For the attack

Trustees are unusual litigants. They are obliged to pursue good claims where there are sufficient funds to do (see Re Brogden; Billing v Brogden (1888) 38 Ch D 546). They are not able to consider all the other factors that a businessperson or other individual may consider in deciding whether to prosecute proceedings, such as the relationships the litigation will imperil, the stress inherent in legal proceedings, the inconvenience of the litigation process or the fear that business may avoid the litigious trustee.

However, trustees must consider whether a Beddoe application prior to litigation is warranted. As long as a trust has sufficient funds to pursue a good claim, a trustee has a duty to pursue that claim.

Of course this iteration of the trustee’s obligation dates from an era when it was necessary for litigants to fund litigation from their own resources. The effect of the relatively recent development of conditional fee agreements (CFAs) and after the event insurance for any adverse costs ruling on the trustees’ obligation has not yet been judicially considered.

However, there must be little doubt that the development of alternative funding mechanisms need not change the trustee’s obligation itself. Rather the development of these methods of funding litigation merely goes to the determination of whether the trust has sufficient assets for the proposed litigation.

Insolvent trust

Another development has been the rise of the “insolvent” trust, in the wake of the global financial crisis. Trusts cannot technically be insolvent as they lack legal personality. An insolvent trust is, in reality, a situation where the trustees’ liabilities, arising from the administration of the trust, equal or exceed the trust property available to satisfy the trustees’ indemnity for those liabilities.

Of course, this problem is not new. One of the landmark decisions in the area, Muir v City of Glasgow Bank (In Liquidation), dates from 1878–9. However, an sign of the increased frequency of insolvent trusts is that the trusts statutes in Jersey, Guernsey and the British Virgin Islands purporting to limit trustee liability in this circumstance, which have never received judicial treatment before, are receiving such treatment now and, at the time of writing, a judgment is expected imminently from the Guernsey courts on the Jersey provisions.

We suggest the usual formulation of the Re Brogden obligation, to pursue good claims so long as there are sufficient funds to do so, remains sound. But this does not affect the enormous practical consequences for trustees of the reforms on their obligation to litigate, especially when combined with the recent increase in illiquid trusts with good claims.

Claims against trustees

The funding reforms will also have implications, albeit perhaps with contradictory effects, for claims against trustees and trustees’ ability to fund a defence of the trust property.

Trustees are obliged to protect the trust property and, therefore, claims against it for which there is a good defence should be secured. A Beddoe application should also be considered by a trustee prior to defending a claim to ensure that the costs of the defence are recoverable from the trust.

Settlors and beneficiaries have always been interested to see good, albeit safe, investment performance in their trusts. Mishcon de Reya’s Tamasin Perkins reports that court and sentencing ?figures indicate that the number of ?trusts, wills and probate disputes filed with the Chancery Division more ?than tripled between 2006 and 2011 in an environment where litigation generally declined.

Following the global financial crisis, beneficiaries’ interest in pursuing possible claims has become keen and they increasingly look for advice about possible claims to hone that performance or, more realistically in these times, make good any losses.

In our view, the Jackson reforms will limit options for funding the defence of claims and potentially expand them for their prosecution.

Less palatable

Prior to the Jackson reforms, CFAs were permitted and damages based agreements (DBAs) were prohibited. Now, CFAs are just less palatable. Under CFAs, lawyers agree to act either without payment or for a reduced hourly rate.

Instead, a success fee is calculated as a percentage increase on their usual hourly rates and charged in the event of a successful claim. Often after the event insurance is taken out in conjunction with the CFA so that the client is insured against any adverse costs award should they lose.

Prior to the Jackson reforms, both the success fee and the insurance premium were generally recoverable from the other side if the client was successful in the litigation. CFAs may be entered into by either the claimant or defendant.

A DBA permits the lawyer to charge a percentage of the damages awarded in any case rather than an uplift on their hourly rates. They are beneficial to claimants; a defendant would be ill advised to contemplate such an arrangement as, obviously, it would highly reward abject failure. Prior to the Jackson reforms, DBAs were prohibited for contentious matters (except in relation to certain employment matters) in England.

Reformed agreements

The success fee and the insurance premium are no longer recoverable ?(after 1 April 2013). However the agreements remain an option. For the reasons discussed below CFAs are likely destined for the bin of legal history ?and will not survive the practical effect of the reforms.

The Jackson Report proposed that DBAs should now be allowed. Therefore, the government published the ‘Draft Damages Based Agreements (DBA) Regulations 2013’ on 23 January ?2013 with a commencement date ?of 1 April 2013.

The 2013 regulations provide that where a client is successful in their claim, the payment that the solicitor will receive from their client’s damages may be the agreed percentage less the costs that can be recovered from the other side. As drafted, it appears that the only payment a solicitor acting under a DBA would be permitted to receive if the claim failed would be non-counsel disbursements. This means that the solicitor will be left responsible for counsel’s fees where counsel is not also acting under a DBA. It has been queried whether this was the intention of those drafting the regulations.

Regulation 4 also specifies a cap on the percentage that a solicitor may take from a client’s damages at first instance:

• 25 per cent in personal injury cases;

• 50 per cent in all other civil litigation.

?It’s important to note that the cap does not apply to appeal proceedings (reflecting the additional risk to a solicitor of representing a client at appeal) and that as well as any costs that are payable by the other side, counsel’s fees are included in the cap on payment.

DBA requirements

Regulation 3 of the 2013 regulations specifies the requirements of a DBA. In particular, the agreement must specify:

• the claim or part of the claim to which the agreement relates

• the circumstances in which the solicitor’s payment, expenses and costs, or part of them, are payable; and

• the reason for setting the amount of the payment at the level agreed.

?Regulation 4 of the 2013 regulations provides that payment from a client’s damages shall be:

• the sum agreed to be paid (including disbursements incurred by the solicitor in respect of counsel’s fees); and

• the net of any costs (including fixed costs) and counsel’s fees payable to the solicitor by another party to ?the proceedings.

?Put simply, the payment includes the agreed percentage to the solicitor (and barrister where appropriate) less the costs that can be recovered from the other side.

Where a successful claimant has entered into a DBA, the defendant will only be required to pay the claimant’s reasonable base costs. The claimant will have to pay the difference between the amount of costs recovered from the defendant and the DBA fee.

In Lord Justice Jackson’s preliminary report, published in May 2009, he set out a number of advantages to allowing contingency fees in all types of contentious work. These included:

• Contingency fees give the lawyer a direct incentive to maximise recovery for their client.

• Contingency fee agreements are arguably simpler than CFAs and are easier to understand.

• Under a contingency fee agreement, the fees payable to the lawyer are always, and by definition, proportionate.

Close alignment

Under DBAs, the lawyer’s interests are more closely aligned with those of the client. Generally, the client would ideally like to receive the highest damages award as soon as possible with the least amount of litigation risk; DBAs best reward the lawyer for producing exactly this result.

Conversely, CFAs, like all hourly based billings, arguably reward the tardy over the swift and the inefficient over the efficient. If billings are based on hourly rates, lawyers earn more for taking their time than for quickly sorting out the dispute.

Those who practise in jurisdictions that permit DBAs universally report there are very few if any disputes with clients about their accounts under such arrangements. They also have the potential to justly reward the skilled ?and efficient lawyer in a way that CFAs and conventional hourly rates arrangements perhaps do not.

DBA disadvantages

This is not to say that DBAs are a complete panacea. Lord Justice Jackson also recognised that there are considerable disadvantages to CFAs, including:

• They create an incentive for solicitors to settle a case early. This is in contrast to CFAs, which encouraged solicitors to draw out proceedings to maximise success fees.

• The fact that it is wrong in principle for the lawyer to have an interest in the level of damages.

• The introduction of contingent fees would be contrary to the existing professional culture, which makes the commercial court attractive to overseas litigants.

• It may lead to “cherry picking” of cases, with solicitors choosing cases that they believe will settle quickly and conducting those on DBAs, while conducting the cases that will go to trial on a CFA.

It has also been queried whether DBAs will give rise to satellite litigation. Andrew Post QC of Hailsham Chambers has said: “It would seem relatively easy to found cases on negligence if a solicitor had advised a client to enter into a DBA where a CFA would be foreseeably better for the client or vice versa. But this is not the only possible cause of action. What about undue influence or other claims based on the solicitor’s fiduciary duty?”

Widespread concern

There has been widespread concern among the legal profession about the commencement date for the reforms to DBAs. Because draft DBA 2013 regulations were published fewer than ten weeks before the proposed commencement date, it is anticipated that in the short term, the delays in publishing the draft regulations are likely to increase costs and risk to both clients and the legal profession, increase satellite litigation and cause delay and uncertainty.

Our view is that these reservations are perhaps misguided. Everyone in litigation knows how stressful the process is for the individuals involved. In personal injury cases, it is well known that a patient involved in litigation takes much longer to recover from their injuries than one who is not. This is not because of malingering but the intense stress of participating in the process. Clients already want to settle early; incentivising lawyers to do likewise can be no bad thing.

Why is it wrong in principle for lawyers to have a financial interest in the proceedings? We always do, albeit not always a direct one. Even in the most conventional of arrangements, the lawyer who loses a big case has usually hampered their career prospects; the lawyer who wins can generally expect the opposite.

The legal culture in the UK, or at least its approach to invoicing, does not motivate clients to select the jurisdiction for its disputes. Wealthy litigants choose the UK for their significant disputes because its judges are more knowledgeable and less corrupt than their counterparts in many other jurisdictions, and because the system strikes a good balance between rights of privacy and documentary discovery. The UK permits broad but not exhaustive documentary discovery and prohibits the exorbitant expense of verbal discovery.

When comfortable, lawyers will prefer the ease of client relations facilitated by DBAs over the continuous haggling inherent to an hourly fees-based system. Why would anyone choose CFAs over DBAs for any matter? The success fee obtainable under the CFAs does not hold a candle to that available under DBAs and the latter more closely, albeit not perfectly, align the lawyer’s and client’s interests.

Trust litigation impact

Any new alternative system for funding will present new challenges for trustees. In meeting their Brogden obligations, trustees will rarely be able to assert that they could not pursue good claims because the trust had insufficient assets to meet the costs of the proposed litigation. Although the trust will likely still need sufficient assets to meet an adverse costs ruling or the premium for after the ?event insurance.

DBAs provide an excellent opportunity for trustees to pursue claims that they may not have been able to otherwise. However, the significant costs of success associated with them will have to be borne by the trust fund. Beneficiaries will also be able to negotiate these arrangements for funding litigation that might otherwise have been impossible or difficult to finance.

Conversely, the loss of recoverability of the success fee will make CFAs unpalatable for claimants and defendants. If the claimant must pay a significant uplift on success that they must bear themselves then far better that success is determined by reference to damages awarded than to hours spent.

In defending claims, no client will be thrilled by the possibility of an increased legal bill in a context where no further funds are forthcoming as a result of the litigation. It is far from clear that such arrangements align the interests of lawyers and clients.

Trustees are unusual litigants and the Jackson reforms will need careful thought by those considering participation in legal proceedings. The reforms represent an interesting opportunity for trustees and contentious trust lawyers alike in deciding whether to prosecute proceedings. However, when it comes to defending proceedings they will probably eliminate the benefit CFAs once had.

Nicholas Holland is head of contentious trusts and estates and Alison Chaloner is a trainee solicitor at Bircham Dyson Bell

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