Conditional fee agreement (CFA) – Indemnity clause — Champerty – Solicitor agreeing to indemnify client against opponent’s costs under CFA — Solicitor having financial interest in litigation – Whether CFA unenforceable as indemnity champertous — Appeal dismissed — Permission to cross-appeal on insurance issue refused
The respondents were the tenants of flats owned by the appellant local authority. Their tenancy agreements required the appellants to maintain the exterior and structure of the flats. The respondents contended that the appellants had failed to comply with that covenant and that they had thereby suffered consequential damage. They brought proceedings in the county court for damages and to require the appellants to perform their repairing obligations.
The terms on which the respondents instructed their solicitor to act were set out in a contract of engagement, which was a conditional fee agreement (CFA). The CFA contained an indemnity clause whereby, instead of costs being protected by an after-the-event insurance policy, the solicitor undertook to pay the opponent’s costs if necessary, so that if the respondents lost, they would be protected against any expenditure of costs.
The respondents’ claims were settled for relatively low values and a deputy costs master held that the CFA was unenforceable for public policy reasons. The High Court allowed the respondents’ appeals against that decision on the basis that the financial interest that the solicitor had in the outcome of the litigation was so small as to be outweighed by the advantages of the CFA scheme. The court also dismissed a cross-appeal by the appellants that the CFA was an unlawful contract of insurance: [2010] EWHC B1 (QB).
The appellants appealed. The issue concerned the extent to which the ancient rule against champerty (an agreement between the plaintiff and his solicitor, whereby the latter agreed to finance and carry a lawsuit in return for a percentage of any money recovered and paid) prevented a solicitor from agreeing to indemnify its client against any liability for costs that he or she might incur against the defendant in which the solicitor was to act. The Law Society intervened to join with the respondents in resisting the appeal. The appellants applied for permission to cross-appeal against the judge’s conclusion that the CFA was not an unlawful contract of insurance.
Held: The appeal was dismissed; permission to cross-appeal on the insurance issue was refused.
Were it not for the inclusion of the indemnity, the CFA in the instant case could not be regarded as being champertous, even though it would result in the solicitor profiting from the litigation, since it would have complied with the requirements of section 58 of the Courts and Legal Services Act 1990 (as amended). However, the indemnity was not permitted by that provision and, therefore, the issue was whether it was champertous for a solicitor to indemnify its client against any potential liability for the defendant’s costs.
The modern approach was to look at the CFA as a whole and decide whether it would undermine the purity of justice or would corrupt public justice, a question to be decided on a case-by-case basis. However, there seemed to be no support for the application of such an approach where the allegedly champertous agreement was entered into with a party that was conducting the litigation in question or providing advocacy services. Such agreements had always been treated as a special category and were subject to stricter rules.
There was obvious attraction in having no general rule determining as unlawful an agreement with a person conducting the relevant litigation from which that party would benefit if successful. However, there was much to be said for clear rules, so that all parties knew where they stood rather than having to wait for a determination on the validity of a potentially champertous agreement on the overall merits. It was a matter for the legislature if such arrangements were thought to be necessary for economic or other reasons and, if so, to decide on their ambit: Awwad v Geraghty & Co (a firm) [2001] QB 570 and Thai Trading Co v Taylor [1998] QB 781 considered.
The inclusion of the indemnity meant that the solicitors had had a financial interest in the outcome of the litigation because it would potentially have to pay the appellants’ costs in the event that the claim had failed, whereas it had no such liability because the claim had succeeded. However, there was no case in which such an arrangement had been held to be champertous. The cases on champerty all involved arrangements whereby there would be a gain if the action succeeded and, although there might also be a loss if the action failed, what was different about the indemnity was that there was just a loss if the action failed. No case has held that it was champertous for a party to risk a loss if an action failed, but not enjoy a gain should the action succeed. The various judicial definitions of champerty all envisaged a gain if the action concerned was successful.
It was an attractive notion that an otherwise unobjectionable CFA with the indemnity should be valid, at least in cases where ATE insurance was unavailable or was prohibitively expensive. In practice, unless a party provided the indemnity such as the solicitor provided in the instant case, tenants who had valid claims for disrepair but had little money would be reluctant to risk issuing proceedings against their landlords. It was difficult to accept that, by shouldering the risk of an adverse order for costs against its client, a solicitor was acting contrary to public policy, which was the basis for the law of champerty.
In the instant case, there was no doubt that, as a result of the indemnity, the solicitors had an interest in the outcome of the claim over and above the statutorily sanctioned interest. However, it was by no means unknown for a solicitor to conduct litigation knowing that, unless the client won, it might find it impossible or difficult to recover its fees. Further, it was common for a solicitor, particularly in high-profile cases, to publicise the fact it had acted for the successful party in litigation. In each such case, the solicitor had an interest in the outcome of the litigation.
With regard to the question of whether the CFA was rendered unenforceable because, owing to the inclusion of the indemnity, it was a contract of insurance, the contract was for legal services, with an indemnity clause whereby the solicitor undertook to pay the opponent’s costs, if necessary. To characterise it as a contract of insurance, albeit that the indemnity created some principles similar to an insurance contract, went too far.
Roger Mallalieu (instructed by the legal department of Southwark London Borough Council) appeared for the appellants; Mark James (instructed by Belshaw & Curtin) appeared for the respondents; David Holland (instructed by the Law Society) appeared for the intervener.
Eileen O’Grady, barrister
