Another twist in the Yellow Brick Road of CFA assignment

McClure: timing of assignment is crucial

McClure: timing of assignment is crucial

Posted by Christopher McClure, regional manager at the Manchester office of Litigation Futures sponsor John M Hayes

So, what are the implications of the decision of Master Leonard in Azim v Tradewise Limited [2016] EWHC B20 (Costs).

As reported recently on Litigation Futures, this was a routine low-value personal injury claim for damages caused by a minor road traffic accident in 2011. The claimant instructed three firms of solicitors under two pre-LASPO conditional fee agreements (CFAs) – the second of which was assigned from firm 2 to firm 3. Both CFAs provided for a 100% success fee.

The claim was settled in January 2015 when the claimant accepted a part 36 offer of £3,500. A bill of costs was drawn and the paying party disputed liability to pay any costs under the second CFA on the premise that there had not been a valid assignment of that CFA. This challenge was rejected by the Senior Court Costs Office.

What are the practical implications of the decision?

That timing is crucial. We have seen a number of recent costs cases where challenges have been made to costs recovery on the basis that a CFA has not been validly assigned. This has been especially so where a portfolio of clients of cases has been transferred from one firm to another.

In Azim, the paying party relied on the case of Alina Budana v The Leeds Teaching Hospitals NHS Trust [2016] WL 00826269 to support its contention that the second CFA had been terminated and was thus incapable of assignment.

Master Leonard distinguished Budana on the premise that the second CFA had not been terminated at the time of the assignment agreement. In essence, solicitors would do well to ensure that any assignment instrument is formally executed before providing notification to the client of any unilateral transfer of their file.

Closer to home, any valid legal assignment by definition must comply with the relevant provisions of section 136 of the Law of Property Act 1925. This basically requires a properly drafted deed of assignment and notification of that assignment to the non-assigning party, i.e. the client.

What considerations were relevant in determining whether a CFA had been terminated?

The paying party’s case for termination of the CFA essentially revolved around the assigning firm’s “unequivocal statement” made to the Claimant that they would no longer represent him, as follows:

“We have recently received an influx of new work as a resulting [sic] of securing a new contract, however unfortunately have been unable to replace a couple of key staff […] Rather than have this impact on the quality of service which you receive or cause any delays to the settlement of your claim, we have put in place arrangements to pass over the handling of your case to another firm.”

By reference to the decision in Budana, such a statement was said by the paying party to constitute a unilateral termination of the retainer in question and the assigning firm had thereby forfeited their right to receive payment from the client.

Master Leonard disagreed. As the assignment instrument was signed by the solicitors on 23 July 2014 and notice of that assignment was sent to the claimant on the same date, by definition the claimant would not have received notice of the unilateral transfer of his file until after the assignment had actually happened.

Thus the assignment of the second CFA had already occurred by the time the claimant received notice of the unilateral transfer of his file. Such a finding was also sufficient to distinguish the index matter from the case of Webb v London Borough of Bromley [2016] WL 01032289 on the facts.

In many respects the decision in Azim is a decision within a decision. Master Leonard did not express any doubt on the correctness of the decision reached in Budana but instead distinguished Azim on the issue of termination on the basis of the “quite different” facts.

On the facts and by reference to the various authorities on the issue of assignment, the decisions in both Budana and Azim are probably correct. Certainly solicitors considering the assignment of CFAs will derive assistance from Master Leonard’s findings on the relationship between termination and assignment.

Does this judgement provide further assistance in determining whether the assignment of a CFA is lawful?

The decision in Azim adds little value to the authorities on the issue of assignment of CFAs as they presently stand. The decision of HHJ Wood QC in Jones v Spire Health Care Limited [2016] 3 Costs LO 487 has, at least for the time being somewhat settled the interpretation and application of Jenkins v Young Brothers Transport Limited [2006] 3 Costs LR 495 – but note that Budana is due to be heard in the Court of Appeal.

Whereas it was previously thought that a CFA could only be assigned where the client’s movement from one firm to another was motivated by personal trust and confidence reposed in a particular solicitor, HHJ Wood QC held: “In my judgment and on careful reading of those paragraphs, Rafferty J was not seeking to qualify the exception to the general rule against the assignment of the burden of a contract to specific situations where personal trust and confidence could be established so much as to set a context in which it applied to the facts of the case.”

Of course, as the decision on appeal in Jones is not binding upon the SCCO but the decision of Rafferty J in Jenkins is, the defendant in Azim sought to persuade the court – as was open to the court – to deviate from Jones in its interpretation of Jenkins and instead find that Jenkins was binding upon it to the extent that a CFA may be assigned only where a solicitor who enjoys the particular trust and confidence of the client moves from one firm to another.

Having considered at some length the decision of the courts in Budana and Jones, Master Leonard expressly agreed with the reasoning of HHJ Wood QC in the following terms: “In summary I can identify no obstacle in the principles governing assignment of the benefit and burden of contracts, to the validity of a bone fide, arms-length CFA assignment in the circumstances of this case.”

What is considered in determining the effectiveness of the assignment of a CFA?

It would appear from Azim that the paying party accepted the findings of HHJ Wood QC in relation to the defendant’s cross-appeal in Jones, i.e. that the right to be paid under a CFA falls into that category of rights presently existing but enforceable only in the future. Thus the right to be paid under a CFA can, in principle, be the subject of an assignment providing that the same complies with the provisions of section 136.

Rather, the paying party’s submission on the efficacy of the assignment centred on the claimant’s failure to disclose all documents pertaining to the assignment instrument. It was argued that, in the absence of full disclosure, the court could not be satisfied that the claimant had discharged the burden upon him to demonstrate that the relevant statutory requirements had been met.

Such doubt, it was said, must be resolved in favour of the paying party in accordance with CPR 44.3(2)(b). The court disagreed and found “no sound basis” for concluding that the assignment of the CFA in any way failed to comply with the provisions of section 136.

Does the judgement give guidance on any other issues?

The master provided guidance on two further issues. Firstly, he dismissed an argument based on the doctrine of vicarious performance: “I would be unable to accept Mr Smith’s argument on vicarious performance because the right of a contracting party to pass its performance obligations on to another person depends upon the circumstances and in particular on the terms and nature of the contract itself. In my view, a solicitor is not in a position to do so, at least absent some very specific contractual provision to that effect.”

Secondly, Master Leonard ruled on the receiving party’s submission that claimant would, if the court had found in favour of the defendant, be left without the benefit of either a CFA or of the qualified one-way costs shifting (QOCS) regime set up to preserve access to justice following the abolition of recoverable success fees.

Here the master observed that he was “required to come to a conclusion on the law as it stands. Consistency with the intention behind the QOCS regime is not a relevant consideration”. Interestingly, this obiter comment appears at odds with the decision of Regional Costs Judge Phillips in Casseldine v The Diocese of Llandaff Board for Social Responsibility (unreported) – a case where the receiving party’s solicitor had terminated the pre-LASPO CFA and thereby rendered void any contractual entitlement to costs – in which the court agreed with the receiving party that the abolition of recoverability of success fees on 1 April 2013 was a ‘quid pro quo’ for the introduction of QOCS.

As an obiter comment to this article, further guidance on the relationship between the doctrine of novation and consent would have been welcomed by many. The letter notifying the claimant of the transfer of his file contained this excerpt: “I also confirm my consent to the assignment of the CFA to [the assignee].” The claimant signed the consent form on 31 August 2014.

It is generally accepted that the consent of the non-assigning party to a purported assignment is fatal to that assignment. Instead, a new contract is created – novated – on terms identical to the original contract, which, of course, would have been disastrous for the assignee and assignor in terms of recoverability of costs for the reasons outlined by Master Leonard at paragraph 19 of his judgment.

But it is difficult to reconcile the claimant’s express consent to the assignment (see paragraph 13) with the master’s finding that the claimant’s consent “was not sought for the purposes of novation” when it would seem that, by definition, the non-assigning third party’s consent (or lack of) is the difference between the dichotomic doctrines of assignment and novation.

Somewhat confusingly, Master Leonard at paragraph 53 appears to treat the assignor’s invitation to consent to the assignment as something synonymous with the requirement to give notice of the assignment.

Whilst the master held that there had not been a novation on the very same grounds on which he found that the CFA had not been terminated by the unilateral transfer from the assignee of the claimant’s file (i.e. that the claimant’s consent to the assignment had been sought – and granted – after the assignment had been executed), such a finding raises the question of whether the claimant’s subsequent consent would retrospectively create a novation of the CFA.

What does the future hold?

We hope to reach the end of this yellow brick road in the not too distant future when the case of Budana comes before Court of Appeal and the issue of whether a CFA can be validly assigned is properly determined once and for all. There we hope to find the brain to understand the decision, the courage to accept it and the heart to continue. But if not, then I’m going home.

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