The recent Court of Appeal case of Stevensdrake Limited v Stephen Hunt  EWCA Civ 1173 provides guidance on whether the office holder is liable to meet the legal costs in CFA cases where there are insufficient recoveries in the estate to meet those costs.
Central to costs assessments in litigation proceedings is what is known as the Indemnity Principle which effectively caps the sum of recoverable costs to the amount that a client is liable to pay their solicitor. Therefore, in order to recover costs from the defendant, office holders must accept personal liability for their solicitor’s costs, but are understandably reluctant to do so in nil asset cases. Equally, solicitors do not wish to incur substantial amounts of work in progress without some comfort that they will be paid for it, or will obtain a benefit of taking such a risk. Often solicitors will require a Conditional Fee Agreement (‘CFA’) as a prerequisite of acting as a result. This case deals with the situation where those interests collide.
The Key Facts
Mr Hunt and the instructed partner (the ‘Partner’) at Stevensdrake Limited (the ‘Solicitors’) had worked together for a number of years and it was common ground that the Partner would often work on a recoveries only basis, including instances where there was a CFA in place.
In 2005, Mr Hunt was appointed liquidator of Sunbow Limited (“Sunbow”) and sought to investigate the conduct of Sunbow’s former administrators. The Solicitors were first instructed in 2005 and the terms of their various retainers modified their standard terms of business to provide that they would wait for payment of their charges until recovery of assets in the estate.
In April 2006, Mr Hunt sent the Solicitors a letter stating that their fees could only be paid out of realisations. It was made clear that if there were no realisations, he would not be in a position to pay those fees, nor would he accept personal liability for them. If the Solicitors were not willing to act on that basis, they were invited to return all relevant papers. The Partner replied, stating that he was “happy to wait for payment of our costs until you make a recovery from any source”.
In April 2008, a CFA was entered into specifying that Mr Hunt was personally responsible for all fees (including the success fee) and that this was not limited by reference to the funds available in the liquidation.
Proceedings against each of the administrators were ultimately settled, which constituted a success under the terms of the CFA. Upon settlement of the first claim, the settlement monies were apportioned between the Solicitors and Mr Hunt on a recoveries basis. Following the second settlement, the administrator declared himself bankrupt and so there was no prospect of further realisations. The Solicitors raised a bill to Mr Hunt seeking £397,686.24 as base costs and the same sum as a success fee and ultimately issued proceedings.
Mr Hunt resisted on several grounds, the main reasons being that:
- the strict legal rights created by the CFA were there to satisfy the Indemnity Principle but that it was common practice in nil asset cases that solicitors would not enforce their legal rights but operate on a recoveries only basis; and
- this practice was an established method of working with the Solicitors and expressly adopted in this case.
The High Court Judgment
HHJ Barker QC found for Mr Hunt (in part) for a variety of reasons, including that:
- the full terms of the agreement between the parties could not be ascertained from the CFA alone and that the CFA was subject to an implied term that the Solicitors’ fees would be paid out of realisations and that Mr Hunt had no personal liability for those fees; and
- irrespective of their strict legal rights, the parties were bound by a convention between them whereby the Solicitors would not insist on a recovery of their fees unless there were funds available from realisations. They were estopped from departing from this convention given that they had not only acquiesced to act on that basis but expressly confirmed the same to Mr Hunt.
It should also be noted that HHJ Barker QC decided not to consider whether the recoveries only arrangements offend the Indemnity Principle but commented that:
“There is a public interest in there being a practical means by which insolvency practitioners are able to obtain the assistance of lawyers to advise and represent them in the pursuit of misfeasant and dishonest officers and former office holders in nil asset estate cases where no creditor is willing to provide an indemnity”.
The Solicitors appealed the decision and were successful on the first ground (as set out above), but not the second. Lord Justice Hamblen found that:-
“this is a case not merely of material influence but of seriously detrimental reliance. SH would otherwise have withdrawn his instructions from SL and found solicitors prepared to do the work on a recoveries only basis. In my judgment no grounds have been shown which would justify this court to go behind the Judge’s finding that it would be unjust to allow SL to depart from the shared common understanding”
Ultimately, therefore, it was held whilst that there was no contractual justification for going outside the terms of the CFA and making it subject to any contrary terms, there was ample evidence of a shared common understanding that was acted upon by both parties and that it would be unjust to allow the Solicitors to depart from that common understanding.
This case should provide welcome relief to office holders who are concerned that instructed solicitors may seek to enforce contractual rights despite any established convention to the contrary. However, it should also serve as a stern warning to solicitors to ensure they clearly set out the terms of their engagement and understand the parameters in which they will be paid. Accordingly attention should be paid to the terms of both retainers and CFAs to ensure that they:-
- do not offend the Indemnity Principle; and
- accurately reflect the terms agreed between the parties.
It may be appropriate to include terms that the office holder only becomes liable if a recovery is made, or to limit such liability to the amount recovered.