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Victory for the NHSR as the Court of Appeal rule that switch from Legal Aid to CFA was unreasonable

The combined appeals of Surrey, AH and Yesil have now been heard and the judgment handed down. The issue raised on the appeals was the approach that “the court should take in deciding whether costs are reasonable or unreasonable in a case where, after liability had been admitted, the funding of the claim changes (at the client’s request) from funding by legal aid to funding under a conditional fee agreement” which is backed by an ATE insurance policy.

The Court of Appeal reversed the previous High Court decision ruling that the switch to a CFA was unreasonable (based upon the specific facts of the cases) and consequently additional liabilities were not recoverable.

Summary

• The Court is entitled to examine the reasons why a receiving party made the choice to switch funding (part of this may include looking at any advice provided by the solicitor);
• In a standard basis assessment the burden is on the Receiving Party to satisfy the costs judge that where the “bad reasons had not been put forward, and the disadvantages had been properly explained, the client would still have made the same choice.”
• Advice from the solicitor that there was a risk that a receiving party may have to make up a shortfall of any costs not recovered from the Defendant was misleading to the client and amounted to a suggestion of “topping up” which is unlawful
• The Court of Appeal were heavily critical of the advice given in the three cases, commenting that the advice had “exaggerated (and in two cases misrepresented) the disadvantages of remaining with legal aid funding; and had omitted entirely any mention of the certain disadvantage [Simmons v Castle 10% uplift] of entering into a CFA”. Given the solicitor stood a substantial prospective entitlement the Court was critical that there was a need for greater transparency. The Court of Appeal further stated that “the fiduciary is not permitted to retain a profit derived from that fiduciary relationship with the fully informed consent of the other.”
• The first instance appeal was wrong in presupposing the position as to the omission to advise upon Simmons v Castle. The Court could not know whether the omission would have changed the decision, the point was that it could have done.
• The right comparison was one between the amount of costs for which the Claimant may be liable for based upon the facts of the case, balanced against the amount of Simmons v Castle uplift. As one was a risk and the other a certainty the comparison could not be fairly made without assessing the seriousness of the risk on the facts of the particular case.
• The fact that a pre-LASPO CFA would make the Claimant immune to costs risks was not relevant. Moreover, this was not one of the reasons for the change of funding and the Claimant could have made a Part 36 offer, however the claim was funded, to put pressure on the Defendant.
• The High Court had also been wrong to suggest that the Simmons v Castle uplift would have caused a delay in any settlement. The uplift would have been the Claimants’ right if they had stayed on Legal Aid.
• It would not be reasonable to separate out the success fee and ATE Premium. The two elements were part of the same package and could not be separated. If the Claimants had remained on Legal Aid then no ATE Premium would have been incepted.

The Appeal

Each of the three cases considered involved claims for clinical negligence resulting in very serious injury. The background to the cases are expanded upon in within the judgment. The common theme, however, is the decision to change funding on the run up to LASPO in March 2013.

 

Paragraph 8 of the judgment describes the background concisely:

“The substantive litigation in each case had been proceeding for several years prior to 1 April 2013 and the claim of each claimant had been advanced with the benefit of legal aid. April 1, 2013 was the date from which it would no longer be possible for claimants proceeding under a conditional fee agreement (“CFA”) to recover success fees and after the event (“ATE”) premiums from the defendant if successful in the litigation. In the month or so prior to 1 April 2013 the solicitors acting for each claimant (lrwin Mitchell LLP), with the agreement of the litigation friend of each claimant, arranged for the legal aid certificates to be discharged in each case and for the funding for each claimant henceforth to be funded by a CFA. In fact, the CFA was what is known generally as a “CFA lite”-in other words, a CFA by virtue of which the client’s liability to pay his lawyers’ costs is limited to the amount of costs recoverable from the other party. Any shortfall is absorbed by the solicitors.

[3] Each case was finalised in a way that was successful from each claimant’s point of view resulting in a liability upon each defendant for costs. However, in due course, recovery of the success fee and the ATE premium in each case was challenged by the defendant (in reality, by the National Health Service Litigation Authority – “the NHSLA”) and the costs judge upheld the challenge in each case, holding that the changed funding arrangements were not reasonable.”

Also of relevance was the 10% uplift on general damages pursuant to Simmons v Castle. Where a CFA is entered pre 31 March 2013 there is no possibility of recovering the 10% uplift. In the three cases referred the uplift was worth between £16,695.00 and £28,000.00. To most these are not insignificant sums.

The Defendant argued that the additional liabilities should not be recoverable inter parties on the basis of two facts:

“(a) at the time of the switch to the CFAs the claimants already had legal aid; and (b) at the time of the switch the defendants were already, in principle, the paying party”

The question was, therefore, whether the decision to enter into a CFA backed by an ATE insurance policy “gave rise to costs reasonably incurred”.

The Court determined that it would be appropriate to examine the reasons why the litigants incurred the costs that they did. Did the Claimant and their solicitors act in a manner that was reasonable and was the change in funding a reasonable choice?

The Claimant sought to argue that as there was nothing much to choose between funding by legal aid and funding by CFA-lite, that either choice would be reasonable. The Court of Appeal disagreed stating that “the Court is required to take into account all the circumstances of the case”. It was also stressed that on a standard basis assessment, the burden of proof would lie on the receiving party.

The Court of Appeal went on to make it clear that it was reasonable for a costs judge to examine “the reasons why a receiving party made the choice that [they] did and in may cases that [would] entail looking at the advice that [they] received.” Irwin Mitchell declined to disclose contemporaneous materials evidencing the advice they had given to the respective Claimants choosing instead to rely on other evidence.

In Surrey Irwin Mitchell relied upon witness evidence from the conducting solicitor who set out her concerns that there was no guarantee that the LSC would increase the reserve to a sufficient level to fund the case going forwards and consequently the Claimant would have been exposed to make up the shortfall of any costs not recovered from the Defendant. The Court of Appeal was highly critical of this advice, stressing that it was “seriously misleading” and that “if the client was advised of a very substantial potential liability” then this would have been unlawful. In the original decision the Court found that that Irwin Mitchell had no concerns that they would not recover their fees to-date, that the risk of legal aid being withdrawn was fanciful and the costs limitation was not problematic. Reference was also made to a possible Part 36 or adverse interlocutory costs order risk, but no consideration was given to the likelihood of these risks, on the facts of the particular case.

In AH the conducting solicitor provided two witness statements. The principle argument of the Claimant was that whilst Breach of Duty was admitted, Causation remained in dispute. Consequently it was averred that there was “no guarantee that the LSC would increase the scope of the costs limit; and that the LSC might have taken a different view on the merits of the claim.” The conducting solicitor also referred to other cases she had been involved in where the “legal aid certificate had been discharged”. The solicitor also made the same statement as to the risk that the Claimant would have to make up the necessary shortfall of any costs not recovered. Again, the solicitor referred to possible Part 36 and adverse costs risk but it was noted by the Court that there was no evaluation of the risks themselves.

Finally, in Yesil witness evidence was relied upon again albeit this evidence came after the initial Surrey judgment so the evidence advanced upon the issues in more detail. The conducting solicitor calculated that the costs incurred at the time of the advice under the legal aid rates were £92,000.00 as against a costs limited of £94,000.00. The LSC were asked to increase the limit to £240,000.00 but the LSC replied stating that it was “inevitable that [they] would recover their costs inter partes from the other side”. The LSC notably did not refuse outright, instead it said that if costs could not be contained within typical limits then a “fully costed costs plan” would be required which would have given a likely maximum of £189,000.00. The solicitor further averred that the Part 36 risk was substantial given the level of expert evidence and that the Simmons v Castle uplift had been considered and it was outweighed by the benefits of a pre-LASPO CFA. Despite this statement, it was accepted that the solicitor did not mention the Simmons v Castle uplift to her client.

The Court were critical of this and stated that the she had seriously over-estimated the amount of costs incurred and that the figure of £240,000.00 requested was never justified. Furthermore, the solicitor had never responded to the LSC’s request for a costed costs plan. Finally, the solicitor did not have regard to the fact that as matters stood at the time, no Part 36 offers had been made and consequently it was inevitable that the claimant would recover inter partes costs from the NHSLA. Based on these reasons it followed that the advice in Yesil to the Claimant was mis-leading, particularly given the over-estimation of costs. If the Claimant’s decision to switch was based upon erroneous information then it followed that the CFA-lite had not been sufficiently justified.

In all the cases, the solicitor failed to advise upon the Simmons v Castle 10% uplift on general damages. In the first instance decision it was held that this was a doubt which had to be resolved in the Paying Party’s favour. Should a “material piece of advice” not be given, “the advice is insufficient to found a reasonable decision”. Had the Claimants known about the 10% uplift then it could have tipped the balance of choice one way or another. The Court of Appeal stated that “if the reasons given for the choice were a mix of good and bad reasons; and that some clear disadvantages to the client of making the switch had not been explained, the burden was on the receiving party to satisfy the costs judge that even if the bad reasons had not been put forward, and the disadvantages had been properly explained, the client would still have made the same choice.”

The Court of Appeal stressed that some of the risks on which the solicitors relied were on the face of it unlawful and others were fanciful or not problematic. The only risk that remained was the risk of a shortfall by reason of a failure to beat a Part 36 offer. This risk had not been evaluated by the solicitor and by contrast “the forfeiting of the Simmons v Castle uplift was a certainty.” This failure by the solicitor “was not good enough”.

The Court of Appeal found that the first instance decisions were correct and were damning of the Claimant. At Paragraph 60 the Court of Appeal said that:

“The bottom line is that in each of the three cases the advice given to the client had exaggerated (and in two cases misrepresented) the disadvantages of remaining with legal aid funding; and had omitted entirely any mention of the certain disadvantage of entering into a CFA. Moreover, one of the advantages of entering into the CFA was Irwin Mitchell’s own prospective entitlement to a substantial success fee. In those circumstances I consider that DJ Besford was correct in saying at [81]:

“Where one of two or more options available to a client is more financially beneficial to the solicitor, the need for transparency becomes ever greater.”

Continuing at Paragraph 61 the Court expressed that:

“The fiduciary is not permitted to retain a profit derived from that fiduciary relationship with the fully informed consent of the other.”

The Court of Appeal could not be clearer.

When considering the outcome of the High Court appeal again the Court of Appeal was critical. The Court had been wrong to presuppose whether the Simmons v Castle would have made a difference. The key point was that it could have. Moreover, the correct comparison to take was “one between the amount of costs for which the individual claimant might have been liable on the facts of the particular case, balanced against the amount of the Simons v Castle uplift.” As one was a risk and the other a certainty the comparison could not be fairly made without assessing the seriousness of the risk on the facts of the particular case. The High Court had failed to take these issues into account when reaching their decision.

The High Court had also been wrong to suggest that the Simmons v Castle uplift would have caused a delay in any settlement. The uplift would have been the Claimants’ right if they had stayed on Legal Aid.

The Court of Appeal also rejected the Claimants’ argument that a litigant who is backed by a CFA-lite and ATE Premium is in a commanding position and immune to costs. This was not a factor which formed part of the decision process for the Claimants and was also not an argument run at the first hearings. Moreover, the Claimants could, regardless of their funding, make a Part 36 offer to exert pressure upon the Defendant.

The Claimant also argued that it was open to the Court to disallow the success fee but allow the ATE Premium. Again, the Court of Appeal noted this was not an argument advanced at the first hearing and no notice of the argument had been given to the Defendant. The Court of Appeal stated that in any event the ATE insurance was “part of the whole package associated with the change in funding” and consequently it would not be right to separate these elements.

 

Conclusion

It’s important that the distinction is drawn that the change of funding was found to be unreasonable based on the specific facts of the three cases. For any practitioners feeling concerned about the outcome of these claims the key is going to be what advice was given to the client when the switch of funding took place.

It’s clear that any advice must have been balanced and transparent and that the best chance of success will come from contemporaneous evidence which sets out both the advantages and disadvantages of the proposed switch.

There will be those that believe that the Court of Appeal decision was just and reasonable based upon the facts. We must not let this distract us from the real-life issues with public funding, particularly within recent years. There are cases where the LSC will not fund the expert evidence required to prove a claim, or on some occasions the LSC will only pay the expert(s) the Legal Aid rate which the expert(s) will not accept. There will also be occasions where Claimants have their public funding withdrawn. Under a post-LASPO CFA these Claimants stand to lose 25% of PSLA and past losses together with a potential ATE Premium. In these cases is it right that it is the litigant who looses out? What about access to justice for all? How can this, on balance, be fair to all involved.

Public Funding is for the most vulnerable people in society and is a cornerstone of the preservation of access to justice within England and Wales. It’s easy to blame the ‘greedy lawyers’ but the real issue is that LASPO and cuts to Legal Aid have created exasperated and exposed some fundamental problems.

The upcoming review into LASPO can be welcomed but it cannot come soon enough. It may be right to punish the solicitor but it must not come at the expense of the Claimant. It can only be hoped that this case brings another spotlight onto the issues of public funding instead of solely becoming a stick with which to criticise lawyers.

Should the Defendant have to pay more? Should the Claimant solicitor have to take the hit? Or should the Claimant make-up the shortfall? That is the real question which is left at the end of this long-standing saga which is likely not over yet.