Thornley v Ministry of Defence – what is a reasonable success fee?  EWHC 2584 (QB) www.bailii.org/ew/cases/EWHC/QB/2010/2584.html
The defendant appealed successfully against a detailed assessment of costs in a clinical negligence infant claim arising out of a premature birth caused by a road traffic accident. The main grounds of appeal concerned the validity of the claimant’s conditional fee agreement (CFA) with his solicitors Irwin Mitchell and the recoverable success fee under both that CFA and a CFA with counsel.
The claim had initially been funded by BTE insurance but by the time that liability and causation had been admitted the limit on that insurance had been exceeded. The claimant entered into a CFA with his solicitors with a two stage success fee: 50 per cent if the case settled more than three months before trial and 100 per cent thereafter. The CFA with counsel was entered into a few months later and it provided for a 100 per cent success fee.
At the detailed assessment the solicitors’ recoverable success fee was reduced to 33 per cent and counsel’s success fee was reduced to 10 per cent. On appeal, the solicitors’ recoverable success fee was reduced to 15 per cent and counsel recovered no success fee.
Reasonableness of entering into a CFA
The court held that it had been reasonable for the claimant to enter into the CFA with Irwin Mitchell because there was no other source of funding available and it was a complex case.
Reasonableness of the solicitors’ success fee
In arithmetic terms, the success fee of 33 per cent found to be reasonable at the detailed assessment was equivalent to a 25 per cent chance of getting no costs at all. Given that the defendant was the Ministry of Defence (so good for the money) and that there was little risk from a Part 36 offer, 33 per cent was too high. 15 per cent (rather than a lesser figure) was appropriate because of the wide range of possible outcomes. This was borne out by the fact that the defendant had argued that the claim was worth no more than £150,000 at the date the CFA was entered into whereas the ultimate settlement figure was £2.4 million four years later.
One feature of the CFA was material here. If a Part 36 offer was refused and the case proceeded to trial, Irwin Mitchell would be entitled to a 100 per cent success fee on all work done prior to the offer even if it was not exceeded. Because of the circumstances of this case, very substantial costs would be incurred before a Part 36 offer could be made. The circumstances in question were that the claimant was both a minor and a patient and his prognosis would have to be delayed for three or four years after the CFA was entered into. It would not have been possible to have a settlement approved before then.
Reasonableness of counsel’s success fee
The CFA between Irwin Mitchell and Elizabeth Gumbel QC provided for a one stage success fee of 100 per cent despite the fact that under the CFA there were only two circumstances in which she would not be paid. The first was if the case was lost and the second was if it ended without success on counsel’s advice. Neither could happen where liability and causation had been admitted. Moreover, it was accepted that counsel’s fees were going to be paid by Irwin Mitchell in any event. As she was at no risk of not receiving her fees, she was not entitled to recover any success fee.
Hourly rates and travel costs
It is important to distinguish between risk which affects the appropriate level of success fee and the complexity of the claim which may justify awarding the claimant higher than the guideline hourly rates. The judge upheld the higher hourly rates allowed below even though he thought they were on the high side. However, he refused to allow Irwin Mitchell to claim travel costs at the higher rates, concluding that since travel formed a significant part of the claimant’s costs, it was an exceptional case justifying a differential hourly rate.
From the standpoint of those acting for defendants, this is the sort of decision that the courts should have been making during the last ten years. The hands-off approach to success fees adopted by the courts to date has led to the fatally flawed system recently derided by the European Court of Human Rights in MGN Ltd v UK. The ECtHR held that the requirement that MGN pay success fees to Naomi Campbell was disproportionate, exceeding the broad margin of appreciation accorded to the Government, and constituted a violation of MGN’s Art.10 right to freedom of expression. The decision was greatly influenced by Jackson LJ’s conclusion that the flaws in our funding system produced in defamation and privacy cases the “most bizarre and expensive system that it is possible to devise” because of the excessive costs burden imposed on defendants. These flaws are present in all claims funded by CFAs and ATE insurance.
To be fair, the Court of Appeal gave costs judges a strong lead in C v W in 2008 when they went painstakingly through the claimant’s solicitor’s risk assessment and reduced the success fee from 98 per cent to 20 per cent. The claim arose out of a car accident and the defendant had already admitted liability. At detailed assessment the district judge reduced the success fee to 70 per cent and at the first appeal, the judge reduced the success fee to 50 per cent.
The Court of Appeal held that there is nothing unreasonable about entering into a CFA after liability has been admitted as long as the claimant makes a proper assessment of the inevitably much reduced risk of failure. (Thornley follows this guidance - a challenge on this ground alone will only be worth making in a truly exceptional case.) The assessment of the risk is likely to be affected by the provision in the CFA dealing with Part 36 offers. In C v W the clause taken from the Law Society’s model form provided that if the claimant rejected a Part 36 offer on her solicitor’s advice and she ultimately recovered less than the offer, the solicitor would not claim costs for work done after notice of the offer.
In a similar case, Haines v Sarner, the court considered the appropriate success fee where the CFA was entered into after judgment was entered on liability. The CFA contained a clause similar to that in C v W but with an important variation - if the claimant rejected a Part 36 offer on her solicitor’s advice and she ultimately recovered less than the offer, the solicitor would not claim a success fee for work done after notice of the offer but he would be entitled to his base costs. In that situation, the reasonable success fee was 5 per cent, and not 60 per cent as claimed.
The cases demonstrate that where a defendant has admitted liability before the CFA is entered into, high success fees cannot be justified and should be challenged. By contrast, the decision last year in Peacock v MGN Ltd shows that if a defendant denies liability and serves a defence containing multiple paragraphs justifying his position, the court is likely to infer that he believes that he has a realistic chance of the defence succeeding at trial and it will be reasonable to suppose that there was a serious defence justifying a 100 per cent success fee.
The bullish approach taken to counsel’s success fee in Thornley will be of particular interest to defendants. These are often agreed at the same high rates as the solicitors’ CFAs and where counsel is going to be paid in any event there is clearly an opportunity to challenge the risk assessment (which had been lost in Thornley).
A similarly bullish approach was taken to the success fee and ATE premium in Redwing Construction Ltd v Wishart (www.bailii.org/ew/cases/EWHC/TCC/2011/19.html). This was a summary assessment of costs following an adjudication enforcement case including a summary judgment application. Such enforcement hearings usually take no more than two hours and the system is designed to allow few challenges to adjudicators’ decisions. Despite this, the success fee in the CFA was 100 per cent and a premium of £8,480 was also claimed.
The judge made it clear that CFAs and ATE insurance should not be used primarily as a commercial threat to defendants. As with counsel’s CFA in Thornley, there was no risk assessment. The judge reduced the success fee to 20 per cent and allowed the claimant to recover only 20 per cent of the recoverable premium. This latter part of the decision is perhaps difficult to justify in the light of previous case law on the recovery of premiums, but the judge reviewed recent guidance in Kris Motor Spares Ltd v Fox Williams and concluded that there is no presumption that a premium is reasonable unless the contrary is shown. He was clearly of the view that the very particular type of hearing combined with the fact that he was assessing the costs summarily enabled him, for policy reasons, to take a more rough and ready approach than would be taken at detailed assessment in a normal multitrack case.
So while we wait for the outcome of the Government’s consultation on the Jackson recommendations, which closed on 14 February, and the almost inevitable change to the present system of costs recovery, there will be plenty of opportunity for the courts to act on the example of these recent cases and to strike down clearly unreasonable success fees. The position regarding premiums is more complicated but Redwing indicates that there may be some flexibility there also. Defendants can improve their position significantly by admitting liability as early as possible and by taking a hard stand in reliance on recent cases where the risk at the date the CFA was entered into cannot justify the success fee.