Stevensdrake v Hunt and the indemnity principle

This article was first published in the Practical Law Dispute Resolution Blog

Having successfully obtained judgment for your client in a case where your firm of solicitors is acting under a conditional fee agreement (CFA), it is only natural that thoughts will turn to the firm’s own impending financial reward. But the terms of a CFA, negotiated at the outset of the case, can prove to be a barrier to their underlying commercial purpose: payment by result.

In the recent case of Stevensdrake Ltd v Stephen Hunt (liquidator of Sunbow Ltd) HHJ Simon Barker QC had to consider a CFA entered into between a liquidator and his solicitors. The CFA permitted the solicitors to be paid only what they recovered from the unsuccessful party, and as such there was a question of whether or not this violated the indemnity principle, and so disentitled the solicitors from recovering anything at all.

The background

The indemnity principle is the backbone of costs assessments between parties in litigation. Section 60(3) of the Solicitors Act 1974 caps the sums recoverable as costs by reference to the costs which a client is liable to pay to their solicitor:

“A client shall not be entitled to recover from any other person under an order for the payment of any costs to which a contentious business agreement relates more than the amount payable by him to his solicitor in respect of those costs under the agreement.”

However, this principle can cause problems for liquidators who wish to pursue former officers and such of a company, if the company in liquidation has no or few assets of value to fund such litigation. Understandably, solicitors will be concerned with how they can be paid whilst liquidators are unlikely to wish to expose themselves personally to costs liability.

The case

Such a problem arose in the current case. The firm of solicitors, Stevensdrake Ltd, differed in their view from that of Mr Hunt as to how it had been solved.

The underlying litigation was between Mr Hunt and two former administrators of the company in liquidation. It was compromised by a Tomlin Order pursuant to which the administrators agreed to pay £125,000 and £1.9 million respectively to Mr Hunt. The smaller sum was paid but the larger sum was not.

Nonetheless, the compromise reached satisfied the definition of success under the CFA between Mr Hunt and Stevensdrake.

So far as relevant, the CFA contained the following terms:

• By paragraph 4, save for disbursements the solicitors were entitled to payment from recoveries made by the liquidator.
• “If you [the Liquidator] win your claim, you pay our basic charges, our disbursements and a success fee.”
• “You [the Liquidator] are personally responsible for any payments that you may have to make under this agreement. Those payments are not limited by reference to the funds available in the Liquidation.”
• “As with costs in general, [the Liquidator] remains ultimately responsible for paying our success fee.”

Mr Hunt refused to pay, arguing that there is an established practice within insolvency litigation concerning estates with few or no assets of value that:

• Insolvency practitioners engage solicitors and counsel on terms where there is a strict legal liability to pay so as not to offend the indemnity principle.
• However,  the legal services are offered on terms whereby solicitors and counsel are paid only from recoveries made in the litigation and as such it is common practice that solicitors will not enforce their strict legal rights.

As such, Stevensdrake presented a bill to Mr Hunt for £938,838.71, including £140,000 of disbursements and £400,000 uplift.

Amongst other things, the disbursements came before the court on a summary judgmentapplication which was successful before a Master and then appealed to HHJ Purle QC sitting as a judge of the High Court. The judge had held that it was fatal to Mr Hunt’s defence that the CFA referred to his personal liability (as opposed to the liability of the company in liquidation). HHJ Purle dismissed this argument briskly (paragraph 3):

“There are in reality only two defendants: Mr. Hunt personally and Griffins. I say “Mr. Hunt personally”, which in my judgment is an adequate description of him whether he is described simply as “Stephen Hunt” or as “Stephen Hunt as liquidator of Sunbow Limited”, because he in either case is the defendant. Describing him as “liquidator of Sunbow Limited” does not turn him into a different person, or affect or limit his liability, and it certainly would not be right to equate him with Sunbow Limited (“Sunbow”) just because he is liquidator. Sunbow is not a party.”

Further, the caveat that the “recoveries only” CFA applied “save for disbursements”, entitled the claimant to summary judgment on that part of their claim.

The balance of the claim and a counterclaim was left until trial. There, the liquidator pursued with greater force his claim that liquidators, as a matter of practice, secure instructions on a recoveries only basis, and that the terms of the CFA are drafted largely to maintain the indemnity principle. As such:

• He did not have personal liability under the CFA.
• Alternatively, recovery under the CFA should be estopped by convention.

Although the terms of the CFA were clear, there was an earlier letter sent by the liquidator to the solicitors. He wrote:

“In the event that there are no realisations I, as Liquidator, will not be in a position to pay your fees, nor will I accept personal liability for those fees. Notwithstanding anything which may be stated in your terms of business, which may have been, or will be, signed by me, your instructions are given on the basis stated here. If you are not willing to act in this matter on this basis, please return to me all papers currently held by you.”

In an email reply, the solicitors stated that they were happy to wait for the payment of costs until the liquidator made a recovery from any source. However, they would require disbursements to be paid, and in particular, counsel’s fees.

The judge held that the true terms of the retainer between the solicitors and the liquidator were not contained within the CFA alone but instead incorporated a term whereby the solicitors would only be paid out of realisations.

This finding was fatal to the solicitors’ claim. In a postscript, the judge noted that he did not have to consider whether the agreement reached offended the indemnity principle. He cautioned that there is a public interest in maintaining a practical means for insolvency practitioners to retain lawyers in nil asset liquidations.

However, the fact that the judge found it necessary to make this postscript highlights a difficulty within it. It seems inescapable from his conclusions that the indemnity principle had in fact been violated. As such, the judgment may well be relied upon in inter partescosts disputes in the future.

Lessons

A number of clear lessons can be drawn from the case:

• Both insolvency practitioners and lawyers should take great care in drafting CFAs and remember to incorporate what are often seen as “potboiler” clauses. In this case, if the CFA had included a “whole agreement” clause within it, the result may well have been different.
• In an insolvency context, personal liability should be expressly excluded for sums not recovered from the unsuccessful party (this will not be possible for trustees in bankruptcy who cannot exclude personal liability in relation to claims run in their personal capacities).
• Where contracts do not contain such a clause, solicitors should consider whether or not they have a duty to bring this to the attention of the liquidator.

Going forward, it is perhaps unfortunate that the judge did not base his decision solely on the estoppel by convention defence. He found that this also acted as an absolute defence to the claim. That finding more clearly circumvents the indemnity principle issues. It would have allowed the judge to find that there was a personal liability, but there was an understanding between the parties that this would not be enforced. It would have been unjust to allow the solicitors to depart from this. Such reasoning would not then create difficulties for inter partes costs arguments. As it is, this judgment is likely to be of benefit to unsuccessful parties in nil asset insolvency litigation.