On 5th December 2017, the Court of Appeal handed down the decision in Alina Budana v The Leeds Teaching Hospital NHS Trust  EWCA Civ 1980.
Emily Thomas summarises the court ruling and analyses the impact of this important judgment with particular emphasis on its application to the recoverability of Pre-LASPO After-the-Event insurance premiums.
Emily is Senior Associate at TheJudge and runs the Manchester office. She is a solicitor and former underwriter at an established ATE insurer.
Summary of the judgment
1. The question before the Court of Appeal was whether Conditional Fee Arrangements (CFAs) can be validly assigned from one law firm to another.
2. Many law firms, in particular personal injury firms, have acquired large numbers of cases from other law practices since the enactment of the Legal Aid, Sentencing & Punishment of Offenders Act 2012 (LASPO) in April 2013 as many firms ceased providing litigation services in the wake of the Jackson reforms.
3. The question of whether a CFA can be validly assigned from one firm to another is of particular importance to such acquiring firms, as prior to 1st April 2013, success fees could be recovered from the losing party as part of costs by the successful party.
If CFAs can be assigned, the success fees in these transferred cases will remain recoverable but if not, the result could be financially disastrous for the acquiring firms who may have paid to acquire the files on the assumption the CFAs uplifts would be recoverable.
4. The County Court in Kingston upon Hull held that a pre-Jackson CFA was not validly assigned after 1st April 2013 as the agreement had been terminated prior to the assignment.
5. DJ Besford rejected arguments that the CFA could not have been assigned in any event, applying the reasoning in the previous High Court decision of Jenkins v Young Bros Transport (2006).
6. The Claimant appealed the first aspect of the decision and the Defendant cross-appealed in relation to the Judge’s determination that had the agreement not already been terminated, it would have been validly assigned. The appeal was leapfrogged to the Court of Appeal to give some long-awaited clarity on this issue.
7. The key issues arising on the appeal were as follows:
a. Was the CFA terminated?
b. If it was not terminated, was the transfer effective as an assignment?
c. On the premise that the CFA was not terminated, but that the transfer took effect as a novation, was the success fee still recoverable?
d. If the CFA was terminated, was the Claimant liable to pay the new firm for the work done by the old firm independently of the terminated CFA?
8. The Court of Appeal acknowledged that the issues had to be approached with an appreciation of the economic environment in which personal injury is conducted today including the need to assign CFAs due to firms closing or ceasing to deal with personal injury litigation.
9. In relation to whether the CFA was terminated, the Court of Appeal held unanimously that the Judge erred in law and that the CFA was not terminated.
10. The question of whether there was an assignment or novation became the focal points of the appeal [para 42-77]. The Defendant argued that since the CFA was a personal contract, the benefit of it could not be lawfully assigned. Giving the leading judgment, Lady Justice Gloster held at paragraph 47 that given the circumstances in which most personal injury litigation is now conducted, the CFA lacks the features of a personal contract. However, whilst the benefit under a contract is assignable, the burden is not. She therefore held that the CFA could not have been assigned, but was instead novated (i.e. the original contract was extinguished and replaced by another). It was held that the correct analysis of the agreements resulted in a novated contract rather than an assignment and though there was a new contract, for the purposes of LASPO, the success fee payable qualified as a success fee payable under a CFA entered into before 1 April 2013. This reflects the purpose of the legislation to produce a dichotomy between pre- and post-LASPO cases and also the intention of the parties.
11. Lord Justice Davis agreed that the appeal should be allowed but his reasoning was not identical to those of Gloster LJ. In his dissenting judgment at paragraphs 80-113 of the judgment, he held that the contract had in fact been assigned rather than novated.
12. However, Lord Justice Beatson agreed with Gloster LJ that the correct analysis resulted in a novated contract rather than an assignment and that even though there was a new contract, the success fee was still payable by the Defendant. Therefore, the majority held that the CFA had been novated.
13. The appeal was therefore allowed and the cross-appeal was dismissed.
14. In light of the conclusions on the previous issues it was not necessary for the Court to consider the last issue.
15. Regardless of the technicalities of whether there was an assignment or a novation of the CFA, the important point of the judgment is that DJ Besford’s decision was overturned and the Court of Appeal was unanimous that that a pre-LASPO CFA could validly be transferred from one firm of solicitors to another, even after 1 April 2013, in such a way as to preserve the right to recover success fees and ATE premiums provided all parties agreed to the transfer.
16. Therefore, properly drafted transfers of pre-LASPO CFAs are most likely to be treated as having the benefit of pre-LASPO terms.
17. The decision has far reaching implications for paying parties who face paying the CFA success fee although arguably to have avoided the payment of a recoverable uplift on what could be described as a technicality would have amounted to a windfall. In fact, this is what I find most interesting about this judgment. It shows the courts are willing to adopt an approach which considers fairness, considering the intention of the parties and the underlying nature of the industry within which these transfers took place.
18. This approach is encapsulated in what Lady Gloster says at para 74 where she states that each case depends on the precise terms of the relevant contractual arrangements…
“…But where, as here, the parties expressly provide by their contractual arrangements that their vested rights and expectations, under the previous CFA entered into under the previous law, should be continued, I see no difficulty in construing section 44 to give effect to that intention”
19. It appears the COA prefer a purposive approach to a ‘black letter law’ approach on these Pre-LASPO issues and if that is true, this will be a good sign for parties seeking a similar approach when it comes to recovering pre-LASPO After-the-Event insurance policies.
20. If a CFA uplift retains its recoverable status after a novation then the same must be said for an ATE insurance policy. This is important because there are situations where a case may need to be transferred from one insurer to another. For instance, the pre-LASPO insurer may have gone into run-off and for various reasons it may be preferable to all parties that the policy is transferred to a new risk carrier. In that situation, there is no reason why the insured should lose recoverability of the ATE premium if the terms remain exactly the same.
21. A question does arise though for those policyholders who need additional cover, which they cannot obtain from their existing pre-LASPO insurer, and may be able to agree a novation to a new carrier who is willing and able to provide the top-up. If recoverability has survived the novation then is it then possible to top-up the novated policy and retain recoverability for the top-up premium? I cannot see why not because most people would expect to recover a top-up premium on a pre-LASPO policy even if the policy was endorsed post-LASPO. Does it matter that there was a novation in those circumstances? This question is important because the number one reason for novating an ATE policy will be to access more cover on a potentially recoverable basis.
22. Nicolas Bacon QC, having represented the Claimant at the appeal, described the decision as probably the most significant costs case post-Jackson and it is easy to see why. This decision has far reaching implications for pre-Jackson claimants; the law firms holding the files; the paying parties and the ATE insurance industry.