Rule 2 letters and unintended consequences

A recent decision of District Judge Hale sitting in the County Court at Nottingham in the case of Arfan.v.S & A Foods Limited, as a Regional Costs Judge (20th October 2015) is an interesting example of the unintended (but expensive) consequences of loosely drafted rule 2 letters.

The case initially proceeded to a detailed assessment hearing on 6th March 2015, where the hearing was adjourned, the claimant put to his election to disclose his retainer and directions made to permit the investigation of the claimant’s entitlement to costs.

The substantive claim had been for industrial deafness.

The issue arose in this way. The claimant’s claim for NIHL was proceeding to a trial of a preliminary issue of breach of duty. At a late stage, this was conceded. An order for costs was made in the claimant’s favour.

Causation and quantum remained live issues: the claimant subsequently conceded the claim, and discontinued. After a considerable delay, his solicitors commenced detailed assessment proceedings based on the costs order made in the claimant’s favour.

The claimant had proceeded under a conditional fee agreement: a “no win, no fee” agreement made in 2007. There having been “no win” and no compensation recovered, the issue before the court was whether the claimant was contractually obliged to pay his solicitors.

The conditional fee agreement stated:

THIS AGREEMENT is a binding legal contract between you and your solicitor(s). Before you sign, please everything carefully. This agreement must be read in conjunction with the Law Society document “Conditional Fee Agreements: what you need to know”.

And:

Paying us

If you win your claim, you pay our basic charges, our disbursements and a success fee. You are entitled to seek recovery from your opponent of all of our basic charges, our disbursements, a success fee and insurance premium, as set out in the document “Conditional Fee Agreements: what you need to know”.

The client care letter stated so far as is material:

What we need from you

I enclose our standard Conditional Fee Agreement which you have signed. This Agreement is in a form approved by the Law Society and is designed in such a way to enable us to claim the costs against your opponent’s insurers.

And:

Legal costs

We have agreed to do your case on a “no win no fee” basis…

I confirm that if we do not recover any compensation for you, then there will be no charge to you and that if we do recover compensation you will receive that compensation without deduction of more than any shortfall on the insurance premium we take out for you and interest on the loan.

I have explained the Conditional Fee Agreement and how it works to you in detail and I enclose an additional explanatory leaflet.

And:

As our client we do share a common interest with you in hoping for a successful outcome to your case because we do not get paid unless we get compensation for you.

(emphasis added)

The copy of “What you need to know” initially produced at the detailed assessment hearing was the version drafted in 2012 which contained the following term, relied on by the claimant:

If on the way to winning or losing you are awarded any costs, by agreement or court order, then we are entitled to payment of those costs, together with a success fee on those charges if you win overall.

But the retainer was made in 2007. The 2012 document could have had no application to a retainer made in 2007: no other version of that document existed on the Claimant’s solicitors file as a copy document of what was provided to the Claimant, and what terms were contained within it.

The case hinged on the correct approach to construction of the retainer. The correct approach to construction of the solicitor’s retainer was established in the case of Jones.v.Wrexham Borough Council [2008] 1 WLR 1590 where the Court of Appeal noted at paragraph 27:

27 I can see no reason why the court should not look at the whole package produced by the solicitor, the CFA agreement, the rule 15 letter explaining to the client the effect of the agreement, and indeed the insurance policy recommended by the solicitor. In that way it can be ascertained whether, as between client and solicitor, the proper understanding was that (save in the circumstances described in paragraph (5) of regulation 3A) the client will not be liable for any own-side costs whatever the result of the proceedings, save to the extent that they can be recovered from the other side or under the insurance policy. I use the word costs but would emphasise that, as between client and solicitor, it is unlikely that a client will have at the forefront of his mind a distinction between expenses and disbursements or between clients disbursements and solicitors own disbursements.

Accordingly the court accepted that the correct approach was to consider the documents as a whole: the conditional fee agreement, standard terms and client care letter as the retainer.

The difficult facing the claimant in terms of the reliance on a particular standard term incorporated by reference into this retainer were three fold.

First, while the defendant acknowledged the application of the signature rule, and the doctrine of incorporation by reference, there was no proof of what was actually incorporated in 2007.  “What you need to know” is a document which has been through multiple incarnations. It has been amended many times to reflect changes in the regulatory regime over the years. It is also a document that is routinely amended by solicitors, to better reflect their own practices and retainers. No copy of the document lay on the solicitors file.

Secondly, assuming that such a term (1) did exist and (2) was incorporated, it did not avail the claimant’s solicitors. The client care letter contained clear and explicit assurances, that if the claimant failed to recover compensation, he would pay no costs.

Those statements were not mere “puffs”: they were statements which had contractual force, the client care letter plainly being intended to create a “CFA Lite”. The effect of the assurances in the letter was to vitiate the standard term, either due to an inconsistency of terms, or by waiver.

The alleged term in “What you need to know” was inconsistent with the position set out in the client care letter. Per The Starsin [2004] 1 AC 715 where a contract is a standard form of contract to which the parties have then added special conditions, then unless the contract provides otherwise greater weight must be given to the special conditions, and in a conflict between general conditions and special conditions, the latter will prevail.

This principle is further reflected in the more general maxim of contra proferentem, that where these is a doubt about the meaning of the contract, it is construed against he who drafted it. To like effect is regulation 7(2) of the Unfair Terms in Consumer Contracts Regulations 1999. As the term in “What you need to know” was contained in a standard form document, the express provisions contained in the client care letter, should prevail.

Finally, even if the claimant had proved the incorporate of the relevant term in “What you need to know”, the client care letter waived the solicitor’s right to rely upon it.

The client would be perfectly entitled to set up as a defence to any claim under the conditional fee agreement, the terms of the assurance contained in the letter were the solicitor to make a demand for payment.

He could state clearly and categorically, pointing to his lack of compensation, that he was told no costs would be paid in such circumstances.

The concept of waiver in the context of a relationship between a standard printed conditional fee agreement and a client care letter was considered in the Jones case supra.

34 I suggest that any client reading that letter would expect: (i) that unless they withdrew instructions, no fees or expenses would be payable to the solicitors; (ii) that they would not be liable for disbursements, possibly because, as the letter suggests, they would be covered by insurance provided they took out insurance. But the understanding of the client would be simply that no liability would fall on the client. (It is suggested that some form of concession was made in the court below as to the meaning of our services. Since we are concerned with the question of construction of a written contract in relation to which it is not suggested some evidence was produced in reliance on such a concession, in my view the claimant should be free to withdraw the same if it was made); (iii) that any costs which might be ordered to be paid because the case was lost would be covered by insurance; (iv) that the solicitors would be producing a CFA contract and recommending an insurance policy that would produce the above result.

Hughes LJ summarised the position as follows at paragraphs 85 to 87:

85 The letter and the CFA were sent together to the client. The client care letter is an essential part nowadays of the contractual relationship between solicitor and client. This letter purports to explain, and advise upon, the CFA and the arrangement between the parties generally. Although in fact drafted by the claims handlers, it came from and was signed by the solicitors. It begins: The purpose of this letter is to set out the terms of our engagement . . . It enclosed the claims handlers printed standard-form CFA, albeit in rather small print. It referred to the CFA as fully setting out the terms of this arrangement. The printed agreement in turn referred to and had attached to it some standard terms headed Law Society Conditions, albeit without the numbering referred to in the body of the printed agreement. The client was asked by the letter to sign both letter and agreement, and if she had read the agreement she would have found in it a warning that she should read it carefully. It is apparent that the letter and printed agreement traverse much of the same ground, but not in identical terms. The reality is that a lay client will, if she reads the printed agreement at all, at the very least read the two together, and is to be expected to take the letter as an explanation and summary of, and advice upon, the agreement. That position is not altered by the fact that it appears from the letter that the solicitors arranged for one of them to telephone the client to ensure that you understand the contents of the agreement. What was actually said to her on this occasion is not in evidence.

86 I respectfully agree with Waller LJ that the letter and agreement together constitute the CFA. The representations and warranties in the letter induced the signature to both it and the agreement, and once both were signed, as they were, the statutory requirement that a CFA be in writing signed by both parties is satisfied.

87 I also agree that the clear meaning of the letter, to any ordinary lay person putting herself into the hands of a professional solicitor, is that in the absence of default by her and so long as she does not withdraw her instructions, she will not have to bear any liability for own-side costs; if payable at all, they will be covered by insurance. Taken, as they must be, in their context within the letter, which is set out in the judgment of Waller LJ and which I do not repeat, that meaning seems to me to emerge from the following statements: (i) Providing you comply with your requirements under the CFA and do not withdraw instructions, we will not charge you for our services unless we are successful whereupon we will receive our costs from the losing party; (ii) Our disbursements . . . In a case of this nature these fees can be very substantial and if your case is not successful these fees will be met by the insurance; (iii) Other party’s costs and disbursements . . . If your case is not successful you may be ordered to pay the other partys costs which again, for a case of this nature, can be very substantial. If you lose, the insurance will pay any award; (iv) Success fee . . . this success fee is recoverable from the other side upon the successful conclusion of your case however, if all or part of the success fee is disallowed, we waive our right to come to you for the balance which means that there will be no deduction from your damages or a bill for you to pay if any of our own costs are unrecovered; although the last of those statements appears under the heading Success fee the closing words, beginning  which means that, clearly go beyond the success fee and, by their own terms, extend to any of our costs.

He went onto explain how where the letter did not properly reflect the terms of the printed agreement, it was to be treated as a waiver of the printed terms in favour of the assurances in the letter at paragraphs 88 to 90:

 88 For a number of reasons, those clear statements in the letter do not properly reflect the terms of the printed agreement. Mr Morgan has pointed to several ways in which, on the terms of the printed agreement, the client may remain exposed to the risk of having to pay some own-side costs.

89 First, Law Society condition 4 contains a waiver by the solicitors of any claim for own side costs in a won case except to the extent they are agreed or allowed on assessment by the court. As Mr Morgan points out, the waiver does not extend to costs allowed by the court but not paid by the defendants, for example if they become insolvent. Like Waller LJ, I am quite satisfied that the letter constitutes a waiver in such a case of any claim for own-side costs not actually obtained from the defendants. No doubt the solicitors and claims handlers both had it in mind that the defendants would be insured.

90 The same condition 4 refers to the statutory power of the court in a won case to disallow part or all of the success fee as against the defendants but to allow it as between solicitor and client. By the printed agreement, the solicitors thus waive the excess success fee but not if the court rules it payable between solicitor and client. For the same reasons, however, the letter constitutes a waiver whether the court so orders or not.

In the event District Judge Hale found against the claimant on all arguments, not being satisfied that a relevant term had been incorporated as a matter of fact, but even if it had, the printed term giving an entitlement to interlocutory costs had to give way to the particular term in the rule 2 letter, and that the claimant’s solicitors had in the rule 2 letter in any event waived, the right to rely on the standard term giving them an entitlement to interlocutory costs.

Given the prevalence of CFA-Lite in pre-2013 CFA arrangements, I suspect there must still be many cases out there, where a solicitor will have unthinkingly waived their rights through a loosely drafted rule 2 letter, to claim interlocutory costs or to be able to send the client a bill, should the client breach of his obligations and the case founder in consequence.