Conditional fee agreements, retainers and capacity

A problem that arises from time to time, in the context of personal injury litigation, is that an issues arises over the validity of a conditional fee agreement made with a claimant who is a patient. The prudent solicitor, will normally provide that the conditional fee agreement in such a case, is made both with the claimant and with the litigation friend who are jointly and severally liable then for costs. But sometimes this is not possible, as there may be no litigation friend, when the conditional fee agreement is signed, or the issue of capacity is not free from doubt.

When costs come to be assessed, one sees sometimes, the plea in the Points of Dispute, that the conditional fee agreement is void as between the solicitor and client, and due to the indemnity principle, there is no liability on the part of the paying party, for costs.

Such an argument is usually misconceived, for a number of reasons, including the status at law of a contract made with a patient, and sometimes due to the doctrine of ratification.

A voidable but not void contract

The law is reasonably clear, on the binding nature of a contract made between a patient and his solicitor. There is a helpful discussion on capacity contained in Chitty on Contracts (31st Edition) where the law is summarised at paragraph 8-069 as follows:

In the case of contracts other than for necessaries, the general rule is that a person who is mentally disordered or otherwise lacking in mental capacity is bound by his contract unless he can show both that this lack of capacity meant that he did not understand what he was doing and that the other party was aware of this incapacity.  On the other hand where these two conditions are satisfied, the contract is voidable at his option.  This rule was laid down in Imperial Loan Co Ltd .v. Stone where Lord Esher MR said

“When a person enters into a contract and afterwards alleges that he was so insane at the time that he did not know what he was doing, and proves the allegation, the contract is as binding on him in every respect, whether it is executry or executed, as if he had been sane when he made it, unless he can prove further that the person with whom contracted knew him to be so insane as not to be capable of understanding what he was about.” 

The validity of a contract entered into by a lunatic who is ostensibly sane is to be judged by the same standards as a contract by a person of a sound mind, and is not voidable by the lunatic or his representatives by reason of unfairness unless such unfairness amounts to equitable fraud which would have enabled the complaining party to void the contract even if he had been sane.

Further the case of the Special Trustees for Great Ormond Street .v. Rushin and Others (High Court Transcript Mr. Justice Rimer 19th April 2000) provides as follows at paragraph 24:

… incapacity to make a contract can, as was made clear in Beaney found a claim by the incapable contracting party(or his Estate) to set the contract aside, but there are two material differences as compared with a like challenge to avoid a gift.  First, a contract entered into by someone lacking the requisite capacity is at most voidable, not void.  Secondly it will only be voidable if (being a contract other than for necessaries) it can be shown that the other contracting party was aware of the incapacity: see the Imperial Loan Co Ltd .v. Stone (1892) 1 QB 599 at 601 per Lord Esher MR.

There is usually little scope for dispute, that the solicitor making the conditional fee agreement was unaware of the incapacity of his client: but what the general law of contract establishes, is that such a contract may be voidable, but it is not void. This then begs the question, whether a paying party can argue that the contract should be treated as void.

Lack of standing

Assuming that the paying party establishes that the claimant as a patient, lacked capacity to make a conditional fee agreement in the first place, the contract is still binding upon the claimant though voidable at her election.  This is not a matter which concerns the paying party nor one which they have the power to interfere with, or to seek to argue that the claimant should be required to void the contract.

In analogous circumstances, the status of a potentially voidable retainer (for alleged undue influence) was considered by Mr. Justice Clarke in an appellant decision that of Forde .v. Birmingham City Council (2009) 1 WLR 2732 where he noted the following at paragraph 111.

But an agreement obtained by the exercise of undue influence is voidable, not void.  It remains in effect unless the person influenced seeks to set aside the contract and the Court allows her to do so; such relief may be given on terms e.g. as to payment of a reasonable sum for services actually rendered: Johnson .v. EBS Pensioner Trustees Ltd [2002] Lloyds Rep PN 309, paras 76 – 80 and O’Sullivan .v. Management Agency & Music Ltd [1985] QB 429. There is no evidence that Miss  Forde has done anything to avoid CFA 2. On the contrary she has consented to these proceedings being brought by McGrath on her behalf. What the Council cannot do is to purport to avoid CFA 2, to which it is not a party, on her behalf and in defiance of her wishes; nor is the Court required to proceed on the basis that she has avoided it when she has not.

He continued at paragraph 114:

I decline to hold that a failure by a solicitor to put his client’s interests first has the effect that any contract which results from such failure is to be regarded as a prohibited contract. Such a conclusion is not justified by the rule which says nothing about agreements. It would have an effect of which Draco would have approved, since, save perhaps where the failure was trifling, the whole contract would be unlawful regardless of the seriousness of the breach, even though a contract procured by undue influence is not unlawful, nor, until avoided, unenforceable; and it would give rise to a myriad of disputes. …

Accordingly it is submitted that the in the ordinary case, a conditional fee agreement made with a patient that has not been avoided by her remains enforceable and good against the paying party, which  lacks standing to void the contract on her behalf.

The contract for necessaries

There is a further argument open to the claimant, namely that a conditional fee agreement, or indeed any retainer to pursue a personal injury claim, should be treated as falling within a fairly narrow class of contracts, which are treated as exceptions to the general law of capacity in contract noted above. This argument arises, when one considers the law appropriate or applicable to contracts for necessaries. Such contracts have always been treated differently in this context.

The law is now contained within the Mental Capacity Act 2005 which provides by reason of Section 7, that if necessary goods or services are supplied to a person who lacks capacity to contract for the supply, he must pay a reasonable price for them.

As Chitty on Contracts notes at paragraph 8-076:

And that for this purpose necessary means suitable to a person’s condition in life and to his actual requirements at the time when the goods for services are supplied.  As has been noted the 2005 Act provides an explanation of lack of capacity for this purpose, a test which can be seen to be broadly consistent with the test previously applied by the Courts, but the shift of statutory focus of the provisions regarding necessary goods (and its addition of necessary services) since the 2005 Act brings with it the application of important new general principles governing mental incapacity.  It is clear that these changes do not alter the general common law position which remains that a person lacking the capacity to enter a contract is liable on the contract (including for necessaries) unless the other party knew of his incapacity….

Although there is no authority directly in point, there is a reasonable argument that for someone who has sustained catastrophic injuries, which render them a patient, a contract for legal services, which enables the claimant to pursue a claim for hundreds of thousands or millions of pounds for lost earnings, care, accommodation and substantal general damages, is very much to be regarded as a contract for necessaries.

Ratification

What happens if a claimant recovers capacity during the course of litigation ? In those circumstances, a further argument is available to the claimant through the doctrine of ratification. This doctrine further re-inforces the argument that the conditional fee agreement is valid, even though made when the claimant lacked capacity, through her subsequent approval of it.

The general principle of ratification and its applicability in the context of an individual lacking capacity is summarised at paragraph 8-073 of Chitty on Contracts as follows:

It would appear that a person who lacks mental capacity at the time of making a contract (so as to render it voidable in principle) may nevertheless be bound by it if he ratifies it subsequently after recovery or during an interval where he possesses the capacity to do so. 

In Bowstead and Reynolds on Agency the nature of ratification is discussed at paragraph 2-050 in these terms:

Juristic nature of ratification.  Ratification seems to be a notion sui generis.  It involves the idea that in certain circumstances a person can by expression of will adopt a transaction entered into by another on his behalf on which is not liable or entitled so as to become liable and/or entitled as if he had made it at the time.  He requires no consideration; and a novation would be juristically different.   Insofar as it depends on the choice of the person concerned, it can be said to be an application of the doctrine of election.  But in the case of election to treat a contract as discharged, there is a choice of remedies in respect of a legal relationship already existing: the innocent party to a breach of contract can choose to treat it as discharged, but if he does not do so the contract continues.  The other form of election normally cited is that between inconsistent existing rights.  In both these cases it is usually said that the election must be communicated to the other party involved, and that it is irrecoverable once made.  It would appear, however, that ratification need not be communicated to anyone if it can be established by probative materials; and that a party who initially refused to ratify may in some circumstances later do so; and that the doctrine overlaps with estoppel and restitutionary doctrine which is manifested especially in the case of ratification by acquiescence or inactivity.

The text goes on to note at paragraph 2-052:

Every unauthorised act, whether lawful or unlawful, which is capable of being done by means of an agent (except an act which is in its inception void) is capable of ratification by the person whose name or on whose behalf it was purportedly done.

Paragraph 2-063 in its concluding sentences notes this:

… The distinction between void and voidable acts may regulate the ratification by mentally incapable persons of contracts made on their behalf: they can ratify, when of sound mind, acts which if effected by themselves would have been voidable.

It should be noted that ratification may be express or by conduct. An express ratification is a clear manifestation by one on whose behalf an unauthorised act has been done and he treats the act as authorised and becomes a party to the transaction in question.  It need not be communicated to the third party or the agent. Ratification can also be implied. Ratification will be implied whenever the conduct of the person in whose name or on whose behalf the act or transaction is done or entered into is such as to amount to clear evidence that he adopts or recognises such act or transaction: and may be implied from the mere acquiescence or inactivity of the principal.

Where the litigation runs on, after capacity is regained, it will usually be easy to establish ratification. The claimant will continue to give the solicitors instructions. She will have required them to carry out work. She will have been informed of her liability for costs, and specific instruction sought on such matters as offers, or other substantive steps in the litigation.

Accordingly, although acting for a claimant who is a patient can be extremely difficult, a conditional fee agreement with a patient should not prove to be one of the particular difficulties in a case, particularly if the litigation friend is prepared to accept joint and several liability for costs.