KU (A Child) v LCC [2005] EWCA Civ 475

[2005] EWCA Civ 475Case No A2/2004/1437
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM LIVERPOOL COUNTY COURT
District Judge Humphreys-Roberts
His Honour Judge Stewart QC
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 27 April 2005
Before
LORD JUSTICE BROOKEVice-President of the Court of Appeal (Civil Division) LORD JUSTICE RIXLORD JUSTICE DYSON
Between
KU (a child, by her mother and litigation friend PU)Claimant/LIVERPOOL CITY COUNCILDefendants/Appellants
David Holland (instructed by the Solicitor to Liverpool City Council) for AppellantsBenjamin Williams (instructed by Paul Crowley & Co) for RespondentHearing Hearing dates : 28 th February and 1 st March 2005
JudgmentINDEXPara Part 1 Introduction 1 Part 2 Issue (i): Was a success fee of 100% appropriate on this CFA at the time when it was made?4 Part 3 Issue (ii): Does the CFA allow contractually for possibility of a different success fee on the detailed assessment from the success fee on the main claim?27 Part 4 Issue (iii): Given that differential rates are not permissible under the contract, does the court have the power, through para 11.8 (2) of the Costs Practice Direction or otherwise, to direct that a success fee is recoverable at different rates for different periods of the proceedings (including a detailed assessment of costs)?29 Part 5 Issue (iv): If the court does have such a power, when and in what circumstances should it be exercised?51 Part 6 Issue (v): What was the proper order in this case?52 Part 7 Issue (vi): Given the matters argued before him, was the decision of Judge Stewart QC wrong?53 Part 8 Conclusion 54Lord Justice Brooke : This is the judgment of the court.Part 1Introduction
[1]This is an appeal by the Liverpool City Council (“the council”) against an order of Judge Stewart QC in the Liverpool County Court on 15th June 2004 whereby he allowed an appeal by the claimant against an order of District Judge Humphreys-Roberts dated 4th March 2004 on a detailed assessment of costs. The district judge recorded in his order that the costs of the action were agreed at £5,500 inclusive of disbursements and VAT, and he made no order for costs in the detailed assessment proceedings save for payment by the defendants of the issue fee. Judge Stewart substituted an order that the defendants pay the costs of the detailed assessment proceedings before the district judge and before him, for which sums of £3,000 and £5,700 (inclusive of VAT) were assessed by consent, subject to liability.[2]The appeal to this court has taken a curious course. The dispute between the parties relates to the reasonableness of the success fee in the conditional fee agreement (“CFA”) agreed between the claimant’s mother (and litigation friend) and the claimant’s solicitors on 18th October 2001. The district judge held that the CFA success fee of 100% was reasonable for the period until the council filed its defence in the action on 10th April 2003, but that thereafter the success fee should be reduced to 5% both for the substantive proceedings and in the detailed assessment proceedings which followed. On the appeal to Judge Stewart the claimant challenged the reduction of the fee to 5%, and the defendants did not cross-appeal. The judge held that the district judge had no power to reduce the success fee, and he therefore permitted a success fee of 100% throughout.[3]The defendants sought permission to appeal to this court as a second appeal. They challenged not only the reasons why the judge had allowed the appeal but also the reasonableness of the success fee of 100% initially agreed. On 30th July 2004 Dyson LJ granted permission to appeal, but when the claimant objected that the defendants could not raise an issue in a second appeal which they had not raised on the first appeal, on 15th November 2004 the court (Brooke and Thomas LJJ) imposed conditions on the defendants’ ability to proceed with the appeal. It also directed that the appeal should proceed by way of re-hearing, and gave directions that on the appeal the court would consider the following matters: i) Whether a success fee of 100% was appropriate on this CFA at the time when it was made, and if not, what a reasonable success fee would have been from the outset; ii) Whether on the proper construction of this CFA, it allows contractually for the possibility of a different success fee on the detailed assessment from the success fee on the main claim; iii) Whether, if differential rates are not permissible as a matter of contract between the solicitor and his client, the court has the power, through para 11.8(2) of the Costs Practice Direction or otherwise, to direct that a success fee is recoverable at different rates for different periods of the proceedings (including a detailed assessment of costs); iv) If the court does have such a power, when and in what circumstances it should be exercised; v) What was the proper order in this case; vi) Whether, given the matters argued before him, the decision of the judge was wrong. At the hearing of this appeal we have benefited greatly from the advice of Master Hurst, the senior costs judge, who has acted as our assessor. Part 2. Issue (i) Was a success fee of 100% appropriate on this CFA at the time when it was made?[4]On this issue we admitted, without any sustained objection, more evidence than was before the district judge. So far as the facts are concerned, the claimant was four years old at the time of her accident on 6th September 2001, and her mother saw her solicitor very soon afterwards. She told him that her daughter had cut her leg when she was coming home from school. She was walking across the grass verge which lay between a public car park and Boundary Lane South in the city of Liverpool. The accident happened when she stepped into a hole.[5]Part of the new evidence consists of the solicitor’s site inspection report dated 11th September 2001, to which are attached a rough sketch of the accident site and eight coloured photographs of the accident scene. The hole is hidden in the grass. It was about 7 inches square and 20 inches deep. The public car park was separated from the main road by a strip of land which included this grass verge and the Strawberry Public House.[6]The CFA was completed and signed about five weeks later, on 18th October 2001. It was in the Law Society model form. The success fee was set at 100%, and Schedule 1 to the agreement contained a cross-reference to a risk assessment. This risk assessment measured the chance of success at 50%, and it contained a preliminary valuation of £750 for the value of the claim. It listed the following information or documents as matters taken into account in the risk assessment:(a) Client’s statement;(b) Potential section 58 defence;(c) Unclear as to who are the defendants;(d) Likely dispute re contributory negligence;(e) Likely dispute re quantum;(f) Callery v Gray.[7]Before the district judge the claimant’s solicitors relied on the contents of this risk assessment and the following other matters: i) This was a public liability claim. According to research carried out by Association of Personal Injury Lawyers (“APIL”) and reported in the August 2003 edition of the Law Society’s publication Litigation Funding the success rate for public liability claims was generally 61%. This factor alone, using the matrix set out in Cook on Costs, produced a success fee of 64%. ii) According to an article in The Daily Mail on 1st November 2003 (which was shown to the district judge and to this court) only 20% of tripping cases against Liverpool City Council succeeded. This factor alone justified a success fee of 100% in any tripping case involving the council.[8]In a supplementary written submission to the district judge the claimant’s solicitors identified the following matters as relevant to the risk in this case: i) The claimant was a minor, thereby causing concern with regards to the reliability of her evidence; ii) Because the accident occurred on a grass verge, this gave them concern as to who would be the registered proprietors of the land; iii) If it transpired that the council were the registered owners, they would potentially have a “system of inspection” defence.[9]To some extent the issue of the reasonableness of the initial success fee of 100% was overshadowed in the argument before the district judge by two quite different matters. The first was that the parties had already agreed the costs of the substantive proceedings in a lump sum. The other was that the whole of the argument revolved around the defendants’ contention that the district judge had power to reduce the allowable success fee after a stage in the proceedings had arrived when the risks inherent in the proceedings were greatly reduced. The defendants did not advance any argument about the reasonableness of the initial 100% success fee, and the district judge simply said:
“A tripper, an infant child and at the time they did not know who owned the property, what it was about (sic) [I am] satisfied 100% is the appropriate success fee until 10th April 2003. Thereafter I think it is appropriate to change the success fee …”
[10]It was only when Judge Stewart held that the allowable success fee must remain the same throughout that the defendants’ advisers turned their attention to the need to challenge the 100% fee approved by the district judge. We were told that the decision in this case, reached in these unusual circumstances, is being cited in other costs assessments in the City of Liverpool, and the defendants were anxious that it should be authoritatively reviewed.[11]On the hearing of this appeal we were shown evidence relating to the incidence of success in “tripping cases”. In the Report of the Case Profiling Study:
“Personal Litigation in Practice by Pascoe Pleasance” published by the Legal Aid Board Research Unit in 1998, 131 closed case files of legally aided personal injury cases were examined for the 1992-1996 period, in the category “Trip, Slip and Fall (Public Authority)”
. These showed a 77% success rate. A random sample of 150 cases in all categories of cases in this study included 16 categorised as “Trip, Slip and Fall”.These showed a 100% success rate.[12]Next, the APIL study mentioned by the claimant’s solicitors contained a category called “public liability”. 96,625 notified settlements in this category in 2001-2 revealed a success rate of 61%. In 2002-3 113,152 notified settlements showed a success rate of 60%. At the hearing in this court on 15th November 2004 it was hoped that the results of recent research conducted under the auspices of the Civil Justice Council might be published before the appeal was heard, but this did not in the event occur.[13]We were then shown evidence relating to the 237 highway tripping claims which were closed in the council’s litigation unit between 31st July 2004 and 31st January 2005. These unaudited statistics tended to suggest that there might have been a success rate of 72.5%, in that payments in excess of £1,000 were made in all but 65 of these cases, but the council accepted that a more accurate conclusion could only be drawn if the files were examined individually.[14]The claimant’s solicitor showed us two recent press cuttings. The first, from The DailyMail in November 2003, said that the number of people claiming compensation for tripping on Liverpool pavements had risen by 50% in the previous year. The council had received 2,200 claims for highway-related incidents in 2000, 4000 in 2001 and 6,000 in 2002, of which 90% were attributed to injuries caused by uneven pavements and kerbstones. It was said that 80% of the claims in 2001 had proved fraudulent or were successfully defended. A council spokesman attributed a lot of these claims to “very aggressive sales tactics used by ambulance-chasing insurance companies offering people no-win no-fee lawsuits”.[15]The article stated that the council had recently engaged a maintenance company in an attempt to show that it had an adequate procedure in place to check for faults in the city’s pavements, and that it had also established a partnership with a firm of solicitors “to examine claims quickly and root out fraudsters”.[16]The other article was published in The Liverpool Daily Post in November 2004. This stated that compensation claims by pavement trippers had dropped by 70% in two years: a figure of less than 3,000 claims received so far in 2004 was compared with “around 10,000” for 2002. The article described how active steps were being taken to improve the quality of the council’s pavements, and stated that the council had been adopting a tough approach to false tripping claims.[17]In an accompanying witness statement the claimant’s solicitor, Mr Moran, gave details of the robust way in which the council had been defending tripping claims in an effort to detect those that had been brought fraudulently. If there was evidence that the claimant or a member of his household had brought claims of a similar nature in the past, or had ever been involved in violence or exposed to violence, or had any history of criminality or benefit fraud, the Liverpool district judges were not slow to find that claims resting solely on the oral evidence of such a claimant either failed for want of proof or were simply fraudulent.[18]He said that when faced with tripping accidents not corroborated by cogent independent evidence, the council commonly challenged the claims on grounds that were impossible for him to foresee at the time that he accepted a claim on a CFA. In the present case, when the CFA was entered, he simply had the claimant’s mother’s word that her daughter had cut her leg after stepping into a hole on a grass verge of uncertain ownership and status. The quantum of the claim was apparently very small, and he did not know whether or not the owner of the grass verge was insured.[19]After describing steps taken by the council in other cases to obtain a lifetime medical history for the claimant, and quoting from a witness statement in another case in which a council employee spoke vividly of the need to protect the council from fraudulent claims, Mr Moran referred to features of tripping claims which made them more difficult than the sort of motor cases considered by the Court of Appeal in other cases. He cited defences to the effect that the defect was not caused by any fault on the council’s part, but was either transient or recent (e.g. caused by vandalism or theft), or that the council had an adequate system of maintenance and inspection in place for the land in question. He also observed that there might be concerns whether the claim would have a financial value in excess of £1,000, since costs are not recoverable at all in the small claims track.[20]When a court has to assess the reasonableness of a success fee it must have regard to the facts and circumstances as they reasonably appeared to the solicitor at the time when the CFA was entered into (see para 11.7 of the Costs Practice Direction and Atack v Lee [2004] EWCA Civ 1712 at [51]). The principle that the use of hindsight is not permitted when costs are being assessed is an old one: see Francis v Francis andDickerson [1956] P 1887, 95; and compare, in a different context, Argyll (Duchess) v Beuselink [1972] 2 Lloyd’s Rep 172, per Megarry J at p 184:
“In this world there are few things that could not have been better done if done with hindsight. The advantages of hindsight include the benefit of having a sufficient indication of which of the many factors present are important and which are unimportant. But hindsight is no touchstone [of negligence]… The standard of care to be expected of a professional man must be based on events as they occur, in prospect and not in retrospect.”
[21]In October 2001 the claimant’s solicitor would not have had access to the post-2001 evidence or other material cited in paragraphs 12-16 above. When deciding upon a success fee he had two choices. He could have taken the view that this claim would probably settle without fuss at a reasonably early stage, but he wished to protect himself against the risk that the claim might go the full distance and might eventually fail. In those circumstances he could select the two-stage success fee discussed by this court in Callery v Gray [2001] EWCA 1117 at [106] – [112], [2001] 1 WLR 2112. In this situation he would be willing to restrict himself to a low success fee if the case settled within the protocol period – or within such other period, perhaps until the service of the defence, as he might choose – and to have the benefit of a high success fee for the cases that did not settle early. As things turned out, he would have benefited on the facts of this case if he had adopted this course: a high two-stage success fee would have been more readily defensible in a case which did not settle until proceedings were quite far advanced.[22]Alternatively, he could have selected, as he did in fact, a single-stage success fee, being a fee which he would seek to recover at the same level however quickly or slowly the claim was resolved. In those circumstances it would not be possible to justify so high a success fee.[23]We must therefore consider the reasonableness of the single-stage success fee on this basis. Although Mr Williams, who appeared for the claimant, cautioned us to be aware that we lacked the local know-how that would be readily available to district judges in Liverpool, we must do the best we can on this re-hearing on the evidential material the parties provided to us.[24]This was not a typical case involving an alleged tripping accident on a city pavement. The solicitor had visited the scene and could see that the hole represented a concealed trap for the unwary. He had also spent 78 minutes taking his client’s instructions before the CFA was entered into. The identification of the owner of the grass verge should not prove over-complicated, and the likelihood of a defence proving successful was not particularly high (despite the arguments raised by Mr Williams in para 14 of his skeleton argument, which we have considered carefully). In a claim as small as this, it is not reasonable that the defendants should have to pay the claimant’s solicitor a higher success fee against the risk that the value of the claim was so low that legal costs would not be recoverable at all: this is a risk the solicitor must bear himself if he is willing to act at all.[25]In our judgment an appropriate single-stage success fee would have been 50% in this case. On the hypothesis that winning and losing claims are of equal weight, this would reflect a 2:1 chance of success. This, incidentally, represents a figure that is closer to the chances of success shown in the Pascoe Pleasance study (see para 11 above) and is not inconsistent with the recent figures produced by the council’s litigation unit, for what they are worth. This simple claim on behalf of a four-year old child who fell into a hole in a grass verge, promoted as it was by a well-known firm of local solicitors, does not on the face of it contain any of the characteristics graphically described in the two newspaper cuttings we were shown. APIL’s public liability category is too broad to be able to draw any useful conclusions from it in relation to a claim as straightforward as this. We must stress that we do not yet possess sufficient empirical data to be sure that we are not understating the prospect of success. This is clearly an area in which the Civil Justice Council might have a valuable input to make, following consultation with interested parties and a fuller study of actual outcomes than has been available to us.[26]Our answer on issue(i) is therefore that a single-stage success fee of 100% was inappropriate on this CFA at the time it was made, and a reasonable success fee would have been 50%. Part 3 Issue(ii) Does the CFA allow contractually for the possibility of a different success fee on the detailed assessment from the success fee on the main claim?

Part 3

[27]This question was included as a consequence of the judgment of this court in Halloran v Delaney [2002] EWCA Civ 1258, [2003] 1 WLR 28 in which it was argued that the district judge should not have allowed a success fee in the costs-only proceedings which had followed the settlement of a small road traffic accident claim. In the event this court was satisfied that the language of the Law Society model CFA, which was being used in that case, covered the costs–only proceedings within the “claim” for which it provided coverage (see paras 15-21 of the judgment).[28]Since the CFA in the present case is on identical terms the answer to this question is “no”. As a matter of contract the same single-stage success fee is available throughout the proceedings on the claim, including the detailed assessment of costs. Part 4 Issue (iii) Given that differential rates are not permissible under the contract, does the court have the power, through para 11.8 (2) of the Costs Practice Direction or otherwise, to direct that a success fee is recoverable at different rates for different periods of the proceedings (including a detailed assessment of costs)?

Part 4

[29]This was the issue on which Judge Stewart differed from the district judge. Before we explore the reasons for the difference, we must describe the course the proceedings took.[30]On 13th November 2001 a letter of claim was sent to the council. On 26th November the council said that the claim was being investigated in accordance with the personal injuries protocol. There was then silence on the council’s part, despite a chasing letter in March 2002, until the hearing of a successful application for pre-action disclosure on 26th June 2002, when its representative said that it had not established whether it was responsible for the verge. No positive information, and no pre-action disclosure, was then forthcoming, so that an “unless” order had to be sought and obtained. Ultimately the council admitted on 24th September 2002 that it owned the land and that the verge was dangerous, but it said that the position on liability was not clear.[31]On 8th January 2003 the claimant’s medical evidence was served, and when no reply was received to a chasing letter, proceedings were issued on 10th March 2003. In the meantime counsel had been instructed under a CFA containing a success fee of 50%.[32]In its acknowledgment of service the council said it would defend the entire claim. In its defence, filed on 10th April 2003, it admitted fault for the condition of the verge, but it did not admit the accident, liability, causation or loss, and required the claimant to prove her claim. On 22nd May 2003 a deputy district judge of his own motion directed that judgment be entered for damages to be assessed on 1st August 2003. Since causation was in issue the council understandably evinced an intention to apply to have that judgment set aside (although it waited until 28th July before saying so), but it changed its mind two days later and at the hearing on 1st August this application was not pursued. The claim was then settled for £2,500 with costs on the standard basis. The value of the claim was higher than originally envisaged because unhappily the claimant was left with an unexpectedly prominent three-inch scar on her leg.[33]The detailed assessment was commenced on 17th September 2003. The claimant’s solicitors were claiming over £7,800 (including the 100% uplift). On 4th February 2004, following the exchange of points of dispute and points of reply, the costs of the substantive claim were agreed at £5,500. All that remained for resolution were the costs of the detailed assessment proceedings. In this respect the claimant’s solicitor claimed a 100% uplift on his base profits costs, and it was the success fee which was at the centre of the controversy.[34]District Judge Humphreys-Roberts said that he was satisfied that this was an appropriate case for there to be what he called a two-stage success fee. The success fee should be 100% up to 10th April 2003, when there was what he called “the clearest admission of liability”. He said that the claimant thereafter only had to satisfy the defendant and the court that she fell in the way she described at the spot where she said she fell, and her evidence was likely to be accepted. She was entitled to recover damages by proving the injury. He was satisfied that the risk then was very small, and the success fee after 10th April should be 5%. A little earlier he had told the claimant’s solicitor that after that date “it would have been appropriate for you to reconsider the success fee and reduced it (sic)”.[35]Judge Stewart, for his part, held that paras 11.7 and 11.8 (2) of the Costs Practice Direction did not give the court anything like the discretion which the district judge thought he possessed. He said (at para 21):
“In other words, for determining costs it [cannot] just say, ‘The risk changed so that they plummeted at some subsequent stage. Therefore I am not going to allow your 100% percentage…but to reduce it because of what subsequently happened in the litigation, causing the risk to be substantially less.’ That, it seems to me, is a wholly impermissible purported exercise of discretion.”
[36]We agree. The approach of the district judge negates the whole purpose of assessing at the outset the risks involved in pursuing a claim. The solicitor did not have the contractual power or the professional duty to do what the district judge suggested, namely to renegotiate the success fee once it became clear that the risks were now very small and that there was no longer any need to fear a “worst case scenario” such as might have been in the solicitor’s mind when the CFA was initially agreed.[37]The language of the governing statute, the governing regulations, and the Civil Procedure Rules all point in the same direction. Section 58 of the Courts and Legal Services Act 1990 (“the 1990 Act”), as substituted by section 27 of the Access to

Justice Act 1999, provides, so far as is material:

“(2) For the purposes of this section and section 58A – … (b) a conditional fee agreement provides for a success fee if it provides for the amount of any fees to which it applies to be increased, in specified circumstances, above the amount which would be payable if it were not payable only in specified circumstances. … (4) The following further conditions are applicable to a conditional fee agreement which provides for a success fee -…”
[38]This language does not envisage a conditional fee agreement which contains two or more success fees, or a success fee which may subsequently waver upwards or downwards as the risks of the proceedings increase or are diminished.[39]The Conditional Fee Agreements Regulations 2000 were made under powers contained in section 58(3)(a) and two other provisions of the 1990 Act. Regulation 3 provides, so far as is material:
“(1) A conditional fee agreement which provides for a success fee – (a) must briefly specify the reasons for setting the percentage increase at the level stated in the agreement… … (2) If the agreement relates to court proceedings, it must provide that where the percentage increase becomes payable as a result of those proceedings, then - … (b) if - (i) any [fees subject to the increase] are assessed, and (ii) any amount in respect of the percentage increase is disallowed on the assessment on the ground that the level at which the increase was set was unreasonable in view of facts which were or should have been known to the legal representatives at the time it was set, the amount ceases to be payable under the agreement, unless the court is satisfied that it should continue to be so payable…” (a) must briefly specify the reasons for setting the percentage increase at the level stated in the agreement… (b) if - (i) any [fees subject to the increase] are assessed, and (ii) any amount in respect of the percentage increase is disallowed on the assessment on the ground that the level at which the increase was set was unreasonable in view of facts which were or should have been known to the legal representatives at the time it was set, the amount ceases to be payable under the agreement, unless the court is satisfied that it should continue to be so payable…”
[40]It is not surprising to find that the regulations which bolster the statutory scheme also envisage a single success fee which may be reduced on the assessment of costs if the court considers that the level at which the increase was set was unreasonable in view of the matters set out in regulation 3 (2)(b)(ii).[41]In CPR 43.2 definitions are given of the phrases “funding arrangement”, “percentage increase” and “additional liability” which perpetuate the concept that a conditional fee agreement may contain a success fee (singular) which provides for a percentage increase (singular). CPR 44.3A prescribes the time at which the court may assess any additional liability.[42]Nowhere in the statute, the regulations, or the rules is there any indication that the court is to have any power to subvert the statutory scheme by determining that although the level of a success fee was reasonable in view of the facts which were or should have been known to the legal representative at the time it was set, he is only entitled to recover a different, much lower, success fee in respect of some later period when different facts were or should have been known to him. Indeed, if the court were to exercise such a power the lawyer would in theory be able to recover the irrecoverable balance from his own client since there is nothing in regulation 3 (2)(b)(ii) to preclude this.[43]Against this statutory and regulatory background, it is equally unsurprising to find that para 11.7 of the Costs Practice Direction provides that:
“11.7 Subject to paragraph 17.8(2), when the court is considering the factors to be taken into account in assessing an additional liability, it will have regard to the facts and circumstances as they reasonably appeared to the solicitor or counsel when the funding arrangement was entered into and at the time of any variation of the arrangement.”
This guidance reflects the intention of the regulations: see para 39 above.[44]Para 17.8 (2) is concerned with costs-only proceedings. It provides that:
“(2) In cases in which an additional liability is claimed, the costs judge or district judge should have regard to the time when and the extent to which the claim has been settled and to the fact that the claim has been settled without the need to commence proceedings.”
[45]In Halloran v Delaney (see para 27 above) at para 13 this court, after hearing full argument on the point, approved the following passage in the judgment of Master Hurst in Bensusan v Freedman (unreported, 20 September 2001):
“The combined effect of [paras 11.7 and 17.8 (2)] is to prevent the costs officer from using hindsight in arriving at the appropriate success fee, and to prevent excessive claims for success fees in cases which settle without the need for proceedings when it was clear, or ought to have been clear from the outset, that the risk of having to commence proceedings was minimal.”
[46]The only matter which has caused any difficulty or uncertainty in the present case arises out of para 11.8 (2) of the Costs Practice Direction which is in these terms:
“(2) The court has the power, when considering whether a percentage increase is reasonable, to allow different percentages for different items of costs or for different periods during which costs were incurred.”
[47]We have had the privilege of hearing excellent arguments by two junior counsel with great experience in this specialist field. Mr Holland, who appeared for the appellants, made a valiant attempt to reconcile the language of this practice direction with the statutory and regulatory scheme we have described. In our judgment, it is impossible to do so. Once it is clear (in the absence of any later consensual variation which provides for a different success fee) that a CFA may only carry one success fee, and that the task of a costs judge is to determine whether that success fee was a reasonable one in the light of the matters that the legal representative knew or should have known when it was made, there is simply no room for a costs judge to substitute different percentage increases for different items of costs, or for different periods when costs were incurred. He could only do this with the benefit of hindsight, which is prohibited, and the rules and the regulations give him no power to remake the parties’ agreement. His powers of interference are limited to altering the success fee to a more reasonable one when he considers the size of the additional liability the paying party should bear. This is because there is nothing in the statute or the regulations to suggest that he is required to do anything other than carry out his usual function of deciding whether an item on a bill is reasonable, and if he decides it is not, of substituting a reasonable amount or deleting the item altogether.[48]The status of a practice direction has been authoritatively delineated by Hale LJ in Re C (Legal Aid: Preparation of Bill of Costs) [2001] 1 FLR 602 at para 21, May LJ in Godwin v Swindon Borough Council [2001] EWCA Civ 1478 at [11], [2002] 1 WLR 997, and Dyson LJ in Leigh v Michelin Tyre plc [2003] EWCA Civ 1766 at [19]-[21], [2004] 1 WLR 846. It is sufficient for present purposes to say that a practice direction has no legislative force. Practice directions provide invaluable guidance to matters of practice in the civil courts, but in so far as they contain statements of the law which are wrong they carry no authority at all.[49]It follows that the answer to the third issue is that the court has no power to direct that a success fee is recoverable at different rates for different periods of the proceedings. In so far as para 11.8(2) of the Costs Practice Direction suggests otherwise, it is wrong.[50]We must add that the district judge fell into error not only because he believed that the claimant’s solicitor had the power and the duty to renegotiate the level of the success fee once the risks inherent in the proceedings had diminished, but also because he misunderstood what this court said about a two-stage success fee in Callery v Gray. In that case Lord Woolf CJ encouraged lawyers to take seriously the possibility of agreeing an initial success fee of, say 100%, on the basis that if the claim settled within the protocol period (or some other period identified by the parties to the CFA) a lower success fee would be recoverable under the CFA. At the assessment of costs attention would then be paid to the reasonableness of the success fee which was recoverable as things turned out, and as we have observed (see para 21 above), this type of arrangement would lead to a greater chance of establishing the reasonableness of a higher success fee given that the claim did not settle within the agreed period. Part 5 Issue (iv): If the court does have such a power, when and in what circumstances should it be exercised?

Part 5

[51]For the reasons given above, the court possesses no such power, so that the issue does not arise. Part 6 Issue (v): What was the proper order in this case?

Part 6

[52]The district judge should have ruled that the success fee of 100% was unreasonable, and should have substituted a 50% success fee which would have covered the entire proceedings, including the detailed assessment of costs. Part 7 Issue (vi): Given the matters argued before him, was the decision of Judge Stewart QC wrong?

Part 7

[53]No, he was entirely correct to rule that if a success fee was held to be proper at the outset, the district judge should not have varied it in relation to a later period of the proceedings when the risks were reduced. As we have observed, he was not invited to rule on the reasonableness of the initial 100% success fee. Part 8 Conclusion

Part 8

[54]We have no power to alter the actual outcome in this case because the council did not in fact appeal the reasonableness of the initial success fee to the first appeal court. It was anxious, however, that we should rule on the important points of practice that arose in the case, and this appeal has proved a valuable opportunity to clear away a number of misunderstandings about the way the CFA regime operates.[55]On 15th November 2004 the court permitted the appeal to proceed on condition that the orders for costs in the court below remained undisturbed and that the council paid the claimant’s costs in the Court of Appeal, whatever the outcome of the second appeal, subject to a cap on those costs. In the event the parties agreed a cost cap figure for the claimant’s costs in the sum of £45,000, such sum to cover all outstanding costs incurred in these proceedings both before and after 15th November 2004.[56]The order of the court should therefore set out in declaratory form the following answers to the matters identified in its order dated 15th November 2004:(i) No. 50%.(ii) No.(iii) No.(iv) Not applicable.(v) That a success fee of 50% should have been allowed throughout the proceedings, including the detailed assessment proceedings.(vi) No. In the particular circumstances of this case (see para 54 above) Judge Stewart’s order will remain undisturbed.[57]Finally, we have benefited from reading the careful judgment of Judge Barnett in the Chester County Court in Cheshire County Council v Lee (unreported, 9th May 2003). Although what we have said about the law (and particularly about para 11.8(2) of the Costs Practice Direction) must supersede what is said in that judgment, this represented a bold attempt to combat what Lord Hoffmann described as a ratchet effect in Callery v Gray (Nos 1 and 2) [2002] UKHL 28 at [32], [2002] 1 WLR 2000, leading to ever higher success fees. We end by reiterating that costs judges should be more willing to approve what appear to be high success fees in cases which have gone a long distance towards trial if the maker of the CFA has agreed that a much lower success fee should be payable if the claim settles at an early stage: see Re Claims Direct Test Cases [2003] EWCA Civ 136 at [101], [2003] 4 All ER 508 for an earlier exposition of this principle.

Cited in 38 later judgments

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