The impact of the recent Court of Appeal decision in the case of Hirachand v Hirachand  EWCA Civ 1498
This article focusses on the impact of the recent Court of Appeal decision (15 October 2021) in the case of Hirachand v Hirachand  EWCA Civ 1498 (previously known as Re H), whereby success fees under a Conditional Fee Agreement (“CFA”) were considered and ultimately formed part of the sum awarded to the successful claimant under the Inheritance (Provision for Family and Dependants) Act 1975 (“the 1975 Act”).
Will this lead to more cases being funded under a CFA?
Sheila Hirachand was the estranged daughter of the deceased, her late father. No provision was made for her under her father’s will. She brought a claim against her late father’s estate seeking reasonable financial provision under the 1975 Act. As a child of the deceased, Sheila fell into the class of individuals who can bring a claim for reasonable financial provision. The claim was defended by the deceased’s surviving spouse, Nalini Hirachand. Nalini was the sole beneficiary of his estate and Sheila’s mother.
Nalini was in her 80s and suffered from ill health and she was profoundly deaf. By the time of trial, Nalini resided permanently in a care home. She had not engaged properly in defending the claim. She failed to file an acknowledgement of service and was debarred from filing evidence in response or from properly participating in the proceedings.
The claim was heard at the first instance by remote means in April 2020, with the parties (including Nalini) attending by video link. Nalini did not have legal representation but was assisted by a care home worker, who sat with her during the hearing and who passed her notes.
Despite being estranged from the deceased for many years, Sheila was successful in her claim in the first instance and was awarded a lump sum from her late father’s estate totalling £138,918. It is noteworthy that the amount awarded was much less than the sums Sheila sought in her claim. In calculating the appropriate sum, the Court did, however, include an element for the success fee that Sheila would incur as a liability if successful in her claim, pursuant to her CFA. The element attributable in the award for the CFA success fee totalled £16,750, which was said to represent a success fee of approximately 25%. Note that this was much lower than the actual success fee provided for in the CFA (72%).
Grounds of appeal
Nalini appealed the first instance decision on 2 grounds:
- whether the Court erred in allowing the trial to take place by video link; and
- whether the Court erred by including a sum as a contribution towards Sheila’s success fee in the award made.
It is the second ground of appeal which makes this case so important for those who deal with 1975 Act claims. Recoverability of CFA success fees have been prohibited in most forms of civil litigation since 2013.
The court’s decision
In relation to the first ground, the Court of Appeal decided that it was appropriate for the Court to proceed with a trial by video link. This is a format that many parties successfully used during the COVID-19 pandemic. In any event, Nalini was debarred from participating in the trial and the Court determined that it was not obliged to manage the attendance of a debarred party. In essence, if Nalini wanted to have an opportunity to participate in the trial, then she should have positively engaged with the litigious process more constructively at a far earlier stage.
In relation to the second ground, the Court of Appeal decided that a CFA success fee is capable of being treated as a debt of the claimant and therefore can be considered as a “financial need” when calculating an appropriate award under the 1975 Act.
What is a CFA?
A CFA is a funding agreement entered into with lawyers which is commonly referred to as a “no win no fee” agreement. In short, if a party is successful in a case funded by a CFA, the solicitor is then entitled to charge the client a basic fee and an additional success fee (an uplift normally expressed as a percentage of the basic fee). If the claimant is not successful, commonly the agreement provides that no fees are payable.
In most forms of civil litigation, (following amendments made by the Legal Aid, Sentencing and Punishment of Offenders Act 2012), the Courts and Legal Service Act 1990 Pt II s.58A (6) provides that a success fee payable under a CFA cannot be recovered by way of an adverse costs order. In other words, the unsuccessful party cannot be ordered to pay the success fee as part of any adverse costs order and can only be ordered to contribute towards the basic fee of the solicitors acting for the other party. This statutory provision was introduced, in part, to tackle the historic problem, highlighted by Sir Rupert Jackson in his review of costs in civil litigation, of disproportionate costs being incurred in litigation.
This meant that a successful 1975 Act claimant, who pursued a claim under a CFA, might recover a contribution to their basic costs, but was left to pay any additional success fee from their own funds (and more often than not out of the amount awarded for their reasonable financial provision).
However, the decision in Hirachand means that a successful party can now seek to recover at least a portion of the success fee as part of the claim itself (so outside of and separate to any order for costs). As the court must, in dealing with a 1975 Act claim, consider the financial position of the applicant, the court effectively takes into account the success fee as a debt of the applicant when exercising its discretion under the 1975 Act.
What does this mean for 1975 Act claimants?
This case will be welcome news for claimants who are considering bringing a 1975 Act claim. The nature of 1975 Act claims (generally being claims for maintenance) means that, often, the claimant does not have the financial resources to fund the legal costs of the claim upfront. Public funding under the Legal Aid Scheme has withered away and therefore access to justice was becoming an increasing problem. The decision in Hirachand means that, if a case is funded under a CFA, then successful claimants are likely to keep more of their award, as an element of the CFA success fee can be taken into account by the court when determining the award.
The risk of the court increasing an award under the 1975 Act, to reflect a CFA success fee, may also encourage defendants to come to the table early in sensible negotiations, before such success fees become a significant factor.
As a result, CFA funding may now become a more attractive option for claimants to explore with their legal representatives. If you do want to talk about funding options with a member of our team, we would be happy to discuss such options with you.
A word of caution though. It is notable that the success fee included in the award in Hirachand represented a significant reduction on the success fee that the claimant was actually liable to pay to her solicitor. The success fee in the agreement was 72% of base costs, but the court only awarded £16,750, which was said to be calculated at 25% of base costs. Claimants must therefore be cautious and should not assume that the full success fee will be awarded.
Additionally, the court will consider whether CFA funding was “necessary” in the circumstances of the case. As a result, as well as challenging the amount of the success fee that should be awarded, it is likely that defendants will seek to argue that other funding options should have been explored (perhaps including seeking interim provision for costs under s.5 of the 1975 Act). One can expect this to be a fierce area of dispute and further clarification by the appeal court might be necessary in the future.
Impact on Defendants to such claims
Defendants to 1975 Act claims are now at risk of paying at least an element of the claimant’s CFA success fees indirectly, through the award any award a court may make to a claimant by way of reasonable financial provision. This is different to almost all other forms of civil litigation, where success fees cannot be recovered.
CFAs commonly have a tiered success fee structure, whereby a higher percentage uplift is payable the further the case has progressed and the closer it comes to trial. It is therefore important for defendants to carefully and seriously consider alternative dispute resolution options, such as mediation, to bring genuine claims to a close at an early stage. This will often reduce and possibly eliminate the success fee altogether.
Defendants should also consider, at the earliest stage possible, whether it is appropriate to give interim relief (claimants can apply for this under s.5 of the 1975 Act). For example, a defendant could agree to meet some or all of the claimant’s legal costs at an early stage, which could remove the need for CFA funding altogether.
The Court made it clear that the decision in Hirachand does not mean that success fees will always be included as part of any award. It will therefore be important for a defendant to look at ways to challenge the position – for example by asking the following questions (as highlighted in the judgment):
- Was a CFA the only way that the claimant could fund litigation?
- To what extent did the claimant “succeed” in the claim?
- What award is necessary for “reasonable provision”?
- What is the impact of the CFA debt on the claimant’s finances? If negligible, is an award appropriate?
It is likely that the decision in Hirachand will lead to an increase in 1975 Act claims being funded by way of a CFA.
Since the award in a 1975 Act claim is made before consideration is given to who should be made responsible for the costs of the litigation, the inclusion of an element of the CFA uplift in the award risks putting the cart before the horse and creating real practical problems.
For instance, when making the award at the trial, the judge cannot be told of any prior Part 36 or Calderbank offers to settle. As such, a successful claimant could, in theory, receive an enhanced award, to include an element for a CFA uplift, but then only later is the judge told that the award does not beat a Part 36 or Calderbank offer that the claimant rejected. If that occurred, it appears to be inherently unfair that a defendant should still be required to pay a success fee uplift on an element of costs incurred after the Part 36 offer was made. The judgement in Hirachand gives no guidance on this.
There also could be thorny issues in respect of showing that the CFA was the only way a claimant could fund the case. Evidencing this could be very difficult and there is a risk that claimants would have to disclose financial information / evidence in respect of funding discussions from their solicitor’s file that would otherwise remain legally privileged. Disclosure of such information could become a minefield in terms of maintaining privilege over the rest of the file.
One can therefore expect that this will prove to be a live issue in future cases and a hot topic for discussion for some time to come!
Our experienced Private Client Dispute Resolution Team are experts in all aspects of estate planning. Contact Freeths to find out how we can help you.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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