Relevance of insurance arrangements
MGN v United Kingdom
In Sousa v London Borough of Waltham Forest Council the Court of Appeal considered whether a claimant was entitled to recover from a defendant the success fee payable to his solicitors under a conditional fee agreement in circumstances where the claim was brought by the claimant's insurer, exercising its right of subrogation.(1) The court also considered the recent decision of the European Court of Human Rights in MGN v United Kingdom and its impact on the recoverability of conditional fee agreement success fees.(2)
Part 44 of the Civil Procedure Rules (CPR) 1998 contains provisions relating to costs, including the assessment of costs in circumstances where a party is ordered to pay another party's costs. The basic rule governing assessment is in CPR 44.4(1), which provides that the court "will not... allow costs which have been unreasonably incurred or are unreasonable in amount". Under CPR 44.4(2), a court assessing costs on the standard basis will allow only those costs which are proportionate to the matters at issue, and will resolve any doubt as to whether the costs are reasonable and proportionate in favour of the paying party.
Mr Sousa's house was damaged by the encroaching roots of trees growing along the public highway, which were the responsibility of the London Borough of Waltham Forest Council. Sousa brought a claim under his household insurance policy, underwritten by Virgin Insurance, which was paid. The insurer exercised its right of subrogation under the policy to bring a claim against the council in Sousa's name. Solicitors were instructed pursuant to a conditional fee agreement with the insurer. The agreement provided that the solicitors would receive a 100% uplift on their normal fee if the claim was successful. The claim was settled before proceedings were issued on the basis that the council would pay Sousa's costs, which were to be assessed if not agreed.
As the parties could not agree on the amount of Sousa's costs that the council should pay, the matter went to a district judge for detailed assessment. The main point of contention was whether the success fee to which Sousa's solicitors were entitled under the conditional fee agreement was recoverable from the council. The judge agreed with the council's submission that it was unreasonable for Sousa to have entered into such an agreement with his solicitors because he was never at risk in respect of costs, which were to be borne by the insurer in any event. The conditional fee agreement success fee that Sousa was to pay his solicitors was therefore not a "reasonably incurred" cost and could not be recovered from the council. Sousa appealed the decision, which was reversed by a circuit judge sitting in the county court, who held that it was not unreasonable for Sousa to have entered into a conditional fee agreement and that the success fee was therefore recoverable.
Relevance of insurance arrangements
Although one of the lord justices scrutinised the insurance arrangements in some detail, the majority of the Court of Appeal held that Sousa's insurance arrangements, and the fact that his claim was subrogated and had been brought at the insurer's behest, were irrelevant to the assessment of costs, as was the fact that the insurer would indemnify Sousa for the costs of the proceedings - this was the point on which the district judge had relied in finding that it was unreasonable for Sousa to enter into a conditional fee agreement.
The court stated that:
"[t]he fact that the insurers are bound to indemnify [Sousa] against the cost of the proceedings does not provide the council with a defence to a claim to recover the costs, any more that it provides it with a defence to a claim for damage caused to this house."
Moreover, the court found that it was not permissible to 'look though' Sousa, in whose name the claim was brought, and treat the insurer as if it were the claimant. The court went further and stated that even if this were permissible, it would not change the position. The authorities were clear that it is reasonable for a commercial organisation, including an insurance company, to enter into a conditional fee agreement where the organisation considers this to be in its commercial interests.
In a judgment delivered on January 18 2011 the European Court of Human Rights held that there had been a violation of Article 10 of the European Convention on Human Rights - on the right to freedom of expression - in respect of model Naomi Campbell's entitlement to recover the success fee payable under a conditional fee agreement with her solicitors, after she was awarded damages from newspaper group MGN for breach of confidence (for further details please see "End of recoverable success fees in media cases?"). Although the council's appeal was heard before the decision in MGN, the parties made written submissions to the Court of Appeal on the impact of the case before judgment was given.
The council argued that the decision supported the proposition that it is unreasonable for a claimant who can finance litigation without recourse to a conditional fee agreement - whether a wealthy individual or an insurance company - to enter into such an agreement. It followed that Sousa's success fee was not reasonably incurred and should not be recoverable from the council.
The Court of Appeal did not accept this argument. The decision of the European Court of Human Rights in MGN turned on the interaction between the recoverability of Campbell's success fee and MGN's right to freedom of expression under Article 10. Therefore, the case was not comparable to the council's appeal, in which neither Article 10 nor any other convention right was at issue. Moreover, the council's submission was contrary to the House of Lords decision in Campbell v MGN (No 2),(3) which stated that the mere fact that a person can fund litigation without retaining solicitors under a conditional fee agreement does not make it unreasonable to retain them on this basis. This decision remained binding of the Court of Appeal, notwithstanding the decision of the European Court of Human Rights.
Although the council's arguments were given short shrift by the Court of Appeal, there was clear enthusiasm for an end to the recoverability of success fees, as recommended by Lord Justice Jackson in his final report on the reform of litigation costs. The court concluded that:
"It is… absurd that insurance companies can bring claims against local authorities under [conditional fee agreements]… thereby doubling the costs burden on council tax payers. The insurance companies can well afford to fund such litigation themselves and should do so… Alas … [t]he present law [is] in their favour. Let Lord Justice Jackson's reforms be enacted sooner rather than later."
For further information on this topic please contact Daniel Hemming at Reynolds Porter Chamberlain LLP by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email ([email protected]).