As is well known, one of the effects of LASPO 2012 and the removal of recoverable success fees and ATE premiums has been to cause firms to leave the personal injury market, or more sadly, to cause many well known and well regarded firms, to enter into insolvency procedures.
When their work in progress is sold on, including the retainers made on a conditional fee agreement basis, there are a number of ways by which this transaction of the sale of work in progress can take place.
Perhaps the most familiar, is the attempt to assign conditional fee agreements, a concept which has proved problematic, given the number of recent cases litigated over this point in the County Court and SCCO. It will be some time yet before the Court of Appeal gives a definitive answer to the question of whether a conditional fee agreement is capable of assignment.
Another route, which has been utilised, is for the original firm of solicitors and the subsequent firm of solicitors, to declare that they have entered into an agency agreement, whereby the original firm is declared to be the principal, and the subsequent firm acts as their agent, undertaking work on their behalf.
Thus the argument runs, that the original conditional fee agreement with its recoverable success fee remains in place, the subsequent firm’s fees are recoverable as agent’s charges, with the success fee claimable on top in accordance with long established authority and the problems of assignment are avoided.
But will this arrangement work? In particular, if the original firm of solicitors has ceased to exist, or the original firm does no further work on the case, nor act as a principal supervising the agent, it would seem that the arrangement is open to attack on the basis of the doctrine of sham.
The doctrine of sham in its modern formulation is derived from the principle contained in the case of Snook v London and West Riding Investments Ltd  2QB786 at page 802 where Lord Justice Diplock as he then was said this:
As regards the contention of the plaintiff that the transactions between himself, Auto Finance and the defendants were a “sham”, it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the “sham” which are intended by them to give third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.
The reason why the scenario outlined above can give rise to a sham is because in an insolvency situation, the effect of the solicitor ceasing practice and being unable to perform his obligations under the conditional fee agreement would ordinarily terminate the conditional fee agreement or discharge it by reason of the doctrine of frustration. To suggest otherwise, is to argue against the clearly established fact that one party to the retainer, has to all intents and purposes ceased to exist.
If the original firm is still in existence, but has no meaningful role in the litigation, does not exercise supervision and does no work in the case, it is difficult to see how this is a relationship of principal and agent in any real sense:the obligations of a solicitor principal are quite onerous, as set out in a long chain of cases going back to the Law Society V Waterlow Bros and Leighton (1883) 8APP CAS 407 through to Hollins V Russell  1 WLR 2487 at page 2536 to 2538. If they have not taken place, this lends force to the analysis, that there is no true principal and agent relationship at all.
Where a sham exists, the transaction is either of no effect or the court gives effect to the true relationship that has been established: the difficulty for solicitors is that the likely conclusion on a true construction of the agreement, is that the original firm of solicitors has terminated its retainer and is not entitled to be paid for the work that it has done.
The second firm of solicitors in turn will be acting without a written retainer which complies with the requirements now set out in the Courts and Legal Services Act 1990 and the Conditional Fee Agreements Order 2013, and any implied retainer, or argument that a novation has taken place on the same terms of the original conditional fee agreement, will lead to a conclusion that this latter retainer is unenforceable and again no costs are recoverable under it.