Garrett v Halton Borough Council

A conditional fee agreement is unenforceable where there is a material failure to satisfy the statutory conditions. Materiality concerns the protection supplied by the regulatory requirement and the proper administration of justice. It does not depend on whether the particular client suffered actual financial loss, and enforceability is ordinarily determined when the agreement is made.

Under the Conditional Fee Agreements Regulations 2000, a solicitor must take reasonable steps to establish whether before-the-event insurance covers the client’s costs risk. The solicitor must also disclose an actual interest in a recommended insurance product, including a material indirect financial interest arising from panel membership.

This judgment determined linked appeals concerning the enforceability of conditional fee agreements made before the revocation of the Conditional Fee Agreements Regulations 2000.

In Garrett v Halton Borough Council, the claimant’s solicitors recommended after-the-event insurance supplied through a claims-management company’s panel. A deputy district judge disallowed the solicitors’ costs for non-disclosure of their interest in that recommendation. Judge Stewart QC dismissed the claimant’s appeal on materiality.

In the related Myatt claims, the Costs Office held that solicitors had failed to comply with regulation 4(2)(c) when investigating before-the-event insurance. The common issue was whether a breach was material only if it had caused actual prejudice to the client.

1. The appeals were dismissed. The court held that the materiality test in Hollins v Russell [2003] EWCA Civ 718 did not make actual client detriment a condition of unenforceability. A departure is material where it has a materially adverse effect on the protection afforded by the regulatory scheme or on the administration of justice. It is assessed principally by reference to the agreement, advice and circumstances existing when the CFA was made. Later events may sometimes illuminate the potential consequences of the breach, but do not convert the inquiry into one of causation or loss.

2. Under section 58 of the Courts and Legal Services Act 1990, Parliament adopted a strict scheme to protect clients. Literal and trivial departures remain immaterial under Hollins v Russell, but an otherwise material breach does not become immaterial because the client happened to have no relevant before-the-event insurance or suffered no actual loss.

3. For regulation 4(2)(c), a solicitor must take reasonable steps to ascertain the client’s insurance position before informing the client whether the costs risk is already insured. Reasonableness is context-sensitive. In the Myatt claims, the solicitors wrongly asked unsophisticated clients to decide whether their policies covered the contemplated claim. That did not reasonably establish the true insurance position. The resulting breach was material notwithstanding that the clients did not in fact have relevant before-the-event cover.

4. The court gave non-exhaustive guidance that the reasonable-steps inquiry may depend on the client’s understanding, the circumstances of instruction, the nature of the claim, the cost of after-the-event insurance, and any prior insurance investigation by a referrer. The guidance in Sarwar v Alam [2001] EWCA Civ 1401 was not an inflexible code.

5. For regulation 4(2)(e)(ii), an “interest” has its ordinary meaning and includes a solicitor’s indirect financial interest in retaining a flow of work through panel membership. The solicitor must disclose the interest actually held, not merely state a belief about it. Websters’ bare statement that it was on the Ainsworth panel, coupled with its assertion that it had no interest in the insurance, did not disclose that recommending a different policy could jeopardise its panel membership. The CFA was therefore unenforceable.

• Court of Appeal (Civil Division): The court dismissed the appeal in Garrett v Halton Borough Council and the related Myatt appeals: [2006] EWCA Civ 1017.
• Liverpool County Court: Judge Stewart QC dismissed Garrett’s appeal on the materiality issue, having refused permission on other issues arising from the detailed assessment.
• Liverpool County Court: Deputy District Judge Storry disallowed Garrett’s solicitors’ costs after finding a material breach of regulation 4(2)(e)(ii).
• Supreme Court Costs Office: Master Wright held the CFAs in the Myatt claims unenforceable for breach of regulation 4(2)(c).