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(Update (13/05/16 - The decision in Jones v Spire Healthcare Ltd on appeal at Liverpool County Court is now available)
Conditional Fee Agreements and Success Fees
The question of whether a conditional fee agreement can be the subject of a valid assignment has ignited much debate since April 2013. To understand why, it is helpful that we first define our terms.
Section 58(2)(a) of the Courts and Legal Services Act 1990 (“CLSA”) defines a CFA as ‘an agreement with a person providing advocacy or litigation services which provides for his fees and expenses, or any part of them, to be payable only in specified circumstances’.
A CFA which provides for a success fee does so by virtue of section 58(2)(b) CLSA, which states that ‘a conditional fee agreement provides for a success fee if it provides for the amount of any fees to which it applies to be increased, in specified circumstances, above the amount which would be payable if it were not payable only in specified circumstances’.
CFAs which provide for a success fee must comply with the stipulations set down by section 58(3) CLSA. Essentially, the CFA in question –
The “comply or die” nature of these requirements is made clear by reference to section 58(1) CLSA.
The Indemnity Principle
Where a CFA is held to be invalid then costs will almost invariably be disallowed in full according to the simple application of the indemnity principle. It is difficult to criticise this approach. An invalid CFA is essentially an unenforceable agreement between practitioner and client and, as such, the client is not liable to remunerate the instructed practitioner for work undertaken. On the principle that the costs in question are the client’s costs, if the client is successful (and therefore by way of Order is entitled to recover his costs from his opponent albeit via his instructed practitioner) but the extent of his liability for costs is zero, the indemnity principle provides that the extent of the client’s ability to recover his legal costs from a paying party is limited to the extent of his liability to his instructed practitioner for those costs, i.e. zero. Thus no costs are recoverable and it is the practitioner who will ultimately lose out.
Although it would appear that a retainer per se can be implied (Fladgate LLP v Harrison  EWHC 67 (QB)) it will be recalled that an immutable feature of an enforceable CFA is that it must be in writing. And so by definition a CFA cannot be implied. It is also unlikely that a court would accept the argument that, in the face of an unenforceable CFA, a standard retainer should be implied – not least because it would be difficult to reconcile the notion of “no win, no fee” with a standard (albeit implied) retainer against which practitioners’ fees are payable in any event.
But assuming that the CFA is enforceable let us consider why an assignment of a CFA would be desirable.
The axiomatic date is 1 April 2013 – the date on which the saving provisions introduced section 44(4) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”) and thereby amended section 58A(6) CLSA to provide that ‘a costs order made in proceedings may not include provision requiring the payment by one party of all or part of a success fee payable by another party under a conditional fee agreement’.
Of fundamental import, however, is section 44(6) LASPO which preserves the recoverability of a success fee payable ‘under a conditional fee agreement entered into before the day on which [section 44(4)] comes into force’ (i.e. 1 April 2013).
Thus in the case of a CFA entered into before 1 April 2013, in principle a success fee is still recoverable from the paying party. But in relation to a CFA entered into on or after 1 April 2013, subject to a small number exceptions a success fee is not recoverable from a paying party and, furthermore, the Lord Chancellor has introduced various caps to the success fees which are recoverable from the practitioner’s client’s damages – most notably a cap of 25% on damages in personal injury proceedings at first instance.
The benefits of preserving the efficacy of a pre-LASPO CFA are readily apparent. Where a client has entered into a pre-LASPO CFA and thereafter transfers instructions to another firm on or after 1 April 2013, if the subsequent firm is able to continue working under the original pre-LASPO CFA then not only will the success fee be recoverable from the paying party as opposed the client’s damages, but the level of the success fee recovered will generally be higher too.
The Law of Assignment
To create a valid legal assignment it is necessary to create a deed of assignment that complies with the following provisions of section 136 of the Law of Property Act 1925 –
The law of assignment provides that one of the parties to the original contract is replaced by a non-contracting third party without the consent of the other party to the original contract. The consent of all parties is fatal to an assignment.
In practice, a CFA is entered into between Firm 1 and the client. Firm 2 is a non-contracting third party. Firm 1 and Firm 2 agree to assign the contract so that Firm 2 replaces Firm 1 and the client remains a party to the original contract. The consent of the client would defeat the assignment and actually create a new contract according to the doctrine of novation.
Of fundamental import to the law of assignment is the general rule that one cannot assign a contract for personal services.
The Law of Novation
Novation is the creation of a new contract on terms which mirror those of the original contract. It happens only at the consent of the parties and non-parties to the original contract. In the above example, at the consent of Firm 1, Firm 2 and the client, the CFA between Firm 1 and the client is novated so that a new agreement in created between Firm 2 and the client, the terms of which are identical to those of the original CFA.
Potential Adverse Consequences of a Failed Assignment (pre-LASPO CFA)
Continuing with the above example, in the event that the assignment is found to be ineffective, then Firm 1 actually stands at risk of recovering nothing.
If, in the mistaken belief that the CFA has been successfully assigned to Firm 2, Firm 1 have ceased to act (and therefore fulfil their obligations under the unassigned CFA to achieve a “win” for the purposes of the same), Firm 1 will likely be taken to have breached the CFA and are thus disentitled to payment from the client. As heretofore mentioned, under the application of the indemnity principle Firm 1 will ultimately recover nothing.
Firm 2 equally stands at risk of recovering nothing. If Firm 2 have been working under the assumption that a pre-LASPO CFA has been assigned to them when, in fact, it has not, then the rhetorical question is under what agreement have they been working? Given the court’s reticence to imply a standard retainer (and their inability to imply a CFA), it is highly likely that Firm 2 will recover nothing.
Firm 2 can mitigate their risk of recovering nothing by entering to a “fall-back” post-LASPO CFA.
Case Law Analysis
The courts’ approach on whether or not a CFA can be assigned has been somewhat haphazard, legally inconsistent and occasionally confusing. This, however, is certainly attributable in part to the fact-specific circumstances of the following cases.
This is the case which started it all and established that, in principle, a CFA could be the subject of a valid assignment notwithstanding the fact that it was a contract for personal services.
The CFA in question was a pre-LASPO CFA. The fee earner moved from Firm 1 to Firm 2; the client followed and the CFA was assigned. The fee earner moved again from Firm 2 to Firm 3; the client again followed and the CFA was again assigned.
It was argued by the paying party that, as a matter of contract law, a contract for personal services (such as a CFA) could not be assigned. Rather, that it was only possible to assign the benefit, as opposed the burden, of a contract for personal services. As a CFA included both the benefit of being paid and the burden of working to be paid, the CFA had not been assigned with obvious consequences to follow.
The Court disagreed citing the “conditional benefit principle” – essentially an exception to the general rule that the burden under a contract for personal services cannot be assigned. Instead, the Court found that where the client’s movement from firm to firm was motivated by personal trust and confidence vested in a particular solicitor, this is sufficient to justify the exception that the burden (and therefore in this case, the CFA) could be assigned.
As such, the CFA was assigned and, as Firm 3 had achieved a “win” for the purposes of the CFA, the client was liable for the success fee and thus entitled to recover the same from the paying party.
The outcome is easier to accept when it is understood why a burden under a contract for personal services cannot be assigned. The common example used to illustrate this point is that of a book publisher who has a contract with an author to write a book. To write a book is to render a very personal service and completely particular to the individual author. It would be patently unacceptable for the author in question to assign the burden of his obligation to write a book to another when his services have been retained precisely because it is his personal style which gave rise to the contract in the first place. In the context of the solicitor and client relationship, it is clear from the judgment that where a client’s movement between firms is motivated by personal trust and confidence in a particular solicitor then the burden under a contract for personal services may be assigned.
This case should, however, not be interpreted beyond the scope of its own facts. The Court stated that ‘whether, absent that trust and confidence, a CFA could validly be assigned is not a matter upon which it has been necessary for us to reach a conclusion’ and, as will be seen, the courts have taken a robust stance in refusing to extend the principle confirmed in Jenkins.
Whilst the Court in this matter never had to face directly the issue of whether a CFA could be validly assigned, the case nevertheless remains important inasmuch as it highlights to solicitors the danger of unilaterally transferring clients’ files.
The facts are straightforward. Firm 1 ceased handling personal injury work and put in place a process of unilateral file transfer to Firm 2. The files in question were subject to pre-LASPO CFAs and all clients were notified of the transfer of their files by way of an “unambiguous” letter. Firm 2 claimed that the CFAs had been assigned to it from Firm 1.
Firm 2 succeeded on behalf of their client and sought to recover a success fee from the paying party. The Court held that the unilateral transfer (i.e. without the consent of the client) of the client’s file amounted to a termination of the retainer by Firm 1. As such, it was not possible to assign a terminated agreement and thus neither firm were entitled to be paid under the pre-LAPSO CFA.
Fortunately Firm 2 had entered into “fall-back” post-LASPO CFA and so could recover all costs from the paying party save for a success fee. Firm 1, having breached the CFA, were entitled to recover nothing.
The judgment is fairly unsurprising and one from which the following three principles can be derived –
This somewhat confusing matter again concerned a bulk file transfer but this time with the consent of Firm 1’s clients. The client in question succeeded in her action via Firm 2 and costs were sought accordingly.
The paying party submitted that a novation of the CFA had taken place on the premise that Jenkins, being distinguishable, did not apply. In return, the receiving party sought to rely on Jenkins in support of their submission that a CFA could be, and indeed was, assigned.
The Court distinguished Jenkins on the basis that the client’s movement from Firm 1 to Firm 2 was in no way motivated by personal trust or confidence – rather convenience as Firm 1 had entered administration. Thus the CFA was not assigned from Firm 1 to Firm 2.
However, the Court nevertheless held that although the burden under the CFA could not be assigned, the benefit (i.e. the right to be paid) under the contract could be. Thus the contractual right to be paid in the event of achieving a “win” had been properly assigned from Firm 1 to Firm 2. As the claimant had succeeded, Firm 1 was entitled to be paid under the assigned part of the agreement.
But in respect of Firm 2 the Court found that there had been a novation of the CFA. Because the original pre-LASPO CFA stipulated a 100% success fee, the novated agreement (which was a post-LASPO CFA) also stipulated a 100% success fee and thereby breached section 58(3) CLSA by failing to cap the success fee at the prescribed 25%. As such, the novated CFA was held to be unenforceable and, by virtue of the application of the indemnity principle, Firm 2 could not recover anything from the paying party under the novated CFA.
The courts’ reticence to apply Jenkins is apparent. The matter has now been appealed and we wait with bated breath for what we hope will be useful, thorough and unambiguous guidance on the position in relation to the assignment of CFAs. Given the sums of money involved in this case alone, it is not inconceivable that the matter will be appealed again.
The facts of this case are not usual and concern a pre-LASPO CFA between Firm 1 and their client. Firm 1 ceased trading in January 2014 and the client was contacted by Firm 2. Upon request, the client consented to an assignment the CFA between herself and Firm 1 to Firm 2, who failed to enter into a “fall-back” CFA. The client was successful in her action and sought, on behalf of Firm 2, to recover a success fee.
The Court found that by reason of the client’s consent to the purported assignment there had been a novation, as opposed an assignment, of the CFA –
‘If it been an assignment there would have been a letter or telephone call to say that the CFA was now with [Firm 2] and that hopefully the claimant would be happy with this but if she was not she would have to go elsewhere.’
The post-LASPO novated CFA was created on terms identical to those in the original CFA and as the success fee was not compliant with the stipulated cap the same was held to be unenforceable under section 58(3) CLSA. In the absence of a “fall-back” CFA Firm 2 were unable to recover their costs.
Firm 1, on the other hand, were in principle entitle to recover their costs as the CFA had been terminated upon novation by the common sent of both firms and the client.
The Court again refused to accept that Jenkins applied. Master Rowley said ‘in case I am wrong that a novation has occurred, I should deal with the question of whether a valid assignment had taken place. For the reasons I have just given, I do not accept that the claimant reposed her trust and confidence in Mr Davies in a manner akin to that of Mr Jenkins and his solicitor.’ The Court was also firm in its stance as to the need for absolute compliance with the s. 58 CLSA provisions as they relate to the enforceability of CFAs: ‘[N]on-compliance with the Regulations is fatal to such an agreement for what is said to be a Draconian sanction is well known. But it is undoubtedly the circumstance here and I need to revise my original conclusion to confirm that in fact Part 2 of the Bill of Costs i.e. those costs relating to [Firm 2] are not recoverable either as to base costs or as to the success fee.’
The need for compliance with the relevant statutory provisions is clear and it would appear that the courts have little, if any, hesitation in finding that CFAs which fail to so comply are unenforceable notwithstanding the potentially disastrous consequences for all firms instructed by the receiving party. Any subsequent firm would do well to enter into a “fall-back” CFA in the event that a purported assignment from a previous firm is held to be invalid. And any firm contemplating assigning a CFA would likewise do well to ensure that they obtain their client’s consent to transfer their file on one hand but to not seek their consent to assign the CFA on the other.
 LASPO 2012 (Commencement No. 5 and Saving Provision) Order (SI2013/77), Art. 3
 The Conditional Fee Agreements Order 2013 (SI 2013/689), Art. 6(2): Diffuse mesothelioma, defamation and (loosely) insolvency