The Price of Success? Recoverability of success fees in financial provision claims

The Supreme Court has unanimously overruled the Court of Appeal and found that a "reasonable financial provision" order under the Inheritance (Provision for Family and Dependants) Act 1975 (“the 1975 Act”) cannot include a component for a success fee (ie a fee that the 1975 Act applicant is required to pay to their lawyers upon their success in the 1975 Act application). As such, the Supreme Court has affirmed that s 58A(6) of the Legal Services Act 1990 ("the 1990 Act") applies to orders under the 1975 Act.

Legal background

1975 Act

It is a general principle of English inheritance law that a testator is free to choose how to dispose of their assets when they die. The 1975 Act creates various exceptions to that principle. For example, pursuant to that Act, where the disposition of an estate by a deceased is not such as to make "reasonable financial provision" for a child of the deceased, then (in certain circumstances) that child may apply under the 1975 Act for the court to make orders including the payment of a lump sum out of the estate to that child.

Reasonable financial provision for a child of the deceased is defined in s 1(2)(b) of the 1975 Act as "such financial provision as it would be reasonable in all the circumstances of the case for the applicant to receive for his maintenance."

1990 Act

A common way for impecunious litigants to fund meritorious litigation is through what is known as a conditional fee agreement ("CFA"). Under such agreements, a litigant will only need to pay their own legal costs if they are successful in the litigation. CFAs often include what is known as a "success fee", which is a fee payable by the litigant to their lawyers upon the litigant's success in the litigation that is in excess of the "base" legal costs (often expressed as a percentage of those "base" legal costs).

A general rule of English costs law is that litigation costs can only be recovered as costs and not as damages (unless the claimant can rely on a separate cause of action in relation to those costs eg the tort of malicious prosecution). Another general rule of English costs law is that costs follow the event. In other words, the unsuccessful party will usually be ordered by the court to pay the successful party's costs (which will be in addition to any award of damages). There are, however, a number of exceptions to this rule including:

1. In ancillary relief proceedings under the Matrimonial Causes Act 1973 ("MCA"), where the general rule is that a court will not make an order requiring one party to pay the costs of another party; and
2. Under s 58A(6) of the 1990 Act, where an unsuccessful party in litigation cannot be ordered to pay any part of a success fee as part of a costs order.

Section 58A(6) of the 1990 Act reads as follows:

"A costs order made in proceedings may not include provision requiring the payment by one party of all or part of a success fee payable by another party under a conditional fee agreement."

Key issue

The key issue in this case was whether a success fee could be recovered other than by a costs order (e.g. under a 1975 Act order).

Facts

Mr Hirachand passed away leaving his entire estate to his Widow. His daughter ("Daughter"), who had insufficient income or assets to support herself, applied for financial provision from Mr Hirachand's estate under the 1975 Act. The Daughter's application was funded by a CFA. The CFA required the Daughter, in the event her application was successful, to pay her legal fees with an uplift (ie a success fee) of 72%. As part of her application under the 1975 Act, the Daughter requested that any order for reasonable financial provision include a component for this success fee.

High Court

At first instance, the Family Division of the High Court granted the Daughter's application for reasonable financial provision and included a component for what the judge considered to be a reasonable success fee of approx. 25% (ie significantly less than the 72% agreed in the CFA). The judge did so because:

1. section 3(1) of the 1975 Act required him to consider the Daughter's financial needs, which he found included her enforceable liability to pay the success fee;
2. if such an allowance was not made, the Daughter’s primary needs would not be met;
3. the success fee could not be recovered as part of any costs award; and
4. the Daughter had no other way of funding the litigation except via the CFA.

Court of Appeal

The Widow appealed on grounds including that it was wrong in law for the first instance judge to include a component for the success fee in the order under the 1975 Act. The Court of Appeal unanimously dismissed the appeal.

Lord Justice King, who delivered the leading judgment, found that there were no grounds for interfering with the decision of the first instance judge because:

1. it was legitimate for an award under the 1975 Act to include a component for the payment of debts (such as the Daughter's legal costs, including a success fee); and
2. an analogy could be drawn between the inclusion of a success fee component in an order under the 1975 Act and the inclusion of a component for legal costs in an order for ancillary relief (also known as an order for financial remedies) under s 25(2)(b) of the MCA. In both contexts, the legal fees are otherwise irrecoverable (the success fee because of s 58A(6) of the 1990 Act and the legal costs in ancillary relief proceedings because of the general rule that, in such proceedings, a court will not make an order requiring one party to pay the costs of another party). Given that an order for ancillary relief can include a component for legal costs, King LJ found that so too could an order under the 1975 Act include a component for a success fee.

Supreme Court

The Widow once again appealed on the basis that it was wrong in law to include a component for the success fee in the order under the 1975 Act. The Supreme Court agreed. It did so because of the language of, and policy underpinning, the relevant 1990 Act provisions.

The Court began with an analysis of the history in relation to success fee recovery. The Court observed that CFAs and success fees were originally prohibited at common law. This was changed by statute, which permitted them but prevented success fees being recovered from opposing parties as part of costs awards. Further legislative changes in the late 1990s then permitted success fees to be recovered from opposing parties. However, these changes were reversed when the current regime was implemented in or about 2012 which once again prohibited the recovery of success fees.

The Supreme Court then considered the substantive reasons for denying the recovery of success fees via an order under the 1975 Act. The Court found that:

1. first, there was nothing in the 1975 Act that displaced the costs regime under the Civil Procedure Rules (which included the prohibition on success fees being recovered from opposing parties). In other words, because the Civil Procedure Rules prohibited the recovery of success fees, and because the Civil Procedure Rules applied to 1975 Act claims, this supported success fees being irrecoverable as part of a substantive award under the 1975 Act;
2. second, that base costs (i.e. costs other than success fees) were not recoverable under the 1975 Act and so it would not make sense for success fees (a type of cost) to be recoverable as part of a substantive award under the 1975 Act;
3. third, that if success fees were recoverable as part of a substantive award under the 1975 Act, they would also have been recoverable under that Act for the decade during which success fees were recoverable as part of a costs award, which would have undermined the cost regime (since even if a court were to make no order as to costs, the success fee could still be recovered as part of a substantive award);
4. fourth, that given the history of amendments in relation to success fees and the reasons that motivated the current regime, Parliament cannot have intended when it legislated to prohibit the recovery of success fees as part of a costs award that they should be recoverable as part of a substantive award; and
5. fifth, allowing success fees to be recovered as part of a substantive award would make Part 36 offers unworkable because it would not be possible to determine if success fees would be payable until the end of proceedings, and the amount of the success fee would also be difficult to determine as they usually depend on the size of base costs and/or a judge may award a success fee different from that which is contractually agreed (as occurred at first instance in this case).

In the course of its judgment, the Supreme Court dismissed various arguments raised by the Daughter.

The Daughter argued that because under s 5 of the 1975 Act, interim relief could be granted to fund a 1975 Act applicant's legal costs (citing the decision of Weisz v Weisz) this supported the existence of a power to include costs in a final substantive order. The Supreme Court dismissed this argument, explaining that the jurisdiction to make interim orders was "different in character" from a power to include costs in a final substantive order.

The Daughter also argued that, because s 58A(6) only prohibits success fees as part of a "costs order", that section could not operate to prohibit the award of a success fee as part of a substantive order under the 1975 Act. The Supreme Court dismissed this argument for various reasons including that awarding a success fee on this basis would undermine the policy underpinning the enactment of s 58A(6), and that the Government's review of civil litigation costs (which is what led to the enactment of s 58A(6)) did not suggest that any exception ought to be made for proceedings under the 1975 Act.

Another argument raised by the Daughter was that (in line with the reasoning of King LJ in the Court of Appeal) because the wording of a section within the 1975 Act (that set out what a court must consider when making a reasonable financial award) was similar to a section within the MCA (that set out what a court must consider when making an award for ancillary relief in financial remedy proceedings), and because awards for ancillary relief in such proceedings can include a component for a success fee, so too could awards under the 1975 Act. The Supreme Court dismissed this argument on the basis that the reason why success fees could be awarded as part of ancillary relief proceedings under the MCA was because the costs regime under the Civil Procedure Rules did not apply to such proceedings, whereas it did apply to proceedings under the 1975 Act.

Takeaways

The Supreme Court's judgment confirms that it will not be possible for final substantive orders under the 1975 Act to include a component for success fees.

This represents a loss for 1975 Act claimants funded by CFAs containing success fees. This may disincentivise impecunious 1975 Act claimants (requiring CFAs with success fees to fund the litigation) from bringing 1975 Act claims. This does, however, represent a win for existing beneficiaries under a will who may be concerned about 1975 Act claims being brought by such impecunious claimants, and the value of the estate being depleted by the significant legal fees associated with CFAs and success fees.

That said, the Supreme Court judgment also confirms that interim awards under s 5 of the 1975 Act are different in character from final substantive orders under s 2 of the 1975 Act. As such, it remains possible for impecunious 1975 Act applicants to fund their legal costs via interim orders (following the authority of Weisz v Weisz). It may be that applying for such interim relief will now become common practice.