If there is a CFA, then part of the
success fee can be taken into account as a debt in making an award for
maintenance under the Inheritance Act, i.e. before a decision is made about
costs taking into account the making of any Part 36 or Calderbank Offer.
Extracts from the judgment at First Instance are set out at the end of this
post. See also my blogs:
Financial provision claim by adult
child – Miles v. Shearer [2021] | Carl’s Wealth Planning Blog
Could HMRC attack
a trust established to receive a capital sum in settlement of an Inheritance
Act claim as a sham or an ‘illusory trust’? | Carl’s Wealth Planning Blog
In
Hirachand v Hirachand & Anor [2021] EWCA Civ 1498 (15 October 2021),Lady Justice King (with whom Lord Justice
Singh and Sir Patrick Elias agreed) concluded:
‘Two
issues arise on appeal:
ii) In
determining the lump sum award payable to the Respondent, the judge included
the sum of £16,750 as a contribution towards the Respondent’s liability to pay
a Conditional Fee Agreement (“CFA”) success fee. The issue is
whether it is wrong in law for a judge to include such a contribution in an
maintenance-based award calculated by reference to the financial needs of a
claimant. …
It
is submitted on behalf of the Appellant that the inclusion in the award of
all or part of the debt which is represented by the success fee cannot be
regarded as “provision that is to be made to meet recurring expenses,
being expenses of living of an income nature” as approved by Lord Hughes
in Ilott (see [43] above). Ms McDonnell submits that contrary to
the Appellant’s argument, the inclusion of the award of £16,750 towards part
of the Respondent’s success fee was ‘directed at meeting day to day living
expenses’. This, she says, is obvious from the context of the Respondent’s
financial circumstances as found by the judge; she has no other means to
discharge her debt other than from her income which, on any view, is and will
remain very modest. Moreover, Ms McDonnell submits the judge expressly held
that if he did not make such an allowance ‘one or more of C’s primary needs
will not be met’.
I
agree with the analysis of Ms McDonnell, but in any event in my judgment, the
Appellant’s argument that a success fee is not a recurring expense falls at the
first hurdle as when one reads on from the passage relied upon by Ms
Stevens-Hoare taken from the passage In re Dennis incorporated into
his judgment by Lord Hughes and highlighted at [43] above, it is quite clear
that payment of a debt can form part of a maintenance payment.
It
follows that, in my judgment, the judge was right in concluding that an
order for maintenance could contain an element referable to a success fee.
As already noted, on the facts of this case, the judge concluded that without
such a contribution ‘one or more of the claimant’s primary needs would not be
met’. As Lord Hughes re-emphasised in Ilott at [24]: ‘The order
made by the judge ought to be upset only if he has erred in principle or law’.
In my judgment the judge did neither. The judge was entitled to regard the
success fee as a debt capable of inclusion in a maintenance award. That being
the case, it would be wrong for this court to interfere with the judge’s
individual value judgment.
I
am conscious, as was the judge, of the difficulty identified by Briggs J
in Lilleyman, namely of the potential for undisclosed negotiations
to undermine a judge’s efforts to make appropriate provision under the
Inheritance Act. The civil litigation costs regime, unlike the approach in
financial remedy cases, means that there is the potential for a situation where
a claimant is awarded a contribution to her CFA uplift but is subsequently ordered
to pay the defendant’s costs of the claim where, for example, the claimant won
overall but failed to beat a Part 36 offer. I note however that this is likely
to be less of a risk than might be thought at first blush to be the case given
that under many CFAs the claimant is obliged to accept any reasonable
settlement offer or an offer above a specified threshold or risk the solicitors
withdrawing from the CFA. Conversely a success fee is frequently not payable in
the event that the claimant, on advice, rejects a Part 36 offer or other
relevant settlement offer but subsequently fails to beat that offer at trial.
The
judge was alive to this tension and commented that he could not avoid some
potential injustice to one side or the other. The judge therefore mitigated
that potential injustice by taking a cautious approach towards the success fee
liability and made an order which resulted in only a modest contribution of 25%
towards payment of the success fee. In my view the judge’s cautious
approach to this difficult aspect of maintenance cases where the claim is made
on the back of a CFA contract cannot be faulted and only serves to highlight
the imperative of the full engagement in the Part 36 process and the importance
of the parties making realistic offers in order to settle these difficult and
distressing cases.’
A costs order made in
proceedings may not include provision requiring the payment by one party of
all or part of a success fee payable by another party under a conditional fee
agreement, see: Legal Aid, Sentencing and Punishment of Offenders Act
2012, s.44: Legal Aid, Sentencing and Punishment of Offenders Act 2012
(legislation.gov.uk), see also: CFA Success Fees in Claims under the Inheritance | Ashfords
Solicitors; and sections 8 (Offers to settle) and 9 (Costs in 1975 claims)
of Chapter 7 of ‘Inheritance Act Claims’ by Sidney Ross.
Is
this decision likely to result in an increase in the making of hopeless (i.e.
unmeritorious) claims using high success fees as leverage to negotiate a bigger
settlement for Claimants, who on a forensic (i.e. legal merits based) analysis,
have an unrealistic expectation of recovery at trial?
In effect, what the
court has done, is to shift the litigation risk of a successful claimant
being unable to pay their own irrecoverable legal costs (i.e. the success fee),
on to the defendants. Does this mean that Part 36 Offers will now need to
arithmetically include an amount for a contribution to a CFA success fee, e.g.
of 25%?
In other words, has the court shifted the goal posts, to the advantage of unworthy claimants, at the expense of estates. If they have, is this likely to result in even more litigation and not less?
The uncertainty this decision has created is not limited to just a future merits based analysis of Inheritance Act claims, and its impact upon the drafting and effect of settlement offers, it also leaves both practitioners and judges adrift about how in principle a contribution is to be calculated, as quantification of the contribution in this case was based upon supposition. Making an educated guess in any case is an unreliable method of quantification, because a belief may subsequently turn out to be based upon a false premise. By contrast with an empirical method, ‘best thinking’ based upon supposition is both subjective and arbitrary. Consequently, it is prone to bias, which could result in an appeal.
Has this decision increased the litigation risks involved in these claims, by adding yet another element of uncertainty into what is already a rather muddled, incoherent and unstable equation?
If this decision
results in the making of inconsistent judicial decisions, what damage has it
caused to the integrity and rigour of the Jackson Reforms?
Has the court just
pushed up the price of doing a deal in mediation, i.e. where mediation is
preceded by the making of a Part 36 Offer?
I think it has.
The problem now, is
working out in any given case, ‘by how much?’
Therefore, the earlier
parties proceed to mediation, the better.
Conversely, where a
Claimant refuses to enter into mediation/JENE, or walks out, there is an
argument that the court should not make any allowance for a success fee in
making an award for a successful claimant.
Since the court has the
power to order mediation where parties do not consent, this is a tool that
every judge should consider using at the first CMC, i.e. to contain the
escalation of costs. However, if for example a Circuit Judge refuses an
application for Mediation/JENE, i.e. because he or she thinks it is not
appropriate (which can happen), unless your client appeals, the price will go
up. Therefore, what is now needed, is judicial guidance about the consequences
of refusing to enter into ADR in an Inheritance Act claim.
At
First Instance, the Trial Judge, The Hon Mr Justice Cohen held:
‘36. I have
to undertake a two-stage approach by asking two questions:
i)
Did the will make reasonable financial provision
for C;
ii) If not, what
reasonable financial provision ought now to be made for C?
That those two tests
are the correct approach was re-emphasised in Ilott v The Blue Cross and
others [2018] AC 545.
37. In
answering both questions I must have regard to the factors set out at Section
3(1) of the Act, in particular I must have regard to the following matters:
a)
The financial resources and financial needs which the
claimant has or is likely to have in the foreseeable future;
b)
… (immaterial);
c)
The financial resources and financial needs which any
beneficiary of the estate of the deceased has or is likely to have in the
foreseeable future;
d)
Any obligations and responsibilities which the deceased
had towards any applicant for an order under section 2 or towards any
beneficiary of the estate of the deceased;
e)
The size and nature of the estate of the deceased;
f)
Any physical or mental disability of any
applicant for order under the said section 2 or any beneficiary of the estate
of the deceased;
g)
Any other matter, including conduct of the applicant or
any other person, which in the circumstances of the case the court may consider
relevant.
38. I
have read but do not set out for the purposes of this judgment the other
sub-sections to section 3.
39. Lord
Hughes in Ilott acknowledged that the section 3 factors are applicable
equally to both stages and there is in most cases a very large degree of
overlap between them. He confirmed that in terms of addressing the stages in a
judgment: “There can be nothing wrong, in such cases, with a judge setting out
the facts as he finds them and then addressing both questions arising under the
act without repeating them”.
40. The
standard for what is reasonable financial provision (in cases other than spouse
claims) is defined in Section 1 (2) (b) of the Act as: “Such financial
provision as it would be reasonable in all the circumstances of the case for
the applicant to receive for his maintenance”.
41. At
paragraph 14 of Ilott, Lord Hughes explained that, “the concept of
maintenance is no doubt broad but the distinction made by the differing
paragraphs of section 1 (2) shows that it cannot extend to any or everything it
should be desirable for the claimant to have. It must import provision to meet
the everyday expenses of living”.
42. Lord
Hughes then cited with approval the extract from Re Dennis (Deceased) [1981]
2 AR 140, where at paragraph 145 Browne-Wilkinson LJ (as he then
was) said: “… the word “maintenance” connotes only payments which,
directly or indirectly, enable the applicant in the future to discharge the
cost of his daily living at whatever standard of living is appropriate to him.
The provision that is to be made is to meet recurring expenses, being
expenses of living of an income nature. This does not mean that the provision
need be by way of income payments. The provision can be by way of lump sum, for
example, to buy a house in which the applicant can be housed, thereby relieving
him pro tanto of income expenditure. … “
43.
Specific guidance for claims by adult children were
considered in Ilott. At paragraph 19 Lord Hughes said this:
“19. For all other
claimants [other than spouses], need (for maintenance rather than for anything
else, and judged not by subsistence levels but by the standard appropriate to
the circumstances) is a necessary but not a sufficient condition for an order. Need,
plus the relevant relationship to qualify the claimant, is not always enough.
In In re Coventry the passage cited above was followed almost immediately by
another much-cited observation of Oliver J at page 475: “It cannot be enough
to say ‘here is a son of the deceased; he is in necessitous circumstances;
there is property of the deceased which could be made available to assist him
but which is not available if the deceased’s dispositions stand; therefore
those dispositions do not make reasonable provision for the applicant.’ There
must, as it seems to me, be established some sort of moral claim by the
applicant to be maintained by the deceased or at the expense of his estate
beyond the mere fact of a blood relationship, some reason why it can be said
that, in the circumstances, it is unreasonable that no or no greater provision
was in fact made. “
20. Oliver J’s
reference to moral claim must be understood … There is no requirement
for a moral claim as a sine qua non for all applications under the 1975 Act,
and Oliver J did not impose one. He meant no more, but no less, than that in
the case of a claimant adult son well capable of living independently,
something more than the qualifying relationship is needed to found a claim, and
that in the case before him the additional something could only be a moral
claim”. (Emphasis added).
44. Thus
the first question before me is whether, in the circumstances, C’s financial
position, difficult as it is, caused by reason of her suffering from a severe
and debilitating mental illness which makes her unable to support herself and
her two primary school age children, and which makes her dependent on state
benefits and precarious financial support from her partner, means that the will
did not make reasonable financial provision for C.
45. The
more that I have contemplated this matter, the harder I have found it.
There is no doubt that C is in a position of real need. But, on the other hand,
C had cut herself off from her family some 10 – 20 years ago and has had no
financial support from them for over 20 years save for the period 2007 – 2011.
For these purposes I ignore the minor gifts that they provided her with on
birthdays and other festivals.
46. How
do I factor in the fact that C’s treatment of her family is largely to be
explained by her psychiatric illness which she, rightly or wrongly, blames upon
their treatment of her?
47. This
is not a large estate and the priority must be to ensure that C’s mother, the
beneficiary under the will, has sufficient funds properly to be maintained for
the rest of her days. She is aged almost 80 and would have a normal life
expectancy of 10 – 11 years. She has very severe health problems which
do not bode well for her future, but the world contains many who have lived
beyond their life expectancy.
48. The
parties have not been able to agree that I should know of any Part 36 offers
and so I will need to deal with costs as between the parties separately, but it
is right that I should at this stage consider the Conditional Fee Agreement
into which C has entered. …
50. As a matter of
law, the other party to litigation cannot be ordered to pay the uplift. Yet,
C asks me to make an order that the additional £48,175 success fee should fall
on the estate as part of her award. As a result of the agreement which C had to
enter into to fund the continuation of the litigation, she has incurred a
liability which her solicitors can enforce so that her needs-based claim will
be correspondingly reduced.
51. There
are only two authorities which Ms Rogers has been able to trace where this
appears to have been considered. The first in time was Re Clarke [2019]
EWHC 1193 and 1194 (Ch), a decision of Deputy Master Linwood sitting in the
Chancery Division. In an Inheritance Act case he declined to increase
his award to include a success fee on 5 grounds:
i)
The calculation of damages is a matter of
procedure carried out before costs are considered and has never included an
element of costs;
ii)
To allow it would contrary to legislative
policy that the losing party should not be responsible for a success fee –
s.58A(6) Courts and Legal Services Act 1980;
iii)
It would amount to an increase in damages by way of
costs;
iv)
It may put a CFA funded litigant in a better
position in terms of negotiation due to the risk of a substantial costs burden;
v)
It would put a claimant in Inheritance Act proceedings
in a better position than, say, a claimant in a personal injuries claim.
52. The
second case is Bullock v Denton, an unreported decision of His Honour Judge
Gosnell in the Leeds County Court in a judgment given just 9 days before
this hearing. In that case the claimant had entered into both a Damages
Based Agreement with her first set of solicitors and a Conditional Fee
Agreement with her second solicitors and arguably might be liable under
both agreements. The judge disregarded the potential DBA liability and
considered the CFA. In that case there was a success fee representing a 50%
uplift on costs which as at 7 June 2019 (i.e. almost a year before trial) stood
at approximately £24,000 + VAT with a substantial (but unquantified) increase
as a result of the trial. The judge allowed a figure of £25,000 in total in
respect of the CFA by way of contribution. That was added to the claimant’s
award.
53. As
it is impossible for me to know how much the true liability by way of success
fee was, I can only surmise, but it seems to me that what was awarded was bound
to have been less than half the uplift to which the solicitors were entitled
under the CFA.
54. It
does not appear that HHJ Gosnell was referred to the decision in Re Clarke.
55. I accept
that it is appropriate for me to consider this liability as part of C’s needs.
I do so largely for case specific reasons. I am not making a large award
(unlike in Re Clarke). It is not an award that permits of much
elasticity. If I do not make such an allowance one or more of C’s primary needs
will not be met. The liability cannot be recovered as part of any costs
award from the other parties. The liability is that of C alone. She had no
other means of funding the litigation.
56. I refer
also to the obiter comments of Briggs J (as he then was) in Lilleyman v
Lilleyman [2012] 1 WLR 2801 where the judge was faced with the risk in an
Inheritance Act claim of the award being undermined by the effect of
undisclosed negotiation offers. He said this: 26. I must in concluding
express a real sense of unease at the remarkable disparity between the costs
regimes enforced, on the one hand for Inheritance Act cases (whether in the
Chancery or Family Divisions) and, on the other hand, in financial relief
proceedings arising from divorce. In the latter, my understanding is that the
emphasis is all on the making of open offers, and that there is limited scope
for costs shifting, so that the court is enabled to make financial provision
which properly takes into account the parties’ costs liabilities. In sharp
contrast, the modern emphasis in Inheritance Act claims … The judge then
went on to observe that the potential for negotiation offers to undermine a
judge’s attempt to meet needs is a disadvantage to the sole litigation costs
regime.
57. It was,
of course, for that main reason that the making of Calderbank offers in
matrimonial financial remedy cases was outlawed.
58. I
intend to adopt the same approach as HHJ Gosnell. I think that it would not be
fair on C for me to ignore completely her liability to her solicitors. But, I
recognise that there is a risk of injustice to the estate, in particular if an
appropriate Part 36 offer had been made, of which I am necessarily unaware at
this stage of proceedings. In addition, I flag up that I do not know the
precise terms of the agreement and what is the definition of “success”.
If my award does not bring about the operation of the uplift, I will revisit
this element of the award.
59. I
cannot see how I can avoid some potential (and it is only potential) injustice
to either C or the estate. All I can do is mitigate the potential by taking a
cautious approach towards this liability.
60. Bearing
that approach in mind and knowing what I do of the case, I cannot envisage how
it could reasonably be thought that the chance of failure was a high chance.
I propose to allow the figure, as part of C’s needs, of £16,750, which
approximates to a 25% uplift.’
