- The full
background to these proceedings is set out in my judgment of 19 July 2002
dealing with the first tranche of issues arising out of the Claims Direct
Scheme. Reference should also be made to that judgment for a description of
Claims Direct, its business model and the underwriting history. These topics
are dealt with in the earlier judgment under the following headings:
- The Claims
Direct Business Model: paragraphs 23 to 28;
- The
Development of the Claims Direct Litigation Protection Insurance Policy:
paragraphs 29 to 43;
- The MLSS
Agreement: paragraphs 44 to 48;
- How the
Premium was Allocated: paragraphs 49 to 64;
- The New
Scheme: paragraphs 65 to 77;
- The
Claimant’s Contract with Claims Direct: paragraphs 78 to 88.
- I also received
evidence at the earlier hearing from three witnesses:
- Mr Brian
Raincock (of Litigation Protection Ltd): paragraphs 89 to 116;
- Mr Daniel
Primer (of Catlin Underwriting Agency): paragraphs 117 to 136; and
- Mr Paul
Doona (the finance director of Claims Direct): paragraphs 137 to
153.
Reference was made during the course of argument of the Tranche 2
issues to the evidence which had been given, particularly to that given by Mr
Raincock.
THE
ISSUES
- This is the
second tranche of issues which were directed to be tried by my order of 7
March 2002. The issues were originally as follows:
TRANCHE 2
Issue 7 Referral fees:
(i)
Are the following referral fees:
(a)
the payment of £395 plus VAT to Medical Legal Support Services Ltd;
(b)
the payment to Mobile Doctors Ltd;
(c)
the payment of £72.50 plus VAT to Poole & Co;
(ii) if so does the solicitor’s agreement to pay them breach the
Introduction and Referral Code;
(iii) if so what are the consequences;
(iv) are these fees irrecoverable for any other reason?
Issue 8 Counsel’s fees:
(i)
Is any part of the fees paid to counsel by a Claims Direct panel solicitor
paid or refunded by counsel to Claims Direct;
(ii) are payments made by counsel in respect of referrals for cases;
(iii) do counsel instructed by Claims Direct panel solicitors sometimes
use a common VAT number, and do they for that or any other reason operate as a
firm;
(iv) are counsel’s fees for advice only payable in specified
circumstances, namely success and recovery from the paying party;
(v)
if the answer to any of the above is in the affirmative, what are the
consequences?
Issue 9 Is the requirement to seek counsel’s advice in
every case under the terms of the Operating Manual reasonable and is the fee
for that recoverable from a paying party?
Issue 10 Recoverability of insurance premiums,
transitional provisions:
(i)
whether money actually paid or committed by a claimant to Claims Direct for
insurance prior to 1 April 2000 is recoverable;
(ii) whether a premium paid in respect of an insurance policy entered
into prior to 1 April 2000 where the certificate of insurance is dated prior
to 1 April 2000 is recoverable;
(iii) whether a premium paid or payable by a claimant to Claims Direct
for an insurance policy entered into after 1 April 2000 replacing a previous
funding agreement is recoverable?"
- As a result of
negotiation and sensible compromise between the parties the number of live
issues has been greatly reduced. The live issues are now:
Issue 7 Referral fees:
(i)
Are the following referral fees:
(a)
the payment of £395 plus VAT to Medical Legal Support Services Ltd;
(ii) if so does the solicitor’s agreement to pay them breach the
Introduction and Referral Code;
(iii) if so what are the consequences;
(iv) are these fees [and the payment to Mobile Doctors Ltd]
irrecoverable for any other reason?
THE COMPROMISED
ISSUES
- It is necessary
to deal briefly with those issues which have been compromised before dealing
with the issue 7 matters in due course.
Issue 8 - Counsel’s Fees
- In relation to
the issues concerning counsel’s fees I had directed, in the order of 8
November 2001, that the Claimants’ Solicitors should provide a copy of that
order to the Heads of Chambers with whom agreements were made by or on behalf
of Claims Direct for the provision of advice by counsel for Claims Direct and
also to: "an appropriate officer of the Bar Council". Recipients were at
liberty to apply to intervene in the determination of the preliminary issues.
- At the case
management conference on 3 October 2002 it became apparent that the Claimants’
Solicitors had not been able to comply with that direction because there
appeared to be no method of identifying which sets of Chambers had entered
into the relevant agreements with Claims Direct. Mr Hood attended the hearing
on 2 October 2002 on behalf of Mr Bruce Stuart and indicated that Mr Stuart
was doing what he could to bring the matter to the attention of other members
of the Bar who might be affected.
- On 4 October
2002, following the case management conference, Robert Rhodes QC (the Head of
4 Kings Bench Walk) sent a memorandum to all members, past and present, of his
Chambers who had ever done any type of Claims Direct work. That memorandum set
out the issue and relevant extracts of the points of dispute. At a subsequent
Chambers meeting it was decided that Mr Stuart "would act in a representative
capacity for all current members of Chambers". In addition Mr Rhodes wrote to
all Heads of Chambers who had ever done any Claims Direct work to inform them
of the proceedings and of what had happened at the recent case management
conference.
- In addition to
that I myself wrote to the Chairman of the Bar on 8 October 2002 bringing the
issue to his attention and explaining the difficulty. Following that letter
Mark Stobbs (Head of the Professional Standards and Legal Services Department
of the General Council of the Bar) wrote to all Heads of Chambers on 16
October 2002 bringing the matter to their attention and informing them that
the issues affecting counsel were to be tried over four days commencing on 2
December 2002. The letter concludes:
"Heads of Chambers, where counsel did work under the Claims Direct
Scheme, are invited to contact the Claimants’ Solicitors Messrs Colman Coyle …
for further information."
No
applications to intervene have been received by this Office other than from Mr
Stuart and those whom he represents.
- Mr Stuart
indicated, in a letter addressed to me dated 29 November 2002, that he had not
been notified by the Claimants’ Solicitors whether any Chambers or individuals
had contacted them following the Bar Council’s invitation. He did indicate
however that Mr Hood had had lengthy discussions with several Chambers,
including York Chambers and Harrington Street Chambers in Liverpool. He states
in his letter that he had formed the impression that the majority of counsel
were content that their interests were being represented in any event (because
they were the same as those of 4 Kings Bench Walk) and would therefore rather
not expose themselves to costs unnecessarily by becoming involved in any
formal sense.
- Full disclosure
was given to the Defendants through Mr Stuart, which led to them abandoning a
number of the points previously in issue. Mr Stuart took the view that it was
appropriate to reach agreement with the Defendants on the sole remaining issue
which concerned his Chambers and the Bar generally. He did this by letter to
the Defendant Solicitors dated 27 November 2002. In order to ensure that every
Chambers and individual who had done Claims Direct work was aware of the
situation he sent by fax a note to each Head of Chambers on his list making
clear the urgency of the issue and reminding them of its importance. The note
attached copies of the letters setting out the agreement so that each Chambers
could consider the full terms reached. At the date of Mr Stuart’s letter to me
he had not received any adverse comments to the agreement from any member of
the Bar, nor did Mr Hood indicate any at the hearing before me.
- The Claimants
have throughout described their position on the counsels’ fee issue as
"neutral".
- The compromise
achieved by Mr Stuart is as follows:
Issue 8 (iii) withdrawn by the Defendants
Issue 8 (iv) withdrawn by the Defendants
- Issue 8(i), (ii)
& (v) concerned the possibility that part of the fee paid to counsel might
be a referral fee. This is of course a matter of considerable importance to
members of the Bar involving a possible breach of the Code of Conduct of the
Bar. The Professional Standards Committee of the Bar issued Guidance on
Commissions and Payment by Barristers for Work on 1 May 2001. The guidance
runs to some four pages and begins:
"This guidance is issued following recent communications from the
Professional Standards Committee concerning schemes under the aegis of the
Claims Direct Personal Injury Programme. The Committee’s view was that these
schemes appeared to involve members of the Bar paying outside consultants in
order to obtain work and could not fairly be construed as arrangements under
which barristers pay for preparation and administrative work which is
necessary to enable them to give good professional advice. The Professional
Standards Committee established a Working Group to consider the issues raised
by such schemes and generally."
- The guidance
goes on to state what the Rules currently are and how the Committee believes
they affect particular sets of circumstances. Under the heading "Other
Guidance Concerning the Claims Direct Scheme" the following appears:
"Fee notes should record the fee that the barrister is actually being
paid for professional services. There is obviously no need to refer to
ordinary professional expenses, such as clerk’s fees, Chambers rent and
administration, travel costs and the like. A special payment to be made to a
third party for preparation or administrative work of the kind that would
normally be undertaken by instructing solicitors would, however be regarded as
an extraordinary expense. Such payments should be recorded on the fee note so
that the document is transparent and so could be challenged by the party
ultimately responsible for paying the fee."
- Mr Neish
explained that Ian Lee was a clerk with 4 Kings Bench Walk (a consultant clerk
since 1996) he entered into an agreement with Medical Legal Support Services
Ltd (MLSS) dated 19 June 1996 (Bundle 11/1/1). That agreement recited that
solicitors requiring advice from counsel were required to forward the
necessary case papers to MLSS, that MLSS had agreed to deliver briefs under
the scheme, which required advice from counsel, to Ian Lee "for distribution
by him to appropriate members of Chambers … and to appropriate members of
other Chambers". The agreement also recited agreement between MLSS and each
solicitor that Ian Lee was "entitled to a fee per brief to cover the
administration and other expenses arising out of performance of his
obligations". It was a condition of the scheme that counsel’s advice on
quantum (and sometimes merits) had to be taken, the fee for which was fixed at
£95 plus VAT. The effect of this was that there had to be instructions to
counsel in every case. Under the agreement Ian Lee had to act as distributor
of instructions to those counsel who were going to give the necessary advice.
The panel solicitors sent instructions to MLSS, MLSS forwarded those
instructions to Ian Lee, who identified the appropriate counsel. The advices
were sent back to Ian Lee, who in turn sent them to MLSS and thence to the
panel solicitors.
- Paragraph 3 of
the agreement provides that in relation to each brief delivered by MLSS to Ian
Lee he would be entitled to a fee of £25; and paragraph 4 provides that once
Ian Lee had received payment of the £25 he was required to inform MLSS in
writing, who would then be entitled to invoice him the sum of £15, which was
to be paid to MLSS by him as soon as practicable. Paragraph 4 sets out the
assistance to be provided by MLSS in return for the £15:
"To
assist the performance of the obligations of Ian Lee … MLSS shall provide all
and any assistance reasonably required of them by Ian Lee including but
without restriction to the generality of the foregoing, the provision of
courier services for the delivery and redelivery of briefs (as and when
required)."
- In the event, Mr
Neish explained, so many instructions were received that MLSS dropped out and
instructions were sent direct to Ian Lee. The distribution was subsequently
taken over by a body known as Brown Associates but nothing turns on that.
- In Spring 2001
the Professional Conduct Committee of the Bar raised a complaint, apparently
of its own motion, based on the possibility that referral fees might have been
paid. That complaint is still pending and I express no view in this judgment
as to whether or not any part of the payment to Ian Lee is a referral fee or
whether there has been any breach of the Code of Conduct of the Bar. It is
clear that, following the guidance given by the Bar Council, fee notes were
sent out stating that in addition to the fee payable to counsel, £15 plus VAT
would be paid to MLSS. Solicitors complained about this (see for example the
letter of 13 July 2001 from Messrs Glaisyers 11/1/30: "We feel that it is
extremely unlikely that [the paying party] will be willing to pay the extra
sum of £15 plus VAT for administrative assistance especially bearing in mind
that the instructions are forwarded directly to Chambers.")
Against this background Mr Stuart agreed that the £15 was irrecoverable
on an assessment between the parties and that issue 8 could be settled (at
least as far as he and those he represents were concerned) on that
basis.
- By a letter of
18 June 2001 Mr Stuart asked Mr Gravell of Claims Direct to let him have a
breakdown of the administrative services provided to counsel by MLSS
[11/1/25]. In his reply of 19 June 2001 Mr Gravelle writes:
"MLSS charges a small administration fee to the barrister which covers
services carried out by this company on behalf of the Chambers and individual
barristers. These services include but are not limited to, credit control,
marketing, the monitoring of service level agreements together with a constant
review as to the efficiency of this scheme."
- Mr Gravell is
the Chief Operating Officer of MLSS.
- For the
avoidance of doubt I state that I can envisage no circumstances in which the
£15 paid to MLSS would be allowed on an assessment between the parties. Mr
Charlton, whilst maintaining the neutral stance of the Claimants, asked that I
should make clear how the distinction is to be made between those expenses
which are ordinarily included within counsel’s fees and allowed without
breaking down and auditing those fees, and payments such as that made to MLSS.
In my judgment the guidance given by the General Council of the Bar, which I
have already quoted, at paragraph 15 accurately identifies the nature of the
payment which should not be included in counsels fees, ie "a special payment …
for preparation or administrative work of the kind that would normally be
undertaken by instructing solicitors".
- Mr Charlton
wished me to go further to make it clear that those counsel who had actually
received the additional £15 in the past should repay that sum to the
solicitors who had paid them. The issues which I am trying arise in the course
of detailed assessment proceedings between the Claimants and the Defendants.
The underlying question which I have to answer is: were the costs claimed by
the Claimant proportionately and reasonably incurred and proportionate and
reasonable in amount? In relation to the £15 I have indicated that it is a
cost not reasonably incurred. The Defendants therefore do not have to pay it.
It is a matter for the Claimants’ Solicitors whether they still seek to charge
their clients that amount, but it seems unlikely that this will be possible
for two reasons: firstly, Section 74(3) of the Solicitors Act 1974
provides:
"The amount which may be allowed on the taxation of any costs [between
solicitor and client] … in respect of any item relating to proceedings in a
County Court shall not, except in so far as Rules of Court may otherwise
provide, exceed the amount which could have been allowed in respect of that
item as between party and party in those proceedings …"
CPR
48.8(1)(A) provides an escape from that provision, provided the solicitor and
client have entered into a written agreement which expressly permits payment
to the solicitor of an amount of costs greater than that which the client
could have recovered from another party to the proceedings.
- Secondly CPR
48.8(2)(c)(ii) provides:
"Subject to paragraph 1(a), costs are to be assessed on the indemnity
basis but are to be presumed
…
(c)
to have been unreasonably incurred if –
(i)
they are of an unusual nature or amount; and
(ii) the solicitor did not tell his client that as a result he might
not recover all of them from the other party."
- The result of
this is that solicitors could be out of pocket in many cases having paid the
irrecoverable £15 to counsel unless counsel refunds it. That matter must
remain one for discussion between solicitors and counsels’ clerks, or if
necessary the General Council of the Bar.
Issue 9 – Seeking
Counsel’s Advice in Every Case
- It was agreed by
the parties that this is a fact sensitive issue since it may well be
reasonable to obtain counsel’s advice in one case when it is not in another. I
am asked, if possible, to give some general guidance as to when the use of
counsel might be appropriate. Mr Neish went so far as to suggest that I might
indicate that it would not be appropriate in any fast track case. That would
however be far too far reaching and would in effect be usurping the task of
the Civil Procedure Rule Committee. If at some date in the future it is
decided that fees for counsel’s advice in fast track cases should not be
recoverable, rules to that effect will be passed. Until such rules are passed
the matter remains one for the discretion of the Judge assessing costs. The
test to be applied on the standard basis is, as I have said, whether the costs
are reasonably and proportionately incurred and are reasonable and
proportionate in amount. The Test Cases before me are for the most part
simple, straightforward cases which competent solicitors of reasonable
experience should be able to deal with without needing to resort to counsel.
There may however be factually simple cases resulting in modest awards of
damages which nonetheless contain difficulties, for example as to causation,
in respect of which the obtaining of counsel’s advice would be both reasonable
and proportionate. In such a case the test of necessity advocated by the Lord
Chief Justice in Lownds v The Home Office [2002] EWCA Civ 365 might
well be satisfied. Given that the facts of each case can vary enormously it is
not in my view possible to give more specific guidance.
Issue 10 –
Insurance Premiums and Transitional Provisions
- Issues (i) and
(ii) have been conceded by the Claimants and (iii) has been conceded by the
Defendants. The only point which arises under this head is in relation to
10(i) where the Claimants’ concession, which was notified to the Defendants by
a letter dated 22 October 2002, is said to be limited in that "it does not
technically bind Claimants other than in the Test Cases". Again I am invited
to give guidance which may assist in future cases.
- Mr Neish,
unsurprisingly, did not welcome the prospect of Issue 10(i) being run in
future cases. It has to be accepted however that if individual Claimants wish
to argue this topic in the future they cannot be prevented from doing so.
- Mr Charlton,
presumably in the hope of resolving an issue which is recurrent, argued that
care was necessary in some cases where for instance the Fair Trading Statement
was signed before 1 April 2000. He took as his example the case of Brooks
9A/4/119. Mr Brooks had suffered an accident on 19 March 1999. He signed a
Fair Trading Statement on 31 March 2000. The Fair Trading Statement is in
effect a proposal form. I have described it more fully at paragraphs 85 to 87
of my earlier judgment. The Claimant (Mr Brooks) signed that:
"I
understand that:
- if this
proposal is accepted by Claims Direct and a certificate of insurance is
issued, Claims Direct will assist me with my claim."
- It is not clear
from the papers in front of me when that proposal was accepted by Claims
Direct but I assume that it was on a date after 31 March 2000 and therefore at
a time when ATE insurance premiums had become recoverable under the Access to
Justice Act 1999. In the case of Mr Brooks the Evidence of Insurance is dated
24 May 2000. Since, in my view, Mr Brooks was not committed to this insurance
until his proposal or offer had been accepted by the insurers, it seems clear
that no money was actually paid or committed by him to Claims Direct prior to
1 April 2000. On the facts of Mr Brooks case I can see no reason why the
recoverable element of the insurance premium should not be recovered. It
follows that had there been a concluded contract before 1 April 2000 that
contract would not come under the provisions of Section 29 of the 1999 Act.
(The applicable law is set out at paragraphs 10 to 22 of my earlier
judgment).
THE LIVE
ISSUES
Issue 7 –
Referral Fees
- (i) (a) Is the
payment of £395 plus VAT to MLSS Ltd a referral fee?
(ii) If so does the solicitor’s agreement to pay them breach the
introduction and referral code?
(iii) If so what are the consequences?
(iv) Are these fees irrecoverable for any other reason?
THE PROFESSIONAL
RULES
- The Solicitors
Practice Rules 1990, so far as relevant, are as follows:
"Rule 1: Basic Principles
A
solicitor shall not do anything in the course of practising as a solicitor, or
permit another person to do anything on his or her behalf, which comprises or
impairs or is likely to comprise or impair any of the following:
(a)
the solicitor’s independence or integrity;
(b)
a person’s freedom to instruct a solicitor of his or her choice;
(c)
the solicitor’s duty to act in the best interests of the client;
(d)
the good repute of the solicitor or of the solicitor’s profession;
(e)
the solicitor’s proper standard of work;
(f)
the solicitor’s duty to the court.
…
Rule 3: Introductions and Referrals
Solicitors may accept introductions and referrals of business from
other persons and may make introductions and refer business to other persons,
provided there is no breach of these rules and provided there is compliance
with a Solicitors Introduction and Referral Code promulgated from time to time
by the Council of the Law Society with the concurrence of the Master of the
Rolls."
- The relevant
part of the Solicitors Introduction and Referral Code 1990 is as
follows:
"Introduction
(1)
This Code states the principles to be observed in relation to the introduction
of clients by third parties to solicitors or by solicitors to third parties.
…
(3)
Non compliance, evasion or disregard of the Code could represent not only a
breach of Practice Rule 3 (Introductions and Referrals) but also a breach of
Practice Rule 1 (Basic Principles) or one of the other Practice Rules, and
conduct unbefitting a solicitor of the Supreme Court or other
lawyer.
Section 1: The Basic Principles
(1)
Solicitors must also retain their professional independence and their ability
to advise their clients fearlessly and objectively. Solicitors should never
permit the requirements of an introducer to undermine this
independence.
(2)
In making or accepting introductions or referrals, solicitors must do nothing
which would be likely to compromise or impair any of the principles set out in
Practice Rule 1:
…
Section 2: Introduction or Referral of Business to
Solicitors
…
(3)
Solicitors must not reward introducers by the payment of commission or
otherwise …
(4)
Solicitors should not allow themselves to become so reliant on a limited
number of sources of referrals that the interests of an introducer affect the
advice given by the solicitor to the clients.
(5)
Solicitors should be particularly conscious of the need to advise impartially
and independently clients referred by introducers. They should ensure that the
wish to avoid offending the introducer does not colour the advice given to
such clients.
…"
The
above provisions are made under Section 31 of the Solicitors Act 1974 and take
effect as subordinate legislation governing the practice and conduct of
solicitors (see Swain v The Law Society [1983] 1 AC 598 (HL)).
THE PANEL
SOLICITORS OPERATING MANUAL
- The Test Cases
are covered by two editions of the Operating Manual, the eighth edition (dated
November 1999) (4/1/1) and the ninth edition (dated October 2000)
(8/2/B/78/256). Section 10 of the ninth edition deals with the MLSS
fees:
"The standard MLSS fee is £395 plus VAT for every claim accepted.
Payment of MLSS fees invoiced on acceptance of the case is deferred for 9
months before coming due." (8/2/B/78/298)
- Section 1 gives
a brief overview of the Claims Direct Scheme and Section 2 deals with the
acceptance procedure, Section 3 progressing the claim and Section 9 support
provided by MLSS. The manual sets out the claims manager’s role in some
detail. I quote selectively from it.
- The Operating
Manual includes the following information:
"Potential claims
In
the initial contact with the potential client, brief details are taken and
then an appointment is arranged for a claims manager to visit the caller. The
claims manager visits the potential claimant at their home to take details
about the circumstances surrounding the accident. He ensures that the
potential claimant completes the necessary application form and takes him
through the Fair Trading Statement which sets out the claimant’s options and
the alternatives to the Claims Direct Scheme.
If
the claimant opts to proceed with Claims Direct, he will need to take out a
Claims Direct Protect insurance policy. The claimant can either purchase cover
himself, or elect to take out a loan arranged by Claims Direct to cover the
cost of the premium.
…
Processing claims
On
accepting a case, the panel solicitor should fax the acceptance form to the
Data Processing Department. An invoice will then be sent out by Poole & Co
for the vetting fee to be paid within 7 days of receipt and by MLSS for the
support services provided by the claims manager.
…
On
receiving acceptance of the case, MLSS will inform the claims manager. The
panel solicitor should also contact the claims manager to arrange for the
required information to be obtained. The claims manager will prepare a
detailed client statement and if necessary, a plan of the locus along with
photographs. As the case progresses, the panel solicitor may need witness
statements and further information from the client. The solicitor should then
progress the case, obtain medical notes, medical reports and counsel’s advice
as required by the scheme.
Settlement
…
The
solicitor should be able to recover the cost of the insurance premium on
behalf of the claimant and must endeavour to do so. The panel solicitor will
also be able to reclaim the MLSS fee as a disbursement … [pages 265 –
266]
…
Initial client contact
There is to be no contact with the client prior to acceptance of the
case. Experience has shown that where clients are contacted prior to the
acceptance of a case by a panel solicitor, who may then subsequently decide
not to accept the case, the client is left confused, particularly when a
second solicitor writes to confirm he is acting for him. Consequently it is
now a mandatory part of the scheme that there is to be no client contact prior
to acceptance of the case. The panel solicitor can of course speak to the
claims manager prior to accepting a case.
Contacting the claims manager prior to acceptance
The
panel solicitor is told the identity of the claims manager dealing with the
case. The panel solicitor is at liberty to request additional information from
the claims manager prior to the acceptance of the case. However, the claims
manager must not be asked to carry out additional work, which is purely of a
speculative nature. It is not in anyone’s interest to waste the claims
manager’s time on a case that is unlikely to be accepted when that claims
manager could be using that time to see a new client. If a simple phone call
may help then by all means make it; otherwise, just return the case to the
Data Processing Department as soon as possible. [page 269]
…
Acceptance of cases
…
MLSS will raise an interim invoice in respect of the work that the
claims manager will carry out on the case. The panel solicitor will not be
expected to discharge the MLSS invoice until 9 months from the date of the
invoice. The panel solicitor should note, however, that payment of the MLSS
invoice becomes due immediately upon conclusion of the case, irrespective of
success or failure, should this occur prior to expiry of the 9 month credit
period.
…
Regular client contact
It
is important that the client receive at least one letter every month from the
panel solicitor, even if nothing has happened on the file.
Incidentally, no reference should be made to "MLSS" as the client will
have no knowledge of that company (always use "Claims Direct"). [pages
272-2730]
…
The
claims manager’s role
Once the panel solicitor has decided to accept the claim, he should
telephone the claims manager and discuss the case with him. This will assist
the claims manager when it comes to the preparation of statements, since he
will be able to ensure the points the panel solicitor feels are important are
covered.
As
soon as the acceptance form is received by the Data Processing Department,
MLSS will instruct the claims manager to produce a fully detailed client
statement together with any other necessary documentation. The claims manager
will have been provided with details of the panel solicitor who has accepted
the case, and will be expected to supply these reports directly to the panel
solicitor between 14 and 35 days of the acceptance notification.
…
The
panel solicitor is urged to use the claims manager to obtain supportive
witness evidence on claims, attend site inspections and, where necessary,
ensure that the client attends for medical appointments for the purpose of
obtaining medical reports. The claims manager will keep a register detailing
all the work which he has done on each case. [page 275]
…
The
initial medical report
…
The
nominated medical reporting service will arrange an appointment for the client
to see the agreed expert and will inform all relevant parties. The client will
be informed in writing of the date and time of the medical appointment. The
claims manager and the panel solicitor will also be informed and it is their
responsibility to ensure that the client attends the appointment … [page
277]
…
Support provided by MLSS – support section
This section of the Legal Department has a dedicated team which
provides guidance and assistance to panel solicitors with respect to the
procedures set out within the Operating Manual. It may also provide guidance
and assistance to the panel solicitor on the day to day conduct of the cases.
In
addition this section considers the reports and requests for authority made by
the solicitor under the guidelines set out in the manual, thus monitoring the
progress of claims where the indemnity provided under the insurance policy may
be affected.
Costing section
The
costing section provides the solicitor with a final MLSS invoice with a
detailed breakdown of costs in respect of the work undertaken by the claims
manger when a case settles. It will also assist with the recovery of the MLSS
invoice and should the panel solicitor experience any difficulty in such a
recovery, he should seek out assistance from this section of the department.
[page 296]"
- The eighth
edition of the Operating Manual contains very similar provisions. Paragraph
2.1(a) "Initial acceptance of cases" states (4/1/11):
"Upon receipt of the faxed acceptance, MLSS will raise an interim
invoice for £395 plus VAT in respect of the work that the Claims Manager will
undertake on the case."
- Section 2.2 "The
Claims Manager’s role" contains the following (4/1/12/13):
"Claims Direct offer a unique service in the market place by providing
the client with a representative who is local to the and who can lead them
through the complex process of making a claim. The Claims Manager therefore
plays an invaluable role not only in obtaining new client instructions but
also by maintaining regular contact with the clients many of who find the idea
of dealing with a solicitor a daunting prospect.
…
As
soon as the Acceptance Form is received by MLSS they will instruct the Claims
Manager to produce a fully detailed Client Statement together with any other
necessary documentation. The Claims Manager will have been provided with the
name, address and reference number of the panel solicitor who has accepted the
case, and will be expected to provide these reports directly to the panel
solicitor within 21 days.
…
The
panel solicitor is urged to use the Claims Manager to obtain supportive
witness evidence on claims, attend site inspections and where necessary,
ensure that the client attends for medical appointments for the purpose of
obtaining medical reports. The Claims Manager will keep a register detailing
all the work that they have done on each case.
At
the conclusion of the case MLSS will submit a breakdown of costs detailing the
Claims Manager’s time (costed on the basis of an outdoor clerk) to the panel
solicitor. Where the value of that work exceeds the sum of £395 already
invoiced to the panel solicitor, a further invoice will be raised for the
balance. This invoice will indicate the full level of the amount of work
undertaken by the claims manager.
The
minimum charge for the work carried out by MLSS on all cases is £395 and where
the panel solicitor is unable to recover all of that outlay from the
Defendant, the panel solicitor will bear the shortfall. In circumstances where
the Claims Manager’s time has been in excess of the initial invoiced amount of
£395, the panel solicitor will receive an invoice in excess of £395 which they
will be expected to attempt to recover. The panel solicitor should remit any
excess recovered to MLSS. The MLSS Cost Drafting Department will provide
support and assistance to the panel solicitor in respect of the recovery of
the MLSS charges. No panel solicitor should deal with the taxation hearing
where the costs of MLSS are in issue without first referring the matter to the
Cost Drafting Department."
Issue 7(i) is the
payment of £395 plus VAT to MLSS Ltd a referral fee?
THE SUBMISSIONS
OF THE PARTIES
- It should be
explained that Mr Neish represented all the Defendants save in respect of one
discrete consequence issue in respect of which Mr Hutton, for the First
Defendants, put in a written submission. The Defendants’ position is that the
compulsory payment of £395 by the panel solicitor to MLSS in respect of every
Claims Direct case taken on is, at least in part, a referral fee, ie a fee
paid by way of a reward or commission in return for the introduction by Claims
Direct of the work to the panel solicitor. The Defendants do not seek to go
behind the finding in my earlier judgment (at paragraph 199) that the £395
plus VAT was charged for work by claims managers in proofing witnesses and
(where necessary) preparing sketch plans and photographs. They argue that the
documents produced in relation to individual test cases show that such work
was performed and that it was charged for within the £395 plus VAT invoices to
panel solicitors by MLSS. They maintain however that this does not mean that
this standard and compulsory fee did not also include a referral element.
- The Second and
Third Defendants go on to argue that such a payment is a breach of the
Solicitors Practice Rules 1990 and the Solicitors Introduction and Referral
Code 1990 which they say leads to the result that the entire retainer, between
the panel solicitor and a Claims Direct customer referred to the solicitor by
Claims Direct in return for referral fees, is tainted with illegality and
unenforceable.
- Those
Defendants’ alternative position is that the entirety of the MLSS fee is
tainted and is therefore irrecoverable. All three Defendants argue that at
least the referral element of the MLSS fee is irrecoverable by the panel
solicitor from his client and therefore irrecoverable from the
Defendants.
- The Claimants’
position is that:
- the mere fact
that a solicitor may pay a fee to an introducer does not of itself mean that
that fee is a "referral" fee;
- it is
necessary for a fee to be in the nature of a reward before it falls within
the definition;
- if the
introducer provides a service beyond mere introduction then a payment for
that service will not be a referral fee;
- therefore the
Defendants need to show that in truth the payment was not for the service
supplied but was (at least in part) a payment in the nature of a reward for
the introduction;
- once it is
accepted that some valuable service has been provided it is not open to the
Defendants to suggest that because they believe the sum paid by the
solicitor was excessive for the work actually performed in any individual
case this automatically makes the excess into a referral fee.
- Mr Charlton
submitted, uncontroversially, that the starting pointed was to look at the
meaning of "referral fee" in the Introduction and Referral Code. Mr Neish
accepted the sort of test set out in the Practice Rules and characterised a
referral fee as "a reward for the work".
Who is the
introducer?
- Since a referral
fee is a reward to an introducer by commission or otherwise, Mr Charlton asks:
who is the introducer? He suggests that it is in fact Poole & Co. Referral
fees paid by one solicitor to another do not breach the Code.
- In response to
this Mr Neish pointed out that Mr Poole was at the relevant time a director of
both Claims Direct and MLSS. He referred to the Introduction and Referral
Agreement between Poole & Co on the one hand and a firm of panel
solicitors on the other (9A/7/61/62). The agreement recites:
"(a) The firm [Poole & Co] has entered into an agreement with
Claims Incorporated Plc (hereinafter referred to as "the company") whereby the
company has agreed to introduce and refer to the firm all accident cases
generated or received by it.
(b)
The company specialises in the handling of accident claims through a national
network of franchisees and informs persons of their rights to claim
compensation.
(c)
The company has reached agreements with the customers to be responsible for
the handling of claims and the collection of damages arising from these
accidents. In addition the company has agreed to indemnify its customers in
relation to the costs incurred by them in the pursuit of their claim in
exchange for fees payable by the customer to the company.
(d)
As part of the standard agreement between the company and each of its
customers the customer has authorised the company to appoint a firm of
solicitors to assist in the handling and prosecution of the customer’s
claims.
(e)
Whilst the company, in accordance with its agreement with its customers, has
appointed the firm to represent all of its customers, the company within its
agreement with the firm has authorised the firm to refer all or any of its
customers to the panel solicitors.
(f)
The company are not "claims assessors" as defined by Rule 9 of the Solicitors
Practice Rules 1990 and do not and will not in relation to claims for death
and person injury receive a contingency fee."
- A little later
the agreement deals with introduction and referral as follows:
"2.1 In consideration of the firm:
2.1.1 Introducing and referring accident claims to the panel solicitor;
2.1.2 agreeing to discharge his several obligations under this
agreement.
The
panel solicitor hereby agrees to:
2.1.3 Pay the firm’s fees as stipulated in the Solicitors Operating
Manual;
2.1.4 comply in all aspects with the terms of the Solicitors Operating
Manual as amended from time to time by the firm; and
[2.1.5] perform its several obligations as stated herein."
- The agreement
goes on to set out the obligations of Poole & Co ("the firm") and then
sets out the obligation of the panel solicitors, which include the
following:
"4.4 The panel solicitor hereby instructs the firm to make a
preliminary study of each accident claim referred to it and assess whether
there are reasonable prospects of success. Further the panel solicitor hereby
authorises the firm to decide whether any statement, photographs or sketch
plan will be required to assist in winning the claim and at the panel
solicitors expense arrange for such documentation to be produced.
4.5
The panel solicitor agrees to abide by the terms of the Solicitors Operating
Manual as amended from time to time and so far as the same is not inconsistent
with the terms herein. The panel solicitor hereby acknowledges that any
serious breach or persistent minor breaches of that manual will result in a
breach of this agreement.
4.6
Subject to the provisions of Clauses 3.5 and 4.1 above the panel solicitor
agrees to use the services of such companies and organisations as the firm may
from time to time recommend for the provision of expert reports and other
support services to the panel solicitors in relation to the accident claims
referred to it by the firm."
- Clauses 3.5 and
4.1 referred to above acknowledge the force of the Solicitors Practice Rules
and indicate that neither party will do anything to breach those rules.
- The Claims
Direct Prospectus, issued some time prior to July 2000, describes the Claims
Direct Protect Scheme. Under the heading "Vetting" it states:
"Poole & Co is entitled to charge a panel solicitor a fee in
respect of administrative and vetting services for each case accepted by that
panel solicitor … this fee will be paid by the panel solicitor to Poole &
Co, which will then pay the fee to the Group in return for vetting services
provided by the Group …"
- Under the
heading "Revenue", it states:
"Under the Claims Direct Protect Scheme, once a potential claim has
passed the Group’s vetting procedures and been accepted by a panel solicitor,
the Group submits a loan application for £1,312.50 to the Bank on behalf of
the Claimants.
The
funds provided by the loan are paid to LPL [Litigation Protection Ltd]. After
deducting a fee to cover the cost of insurance and insurance premium tax, LPL
pays the balance to the Group. The Group can also receive payments from panel
solicitors, barristers and mobile doctors. In total the Group receives
approximately £1,560 of gross revenue per claim but incurs direct costs of
approximately £425 and indirect costs of approximately £475 per claim. The
Group therefore makes gross profit per claim of approximately £660."
(4/2/177)
- Mr Doona
confirmed (transcript 18 June 2002, 55/22) that the £425 direct cost is the
payment to the claims manager. Of that sum £395 was paid by the panel
solicitor and £30 by Claims Direct.
- Under the terms
of the Ninth Operating Manual which I have quoted, at paragraph 36, under the
sub heading "Acceptance of Cases" it is made clear that the £395 is payable by
the panel solicitor whether the case is won or lost. The passage which I have
quoted from the Eighth Operating Manual at paragraph 38 makes it clear that
the panel solicitor bears any shortfall. The £395 is not, it seems, covered by
the ATE policy.
- Mr Neish then
referred to a research paper prepared by Charterhouse Securities dated 15
September 2000 (4/1/IX/123-126). This paper, under the heading "Financial
Analysis and Valuation" states:
"The average income stream from a Claimant’s case that is accepted can
be broken down as shown in the following table:
Table 2: Estimated income per post-event insurance case
|
Insurance policy income |
1,100 |
|
Payment from solicitors |
395 |
|
Payment from Poole & Co for vetting services |
73 |
|
Payment from medical agency from referrals |
40 |
|
Payment from barrister’s from referrals |
15 |
|
Total income |
1,623 |
- Mr Raincock
giving evidence during the Tranche 1 hearing was asked about the nature of the
£395 payment. He said, among other things:
"I
have got no specific breakdown of what it [the £395] was". Certainly some of
it would have been what was called a referral fee, although it is
objectionable language at the moment … Fundamentally you were paying for a
lead and within the lead we provided you with a certain amount of information
…" (Tranche 1 transcript, day 5, p.144-145)
- Mr Raincock was
later asked what element of the £395 was a referral fee. He replied:
"I
have absolutely no idea. That was nothing to do with me. That was a contract
between Claims Direct and the panel solicitor. Nothing to do with me
whatsoever.
Q.
Where does the reference to referral fee come from? Is there a document that
you created [which] referred to referral fee?
A.
You asked me what it was and there are various euphemisms for referral fees in
the market at the moment because the Law Society Rules do not allow referrals.
Q.
But do you agree that it the £395 is not purely a referral fee because I read
to you precisely what the panel solicitors Operating Manual says ..
A.
There are elements, yes, and there is an element of duplication …"
(Transcript day 5, p.150-152)
- Mr Raincock is,
as I have stated in my earlier judgment, an expert in his field. He is
intelligent and articulate and very well aware of the difficulties surrounding
the Law Society’s Introduction and Referral Code. He was, as Mr Neish
submitted, at the head of the developing business model and fully informed and
authoritative on the subject. In my view Mr Raincock was well aware that the
£395 was, at least in part, a referral fee paid by the solicitor to Claims
Direct through MLSS in order to obtain the work.
- Mr Neish submits
and I accept, that, taken together with the terms of the agreement between
Poole & Co and the panel solicitor and the Operating Manual, this
information makes it clear that the payment of £395 (and the £72.50 paid to
Poole & Co) was in fact part of the Claims Direct income stream. The cases
belonged to Claims Direct, not to Poole & Co. Poole & Co was not the
introducer, rather it was an intermediary. It was MLSS, of which Mr Poole was
a director, which distributed the work through Poole & Co and which was
the true introducer.
What did the £395
plus VAT cover?
- Mr Charlton’s
alternative argument, if MLSS was found to be the introducer, is that no
Defendant suggests that the whole of the £395 paid to MLSS is a referral fee,
because part of it was for work actually done by MLSS. The Claimants’ case is
that it is not a referral fee at all because nobody knows in advance what work
is to be done by MLSS and sometimes the work done may be worth as much as, or
more than, the £395.
- Mr Charlton
argues that the burden is on the paying party to show what element of the £395
is a referral fee; but his position is that it is a fixed fee and not a
referral fee. He submits that the Claims Direct Scheme allows and encourages
the panel solicitor to use the claims management services supplied by MLSS.
Those services are in fact used, and, since there is no suggestion of sham, he
argues that there is no need for him to produce evidence to show what the
charge is for. In short he argues that it is a block fee charged at the outset
for work to be done. If there is a shortfall this does not necessarily mean
that the surplus is a referral fee.
- He identified
three points to be considered in resolving this issue:
- What did the
individual solicitor understand at the time he took on the obligation to pay
£395 to MLSS?
- When judging
whether or not there has been a breach of the professional rules it is
irrelevant to look at subsequent events, ie it would not be right to use
hindsight.
- Even if it
were appropriate to consider the amount of work done by MLSS in each case
this should be done on a solicitor and client basis not on a between the
parties basis since the outcome might be significantly different.
- Mr Charlton
submitted that it could not be said that any solicitor in the Test Cases would
never require the claims manager to provide £395 worth of work. He disagreed
with Mr Neish’s submission that in pretty well every case the solicitor would
know in advance what he would want the claims manager to do.
- Referring to the
Operating Manual (both editions) Mr Neish argued that in order to obtain each
client introduced by Claims Direct, the panel solicitor had to agree in
advance to pay MLSS £395 plus VAT against an invoice automatically raised by
MLSS when the case was accepted. He points out that this figure is payable in
full whatever the nature or facts of the case and whatever the nature or
extent of the work actually performed by the claims manager. It is common
ground between the parties that any part of the £395 which cannot be justified
on the basis of the work done by the claims manager is irrecoverable. Mr Neish
also points out that, although the eighth edition of the Operating Manual
provides that MLSS would provide a breakdown of costs detailing the claims
manager’s time to the panel solicitor, and that the claims managers were
required to record their time on Cost Action Reports, such reports only appear
in three of the Test Cases (Gore, Warner and Wilson). He also asserts that
only six of the 15 remaining Test Cases (Benton, Sly and Morgan, in addition
to the three named above) is there any evidence as to time spent/cost/value of
the work done by the claims managers in the Test Cases.
How the system
worked in practice
- Both counsel
sought to establish their respective positions by reference to individual Test
Cases. Mr Charlton referred to the cases of Gore, MacAvoy, Wilson, Sly and
Goodfellow. Mr Neish referred to the cases of Benton, Gore, Sly, Warner,
Wilson and Morgan. The purpose of the exercise, so far as the Claimants were
concerned, was to demonstrate that the work undertaken by the claims manager
could be worth as much as or more than the £395 plus VAT. The Defendants for
their part wished to demonstrate that the work undertaken could not be valued
at anything approaching that figure. I will refer to the cases of Gore and Sly
which both counsel dealt with.
- The case of Gore
(9B/6/106) was an employers’ liability claim where the Claimant, who lived in
Wigan, had slipped on an onion skin at work. The claim settled for £3,000
following an admission of liability without the issue of proceedings. The
accident took place on 22 March 1999 and the claim was settled in March 2000.
- A brief
chronology is as follows:
22
March 1999 - accident occurred.
13
December 1999 - the claims manager completed the Claims Direct application
form on an initial visit to see the Claimant (p. 186-196).
15
December 1999 - the claims manager prepared a file note (p. 183-184).
7
February 2000 - case eventually accepted by Messrs Kenneth Bush of Kings Lynn
(p. 172-179).
11
February 2000 - MLSS invoiced Kenneth Bush for £395 plus VAT using their
standard invoice (p.198).
5
March 2000 - the claims manager took the Claimants’ statement (p. 181- 182).
- The MLSS
standard invoice reads:
"To
the provision of enquiry agents services.
To
include liasing with the client throughout obtaining witness statements,
sketch plans and photographs as appropriate, obtaining information and
documentation relating to losses.
Reporting throughout."
- There is also a
note at the bottom of the invoice:
"The debt arising under this invoice has been assigned to Investec
Bank (UK) Ltd … whose receipt is the only valid discharge. If this invoice is
not found to be correct in all respects Investec Bank (UK) Ltd must be
notified immediately."
- Mr Charlton
pointed out that the invoice was intended to relate to future work as well as
to work done to date, ie between 13 December 1999 and 11 February 2000.
- The claims
manager set out the work he had done and the time taken on the Claims
Manager’s Costs Action Report (p. 161). This form demonstrates that between 13
December 1999 and 28 February 2000 the claims manager had spent 3½ hours in
attendance upon the client and in preparation of notes and claim form, had had
four telephone conversations with the client and had written four letters to
the client and the solicitor. In addition he had spent 3 hours in travelling a
distance of 80 miles. Mr Charlton submitted that this work, charged at
paralegal rates of £65 per hour, plus £7.50 per letter and telephone call,
comfortably exceeded the charge of £395 plus VAT (a figure of £482.50 plus
VAT, £566.94).
- Mr Neish sought
to discount the work undertaken by the claims manager prior to the invoice
from MLSS, which he said could only be in respect of future work. He also
sought to discount the travelling time in respect of the claims manager
visiting the client. It was argued by Mr Neish that even on the solicitor and
client basis this travelling would not be recoverable from a client. The
answer to that of course depends on the terms of the retainer. The client is
entitled to agree whatever terms he or she likes with the solicitor.
- Ms Gore’s case
was not accepted by the solicitors until 7 February 2000. After acceptance the
claims manager again travelled to see her in order to draw up her witness
statement. Mr Neish points out that he had all the details already on the
application form and file note, that the case was entirely straightforward and
that solicitors would normally have undertaken this work in any event.
Accordingly, by Mr Neish’s calculations, the only valued work reasonably
incurred was 1 hour in respect of the witness statement and the eight letters
and telephone calls which he calculated at £125 plus VAT (£151.50). In the
solicitors’ claim for costs the MLSS fee was claimed as a disbursement (in
accordance with the Operating Manual).
- The case of Sly
(9B/10/302) concerned a minor accident in which the Defendant drove over the
Claimant’s foot while reversing out of a parking space. The accident occurred
in October 1999 and was settled without the issue of proceedings in June 2001
for £4,085.07. The accident occurred in Birmingham where the Claimant lived.
The claims manager apparently came from Tamworth in Staffordshire and the case
was accepted on 14 March 2000 by Messrs Hodgkinsons solicitors of Skegness.
The claims manager saw the Claimant on 22 November 1999 and completed the
application form (p. 317-326). He subsequently completed a file note (p. 315).
The solicitors requested that the claims manager obtain a detailed statement
from the Claimant (p. 309-310) and also asked the claims manager to attempt to
obtain statements from other potential witnesses (p. 305-308). Liability was
denied.
- The MLSS
invoice, in identical terms to that used in the case of Gore, was sent to the
solicitors (p. 328). It does not bear a date, but is stamped "paid 13 Dec
2000".
- On 13 February
2001 the claims manager prepared what he called a Costing Report (p. 302).
This showed that between 22 November 1999 and 23 October 2000 he had spent 17
hours in attendance upon the Claimant and preparing her statement and two
further witness statements. He had travelled 80 miles but the travelling time
was not broken down. He also mentions "various phone calls to Ms Sly and
witnesses 45 minutes". On 25 July 2001 MLSS forwarded a more detailed
breakdown to the solicitors. This is not in the standard form and reads as
follows:
"The client sustained personal injury as a result of a road traffic
accident.
Attending on client, obtaining full initial instructions and compiling
case management report – 1 hour 15 minutes.
Attending on client, obtaining details of proof of evidence and
compiling same – 1 hours.
Letters written – 2.
Telephone calls – 2.
Travel time – 1 hour 30.
Disbursements
Travelling (limited to 60 miles) £21.60.
VAT
£3.78. £395.00
VAT
at 17½% £69.13
Overall total (inc VAT) £464.13"
- In respect of
this claim for costs Mr Neish, again excluding travelling time and work done
prior to the solicitors’ acceptance of the case, suggested that the valued
work would be 2 hours and came to a figure of £130 plus VAT (£157.58) as the
cost of the work done.
- It seems that in
this case the claim for the MLSS fee was treated as profit costs rather than a
disbursement. There seems little consistency in the test cases in the way in
which the MLSS fee was treated.
- As I have stated
both Mr Charlton and Mr Neish took me through other test cases seeking to
demonstrate their particular point of view, but there is no need to set them
out here.
Is the MLSS fee a
disbursement or profit costs?
- Dealing first
with the way in which the MLSS fee is to be treated: the Operating Manual
makes it clear that the intention was that the fee should be claimed as a
disbursement (8/2/B/78/266). The correct treatment of disbursements and profit
costs has been the subject of a considerable amount of litigation. Lord
Langdale, in the case of Re: Remnant (11 Beav 603, 613), laid down the
following rule:
"That those payments only, which are made in pursuance of the
professional duty undertaken by a solicitor, and which he is bound to perform,
or which are sanctioned as professional payments, by the general and
established custom of the profession, ought to be entered and allowed as
professional disbursements in the bill of costs."
At
that time other payments made by a solicitor as agent for the client were
properly recorded in the cash account not in the solicitors bill. Section 67
of the Solicitors Act 1974 now provides, in respect of
disbursements:
"A
solicitor’s bill of costs may include costs payable in discharge of a
liability properly incurred by him on behalf of the party to be charged with
the bill …"
- And chapter 20
of the Law Society’s Guide to the Professional Conduct of Solicitors (Eighth
Edition) states at paragraph 20.01:
"Duty to pay agent’s fees
A
solicitor is personally responsible for paying the proper costs of any
professional agent or other person whom he or she instructs on behalf of a
client, whether or not the solicitor receives payment from the client, unless
the solicitor and the person instructed makes an express agreement to the
contrary".
- It is now not at
all uncommon for a solicitor to pay money for services as agent for the client
and then to bill the client in respect of that payment. Such a payment is not
strictly a professional disbursement but is treated as a disbursement for the
sake of convenience. In those cases where the client is able to pay,
solicitors frequently ask for money from the client to cover those payments
which the solicitor proposes to make on the client’s behalf. In my judgment,
if any of the MLSS fee is recoverable it should be treated as a disbursement
not as part of the solicitors’ profit costs. In my view the solicitor can
charge as profit costs only that work undertaken by him or a member of his
firm in the capacity of solicitor. If a task is delegated to a solicitor agent
that too is chargeable as part of the principal solicitor’s profit costs.
Where tasks are delegated to other non solicitor bodies any charge which those
bodies make must be treated as a disbursement incurred by the client through
the agency of the solicitor (see In Re Blair & Girling [1906] 2 KB 131
CA). Where a solicitor, for example, instructs an enquiry agent to carry out
certain work and perhaps to obtain a witness statement, the enquiry agent’s
charges will be paid by the solicitor as agent for the client and will be
treated as a disbursement in the solicitor’s bill. If the enquiry agent fails
properly to carry out the solicitor’s instructions, or carries them out
negligently, the solicitor will not in normal circumstances be liable for the
negligence of the enquiry agent and the client may be able to withhold payment
of the fee or to pay a reduced fee. (The solicitor may of course have been
negligent in his selection of enquiry agent.) If, on the other hand, the
solicitor (in his own capacity rather than as agent for the client) instructs
another solicitor to act as his agent, for example to interview a distant
witness, the solicitor agents’ charges are not entered in the solicitor’s bill
as a disbursement but appear as part of the principal solicitor’s profit costs
(see paragraph 4.6(9) of the Costs Practice Direction). One of the reasons for
this is that the principal solicitor remains liable for the acts of his agent,
and another is that any agency charge is borne by the principal solicitor. It
forms part of that solicitor’s overheads.
Is the whole MLSS
fee a recoverable disbursement?
- Other questions
arise when one considers the nature of the MLSS invoice. In my judgment the
invoice, which is sent as soon as the panel solicitor has accepted the case,
can refer only to future work, ie to work done after the solicitor has been
retained. In order for a disbursement to be recoverable it must have been made
by the solicitor on the client’s behalf or be an out of pocket expense of the
client personally (see Re: Remnant [1849] 11 Beav 603 at 611; Re: Buckwell
& Berkeley [1902] 2 Ch 596 CA and Brown v Barber [1913] 2 KB 533). In the
Claims Direct Test Cases no client has ever been called upon to pay the MLSS
fee. Indeed the client does not even know of the existence of MLSS.
- Solicitors can
only pay disbursements as agent for a client if they are authorised to do so
by the client. Prior to the acceptance of the case by the solicitor there is
no client and therefore no authority. It is quite clear therefore that any
recoverable element of the £395 plus VAT could only be in respect of work
undertaken by the claims manager after the case has been accepted. It may well
be that, once the case has been accepted, the claims manager carries out work,
on the instructions of the solicitor, for which it is appropriate to make a
charge, the cost of which may be recoverable as a disbursement. On the
evidence before me, applying the above principles, none of the cases contain
details of work which would bring the amount properly chargeable near to the
figure of £395 plus VAT.
If not, what is
the MLSS fee?
- It is quite
clear that the £395 plus VAT is the price which the panel solicitor must pay
in order to obtain the work. If the panel solicitor is not prepared to pay,
the work goes elsewhere. This is not a question of client choice but of MLSS
effectively selling work to panel solicitors. Panel solicitors have the option
of rejecting a case, if for some reason they do not wish to take it on, but if
they do wish to take it on they cannot avoid having to pay the fixed price.
- The payment of
the £395 plus VAT is therefore a referral fee, the consequences of which I
will consider further in due course.
The Claimants’
position
- At paragraphs 42
and 60 I set out the position as argued on behalf of the Claimants by Mr
Charlton. It is now possible to deal with those points.
- The mere fact
that a solicitor may pay a fee to an introducer does not of itself mean that
that fee is a referral fee.
Accepted.
- It is
necessary for a fee to be in the nature of a reward before it falls within
the definition.
Accepted.
- If the
introducer provides a service beyond mere introduction then a payment for
that service will not be a referral fee.
I
consider this further under the heading of consequences.
- The Defendants
need to show that in truth the payment was not for the service supplied but
was (at least in part) a payment in the nature of a reward for the
introduction.
Rejected. In my judgment the onus is on the Claimant, if the payment
is recoverable at all, to show that it was, at least in part, for work the
cost of which is recoverable.
- It is not open
to the Defendants to suggest that because the sum paid by the solicitor was
excessive for the work actually performed, this automatically makes the
excess into a referral fee.
For
the reasons given I am satisfied that the payment is in fact a referral fee.
Whether any part of the money paid is recoverable will be examined under the
heading of consequences.
- Mr Charlton
posed three further questions:
- What did the
individual solicitor understand at the time he took on the obligation to pay
the £395 to MLSS?
The solicitor can have understood only that this was the price which
had to be paid in order to obtain the work.
- When judging
whether or not there has been a breach of the professional rules it is
irrelevant to look at subsequent events, ie it would not be right to use
hindsight.
Accepted. It would be clear from the outset to the solicitor that the
fee payable was a referral fee.
- Even if it
were appropriate to consider the amount of work done by MLSS in each case
this should be done on a solicitor and client basis not on the between the
parties basis.
If
it be the case that any part of the fee paid to MLSS is recoverable, it will
have to be borne in mind that these Test Cases take place in the course of a
detailed assessment between the parties on the standard basis. Accordingly the
tests of reasonableness and proportionality would apply.
- It is necessary
to deal also with a point raised by Mr Charlton concerning proceedings before
the Solicitors Disciplinary Tribunal in April 2002 in respect of the solicitor
Mr David Tubby (authorities 5). It was asserted against Mr Tubby, among other
things, that he had paid commission to introducers of work contrary to Section
2(3) of the Solicitors Introduction and Referral Code 1990. Investigation had
shown that in 25 cases payments of £100 had been made in each case to an
accident management company. These payments were described as "report fees". I
quote from paragraphs 57 and 58 of the Report:
"57. Copies of the Reports were before the Tribunal. They consisted of
pro formas in which an amount of details about a case had been inserted. There
was before the Tribunal no evidence as to the circumstances in which or by
whom such forms were completed. The respondents said they were produced by the
accident management company but the applicants showed that in none of the 25
matters was there any evidence of any report being so produced. The applicant
claimed that the sums paid were fees to the accident management company in
exchange for introductions to the respondent but this was denied by the
respondent.
58.
The respondent denied that he paid introduction fees. He recognised that such
a payment would breach the introduction and referral code. The respondent had
sought guidance from the Law Society and it had been confirmed to him that the
payments were made in accordance with the Introduction and Referral Code
1990."
- The Tribunal
found the following facts:
"117. The respondent made payments to accident management companies
which introduced road traffic accident victims to him as clients. It appeared
that accident management companies sought to assist the victims of road
traffic accidents. They used pro formas the proper completion of which would
give full details of the accident and related aspects of the matter which
would in effect constitute the initial instructions of the respondent and
enable him immediately to pursue the clients claims. The Tribunal had before
it no evidence as to the way in which those pro formas were completed. The
Tribunal find that a completed pro forma did constitute a formal report and it
would have been necessary to spend some time and effort in making sure that
all requirement information was contained in the report. In the absence of any
evidence to the contrary the Tribunal finds that the accident management
companies completed the pro forma and the payment of £100 was in respect of
the completion of the report and that this was a reasonable average sum to
pay. The Tribunal did not find that the payments of £100 amounted to the
payment of commission for the introduction of work contrary to the
Introduction and Referral Code 1990."
- The Tribunal’s
findings, so far as relevant, were:
"With regard to Allegation 10 the Tribunal found that payments made by
the respondent to accident management companies were proper for the
preparation of a report and were not a commission paid for the introduction of
work. The Tribunal noted that the respondent had taken the Law Society’s
advice in this connection and clearly had been anxious not to fall foul of the
Introduction and Referral Code."
- Mr Charlton
relied on the amount of work done by the claims manager in these cases to
assert that the £395 was a reasonable average sum to pay and that it could not
be inferred from the size of that sum, or from the Operating Manual, that the
amount paid was a referral fee. I have already stated, at paragraph 82, that
the amount of work done by the claims manager does not warrant a charge of
£395.
- Mr Neish pointed
out that had the Disciplinary Tribunal found that the amount paid by Mr Tubby
had been not a reasonable one, the result would have been otherwise.
- I am not
persuaded that any guidance can be obtained from the case of Mr Tubby. The
Tribunal made it clear in its findings that there was no evidence before it.
The respondent had taken the trouble to check with the Law Society that he was
not breaching the Code and the amount which he paid in each case was
relatively modest. There appears to have been no investigation of when the
work was done for which payment was made, nor whether that payment was
properly a disbursement of the solicitor, nor whether it was a necessary pre
condition to the solicitor obtaining the work. For the reasons which I have
given, the case of Mr Tubby does not alter my view that the payment of £395
plus VAT to MLSS is a referral fee.
Issue 7 (ii) If so does the solicitors agreement to pay them breach the
Introduction and Referral Code?
(iii) If so what are the consequences?
- In respect of
this issue the Claimants originally sought to rely on the imminent
introduction of the Enterprise Act 2002, Section 207 of which repeals Schedule
4 of the Competition Act 1998. Mr Charlton accepted however that the effect of
this could not be retrospective and, since the relevant section has not been
brought into force, he did not pursue the point. He also suggested that the
Law Society was about to abandon the Introduction and Referral Code. As it
turned out the Law Society Council at a meeting a few days after this hearing
decided to retain the Code.
- Mr Charlton also
sought to rely on what he referred to as the European Dimension (see paras 63
to 69 of the Claimant’s replies), suggesting that the Solicitors Practice
Rules and the Solicitors Introduction and Referral Code, to the extent that
they ban payment or receipt of referral fees, are anti-competitive and a
breach of Article 81 of the Treaty establishing the European Community. At
paragraph 15 of the Claimant’s closing note he wished to reserve the
Claimant’s position "to await further directions in the event that the point
becomes necessary to develop after the court’s decision on the other
issues."
- Mr Neish quite
properly took the point that Mr Charlton had not argued this point in his
opening submissions, he in turn had not replied to it, nor had he prepared any
argument in reply and he objected to Mr Charlton seeking at the end of the
case to reserve the Claimants’ position so that, should this decision not be
in the Claimants’ favour, it might be possible to come back and argue the
issue from another angle. I took the view that my decision should be final and
only given after I had heard all the arguments. Had the European point been
argued further, an adjournment would have been inevitable, and, given the way
the case had been presented on behalf of the Claimants, there would inevitably
have been a costs sanction. In the event Mr Charlton, on instructions, decided
not to pursue the European point.
- Mr Charlton
argued that even if the payment of £395 to MLSS was a breach of the Code, it
did not make the retainer illegal. In his submission the only possible
consequences of there being a breach of the Solicitors Practice Rules was the
potential imposition of a professional penalty following formal complaint to
the Law Society. He suggested that a breach of the Code did not render the
retainer unenforceable and suggested that there was nothing objectionable
about the terms of the retainer itself. He drew a distinction between the
effect upon the agreement between the introducer and the solicitor on the one
hand, which he concedes may be rendered unenforceable by breach of the Code,
and the agreement between the solicitor and client which contains no illegal
terms and under which the client is obliged to pay for MLSS services "at least
on a quantum meruit basis cf Mohamed v Alaga & Co".
- It will be
remembered that the Second and Third Defendants argue that breach of the Code
taints the entire retainer and renders all fees payable to the panel
solicitors irrecoverable or that it taints the entirety of the MLSS fee so as
to make that fee irrecoverable. All three Defendants take the point that at
least the referral element of the MLSS fee is irrecoverable. The Defendants
rely on the decisions of the Court of Appeal in Awwad v Geraghty & Co
[2001] QB 570 and Mohamed v Alaga & Co [2001] WLR 1815. Mr Neish accepted
that the agreement which breached the Code was not the retainer between the
solicitor and the client but the panel solicitors’ agreement with MLSS that
he/she would pay a referral fee in return for Claims Direct introducing the
client. Mr Neish also argues that since the retainer arose out of, and would
not have existed but for the agreement to pay the referral fee, the whole of
the retainer is tainted and as a matter of public policy the court should not
permit the panel solicitor to enforce the retainer against the client. He
relies on what Schiemann LJ said in Awwad (at 594):
"…
if an agreement is against public policy … then it should not be enforced by
the courts. It would be inappropriate to leave enforcement of this policy
purely to the disciplinary processes of the professional body."
In
the Awwad case the agreement between the solicitor and the client was
unlawful.
- In my judgment
the fact that the tainted contract is that between the panel solicitor and
MLSS provides the answer. There does not appear to be any objectionable
feature in the contract between the solicitor and the client. The fact that
the solicitor would not have had the client had the referral fee not been paid
does not in my view taint the retainer itself.
- Schiemann LJ (at
594) went on to say:
"…
I would hesitate to say, in the absence of full argument, that any breach of
the rules in the course of reaching a fees agreement necessarily involved
forfeiting all possibility of enforcing the agreement."
- Mr Neish argued
that the court was here referring to other breaches of other practice rules
and he suggested that following the Court of Appeal’s decision in Mohamed v
Alaga & Co enforcement of a retainer tainted by breach of the rules would
have been regarded by Schiemann LJ as contrary to public policy.
- In the Awwad
case the solicitor had purported to enter into an illegal retainer with the
client. The retainer was unlawful and unenforceable. Any claim for payment
based on a quantum meruit also failed, Schiemann LJ stating (at 596):
"…
In my judgment this attempt [to obtain payment on a quantum meruit basis]
should fail. If the court for reasons of public policy refuses to enforce an
agreement that a solicitor should be paid it must follow that he cannot claim
on a quantum meruit. The position in the Mohamed case was totally different.
The interpreter was blameless and no public policy was infringed by allowing
him to recover a fair fee for interpreting; the public policy element in the
case only affected fees for the introduction of clients. In the present case,
what public policy seeks to prevent is a solicitor continuing to act for a
client under a conditional normal fee arrangement. That is what Ms Geraghty
did. That is what she wishes to be paid for. Public policy decrees that she
should not be paid."
- In the Claims
Direct Test Cases the agreements between the panel solicitors and the clients
appear to be perfectly proper. The agreement between the panel solicitor and
MLSS to pay a referral fee is unlawful. In my judgment this system is a direct
breach of Section 2(3) of the Introduction and Referral Code 1990:
"Solicitors must not reward introducers by the payment of commission or
otherwise …"
The
solicitor cannot charge his client for it and the Defendants do not have to
pay it. I express no view as to whether MLSS might have a claim on a quantum
meruit against the solicitors following the decision in the Mohamed
case.
- Given my
decision above that the whole of the referral fee is irrecoverable, it is not
necessary for me to deal with the First Defendant’s submission that only that
part of the £395 which is actually in respect of the referral should be
irrecoverable.
Issue 7(iv) Is
the fee to MLSS irrecoverable for any other reason?
- Under this head
the Defendants argue that, in so far as any part of the payment made is a
referral fee, there is no reasonable basis upon which the Defendant should be
required to pay to the Claimant sums which have not been paid by that Claimant
for legal services or for services otherwise related to the conduct of the
case. In any event the Defendants argue that the £395 is irrecoverable save to
the extent that the Claimants prove that: (a) it does not pay for the same
work as any part of the £1,000 paid as part of the premium (the duplication
point) and/or (b) the work performed by the claims manager in a particular
case has a value of £395 when considered on normal assessment principles in
accordance with CPR 44.5.
- The Claimants’
position is that the issues are fact sensitive and must be decided by the
application of CPR 44.4 and 44.5. It may be the case that work has been done
by a claims manager on the instructions of a panel solicitor who has accepted
a case, which would in normal circumstances be recoverable as a disbursement.
Given the circumstances of the Claims Direct Scheme the onus would, in my
view, be on the claimant to show what work had been undertaken and why the
cost of it should be recoverable.
- The Defendants
argue that fast track cases need to have predictable costs and that I should
therefore arrive at a benchmark figure to provide at least a starting point
for the assessment of the value of the work done by claims managers. Mr Hutton
at paragraph 12 of his written submissions suggests that it would be
appropriate to allow 2½ hours work at £65 per hour, a total of £162.50 plus
VAT.
- Mr Charlton
described this approach as unreal and suggested that there might in some cases
be extensive work.
- Having
considered the work undertaken by the claims manager in the various cases
referred to during argument I am satisfied that an appropriate starting point
for the claims manager’s work is the figure of 2½ hours put forward by the
Defendants. The cost of doing this work would be recoverable if it is
subsequently held that breach of the Referral Code does not render the entire
referral fee irrecoverable. It would however be open to a Claimant to prove,
by normal evidential means, that work to a greater value had been carried out
by the claims manager in a particular case.
- With regard to
the duplication point this does not arise given my earlier judgment. That
judgment is presently the subject of an appeal to the Court of Appeal whose
decision is awaited. It has to be recognised that it may prove necessary for
this point to be re-argued once the Court of Appeal decision is known. I will
hear further submissions from parties should the need arise once the Court of
Appeal has delivered its decision. The matter may be restored on the written
application of any party.
Issue 7 (v) Is
any part of the payment made to MDL irrecoverable for non referral fee
reasons?
- The position
with Mobile Doctors Ltd has been greatly clarified by the evidence of Matthew
Game (9A/8/75). Mr Game describes the history of his company and, at
paragraphs 21 to 23 of his statement, the involvement of the company with
Claims Direct. At paragraph 25 he states (9A/8/82):
"The arrangement between ourselves and Claims Direct as to the fact
that we paid any commission and the amount, was a normal commercial
arrangement between the two of us and I would expect an arrangement of this
nature to exist when anyone was providing bulk work and understand that this
is common practice with our competitors in the industry as well. By Claims
Direct providing volume referrals we did not need to spend time and money on
advertising and promotion.
26.
As far as I am aware panel solicitors had no knowledge of this arrangement,
nor was there any reason why they should …"
- Three agreements
between Mobile Doctors Ltd and Claims Direct have been produced showing that
Mobile Doctors agreed to pay Claims Direct £40 per case in all cases (clause
6.3, agreement 31 July 1998 (9A/1/7)). This arrangement was subsequently
changed to a fee of £40 for a specialist referral and £30 for a GP referral
(clause 6.3 agreement 1 August 1999 (9A/2/28)). The fee was then increased to
£50 for a specialist and £40 for a GP (clause 4.1 agreement 11 May 2001
(9A/3/38)).
- Mobile Doctors
Ltd produced a pricing structure which set out the fee payable depending upon
the type of report to be obtained. Mr Game explained in his statement
(paragraph 24) that the fee charged under the Claims Direct scheme was the
same as that charged to any other client coming to them direct. Many of the
liability insurers use the services of MDL and are charged at the same rate.
Mr Game explained:
"The "commission" therefore came out of our own margin. However, from
our point of view we were happy to absorb this because of the large volume of
work that was going to come through."
- It is not within
the power of this court to disallow the sum which MDL pays to Claims Direct
for each case referred. The real question to be decided is whether and to what
extent the charge made by MDL for obtaining the report is reasonable and
proportionate.
- There is no
doubt that MDL carries out a certain amount of correspondence, which, had they
not been involved, the solicitor would have had to do. To the extent that this
work is carried out at the same or a lower cost than if the solicitor had done
it, it is recoverable. The judgment of His Honour Judge Cook in Stringer v
Copley (Authorities/4) is trite costs law. I agree with Judge Cook that there
is no principle which precludes the fees of a medical agency being recoverable
between the parties provided it is demonstrated that their charges do not
exceed the reasonable and proportionate costs of the work if it had been done
by the solicitors. There may however be, within MDL’s fixed charge, an element
in the nature of an administration fee which is not recoverable. Mr Charlton
argues that if the fee charged is reasonable the court should look no further
but merely allow the fee as claimed. I further agree with Judge Cook when he
states (at p.8):
"…
It is important that [medical agencies] invoices … should distinguish between
the medical fee and their own charges, the latter being sufficiently
particularised to enable the costs officer to be satisfied that they do not
exceed the reasonable and proportionate costs of the solicitors doing the
work."
- The Judge also
raises concerns about the proper treatment of VAT. I part company with the
Judge in his finding that the fees of medical support agencies "could also be
treated as though the work had been done by the solicitors and charged
accordingly". For the reasons I have already given (at paragraphs 78 to 80) I
am of the view that such expenditure should be treated as a disbursement. I am
reinforced in that view when it is remembered that a large part of the MDL fee
is that charged by the expert. The expert’s fee cannot on any reading be part
of the solicitor’s profit costs. Judge Cooke based his view on the decision in
Smith Graham (A Firm) v The Lord Chancellor’s Department [1999] NLJ R1443 QBD.
The basis of that decision (on which I sat as an assessor with Mrs Justice
Hallett) was that the retired police officer could be treated for the time
being as the temporary employee of the solicitors who throughout remained
responsible for the conduct of the case and for the conduct of the retired
police officer.
- Mr Neish argues
that since it is not possible to break down the cost charged by MDL I should
have regard to the fact that the fee was sufficient to enable MDL to pay £40
or £50 to Claims Direct in respect of every case and it would therefore be
appropriate to disallow such an amount.
- Mr Charlton
argues, correctly, that this would be an improper departure from the normal
procedure on detailed assessment. The principle is clear, namely that the
administration element of any fee charged by MDL is not recoverable. It will
therefore be necessary for the receiving party to obtain from MDL in every
case a properly broken down fee note showing the actual fee paid to the
expert, the amount charged for correspondence and telephone calls and the
administration element. In deciding what proportion of that fee is recoverable
the court will have to take into account the solicitor’s correspondence with
MDL which would not have occurred had they not chosen to instruct MDL.
- I appreciate
that this requirement may cause considerable difficulty, both in respect of
these Test Cases and in respect of other cases which MDL are involved and in
which the fee paid to them is challenged. Since the paying parties in the
large majority of cases are the liability insurers, who themselves use the
services of MDL, I express the hope that some sensible solution can be found
to enable the administration fee element to be identified so that it is not
necessary, in every detailed assessment where such a fee is challenged, for
MDL to have to produce the detailed breakdown to which I have referred. In my
experience an administration fee of £15 is not uncommon in such cases, but I
have no evidence before me in these cases and make no finding to that effect.
I should make it clear that there is no criticism of MDL for charging their
customers an administration fee, it is merely that such a fee is not in my
view recoverable between the parties, firstly because it is not costs of the
action and secondly because it fails the test of necessity when considering
the question of proportionality.
SUMMARY
- I summarise my
findings as follows: The Solicitors Practice Rules 1990 and the Solicitors
Introduction and Referral Code 1990 take effect as subordinate legislation
governing the practice and conduct of solicitors.
- Poole & Co
was not the introducer of the client to the solicitor, rather it was an
intermediary. It was MLSS which distributed the work through Poole & Co
and which was the true introducer.
- The MLSS fee
should be treated as a disbursement in the solicitor’s bill not as part of the
solicitors profit costs.
- The MLSS
invoice, which is sent as soon as the panel solicitor has accepted the case,
can refer only to future work, ie to work done after the solicitor has been
retained. In order for a disbursement to be recoverable it must have been made
by the solicitor on the client’s behalf or be an out of pocket expense of the
client personally.
- The fee of £395
plus VAT paid to MLSS is the price which the panel solicitor must pay in order
to obtain the work. The payment is a referral fee.
- The payment to
MLSS is a direct breach of Section 2(3) of the Solicitors Introduction and
Referral Code 1990. It is irrecoverable from the client and therefore
irrecoverable from the paying party.
- If it is
subsequently held that breach of the Referral Code does not render the entire
referral fee irrecoverable, the cost of 2½ hours work by the claims manager is
an appropriate starting point.
- The
administration element of any fee charged by MDL is not recoverable.
