Garrett v Halton Borough Council

The Court of Appeal applied and interpreted the materiality test for breaches of the statutory conditions applicable to conditional fee agreements (CFAs) as explained in Hollins v Russell. The court held that materiality is to be assessed by reference to whether a departure from the Regulations had a materially adverse effect on the protection afforded to the client or on the proper administration of justice, not by requiring proof that the client actually suffered loss as a result.

In relation to regulation 4(2)(c) of the Conditional Fee Agreements Regulations 2000 the court confirmed that a solicitor must take reasonable steps (proportionate to the circumstances) to ascertain whether the client has before-the-event legal expenses insurance (BTE), and that asking inappropriate or insufficient questions to elicit that information can be a material breach rendering a CFA unenforceable.

In relation to regulation 4(2)(e)(ii) the court held that the duty to disclose any interest in recommending a particular insurance contract includes indirect financial incentives such as panel membership that gives a solicitor a commercial interest in recommending a particular insurer; mere statement of panel membership did not suffice where the panel membership effectively obliged or strongly incentivised the firm to recommend the insurer.

Procedural background and nature of the appeals.

The Court of Appeal heard linked appeals arising from costs assessments. The appeals reached the court from decisions of Master Wright (Supreme Court Costs Office) and Deputy District Judge Storry (Liverpool County Court / costs assessment). The appeals concerned whether particular CFAs entered into before the revocation of the Regulations were enforceable because of alleged breaches of the Conditional Fee Agreements Regulations 2000.

Parties and claims.

• Myatt appeals: four claimants (ex-miners) who had settled low-value industrial disease claims and whose solicitors (Ollerenshaw) were found by Master Wright to have breached regulation 4(2)(c) by failing to inform clients whether their risk of costs was insured under BTE. If the CFA were unenforceable the associated ATE premiums were also not recoverable.
• Garrett appeal: Ms Garrett, whose solicitors (Websters) were found by Deputy District Judge Storry to have breached regulation 4(2)(e)(ii) by failing to disclose an interest in recommending a particular ATE insurer (arising from panel membership) and whose solicitors’ fees were disallowed.

Issues for decision.

• Whether the test in Hollins v Russell requires proof of actual detriment to the client for a departure from the Regulations to be material.
• Whether, under regulation 4(2)(c), solicitors satisfied their duty when they asked the questions they did about BTE and what reasonable steps are required to ascertain BTE cover.
• Whether under regulation 4(2)(e)(ii) a solicitor must disclose indirect financial interests such as panel membership and whether the facts in Garrett constituted a disclosure breach.

Court’s reasoning and disposition.

The court concluded that Hollins v Russell did not decide that materiality requires proof of actual loss to the client and that the statutory scheme (section 58 of the Courts and Legal Services Act 1990 as substituted by the Access to Justice Act 1999, and the Regulations) must be read to permit an enforceability determination by reference principally to the terms of the CFA and the advice given at the time it was made. The statutory sanction of unenforceability was intended as a strong protective measure for clients and Parliament had not limited its operation to cases where the client had suffered actual prejudice.

On the facts of the Myatt appeals the court held the solicitors had asked the wrong and insufficient questions and had not taken reasonable steps to ascertain BTE cover; that failure was material and the CFAs were unenforceable. In Garrett the court held that the firm’s membership of the Ainsworth panel created an indirect financial interest in recommending the panel insurer, the membership disclosure given did not fairly disclose that interest, and the failure to disclose was material. The Garrett and Myatt appeals were dismissed.

The court also gave practical guidance on the content of reasonable enquiries under regulation 4(2)(c): the required steps are fact-sensitive, proportionate and include consideration of client characteristics, the claim type, likely prevalence of BTE, cost of ATE and whether the matter was handled remotely or by referral.

Appeals dismissed. The court held that the Hollins v Russell materiality test does not require proof of actual detriment to the client; materiality is to be judged by whether the breach had a materially adverse effect on client protection or the administration of justice. On the facts, Ollerenshaw failed to take reasonable steps under Regulation 4(2)(c) to ascertain BTE cover and Websters failed to disclose a real interest under Regulation 4(2)(e)(ii) (panel-related commercial interest). The breaches were material and rendered the CFAs unenforceable.

Appeals to the Court of Appeal (Civil Division) from costs decisions: from the Warwick County Court / assessment by Master Wright (Myatt appeals) and from the Liverpool County Court / Deputy District Judge Storry (Garrett). Neutral citation: [2006] EWCA Civ 1017.