When is an interest not an interest?

Last month’s Personal Injury Law Journal examined the continuing uncertainty in relation to challenges to the validity of Conditional Fee Agreements (CFAs) where the solicitor’s consideration of alternative funding options and compliance with section 4(2)(c) of the CFA Regulations 2000 is questioned. However, this is only part of the picture. Whenever one comes across such a challenge by a paying party, one can be reasonably certain that there will be a further challenge to the validity of the CFA under section 4(2)(e) of the regulations. The section 4(2)(c) argument is often given the shorthand title of ‘the Myatt argument’, after Myatt v National Coal Board (2006), and it has given rise to the series of cases considered last month. The section 4(2)(e) argument is known as ‘the Garrett argument’, after the case of Garrett v Halton MBC (2006), which was heard at the same time as Myatt, and it has generated its own body of case law which is equally, if not more, uncertain.

The Court of Appeal’s decision in Garrett was based upon how to interpret the meaning of the word ‘interest’ in regulation 4(2)(e)(ii). The regulation requires that, where a solicitor recommends a particular After the Event (ATE) insurance premium to their client, they must give reasons for the recommendation and also advise the client whether they have an interest in so doing. Clearly, any direct financial interest, such as a commission must be declared, but the paying party’s argument in Garrett went further and sought to argue that a solicitor must also declare an indirect financial interest which was created by virtue of the relationship between the solicitor and the claims management company who referred the case to them and whose ATE policy was recommended by the solicitor. The paying party’s argument was that the recommendation of the ATE policy was a requirement of the solicitor’s arrangement with the claims management company and if the solicitor failed to recommend the ATE policy, their relationship with the claims management company would be prejudiced. This would result in a reduction or a complete cessation of future referrals and this would quite clearly affect the solicitor financially. Thus the solicitor has an indirect financial interest in recommending the ATE policy and this must be declared to the client.

The decision in Myatt was widely seen as having the result of damping down technical challenges to CFAs through its application of a test of reasonableness and the disapproval of the mantra that solicitors must actively consider their client’s insurance documents as part of their consideration of alternative funding. The decision in Garrett, by contrast, was seen as adding fuel to paying parties’ future challenges in this area, particularly in the thousands of cases involving a claims management company, and a series of cases on the issue were sure to follow.

The first of these was a decision of the Senior Costs Judge in Andrews v Harrison Taylor Scaffolding (2007). Andrews involved the same claims management company as Garrett and it was a clear attempt to isolate the Garrett decision as one limited to its own peculiar facts. In particular, in Garrett, the entire conclusion of an indirect financial interest had been based on no more than inference. It was accepted that the case was a referral and that the referrer’s ATE policy was recommended but the conclusion that the solicitor was effectively bound to make the recommendation by virtue of their relationship with the claims management company was premised on what the court called ‘a proper inference’. There was no direct evidence either for or against the proposition. In Andrews, by contrast, the Claimant Solicitor sought to adduce evidence to show that there was not, in fact, any such indirect financial interest. To this end, witness evidence was served that sought to show that there was not in fact an obligation to recommend the ATE policy and that any failure to do so would not result in the solicitor losing their position on the referrer’s panel for future cases. It therefore followed, so said the Claimant, that there was no indirect financial interest. The Senior Costs Judge did not agree. He accepted that there was no evidence that a failure to recommend the ATE policy would result in the solicitor being removed from the panel, but in relation to the question of whether there was an indirect financial interest notwithstanding this, his judgement was very clear:

The strength of this judgement cannot be understated. The Senior Costs Judge had concluded that, even if there was no actual contractual obligation to recommend the ATE policy and, even if any failure to do so would not result in removal from the panel, there was still, in his judgement, no doubt that there was an indirect financial interest that must be declared and any failure to do so would result in the CFA being invalid.

A further robust view was taken by Master Wright in Bevan v Power Panels Electrical Systems (2007). The CFA declared that:

The Claimant Solicitors received less than 10% of their cases from the particular claims management company but they accepted that they still had an interest and consequently the Claimant was advised of this orally. However, the Court held that the wording in the CFA did not comply with the requirement to give such a declaration in writing. Merely advising of a solicitor’s place on the panel could not override the clear message of the CFA that there was no interest. Furthermore, a proper oral explanation of the position could not put right a clear written statement in the CFA that was in conflict with the oral advice. The CFA was therefore held to be invalid.

Of possibly even more importance long term, is the decision of Master Rogers in Myers v Bonnington (Cavendish Hotel) Ltd (2007) which considered the Law Society approved Accident Line Protect scheme. The Accident Line scheme is administered by the Law Society and the Claimant Solicitors laid great stress on the differences between this scheme and other claims management schemes. However, the scheme does require that a member solicitor should recommend the Accident Line ATE policy if it is available and the scheme operating manual makes clear that solicitors are expected to comply with this and other requirements lest they lose their position on the panel. The paying party therefore submitted that there was a Garret type interest and in the absence of this being declared to the client the CFA was invalid.

The Claimant accepted that membership of the Accident Line scheme gave rise to a potential declarable interest but submitted that on the facts if this case, no such interest actually arose, principally on the basis that any such interest in this case should be treated as de minimis. The Claimant Solicitors provided evidence that only 0.1% of their new cases came from the Accident Line scheme and furthermore, the client was a longstanding client of the firm who would, in any event, have still taken out the ATE policy even of the interest was declared to him. In these circumstances, the Claimant submitted that there was no breach of the regulations.

Master Rogers held that the failure to advise the client of the obligation to recommend the Accident Policy was a breach of the regulations. However, in light of the low level of reliance on the scheme for referrals and the fact that the client would have been unlikely to have acted any differently if this advice had been given, the court held that there was no material breach of the regulations and the CFA was upheld as valid.

This decision, whilst provisionally a success for the Accident Line scheme, does leave open a number of questions. Firstly, at what level of reliance on referrals does the interest cease to be treated as de mimimis? In Bevan the extent of reliance was less than 10% but this was still held to be a declarable interest, but how low does this have to be for the Myers judgement to take effect? This seems a very fertile area for argument. Secondly, to what extent was the decision in Myers presaged on the particular features of the client and his relationship with the solicitors? Mr Myers was a long standing client who trusted his solicitors and had made a previous personal injury claim with them using the same scheme. In these circumstances, the Court held that the level of protection he needed to be afforded was minimal, but what about the first time client? Presumably they require a higher level of protection and therefore the interest should be declared to them. The Accident Line Protect scheme is certainly far from safe from future challenges.

Against the above decisions, some cases have been decided in what may broadly be described as a more favourable manner for Claimant Solicitors. In King v Halton MBC (2006), evidence was put forward that the solicitor had flexibility as to whether they recommended the claims management company’s ATE policy and there was never any question of being removed from the panel if they recommended a different policy. HHJ Halbert therefore distinguished the case from Garrett where there was no comparable evidence and held that there was no interest. This decision dates back to November 2006 and therefore predates the decisions in Andrews, Bevan and Myers with which it appears to conflict. Whether the same decision would be made today in light of these subsequent decisions is open for conjecture.

Finally, in Foord v American Airlines (2007), the Claimant Solicitor advised the client that they did not have a financial interest in recommending the ATE policy of the referrer but they were on their panel of solicitors. They also wrote to the client and informed him that the case had been referred to them by the claims management company for a fee of £300.00. The Claimant Solicitor also gave evidence that there was no obligation on them to recommend the policy and in fact, in 30% of the cases referred to them from the referrer, the client was advised not to take out an ATE policy at all. Furthermore, the reliance on the particular referrer was less than 8% of the total of new cases. In these circumstances, Master Simons held that, not only was there no interest in recommending the policy, but that the solicitors had given full information regarding their relationship with the referrer to the client. In those circumstances, there was no breach of the regulation and the CFA was valid.

In light of these decisions, how does one summarise the position? The answer is that the position is very far from clear. The decision in Garrett has opened up a hornets’ nest where any case where a case has been referred from a claims management company (or the Accident Line scheme) is potentially open to a very serious challenge as to the validity of the CFA. It was clear from the arguments put forward in Garrett that the vast majority of solicitors, and indeed the Law Society, were of the view that there was no obligation to declare the relationship with a claims referrer as an interest when recommending the referrer’s ATE policy, save for mentioning that they were on the panel. This has been roundly rejected by the Court of Appeal and various judges in the Supreme Court Costs Office. Claimant Solicitors now face the unenviable task of trying to justify advice given in cases where the CFA was taken out many months or years before the decision in Garrett and, as can be seen from some the judgements discussed above, often failing to do so with draconian consequences. If a solicitor was dependent on a claims referrer for a reasonable proportion of their cases and they have failed to provide any more information to the client than advising them of panel membership, then they will face a difficult task in persuading a court that they have not fallen foul of the regulations. An assertion that there is no obligation to recommend the policy or penalties if they fail to do so may not be sufficient, although much will depend on the facts surrounding not only the relationship with the claims referrer but the individual client.

What is clear is that this issue, possibly even more so than the alternative funding issue, will continue to be the subject of costs assessment for some time to come.

Paul Jones
Technical Director
LCN

Cases Cited:

Myatt v National Coal Board; Garrett v Halton MBC [2006] EWCA Civ 1017
Andrews v Harrison Taylor Scaffolding [2007] EWHC 90071 (Costs)
Bevan v Power Panels Electrical Systems [2007] EWHC 90073 (Costs)
Myers v Bonnington (Cavendish Hotel) Ltd [2007] EWHC 90077 (Costs)
King v Halton MBC [2006] Lawtel 20.4.07
Foord v American Airlines [2007] EWHC 90076 (Costs)