Court of Appeal warning about no win no fee agreements Pankhurst v White and MIB grotesque fee arrangements both sides paid the cost On the 15 th December 2010, the Court of Appeal fired a warning shot across the bows of the CFA. In their judgment in Pankhurst v White and MIB [2010] EWCA Civ 1445, they analysed the problem in claiming significant uplifts in cases where there is no risk, and they castigated the Claimant s solicitors fee arrangements as grotesque. Their reasoning should encourage us all to re-visit our approach to no win, no fee, no risk, huge uplift. The case is also interesting for the insight it gives into the litigation risks attached to running catastrophic injury claims. Although the appeal was theoretically about interest on costs, and on damages for future loss, the real interest lies in the wider issues of management of catastrophic injury litigation. The Claimant sustained catastrophic injuries when knocked off his bike. He obtained summary judgment on primary liability, and the allegation of contributory negligence against him was later tried and dismissed. However, after summary judgment was obtained, the Claimant s solicitors entered into a conditional fee agreement with him. That agreement provided for a success fee of 22 ½% if the action settled before trial, and 100% if the case went to trial. Success was defined as any recovery of damages. As primary liability had been admitted, there was bound to be recovery of damages, and so success was guaranteed, and therefore the Claimant s solicitors were bound to be paid their base costs in full. Lord Justice Jackson said: This makes a mockery of what is said to be the justification for the present conditional fee agreement regime. Before the issue of contributory negligence was tried, the Claimant s solicitors had made a Part 36 offer to accept 3.4 million (or a lesser capital sum plus periodical payments). Luckily for the Claimant, the MIB rejected that offer; the eventual valuation of the claim at trial, capitalised, was 6.1 million. Sadly for the Claimant, though, he had been offered 6.8 million not long before trial.
The trial judge was strongly critical of the claimant s decision to purchase a property, to demolish it and to rebuild a huge house on the site. This is another warning to claimants that all issues must be approached sensibly and reasonably. The problem in the Court of Appeal arose because each party had beaten the other side s Part 36 offer. The Claimant had recovered about 2.7 million more than his solicitors had offered to take before contributory negligence was sorted out (which makes one wonder about the offer); the MIB had offered about 700,000 more than the Claimant recovered at trial. It was agreed that the Claimant should pay the MIB s costs from the date of the expiry of their offer; effectively this meant that the Claimant paid the MIB s costs of the quantum trial. The judge decided that the Claimant should recover interest at 10% on special damages and at 4% on general damages. He refused to award interest on future losses. The claimant recovered indemnity costs from the date of his offer to the date of expiry of the defence offer, but not interest on costs. The effect of all this was that the Claimant s damages were increased by only 17,000, whereas the impact of the costs order against him was said to be a six figure sum. The Claimant s advisers appealed because they said that the judge should have awarded interest on future losses, and interest on costs. They submitted at the outset that there is an imbalance between the rewards which claimants and defendants receive for making effective Part 36 offers. However, when the Court of Appeal asked for further information about the costs and insurance position, they discovered that the Claimant would not have to pay any sum to the MIB, because the claimant had after-the-event insurance against defence costs, the premium for which would be paid by the MIB. The Court of Appeal therefore did not see the imbalance in the same way. The appeal against the judge s refusal to award interest on costs allowed the Court of Appeal to explore the costs aspect of the case. The costs schedule which the Claimant s solicitors provided to the Court of Appeal showed that their profit costs were 500,403 up to the defence offer, including a success fee of 106,668. In addition, the claimant s solicitors
expected to recover their disbursements for the same period, including counsel s fees and the after-the-event insurance premium. Counsel s fees and other disbursements for the quantum trial (ie the period for which the judge made an order for defence costs) would be paid by the after-the-event insurers, for which the MIB would pay the premium. The Claimant s solicitors profit costs for the quantum hearing amounted to 60,080, which could not be recovered from the MIB because the claimant had failed to beat the MIB s Part 36 offer. Lord Justice Jackson assumed that the Claimant s solicitors would not be paid their profit costs for the quantum trial by the claimant personally, because (a) the result was not a success and (b) the claimant s solicitors were already receiving a much larger sum by way of success fee for the earlier period. However, he was told that his assumption was incorrect, and that not only would that sum be deducted from the Claimant s damages, but also the Claimant s solicitors would charge their client a postponement fee of 10% of base costs (ie 35,810), which would also come out of the Claimant s damages. That revelation provoked him to say: I regret to say that I regard the arrangements made by the Claimant s solicitors in this case as grotesque. In addition to their base costs (i.e. their proper costs for conducting the litigation) they are extracting from MIB a success fee of some 100,000 for running a risk which simply did not exist. Then despite the fact that they were on a conditional fee agreement, and that the quantum trial was in any real sense a failure (the claimant lost on the main issues and failed to beat the defendant s Part 36 offer), the solicitors require payment of a further 100,000, which must come out of the client s damages.. Counsel also submits (and I shall assume) that the claimant s solicitors were complying with the practice of other personal injury solicitors in the arrangements which they made for their own remuneration.. I adhere to the view that collectively the arrangements described in the preceding paragraphs are grotesque and that this factor is highly relevant when one comes to consider the claim for interest on costs.. The Chancellor of the High Court, Sir Andrew Morritt, added: In addition to his criticism of the solicitors I regard the situation, as described by Jackson LJ, as a criticism of the system for which Part 36, CFAs and ATE provides. That such a system increases the costs involved is obvious.. And where else. may an investor (or punter) obtain a short term, risk-free, return of between 22.5% and 100% of his investment (or stake)? The facts of
this case appear to show that access to justice for one party may well lead to a substantial denial of justice to the other. CONCLUSIONS 1 This case should sound warning bells for all catastrophic injury lawyers. 2 Early offers to settle by claimants are always fraught with difficulty. I am frequently asked whether we should make an early offer, and I tend to feel that the risks are too great. This case is a perfect example. The early offer was 2.7 million below what the Claimant genuinely needed (assuming that the judge was correct in his decision). If the MIB had accepted, the Claimant would have run out of money shortly after half way through his remaining life. 3 Refusing defence offers can carry a significant risk. By refusing the offer of 6.8 million, the Claimant (on advice?) lost 700,000 (11.5%). The ATE insurers lost a six figure sum. The Claimant also, apparently, lost the further sum of 100,000 to be paid to his solicitors, on top of the success fee paid to them by the MIB (and in addition to their base costs). 4 Trial judges are difficult to predict, and are generally best avoided, unless they are specialists with an established track record. 5 Grand accommodation plans are unlikely to be looked on with favour. 6 Appeals are notoriously tricky. 7 Were both sides losers? The Claimant lost 800,000, but it cost the Defendant, depending which way you look at it, either about 3.5 million (not accepting the Claimant s offer, and costs and disbursements awarded against them), or half a million as the Claimant s costs of the action. The winners? Well, that depends on how you look at it. 8 Would ADR have improved the result? Surely a good mediator would have worked out early on that the Claimant s solicitors position on costs was not quite as straightforward as was first presented to the Court of Appeal, and would have urged them to re-think their
position. In my experience, the gap between 6.1 and 6.8 million is often easily bridged; after all, presumably 6.1 was about the worst result which the Claimant s advisers could have foreseen, so one can easily see compromise somewhere between the two figures.