they fail to do so but are found out later, even if their failure is not discovered at the assessment stage, they will risk disciplinary action from the Law Society. As Lord Justice Henry said in Bailey v IBC Vehicles (1998) 3 All ER 570 in relation to the signature of bills: 'And the other side of a presumption of trust afforded to the signature of an officer of the court must be that breach of that trust should be treated as a most serious disciplinary offence.'



Finally, while the decision affects future assessments, its effect on future CFAs is limited. The revocation of the 2000 regulations in relation to CFAs made on or after 1 November 2005 means that failure to comply with a regulation will no longer be a problem for new CFAs. However, even with new CFAs, cases where a breach of the provisions of section 58 of the 1990 Act or of the CFAs Order 2000 is under consideration will arise, and these will be affected by the court's interpretation of the question posed by paragraph 107 of Hollins.



Jeremy Morgan QC appeared for the respondents in both cases.