Facts
Challenge
Lower courts
Court of Appeal decision
Comment
The Court of Appeal has held that solicitors may agree to indemnify clients against adverse costs liabilities. The Law Society, which intervened in the appeal, hailed the decision as "eminently sensible", claiming that it not only sends a clear message about the importance of access to justice, but also paves the way for clients to be fully indemnified against adverse costs orders by solicitors in cases in which legal aid or legal expenses insurance is unavailable.
Ms Morris, a residential tenant of the London Borough of Southwark, instructed solicitors to issue proceedings against the borough council for breaches of its obligations under her tenancy agreement.
The terms of engagement with her solicitors were set out in a conditional fee agreement. In general terms, this provided that she would not have to pay her solicitors' charges if the claim failed. If the claim succeeded, she would not have to pay her solicitors more than she would recover from the council by way of costs, although her solicitors would be entitled to a 10% success fee.
On those terms, the arrangement fell within the ambit of 'no win, no fee' agreements permitted by Section 58 of the Courts and Legal Services Act 1990 (as amended). However, the agreement went further by providing an indemnity in the following terms:
"If you lose, you pay your opponent's charges and disbursements. You may be able to take out an insurance policy against this risk. If you are unable to obtain an insurance policy against this risk, we indemnify you against payment of your opponent's charges at the end of the case if you lose. This means that we will pay those charges."
The claim was settled by an agreed order which provided that the council was to:
- pay £10,000 damages;
- carry out the necessary work and repair as required by the covenant; and
- pay the claimant's legal costs, to be subject to detailed assessment if they could not be agreed.
As part of the detailed assessment proceedings, the council argued that the agreement was unenforceable on the basis that the solicitors' indemnity against any adverse costs order contravened the law against champerty (which renders it unlawful for a third party to support the conduct of litigation in return for financial gain). It argued that because the indemnity was an integral provision of the agreement, the entire agreement was wholly unenforceable.
The issue for the court was simple: whether it was champertous for solicitors to indemnify clients against liability for the other side's costs. There was no dispute that the agreement was otherwise permitted by statute.
At first instance the judge found the agreement to be unenforceable. In forming this view, he relied on the proposition that it was unlawful for a solicitor to agree to conduct litigation on terms which gave him or her a financial interest in the outcome of proceedings, unless this was expressly permitted by legislation. As there is no legislation that expressly permits a solicitor to underwrite a client's liability to pay its opponent's costs, the judge concluded that the indemnity was void and that the conditional fee agreement was unenforceable in its entirety.
The appellate judge took a different view. He considered that the law on champerty had moved on and that the question of whether an agreement was void should be decided by reference to the facts and circumstances of a particular case. On the facts of the case in question, he held that there was no public policy justification for invalidating the conditional fee agreement. He therefore upheld the agreement.
The Court of Appeal also upheld the agreement, but for different reasons. Master of the Rolls Lord Neuberger, who gave the leading judgment, disagreed that the law on champerty had significantly moved on. Although he acknowledged the obvious attraction of the notion that each case should be assessed on its merits, he considered that "there [is] much to be said for clear rules so that all parties - solicitor and claimant client as well as the defendant - know where they stand". He also reiterated that whether such conditional or contingency fee agreements were necessary was a matter for Parliament, as was the decision on their proper ambit.
The upholding of the agreement involved a more technical approach. The leading judgment relied on the fact that there was no authority to suggest that it was champertous for a person to agree to run the risk of a loss if the action failed, without enjoying any gain if the action succeeded. To find the indemnity to be champertous would require an extension to the law of champerty, and the court was unwilling to extend the law in this way "at a time when… its scope is to be curtailed, rather than expanded". The judgment stated:
"Access to justice is an essential ingredient of a modern civilised society, but it is difficult to achieve for the great majority of citizens, especially with the ever reducing availability of legal aid. This has been accompanied by a shift in legislative policy towards favouring a relaxation of previously tight professional ethical constraints, in order to enable a variety of more flexible funding arrangements… In these circumstances, I find it hard to accept that, by shouldering the risk of an adverse order for costs against his client, a solicitor is acting contrary to public policy, which is, of course, the basis for the law of champerty."
These arrangements will not replace the products offered by the insurance market and it is unlikely that solicitors will commonly offer an indemnity for adverse costs. Nevertheless, the case is significant in reinforcing the significant access to justice considerations which underpin the debate on, and approach to, legal funding. In view of the government's recently announced civil litigation costs and funding reforms, the testing of the perimeters of permissible funding arrangements looks set to be a recurrent theme.
For further information on this topic please contact Matthew Dando at Reynolds Porter Chamberlain LLP by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email ([email protected]).
Endnotes
(1) Regina Sibthorpe v London Borough of Southwark [2011] EWCA Civ 25.