Early settlement success fees are reduced to just 5%

Introduction
In the Law-Now 'Litigation Annual Review 2002: Conditional Fees' we explained the mechanism of, and rationale behind, conditional fees, and discussed the issues raised in the 2001 case of Callery v. Grey. In Halloran v. Delaney, the court re-examined one of the issues relating to conditional fees that was raised in Callery, namely whether or not an uplift, or success fee, is recoverable where the case settles before court proceedings are commenced, and if such a success fee is recoverable, whether it should be capped.

Halloran v. Delaney
Court of Appeal, Civil Division
6 September 2002

Facts
The Claimant was injured in a road accident on 22 May 2000. He instructed a firm of solicitors and entered into a conditional fee agreement with them in the Law Society model form. The agreement covered, amongst other things, the claim against the defendant, and any proceedings taken to enforce a judgment order or agreement. The success fee was set at 40% of the basic charges. The claimant also took out After The Event insurance at a premium of £840. By December 2000, the claim was settled in the sum of £1500, and by January 2001, agreement had been reached on the base costs. The sums left in dispute were the recoverability of the success fee and the insurance premium.

In July 2001, costs only proceedings were issued. The parties agreed the amount of the success fee and the insurance premium payable on the main claim in the total sum of £585. The only sum still in dispute was therefore the cost of the costs only proceedings, and whether the success fee or uplift should apply to any costs recovered. At the hearing, in February 2002, the district judge ruled that the claimant had acted reasonably in issuing the costs only proceedings and was entitled to recover the costs of those proceedings including a 20% success fee. The claimant recovered the total of £1,298.24

Issues on appeal
The defendant (in reality, of course, the defendant's insurers), appealed against the district judge's decision, contending: (i) that as a matter of principle, the district judge should not have allowed any success fee by way of percentage uplift on the costs of the costs only proceedings; or in the alternative (ii) that the figure of 20% was excessive given the minimal amount of risk involved, a figure of 5% being more appropriate. It was further submitted by the defendant that the claimant's conditional fee arrangement did not cover costs only proceedings and that, therefore, no success fee should have been recoverable. The success fee element of the first instance decision, the element that the defendants were appealing, was only £172.80 excluding VAT.

Held
Dismissing the appeal

The claimant's conditional fee arrangement, the then Law Society model arrangement, did cover the costs only proceedings. The costs only proceedings were within the 'claim' for which the conditional fee arrangement provided coverage. The costs only proceedings were not proceedings to enforce an agreement because liability under the agreement had yet to be quantified, and could not therefore be enforced.

The Court was not willing to hold that the 20% uplift or success fee recovered by the claimants was unreasonable, or that there was any other reason to interfere with the decision the district judge had made. However, it was appropriate to "reappraise" the appropriate level of success fee which should be recoverable in simple claims, such as the one in hand, when they are settled without the need for court proceedings. The Court considered that where judges are concerned with questions relating to the recoverability of a success fee in simple claims which are settled without the need to commence proceedings should now ordinarily decide to allow an uplift of 5% on the claimants lawyers' costs (including the costs of any costs only proceedings which are awarded to them) unless persuaded that a higher uplift is appropriate in the particular circumstances of the case. This policy is to be adopted in relation to all conditional fee arrangements, however they are structured, entered into on or after 1 August 2001.

Comment
The judgment has caused some consternation in the legal community not least because of the decision to backdate it to August 2001. Most solicitors who operate conditional fee arrangements will now, as a result of the decision, be operating two tier arrangements, where a high success fee is agreed, for example 80-100%, but a reduced fee, such as 5%, will operate if the case settles within the protocol period, or before proceedings are started. This refinement had first been suggested by Lord Woolf in the Callery case.

Although the judgment is something of a victory for the insurance industry (and, indeed, for common sense), it should also be welcomed by claimant lawyers as it brings some certainty to an area of costs assessment that, since the introduction of conditional fee arrangements, has suffered more than its fair share of uncertainty.

If you would like any further information, please contact Phillip Carnell by email at phillip.carnell@cms-cmck.com or on +44 (0)20 7367 2430.