An insured bringing a subrogation claim under a conditional fee agreement was entitled to recover his lawyer’s success fee from the defendant, even though he had an indemnity from his insurer against costs.

Sousa v London Borough of Waltham Forest Council

  • [2011] EWCA Civ 194

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Facts

Mr Sousa's house suffered subsidence caused by a tree owned by the council and he successfully claimed on his household policy.

After paying the claim, the insurer exercised its right of subrogation and required Mr Sousa to pursue a claim against the council, instructing a specific firm of solicitors with whom the insurer had a collective conditional fee agreement.

A collective conditional fee agreement is where funders of litigation (including insurers, trade unions and motoring organisations) enter into a conditional fee agreement (CFA) with a law firm for certain classes of proceedings. Fees are payable on a common basis for each class.

The claim was settled quickly and the council agreed to pay Mr Sousa's costs on the standard basis. Costs were agreed, subject to the question of the success fee – the percentage uplift the lawyer is entitled to charge under the CFA if he wins the case.

The council argued there should be no success fee. Under rule 44 of the Civil Procedure Rules, a court must take all the circumstances into account when deciding whether costs were proportionately and reasonably incurred.

Under the Costs Practice Direction, when deciding whether a success fee under a CFA is reasonable, the relevant factors include what other methods of funding were available.

The council said it was not reasonable for Mr Sousa to litigate with the benefit of a CFA when he had the benefit of a complete indemnity for costs from his insurer.

At first instance, the district judge agreed that no success fee was payable. He said the court must look at the reality of the situation. Mr Sousa was never at risk as to costs, so it was unreasonable for him to be allowed to rely on a CFA. The claimant appealed.

The High Court judgment

The High Court judge allowed the appeal. He accepted that, under the court rules, it must be reasonable for a claimant to enter into a CFA and incur the potential liability of a success fee. He also acknowledged that the court was entitled to take into account relevant factors, such as alternative methods of funding.

But he found it difficult to see why a claimant pursuing a subrogated claim at the behest of his insurer should be in any different position from, say, a trade union member taking advantage of a costs indemnity provided by his union.

In any event, the judge noted that it is inherent in the concept of subrogation that the insurer enjoys the same rights as the insured.

A defendant is not allowed to rely on the insurer's payment of the insurance claim as a defence to the subrogated claim. Equally, he should not be allowed to rely on the fact that the insurer is funding the action as a defence to the insured's right to recover a success fee when the subrogated claim succeeds. Otherwise, the insurer would be in a worse position than the insured would have been.

The council appealed, arguing that the fact that anyone can enter into a CFA does not make recovery of the success fee automatic. That must depend on whether the fees were reasonably incurred. The fact that the insured had an indemnity against costs was a relevant factor to be taken into account

The Court of Appeal judgment

The appeal was dismissed.

Costs awards are governed by the indemnity principle, which means they can only indemnify a litigant against costs and expenses that he has paid or has become liable to pay.

Mr Sousa was not a party to the CFA between his insurer and the solicitors. But, in pursuing a subrogation claim at his insurer’s behest, a client is taken to have ratified the insurer's instructions to the solicitor to pursue the action in his name and this must include the terms of any CFA.

Consequently, in this case, the court had to treat the CFA as Mr Sousa’s CFA.

His representatives argued that the fact that Mr Sousa had an insurance policy which indemnified him against any costs had to be completely ignored. The Court of Appeal agreed this would give effect to the full rigour of the subrogation principle, but thought the reality of the situation should also be taken into account, as required by rule 44 of the CPR.

When an insurer exercises its right of subrogation, the insured has no choice but to fall in with whatever the insurer wishes to do to advance the claim, including any CFA. In such circumstances, the insured can hardly be said to be acting unreasonably.

But taking into account the reality of the situation was it reasonable for the insurer to enter into the CFA? The Court of Appeal held it was.

In 2005, the House of Lords (as it then was) confirmed in the Naomi Campbell case that CFAs are open to everyone, irrespective of their means. This applies equally to rich and powerful insurance companies.

"If the law permits it, it must be reasonable for rich as well as poor to take advantage of that which the law permits," the Court of Appeal concluded.

Commentary

The ruling is relevant to any subrogation action where insurers require the insured to instruct lawyers to pursue a claim against a third party.

It confirms, not only the classic principle of subrogation – that the insurer pursuing a subrogation claim enjoys the same rights as the insured (in this case, to enter into a CFA) - but also that, even when the "reality" of the situation is taken into account, an insurer is as entitled as any litigant to enter into a CFA.

What, of course, the Court of Appeal could not alter was the rule that says a claimant can recover his lawyer's success fee from the defendant.

"Tree root" cases such as this were cited by Lord Justice Jackson in his report on civil litigation as a specific example of recoverable success fees inflating claims costs. He found it "absurd" that insurance companies could bring claims against local authorities using collective CFA's, thereby doubling the cost burden on council tax payers. His recommendation was to end recoverability, but this will require a change in the law.

The Ministry of Justice has been consulting on such a change but the outcome of that exercise has not yet been announced (see: Government outlines fundamental reforms to civil litigation funding, OUT-LAW News 17/11/2010).

Lord Justice Ward, giving the leading judgment in this case, commented: “Being an old curmudgeon... I cannot but feel that in many respects CFAs have operated as a bonanza for insurers and their lawyers.  I entirely endorse the views of Lord Justice Jackson."