Seasoned IPs will be familiar with conditional fee agreements. They have for some time been the primary tool that allows officeholders to bring court proceedings on behalf of insolvent estates.
Since the inception of CFAs in insolvency proceedings, a number of uncertainties have been known to arise out of their operation. These include whether lawyers’ fees should be payable upon a “success” or only upon a sufficient financial recovery, what happens when a partial recovery is made, whether IPs need to obtain independent advice, and how to achieve a commercial arrangement that avoids breaching the indemnity principle*.
Client-lawyer relationships should be based upon trust, goodwill and mutual interest. When a CFA is prepared by most lawyers, it is prepared with these principles in mind. However, as we all appreciate in an insolvency context, a full recovery of the cake is not always achieved at the conclusion of court proceedings.
These circumstances arose in the recent High Court case of Stevensdrake. In 2005 Stevendrake solicitors were instructed by the liquidator of Sunbow Limited, Mr Hunt, to bring a claim in misfeasance against the former administrators. In short, the claim was successfully settled, but only a small financial recovery was made. Stevensdrake incurred costs of nearly £800,000 in bringing those proceedings.
Stevensdrake later brought High Court proceedings against Mr Hunt for non-payment of those fees. They argued that because the litigation had been successful, Mr Hunt should be personally liable to pay Stevensdrake’s fees. These were the clear written terms of the CFA.
It was however found by HHJ Barker that the terms of the CFA did not override the implied terms agreed between the parties. They had a long standing relationship in the years before and after the signing of the CFA. The decision was based on the specific facts and substantial evidence that Stevensdrake had only ever charged for their fees when a recovery was made. The court concluded that Stevensdrake had also breached equitable, fiduciary and tortious principles.
IPs should take the following away from this case:
- The court refused to recognise that any general practice had been adopted within the insolvency industry between IPs and lawyers when dealing with litigation in estates where no or limited recoveries are made. Therefore, it is best practice for IPs and lawyers to discuss and agree what should happen in such an eventuality, before any litigation is embarked upon.
- When first instructed in prospective litigation, as a term of their retainer, solicitors often agree that they will charge only to the extent that a recovery is made. If a CFA is then later entered into, and a solicitor then wishes to charge IPs once a “success” is achieved (regardless of any financial recovery), that solicitor will be required to clearly clarify that they intend to depart from that initial agreement and understanding. Therefore, should a solicitor fail to clarify their position at the outset of a retainer, or when entering into a CFA, it would be sensible for IPs to ask for written confirmation of their position.
- With a view to avoiding the indemnity principle being breached, the terms of any retainer should be as follows: that upon a success, the lawyers will be entitled to invoice the IP for their costs. However, the payment terms of any lawyer’s invoice will provide that such fees will only be payable when a sufficient “recovery” has been made to pay them. Practically, lawyers could only then recover their fees once funds were available for the purpose.
If you would like to discuss this case or insolvency litigation funding further, please contact Mark Hague, Senior Associate on 0161 833 8453.
Stevensdrake Ltd (t/a Stevensdrake Solicitors) v Hunt (as Liquidator of Sunbow Ltd)  EWHC 342 (Ch) (http://www.bailii.org/ew/cases/EWHC/Ch/2016/342.html)
*The indemnity principle effectively means that amount which the unsuccessful paying party has to pay cannot exceed the amount which the successful party has to pay to his own solicitor.