Sibthorpe & Morris v LB Southwark [2011] EWCA Civ 25

Champerty and maintenance are two common law doctrines relating to the funding of civil claims. They were, at one time criminal offences, but now survive only as a matter of public policy. Briefly, maintenance is where a third party agrees to fund the suit of another in which he has no legitimate cause or interest whereas champerty is where the third party maintains the suit while also seeking a share of the damages to be awarded. Both of these were commonly used by the wealthy and powerful in the past in order to advance political causes as well as to simply make mischief and were banned as a result.

In this case S and M were both tenants of Southwark. They both complained of disrepair in their properties. Their solicitors, Belshaw and Curtin, had entered into a slightly unusual form of CFA with both of them although it is one that may well become more common in future. Essentially, neither party was able to obtain insurance against Southwark’s costs if they lost (ATE insurance) and so B & C had undertaken to indemnify them against those costs.

Southwark lost both cases and sought to contest the costs (some might say in a fit of pique although I am not, of course, saying that) on the basis that the CFA fell foul of the common law rule against champerty. The Deputy Master who initially dealt with costs agreed with Southwark, HHJ Macduff reversed this decision on appeal and so the case came before the Court of Appeal with the Law Society joining in as an intervenor on behalf of S and M (although they were doing so more on the basis of support for B & C). Lord Neuberger gave the leading judgement, with LJs LLoyd and Gross concurring.

Before the Court of Appeal it was argued for M (and by extension S although his appeal was taken by the Court to simply follow from M’s and so it was not considered in detail) as well as by the Law Society that:
1. the indemnity arrangement was not champertous under any reading of the rule against champerty;
2. even if it was champertous under the original rule, the law had developed since that point and in any event each case should be considered on its merits without over-strict observance of previous cases; and
3. if the indemnity arrangement was champertous it should be deleted from the rest of the CFA which should stand without it and costs should therefore be paid under that agreement.
Southwark basically took the contrary view on each of those points.

The Court considered carefully the comments of the Court of Appeal in R (Factortame Ltd) v Secretary of State for Transport, Local Government and the Regions (No 8) [2002] EWCA Civ 932, [2003] QB 381. It took note of the statement of Lord Phillips that the rule against champerty was a matter of public policy and therefore should remain under review by the Courts as policy is subject to change on the basis of the public interest.

In Factortame it was alleged that a fee sought in Court for the work done by the accountants, Grant Thornton, was champertous because it was expressed as a percentage of the total amount of damages recovered. A distinction was drawn in that case between contingency agreements entered into by a litigator and those entered into by other parties whose work supported the litigation and on that basis Grant Thornton’s fee was recoverable as costs. In this case it was argued that the principle laid down in Factortame was actually that potentially champertous agreements had to be looked at “in the round” and consideration had to be given as to whether the agreement would undermine the “purity of justice”. The Court did not accept that argument and held that Factortame had continued the principle that agreements concluded between parties and those conducting litigation for them would be looked at more closely and were subject to stricter rules. Accordingly there has been no loosening of the rules of champerty in regard to litigators although there may well have been in regard to experts and other third parties.

In fact the Court went further here and made a comment (at para 41) that looks rather like an attack on the current views of the Ministry of Justice on litgation funding:

There is … much to be said for a properly funded legal profession, which has no need to have recourse to conditional fees or contingency fees or the like. It is a matter for the legislature if such arrangements are thought to be necessary for economic or other reasons, and, if they are so necessary, then it is for the legislature to decide on their ambit.

In other words the Courts are not prepared to support a change in funding arrangements toward contingency fees without primary legislation. Given that this comment was made by the Master of the Rolls, who is effectively charged with taking the Jackson review forward it is revealing that he appears to be of a firm view that contingency fees are, at least on the current law, a step to far.

Notwithstanding its refusal to loosen the rules on champerty the Court actually held that the indemnity was not itself champertous and to make it so would constitute an unwarranted extension in the law of champerty. The Court accepted that it was drawing a slightly artificial distinction between a litigator acccepting a contingency fee and thereby having an interest in the success of the litigation (forbidden) and a litigator giving an indemnity and thereby having an interest in the failure of the litigation (allowed). However, it drew comfort from judicial views that the rule against champerty should be curtailed rather than extended and the public policy advantage, in terms of access to justice, that this form of indemnity provided.

There was then a slightly (more) academic discussion which came to the view that champerty was no longer a subspecies of maintenance as previously held and that the two were now separate. This is because maintenance occurs where the party supporting the case has no “justification or excuse” for doing so and this could not be held to apply to a solicitor who had an interest in the success or failure of a case.

Given that the indemnity was not held to be champertous, this was all that needed to be said. However, in brief the Court held that champerty was not to be decided on a case by case basis and refused to rule on whether a champertous clause could be severed from the remainder of a CFA agreement. Finally, the Court refused permission to appeal on the separate ground that, by including the indemnity, the CFA was an insurance contract and therefore void by virtue of s.26 FSMA 2000, as the solicitors were not authorised or exempt for the purposes of s.19 of the FSMA.

This case has huge potential importance, especially when placed in the context of cuts in public funding and the Jackson review of civil litigation costs. It should be remembered that contingency fee arrangements by lawyers have been banned on the basis that they too are champertous and therefore that the rule on champerty is all that stands in the way of their removal. There has been extensive discussion as to whether solicitors should be able to enter into some form of contingency fee with clients, as is common in the USA, and this has been put forward as a possible solution for certain types of case (see BBC Radio 4’s Law in Action, 28 October 2010). Clearly such an idea cannot get off the ground unless the Courts demonstrate a preparedness to relax the rules on champerty or legislation is enacted.

Additionally, B & C’s funding model, while it will not appeal to everyone, is a potential solution for CFAs which insurance companies do not want to take on because they are too small or which will become uneconomic if the Jackson reports recommendations regarding litigants having to pay their own insurance premiums from damages is taken forward.

The summary then is: indemnity against costs=OK, contingency fee=No way!