No alternative?

The principles laid down in Myatt and Garrett will lead to another round in the costs war, says Brett Dixon

Progressive? Modernising? An end to the costs war? All these things have been promised at various stages of the never-ending story of conditional funding agreements (CFAs) and compliance with the constantly changing schemes for their use in funding litigation.

It would seem though that we have taken a step back in recent months'¦ as far as 1757. In 1757, Admiral John Byng was executed for failing to do his duty, and to encourage the others or 'pour encourage les autres' to do their duty in the future.

The Court of Appeal in the conjoined appeals of Garrett v Halton Borough Council and Myatt v National Coal Board [2006] EWCA Civ 1017 handed down a judgment that had as its theme the very same idea.

Only this time it is to be the solicitor who has entered in to the CFA that is to play the role of the unfortunate Admiral Byng.

The appeals dealt with two separate but linked issues. In Garrett, the court was asked to focus on the issue of compliance with reg 4(2)(e) of the CFA Regulations 2000, which, in short, is the solicitor's duty to advise their client of any interest they have in the recommendation of an after the event policy of insurance to their client. In Myatt, reg 4(2)(c) and the solicitor's duty to consider the availability of before-the-event insurance to cover their client's costs risks was the live issue.

Both these issues required the court to consider the guidance previously given in Hollins v Russell [2003] 1 WLR 2487 as to what constituted a materially adverse effect. The Court of Appeal at para 107 in that case had indicated that, where a judge was confronted with an allegation that there had been a breach of the CFA Regulations, they had to ask whether
the particular departure from the Regulations had a 'materially adverse effect either upon the protection afforded to the client or upon the proper administration of justice'?

Hollins: a materially adverse effect

The Court of Appeal ruled that the language of s 58 of the Courts and Legal Services Act 1990, from which the Regulations flow, was uncompromising. By choosing that language, Parliament had plainly intended the regime to be strict. If a solicitor did not comply with it, the CFA would be unenforceable and the solicitor would not be paid. In effect a tough approach had been taken by Parliament and the solicitor was to be punished 'pour encourager les autres'.

This removes any possibility of the solicitor who had entered in to the CFA arguing that his breach of the Regulations was trivial and did not have any effect on his specific client. The test now would appear to be purely objective. In short, if the breach could have affected consumer protection or the proper administration of justice, the CFA is unenforceable. The reality of whether it did in fact impinge upon either of those is not relevant.

Certainly it is a harsh decision, and one that will have a separate materially adverse effect, in that it can only serve to fuel the fires of the costs war.

Before-the-event insurance enquiries

The court gave general guidance as to the nature of the solicitor's duty to advise their client of alternative methods of funding to the CFA under reg 4(2)(c).

Unfortunately, that guidance does not make it clear what steps must be taken to ensure compliance. The obligation is to take all reasonable steps to ascertain what, if any, before-the-event cover the client has available. To make matters even more problematic, it was said that what is reasonable will depend on all the circumstances of the case.

The relevant factors identified by the court were not exhaustive, but included:

• the nature of the client;
• the circumstances in which the solicitor is instructed;
• the nature of the claim;
• the cost of any ATE policy; and
• whether the availability of BTE had already been investigated by a referring organisation.

The solicitor need not have to see the policy documents in every case, but I would suggest, given the nature of the duty and the possible consequences of non-compliance, he would be well advised to do so.

Declaring your interest

The court was concerned with reg 4(2)(e) in Garrett. The claimant's solicitors here were referred the case by a claims management company. A term of their panel membership with that company was that they had to recommend a linked policy of ATE insurance. They did not receive a commission for the policy being taken.

The mere disclosure of panel membership to their client was not sufficient to comply with their duty. A client would be likely to view this as a badge of quality, rather than an indication that the solicitor had an interest in recommending the ATE policy, in that they had to do so to remain on the panel.

Where are we now?

We are heading towards a further round of the costs war. The paying parties will undoubtedly take great encouragement from these cases, and indeed I have already seen a marked increase in standardised letters and questionnaires from their representatives raising the issues of compliance with reg 4.

It must not be forgotten that, despite the terms of the judgments, the court made it very clear that such technical challenges were not welcome, and to be discouraged. You need only read para 79 of the judgment to see that.

'79. What we have said in paras 71-78 should not be interpreted as giving encouragement to defendants to embark on fishing expeditions in the hope that, if they ask a sufficient number of questions, they may be able to show that the claimant's solicitor did not discharge his reg 4(2)(c) duty. We refer to the salutary words of this court in Hollins v Russell at para 81 that the court should not require further disclosure unless there is a genuine issue as to whether there has been compliance with regulation 4.'

Brett Dixon is a solicitor and technical director of C2G, the costs recovery division of Smith Jones Solicitors