For many years the questions of alternative funding and its availability has been central to disputes about the recovery of costs claimed under a conditional fee agreement. Under regulation 4 of the long since repealed Conditional Fee Agreements Regulations 2000, failure to consider and advise a client upon alternative funding mechanisms before execution, could render a conditional fee agreement unenforceable and defeat a claim for the costs incurred under the conditional fee agreement in their entirety. Such happy days.
Only somewhat less Draconian, even after the repeal of the Conditional Fee Agreements Regulations 2000, if it could be established by the paying party that there was available to the receiving party an adequate and less expensive source of alternative funding in a particular case, such as BTE or Legal Aid, the failure to utilise this means of funding could lead to the disallowance of extraneous success fees or ATE premiums, as costs unreasonably incurred.
So the recent case of Kai Surrey v Barnet and Chase Hospitals NHS Trust and other appeals  EWCA Civ 451 is the latest instalment in a long line of authority on the effect of alternative funding on a claim for costs which includes additional liabilities. The reasoning of the Court of Appeal which overturned the decision of Foskett J, is of considerable interest not only for those vestigial cases which still accrue recoverable success fees and ATE premiums, but in any case where there might be a less expensive means of funding a case open to the receiving party, who gracefully declines that possibility.
The root authority on choice of funding remains the classical statement of Potter J approved by the Court of Appeal in the case of Wraith v Sheffield Forgemasters Ltd  1 WLR 132 where they recorded:
When giving judgment in Wraith v. Sheffield Forgemasters Ltd.  1 W.L.R. 617 , 624–625 Potter J. said:
“in relation to the first question ‘Were the costs reasonably incurred?’ it is in principle open to the paying party, on a taxation of costs on *142 the standard basis, to contend that the successful party’s costs have not been ‘reasonably incurred’ to the extent that they had been augmented by employment of a solicitor who, by reason of his calibre, normal area of practice, status or location, amounts to an unsuitable or ‘luxury’ choice, made on grounds other than grounds which would be taken into account by an ordinary reasonable litigant concerned to obtain skilful competent and efficient representation in the type of litigation concerned … However, in deciding whether such an objection is sustainable in practice, the focus is primarily upon the reasonable interests of the plaintiff in the litigation so that, in relation to broad categories of costs, such as those generated by the decision of a plaintiff to employ a particular status or type of solicitor or counsel, or one located in a particular area, one looks to see whether, having regard to the extent and importance of the litigation to a reasonably minded plaintiff, a reasonable choice or decision has been made. If satisfied that the choice or decision was reasonable, it is the second question ‘what is a reasonable amount to be allowed?’ which imports consideration of the appropriate rate or fee for a solicitor or counsel of the status and type retained. If not satisfied that the choice or decision was reasonable, then the question of ‘reasonable amount’ will fall to be assessed on the notional basis of the costs reasonably to be allowed in respect of a solicitor or counsel of the status or type which should have been retained. In either case, solicitor’s hourly rates will be assessed, not on the basis of the solicitor’s actual charging rates, but (in a case where the decision to retain was reasonable) on the basis of the broad costs of litigation in the area of the solicitor retained or (in a case where the choice made was not reasonable) of the type or class of solicitor who ought to have been retained”
That in my judgment is right.
Later authority refined matters, by noting that whilst the test was subjective, an objective gloss was placed upon it.
In Kai Surrey which involved three conjoined appeals, Lewison LJ summarised the issues as follows:
2 The issue raised on these appeals from Foskett J (sitting with Senior Costs Judge Gordon-Saker as assessor) is the approach that the court should take in deciding whether costs are reasonable or unreasonable in a case where, after liability has been admitted, the funding of the claim changes (at the client’s request) from funding by legal aid to funding under a conditional fee agreement (a “CFA”) supplemented by a self-funding after the event insurance policy (“ATE insurance”). The judge’s judgment is at  EWHC 1598 (QB);  1 WLR 499. Since all these appeals are second appeals, our primary focus must be on the decisions at first instance.
He briefly summarised the context of the appeals:
3 Each of the three cases under consideration involves claims for clinical negligence resulting in very serious injury. In the Surrey case the claimant suffered very serious brain damage at birth. In the AH case the adult claimant also suffered devastating brain injury as a result of strokes, as well as becoming blind and paralysed. In the Yesil case the claimant was born with very serious mental and physical disabilities. The details of the individual cases do not bear on the legal issue, save to the extent that the quantum of damages recoverable in each case was likely to be very large if liability were established. Further factual details about each case can be found in the judge’s judgment. However, the litigation history in each case is of relevance.
Refining the issues he explained:
13 There is no objection on the part of the defendants to their liability to pay the claimants’ solicitors’ base fees. The objection is to the success fees, and the ATE insurance premiums payable as a result of the change from funding by legal aid to funding by CFA-lite. In the case of Surrey , the combined total claimed exceeded £100,000; in AH it exceeded £50,000, and in Yesil it exceeded £100,000. What marks these cases out from previous cases that the courts have considered is the combination of two facts: (a) at the time of the switch to the CFAs the claimants already had legal aid; and (b) at the time of the switch the defendants were already, in principle, the paying party.
14 The question for us is whether, in each of the three cases, the decision to enter into a CFA, with its accompanying ATE insurance policy, gave rise to costs reasonably incurred. Where the client is faced with a choice between two alternative courses of action which will involve incurring costs, it may well be the case that both courses of action are reasonable, even if one is more costly than another. For example, it may be reasonable to instruct solicitors in London rather than in the regions, even though the former charge more than the latter, and even where the latter would have been capable of doing a perfectly competent job. Whether the incurring of costs is or is not reasonable will depend on the facts that are relevant to the particular case under consideration.
Lewison LJ then developed the issue of choice by stating:
30 Mr Williams QC argued that since there was nothing much to choose between funding by legal aid and funding by CFA-lite plus ATE insurance, it followed that either choice was a reasonable choice. It therefore followed that the costs incurred in entering into the CFA-lite and the ATE policy were reasonably incurred; and that the costs judges were not entitled, let alone required, to examine the reasons for the switch. I do not agree. The court is required to take into account all the circumstances of the case. That means the particular case under consideration: not some generalised description of similar cases, as Solutia makes clear. Moreover, the burden of proof, in the case of an assessment on the standard basis, lies on the receiving party. Accepting for the sake of argument that there is a “level playing field” and that there was not much to choose between funding by legal aid and funding by CFA, the fact is that in each of the three cases the claimant already had chosen legal aid. If there is not much to choose between the two methods of funding, and the claimant decides to switch to a funding method that is far more disadvantageous to a paying party, I consider that the paying party is at least entitled to ask the question: why did you switch? In those circumstances I consider that it is up to the receiving party to justify his choice; and that entails examining the reasons why the choice was made.
31 In our cases the judge held at  (the emphasis is his):
“It seems to me that what Sarwar’s case decided, as a matter of principle, albeit in the context of the issues that arose in that case, was that the advice received by the receiving party on an issue as to the funding of the litigation may be relevant to the question of the reasonableness of the decision concerning funding, but the advice itself is not to be judged by reference to the standards of negligence.”
He explained the difference between advice and reasons, and the extent to which the two overlap:
32 I agree with this, as far as it goes, at least in a case in which the litigant has followed his solicitor’s advice. However, in my judgment, the real issue is not the advice as such, but the reasons why the receiving party made the choice that he did. If the reasons for that choice are contained in the advice, then the advice constitutes the reasons. In my judgment a costs judge is entitled to examine the reasons why a receiving party made the choice that he did; and in many cases that will entail looking at the advice that he received.
33 So what were the reasons that prompted each of the claimants to switch from funding by legal aid to entry into a CFA-lite? The NHSLA applied for disclosure of contemporaneous materials evidencing the advice that had been given to the clients in each case, in accordance with the procedure laid down in PD 47 para 13.13. This gives the receiving party an election whether to disclose the material (which is likely to be privileged) or to decline to disclose and “instead rely on other evidence”. In the present case Irwin Mitchell chose to rely on other evidence. It seems to me that in those circumstances we must take that evidence as proxy for the reasons given to the client for the change.
He was unimpressed by the advice given in one of the appeals and the way it bled into the reasons:
34 In Surrey , the relevant solicitor was Ms Stanford-Tuck. She made a witness statement in which she explained why she had advised the switch from legal aid to a CFA-lite. That switch was made at a time when judgment for damages to be assessed had already been entered against the defendant; and no Part 36 offer had been made. Her main point was that there was no guarantee that the LSC would increase the reserve to a sufficient level to fund the assessment of damages hearing. However, she gave no details of what costs had been incurred, what the authorised costs limit was, what further costs needed to be incurred, and how the LSC had reacted to requests for an increase in the costs limit. In short, her discussion was at a very high level of generality. She also made the extraordinary point that:
“There was a risk to the client that there may not be sufficient funding to cover the cost of our work in the future and my client could be exposed to make up the shortfall of any costs not recovered from the Defendant.”
35 If that was the advice that she gave her client, it was also seriously misleading. It amounts to saying that a legally aided client must make up the shortfall in his own solicitors’ costs if they are not recovered from the other side. But that amounts to “topping up” which is unlawful: Access to Justice Act 1999 s 10 (1) and s 22 (2) ; LASPO s 23 ; s 28 (2) . On one reading of her evidence the amount of that shortfall might have been as much as £150,000. If the client was advised of a very substantial potential liability that was in fact unlawful, then he has been misled into making a decision based on deeply flawed advice to the effect that he was exposed to a substantial financial risk which was in fact non-existent. Although this was one of the reasons that Master Rowley gave for his decision, Foskett J did not refer to it. Having stated the main reasons for the switch, Ms Stanford-Tuck also said that there were “other general considerations” to be taken into account. Among these was the point that legal aid does not protect a client’s damages from the effect of failing to beat a Part 36 offer, or adverse interlocutory costs orders. However, although these risks were mentioned, she gave no consideration to the likelihood of any of those risks eventuating, on the facts of the particular case.
He returned to the findings of the judge at first instance:
36 Master Rowley was not impressed with Ms Stanford-Tuck’s reasoning. He found at  that the solicitors had no concern that they would not recover their fees to date, even though they had ignored the costs limitation imposed by the LSC. At  he dismissed the argument based on the alleged bureaucratic approach of the LSC. At  he held that the risk of legal aid being withdrawn was fanciful; and the costs limitation was not problematic. He considered at  that the strongest reasons for the change in funding were the shortfall issues. There were two potential points about shortfall. One was the risk of failing to beat a Part 36 offer. The other (which he described as modest) was the operation of the LSC’s statutory charge.
Later he discounted the false analogy that had been drawn with the Montgomery case:
51 I find it hard to see how the decision in Montgomery bears directly on this case. The issue in Montgomery was quite different: it concerned the scope of the duty of a medical practitioner towards a patient. The quality of the patient’s decision to undergo treatment was not the point. In the present case the question is whether the costs in question were reasonably incurred. Accordingly, I agree with the judge at  that the focus on Montgomery was “a distraction”. However, although I agree with the judge that Montgomery was a distraction, I do not think that the rather unhelpful analogy undermines the correctness of each of the costs judges looking at the particular reasons why each litigation friend made the choice that he or she did. As we have seen the court often examines the reasons underlying a particular choice in the context of litigation; and a test of materiality is not inappropriate, as we have seen from Solutia . I consider also that if (as each costs judge found) the reasons given for the choice were a mix of good and bad reasons; and that some clear disadvantages to the client of making the switch had not been explained, the burden was on the receiving party to satisfy the costs judge that even if the bad reasons had not been put forward, and the disadvantages had been properly explained, the client would still have made the same choice.
The appeals were allowed. The advice given was flawed and that fatally undermined the reasons, for changing the funding mechanisms mid stream and hence the reasonableness of the costs incurred.
But the more interesting observations in the judgment reflect the arguments that were not put, or the road that was not taken:
74 By way of postscript I should record that Mr Hutton did not challenge the proposition that whether costs have been reasonably incurred is to be judged solely from the point of view of the receiving party, even in a case in which it is known that the other side will pay the ultimate bill and the client has no real interest in controlling costs. It is also difficult to see how the indemnity principle applies to a case like this where under the terms of a CFA-lite plus self-funding ATE insurance the client will never be liable to pay anything. As Mr Williams engagingly put it, the indemnity principle in a case like this is “a bit of a nonsense”. But these are the constraints within which we have been invited to determine these appeals.
What was Lewison LJ thinking of?
It has to be observed, that in the twenty first century, where the Civil Procedure Rules place at their heart, when assessing costs (or budgeting them) the principle of proportionality, it is difficult to see why matters of recovery should remain grounded at all, in the reasonableness of the claimant’s decision making process, an unhappy fudge of subjective and objective factors.
The artificiality of the exercise at work in this case is manifest. For a claimant with a CFA Lite and ATE premium, incurring huge costs on a risk free basis, to win a case with complete peace of mind would be reasonable, if viewed solely from the claimant’s perspective, even if this meant discounting cheaper sources of funding.
So in order to provide some degree of objective control over costs, the court is forced to pick holes in the claimant’s reasoning for electing for a certain funding model, which may arise from the solicitors advice or from other factors.
The philosophy that the extent of the recovery of costs incurred under a CFA Lite and ATE should hinge upon a claimant’s notional reasonableness or the quality of his solicitor’s advice, is simply incompatible with the philosophy currently at work in the legal system which is moving inexorably to fixed costs for a larger and larger proportion of cases; because in a fixed costs case, no one cares how the receiving party funds his case or why he chose the funding that he did: the level of costs recovery deemed to be reasonable and proportionate is fixed across the board, as it recognises that what is really engaged in any assessment where the indemnity principle is notional, is the paying party’s interests.
As Lord Hope noted long ago in Campbell v MGN (No 2)  1 WLR 3394 the tests of reasonableness and proportionality are separate and applied separately, with the possibility entertained by that judge (though curiously never developed in the principles governing the assessment of costs in the years up to 2013) that a success fee might be reasonable, but also disproportionate of itself, irrespective of the separate question whether base costs were reasonable and proportionate.
I would predict that in a future appeal, a paying party may well travel the “road not taken” and argue that the time has come to look at costs incurred on a solely objective basis.