Claims Direct Test Cases Tranche 2 Issues [2003] EWHC 9005 (Costs)

Case No:

[2003] EWHC 9005 (Costs)

IN THE HIGH COURT OF JUSTICE

SUPREME COURTS COST OFFICE

Supreme Courts Cost Office

Clifford Inn

Venue Fetter Lane

London

EC4A 1DQ

Date 3 January 2003

Before

CHIEF MASTER HURST, SENIOR COSTS JUDGE

CLAIMS DIRECT TEST CASES TRANCHE 2 ISSUES

Mr T Charlton QC and Mr N Bacon (instructed by Colman Coyle) for the Claimants

Mr A Neish (instructed by Beachcroft Wansbroughs) for the Defendants

Mr N. Hood on behalf of Mr Bruce Stuart of 4 Kings Bench Walk

Also Present Mr Stephen Seed of Harrington Street Chambers, Liverpool

Hearing Hearing dates : 2, 3 & 4 December 2002

Judgment

TABLE OF CONTENTS

Paragraph No.Background 1 The issues 3 The compromised issues Issue 8 – counsel’s fees Issue 9 – Seeking counsel’s advice in every case Issue 10 – Insurance premiums and transitional provisions 5 6 26 27 The live issues Issue 7 – Referral fees 31 31 The professional rules 32 The panel solicitors operating manual 34 Issue 7 (i) Is the payment of £395 plus VAT to MLSS Ltd a referral fee?The Submissions of the parties Who is the introducer?What did the £395 plus VAT cover?How the system worked in practice Is the MLSS fee a disbursement or profit costs?Is the whole MLSS fee a recoverable disbursement?If not, what is the MLSS fee?The Claimants’ position 39 44 56 61 76 77 79 81 Issue 7 (ii) If so does the solicitors agreement to pay them breach the Introduction and Referral Code?89 Issue 7 (iii) If so what are the consequences?89 Issue 7 (iv) Is the fee to MLSS irrecoverable for any other reason?100 Issue 7 (v) Is any part of the payment made to MDL irrecoverable for non referral fee reasons?106 Summary 115

Chief Master Hurst

BACKGROUND

[1]The full background to these proceedings is set out in my judgment of 19 July 2002 dealing with the first tranche of issues arising out of the Claims Direct Scheme. Reference should also be made to that judgment for a description of Claims Direct, its business model and the underwriting history. These topics are dealt with in the earlier judgment under the following headings:• The Claims Direct Business Model: paragraphs 23 to 28;

• The Development of the Claims Direct Litigation Protection Insurance Policy: paragraphs 29 to 43;

• The MLSS Agreement: paragraphs 44 to 48;

• How the Premium was Allocated: paragraphs 49 to 64;

• The New Scheme: paragraphs 65 to 77;

• The Claimant’s Contract with Claims Direct: paragraphs 78 to 88.

[2]I also received evidence at the earlier hearing from three witnesses:• Mr Brian Raincock (of Litigation Protection Ltd): paragraphs 89 to 116;

• Mr Daniel Primer (of Catlin Underwriting Agency): paragraphs 117 to 136; and

• Mr Paul Doona (the finance director of Claims Direct): paragraphs 137 to 153. Reference was made during the course of argument of the Tranche 2 issues to the evidence which had been given, particularly to that given by Mr Raincock. THE ISSUES

[3]This is the second tranche of issues which were directed to be tried by my order of 7 March 2002. The issues were originally as follows: TRANCHE 2 Issue7 Referral fees:(i) Are the following referral fees: (a) the payment of £395 plus VAT to Medical Legal Support Services Ltd; (b) the payment to Mobile Doctors Ltd; (c) the payment of £72.50 plus VAT to Poole & Co;

(ii) if so does the solicitor’s agreement to pay them breach the Introduction and Referral Code;

(iii) if so what are the consequences;

(iv) are these fees irrecoverable for any other reason? Issue8 Counsel’s fees: (i) Is any part of the fees paid to counsel by a Claims Direct panel solicitor paid or refunded by counsel to Claims Direct; (ii) are payments made by counsel in respect of referrals for cases; (iii) do counsel instructed by Claims Direct panel solicitors sometimes use a common VAT number, and do they for that or any other reason operate as a firm; (iv) are counsel’s fees for advice only payable in specified circumstances, namely success and recovery from the paying party;

(v) if the answer to any of the above is in the affirmative, what are the consequences? Issue9 Is the requirement to seek counsel’s advice in every case under the terms of the Operating Manual reasonable and is the fee for that recoverable from a paying party? Issue10 Recoverability of insurance premiums, transitional provisions: (i) whether money actually paid or committed by a claimant to Claims Direct for insurance prior to 1 April 2000 is recoverable; (ii) whether a premium paid in respect of an insurance policy entered into prior to 1 April 2000 where the certificate of insurance is dated prior to 1 April 2000 is recoverable; (iii) whether a premium paid or payable by a claimant to Claims Direct for an insurance policy entered into after 1 April 2000 replacing a previous funding agreement is recoverable?"

[4]As a result of negotiation and sensible compromise between the parties the number of live issues has been greatly reduced. The live issues are now: Issue7 Referral fees:(i) Are the following referral fees: (a) the payment of £395 plus VAT to Medical Legal Support Services Ltd;

(ii) if so does the solicitor’s agreement to pay them breach the Introduction and Referral Code;

(iii) if so what are the consequences;

(iv) are these fees [and the payment to Mobile Doctors Ltd] irrecoverable for any other reason? THE COMPROMISED ISSUES

[5]It is necessary to deal briefly with those issues which have been compromised before dealing with the issue 7 matters in due course. Issue8 - Counsel’s Fees

[6]In relation to the issues concerning counsel’s fees I had directed, in the order of 8 November 2001, that the Claimants’ Solicitors should provide a copy of that order to the Heads of Chambers with whom agreements were made by or on behalf of Claims Direct for the provision of advice by counsel for Claims Direct and also to:

"an appropriate officer of the Bar Council"

. Recipients were at liberty to apply to intervene in the determination of the preliminary issues.

[7]At the case management conference on 3 October 2002 it became apparent that the Claimants’ Solicitors had not been able to comply with that direction because there appeared to be no method of identifying which sets of Chambers had entered into the relevant agreements with Claims Direct. Mr Hood attended the hearing on 2 October 2002 on behalf of Mr Bruce Stuart and indicated that Mr Stuart was doing what he could to bring the matter to the attention of other members of the Bar who might be affected.

[8]On 4 October 2002, following the case management conference, Robert Rhodes QC (the Head of 4 Kings Bench Walk) sent a memorandum to all members, past and present, of his Chambers who had ever done any type of Claims Direct work. That memorandum set out the issue and relevant extracts of the points of dispute. At a subsequent Chambers meeting it was decided that Mr Stuart "would act in a representative capacity for all current members of Chambers". In addition Mr Rhodes wrote to all Heads of Chambers who had ever done any Claims Direct work to inform them of the proceedings and of what had happened at the recent case management conference.

[9]In addition to that I myself wrote to the Chairman of the Bar on 8 October 2002 bringing the issue to his attention and explaining the difficulty. Following that letter Mark Stobbs (Head of the Professional Standards and Legal Services Department of the General Council of the Bar) wrote to all Heads of Chambers on 16 October 2002 bringing the matter to their attention and informing them that the issues affecting counsel were to be tried over four days commencing on 2 December 2002. The letter concludes:

"Heads of Chambers, where counsel did work under the Claims Direct Scheme, are invited to contact the Claimants’ Solicitors Messrs Colman Coyle … for further information."

No applications to intervene have been received by this Office other than from Mr Stuart and those whom he represents.

[10]Mr Stuart indicated, in a letter addressed to me dated 29 November 2002, that he had not been notified by the Claimants’ Solicitors whether any Chambers or individuals had contacted them following the Bar Council’s invitation. He did indicate however that Mr Hood had had lengthy discussions with several Chambers, including York Chambers and Harrington Street Chambers in Liverpool. He states in his letter that he had formed the impression that the majority of counsel were content that their interests were being represented in any event (because they were the same as those of 4 Kings Bench Walk) and would therefore rather not expose themselves to costs unnecessarily by becoming involved in any formal sense.

[11]Full disclosure was given to the Defendants through Mr Stuart, which led to them abandoning a number of the points previously in issue. Mr Stuart took the view that it was appropriate to reach agreement with the Defendants on the sole remaining issue which concerned his Chambers and the Bar generally. He did this by letter to the Defendant Solicitors dated 27 November 2002. In order to ensure that every Chambers and individual who had done Claims Direct work was aware of the situation he sent by fax a note to each Head of Chambers on his list making clear the urgency of the issue and reminding them of its importance. The note attached copies of the letters setting out the agreement so that each Chambers could consider the full terms reached. At the date of Mr Stuart’s letter to me he had not received any adverse comments to the agreement from any member of the Bar, nor did Mr Hood indicate any at the hearing before me.

[12]The Claimants have throughout described their position on the counsels’ fee issue as "neutral".

[13]The compromise achieved by Mr Stuart is as follows: Issue 8 (iii) withdrawn by the Defendants Issue 8 (iv) withdrawn by the Defendants

[14]Issue 8(i), (ii) & (v) concerned the possibility that part of the fee paid to counsel might be a referral fee. This is of course a matter of considerable importance to members of the Bar involving a possible breach of the Code of Conduct of the Bar. The Professional Standards Committee of the Bar issued Guidance on Commissions and Payment by Barristers for Work on 1 May 2001. The guidance runs to some four pages and begins:

"This guidance is issued following recent communications from the Professional Standards Committee concerning schemes under the aegis of the Claims Direct Personal Injury Programme. The Committee’s view was that these schemes appeared to involve members of the Bar paying outside consultants in order to obtain work and could not fairly be construed as arrangements under which barristers pay for preparation and administrative work which is necessary to enable them to give good professional advice. The Professional Standards Committee established a Working Group to consider the issues raised by such schemes and generally."

[15]The guidance goes on to state what the Rules currently are and how the Committee believes they affect particular sets of circumstances. Under the heading "Other Guidance Concerning the Claims Direct Scheme" the following appears:

"Fee notes should record the fee that the barrister is actually being paid for professional services. There is obviously no need to refer to ordinary professional expenses, such as clerk’s fees, Chambers rent and administration, travel costs and the like. A special payment to be made to a third party for preparation or administrative work of the kind that would normally be undertaken by instructing solicitors would, however be regarded as an extraordinary expense. Such payments should be recorded on the fee note so that the document is transparent and so could be challenged by the party ultimately responsible for paying the fee."

[16]Mr Neish explained that Ian Lee was a clerk with 4 Kings Bench Walk (a consultant clerk since 1996) he entered into an agreement with Medical Legal Support Services Ltd (MLSS) dated 19 June 1996 (Bundle 11/1/1). That agreement recited that solicitors requiring advice from counsel were required to forward the necessary case papers to MLSS, that MLSS had agreed to deliver briefs under the scheme, which required advice from counsel, to Ian Lee "for distribution by him to appropriate members of Chambers … and to appropriate members of other Chambers". The agreement also recited agreement between MLSS and each solicitor that Ian Lee was "entitled to a fee per brief to cover the administration and other expenses arising out of performance of his obligations". It was a condition of the scheme that counsel’s advice on quantum (and sometimes merits) had to be taken, the fee for which was fixed at £95 plus VAT. The effect of this was that there had to be instructions to counsel in every case. Under the agreement Ian Lee had to act as distributor of instructions to those counsel who were going to give the necessary advice. The panel solicitors sent instructions to MLSS, MLSS forwarded those instructions to Ian Lee, who identified the appropriate counsel. The advices were sent back to Ian Lee, who in turn sent them to MLSS and thence to the panel solicitors.

[17]Paragraph 3 of the agreement provides that in relation to each brief delivered by MLSS to Ian Lee he would be entitled to a fee of £25; and paragraph 4 provides that once Ian Lee had received payment of the £25 he was required to inform MLSS in writing, who would then be entitled to invoice him the sum of £15, which was to be paid to MLSS by him as soon as practicable. Paragraph 4 sets out the assistance to be provided by MLSS in return for the £15:

"To assist the performance of the obligations of Ian Lee … MLSS shall provide all and any assistance reasonably required of them by Ian Lee including but without restriction to the generality of the foregoing, the provision of courier services for the delivery and redelivery of briefs (as and when required)."

[18]In the event, Mr Neish explained, so many instructions were received that MLSS dropped out and instructions were sent direct to Ian Lee. The distribution was subsequently taken over by a body known as Brown Associates but nothing turns on that.

[19]In Spring 2001 the Professional Conduct Committee of the Bar raised a complaint, apparently of its own motion, based on the possibility that referral fees might have been paid. That complaint is still pending and I express no view in this judgment as to whether or not any part of the payment to Ian Lee is a referral fee or whether there has been any breach of the Code of Conduct of the Bar. It is clear that, following the guidance given by the Bar Council, fee notes were sent out stating that in addition to the fee payable to counsel, £15 plus VAT would be paid to MLSS. Solicitors complained about this (see for example the letter of 13 July 2001 from Messrs Glaisyers 11/1/30: "We feel that it is extremely unlikely that [the paying party] will be willing to pay the extra sum of £15 plus VAT for administrative assistance especially bearing in mind that the instructions are forwarded directly to Chambers.") Against this background Mr Stuart agreed that the £15 was irrecoverable on an assessment between the parties and that issue 8 could be settled (at least as far as he and those he represents were concerned) on that basis.

[20]By a letter of 18 June 2001 Mr Stuart asked Mr Gravell of Claims Direct to let him have a breakdown of the administrative services provided to counsel by MLSS [11/1/25]. In his reply of 19 June 2001 Mr Gravelle writes:

"MLSS charges a small administration fee to the barrister which covers services carried out by this company on behalf of the Chambers and individual barristers. These services include but are not limited to, credit control, marketing, the monitoring of service level agreements together with a constant review as to the efficiency of this scheme."

[21]Mr Gravell is the Chief Operating Officer of MLSS.

[22]For the avoidance of doubt I state that I can envisage no circumstances in which the £15 paid to MLSS would be allowed on an assessment between the parties. Mr Charlton, whilst maintaining the neutral stance of the Claimants, asked that I should make clear how the distinction is to be made between those expenses which are ordinarily included within counsel’s fees and allowed without breaking down and auditing those fees, and payments such as that made to MLSS. In my judgment the guidance given by the General Council of the Bar, which I have already quoted, at paragraph 15 accurately identifies the nature of the payment which should not be included in counsels fees, ie "a special payment … for preparation or administrative work of the kind that would normally be undertaken by instructing solicitors".

[23]Mr Charlton wished me to go further to make it clear that those counsel who had actually received the additional £15 in the past should repay that sum to the solicitors who had paid them. The issues which I am trying arise in the course of detailed assessment proceedings between the Claimants and the Defendants. The underlying question which I have to answer is: were the costs claimed by the Claimant proportionately and reasonably incurred and proportionate and reasonable in amount? In relation to the £15 I have indicated that it is a cost not reasonably incurred. The Defendants therefore do not have to pay it. It is a matter for the Claimants’ Solicitors whether they still seek to charge their clients that amount, but it seems unlikely that this will be possible for two reasons: firstly, Section 74(3) of the Solicitors Act 1974 provides:

"The amount which may be allowed on the taxation of any costs [between solicitor and client] … in respect of any item relating to proceedings in a County Court shall not, except in so far as Rules of Court may otherwise provide, exceed the amount which could have been allowed in respect of that item as between party and party in those proceedings …"

CPR 48.8(1)(A) provides an escape from that provision, provided the solicitor and client have entered into a written agreement which expressly permits payment to the solicitor of an amount of costs greater than that which the client could have recovered from another party to the proceedings.

[24]Secondly CPR 48.8(2)(c)(ii) provides:

"Subject to paragraph 1(a), costs are to be assessed on the indemnity basis but are to be presumed … (c) to have been unreasonably incurred if – (i) they are of an unusual nature or amount; and (ii) the solicitor did not tell his client that as a result he might not recover all of them from the other party."

[25]The result of this is that solicitors could be out of pocket in many cases having paid the irrecoverable £15 to counsel unless counsel refunds it. That matter must remain one for discussion between solicitors and counsels’ clerks, or if necessary the General Council of the Bar. Issue 9 – Seeking Counsel’s Advice in Every Case

[26]It was agreed by the parties that this is a fact sensitive issue since it may well be reasonable to obtain counsel’s advice in one case when it is not in another. I am asked, if possible, to give some general guidance as to when the use of counsel might be appropriate. Mr Neish went so far as to suggest that I might indicate that it would not be appropriate in any fast track case. That would however be far too far reaching and would in effect be usurping the task of the Civil Procedure Rule Committee. If at some date in the future it is decided that fees for counsel’s advice in fast track cases should not be recoverable, rules to that effect will be passed. Until such rules are passed the matter remains one for the discretion of the Judge assessing costs. The test to be applied on the standard basis is, as I have said, whether the costs are reasonably and proportionately incurred and are reasonable and proportionate in amount. The Test Cases before me are for the most part simple, straightforward cases which competent solicitors of reasonable experience should be able to deal with without needing to resort to counsel. There may however be factually simple cases resulting in modest awards of damages which nonetheless contain difficulties, for example as to causation, in respect of which the obtaining of counsel’s advice would be both reasonable and proportionate. In such a case the test of necessity advocated by the Lord Chief Justice in Lownds v The Home Office

[2002] EWCA Civ 365

might well be satisfied. Given that the facts of each case can vary enormously it is not in my view possible to give more specific guidance. Issue 10 – Insurance Premiums and Transitional Provisions

[27]Issues (i) and (ii) have been conceded by the Claimants and (iii) has been conceded by the Defendants. The only point which arises under this head is in relation to 10(i) where the Claimants’ concession, which was notified to the Defendants by a letter dated 22 October 2002, is said to be limited in that "it does not technically bind Claimants other than in the Test Cases". Again I am invited to give guidance which may assist in future cases.

[28]Mr Neish, unsurprisingly, did not welcome the prospect of Issue 10(i) being run in future cases. It has to be accepted however that if individual Claimants wish to argue this topic in the future they cannot be prevented from doing so.

[29]Mr Charlton, presumably in the hope of resolving an issue which is recurrent, argued that care was necessary in some cases where for instance the Fair Trading Statement was signed before 1 April 2000. He took as his example the case of Brooks 9A/4/119. Mr Brooks had suffered an accident on 19 March 1999. He signed a Fair Trading Statement on 31 March 2000. The Fair Trading Statement is in effect a proposal form. I have described it more fully at paragraphs 85 to 87 of my earlier judgment. The Claimant (Mr Brooks) signed that:

"I understand that: • if this proposal is accepted by Claims Direct and a certificate of insurance is issued, Claims Direct will assist me with my claim."

[30]It is not clear from the papers in front of me when that proposal was accepted by Claims Direct but I assume that it was on a date after 31 March 2000 and therefore at a time when ATE insurance premiums had become recoverable under the Access to Justice Act 1999. In the case of Mr Brooks the Evidence of Insurance is dated 24 May 2000. Since, in my view, Mr Brooks was not committed to this insurance until his proposal or offer had been accepted by the insurers, it seems clear that no money was actually paid or committed by him to Claims Direct prior to 1 April 2000. On the facts of Mr Brooks case I can see no reason why the recoverable element of the insurance premium should not be recovered. It follows that had there been a concluded contract before 1 April 2000 that contract would not come under the provisions of Section 29 of the 1999 Act. (The applicable law is set out at paragraphs 10 to 22 of my earlier judgment). THE LIVE ISSUES Issue 7 – Referral Fees

[31]

(i) (a) Is the payment of £395 plus VAT to MLSS Ltd a referral fee?

(ii) If so does the solicitor’s agreement to pay them breach the introduction and referral code?

(iii) If so what are the consequences?

(iv) Are these fees irrecoverable for any other reason? THE PROFESSIONAL RULES

[32]The Solicitors Practice Rules 1990, so far as relevant, are as follows:

"Rule 1: Basic Principles A solicitor shall not do anything in the course of practising as a solicitor, or permit another person to do anything on his or her behalf, which comprises or impairs or is likely to comprise or impair any of the following: (a) the solicitor’s independence or integrity; (b) a person’s freedom to instruct a solicitor of his or her choice; (c) the solicitor’s duty to act in the best interests of the client; (d) the good repute of the solicitor or of the solicitor’s profession; (e) the solicitor’s proper standard of work; (f) the solicitor’s duty to the court. … Rule 3: Introductions and Referrals Solicitors may accept introductions and referrals of business from other persons and may make introductions and refer business to other persons, provided there is no breach of these rules and provided there is compliance with a Solicitors Introduction and Referral Code promulgated from time to time by the Council of the Law Society with the concurrence of the Master of the Rolls."

[33]The relevant part of the Solicitors Introduction and Referral Code 1990 is as follows:

"Introduction (1) This Code states the principles to be observed in relation to the introduction of clients by third parties to solicitors or by solicitors to third parties. … (3) Non compliance, evasion or disregard of the Code could represent not only a breach of Practice Rule 3 (Introductions and Referrals) but also a breach of Practice Rule 1 (Basic Principles) or one of the other Practice Rules, and conduct unbefitting a solicitor of the Supreme Court or other lawyer. Section 1: The Basic Principles (1) Solicitors must also retain their professional independence and their ability to advise their clients fearlessly and objectively. Solicitors should never permit the requirements of an introducer to undermine this independence. (2) In making or accepting introductions or referrals, solicitors must do nothing which would be likely to compromise or impair any of the principles set out in Practice Rule 1: … Section 2: Introduction or Referral of Business to Solicitors … (3) Solicitors must not reward introducers by the payment of commission or otherwise … (4) Solicitors should not allow themselves to become so reliant on a limited number of sources of referrals that the interests of an introducer affect the advice given by the solicitor to the clients. (5) Solicitors should be particularly conscious of the need to advise impartially and independently clients referred by introducers. They should ensure that the wish to avoid offending the introducer does not colour the advice given to such clients. …"

The above provisions are made under Section 31 of the Solicitors Act 1974 and take effect as subordinate legislation governing the practice and conduct of solicitors (see Swain v The Law Society

[1983] 1 AC 598

(HL)). THE PANEL SOLICITORS OPERATING MANUAL

[34]The Test Cases are covered by two editions of the Operating Manual, the eighth edition (dated November 1999) (4/1/1) and the ninth edition (dated October 2000) (8/2/B/78/256). Section 10 of the ninth edition deals with the MLSS fees: "The standard MLSS fee is £395 plus VAT for every claim accepted. Payment of MLSS fees invoiced on acceptance of the case is deferred for 9 months before coming due." (8/2/B/78/298)

[35]Section 1 gives a brief overview of the Claims Direct Scheme and Section 2 deals with the acceptance procedure, Section 3 progressing the claim and Section 9 support provided by MLSS. The manual sets out the claims manager’s role in some detail. I quote selectively from it.

[36]The Operating Manual includes the following information:

"Potential claims In the initial contact with the potential client, brief details are taken and then an appointment is arranged for a claims manager to visit the caller. The claims manager visits the potential claimant at their home to take details about the circumstances surrounding the accident. He ensures that the potential claimant completes the necessary application form and takes him through the Fair Trading Statement which sets out the claimant’s options and the alternatives to the Claims Direct Scheme. If the claimant opts to proceed with Claims Direct, he will need to take out a Claims Direct Protect insurance policy. The claimant can either purchase cover himself, or elect to take out a loan arranged by Claims Direct to cover the cost of the premium. … Processing claims On accepting a case, the panel solicitor should fax the acceptance form to the Data Processing Department. An invoice will then be sent out by Poole & Co for the vetting fee to be paid within 7 days of receipt and by MLSS for the support services provided by the claims manager. … On receiving acceptance of the case, MLSS will inform the claims manager. The panel solicitor should also contact the claims manager to arrange for the required information to be obtained. The claims manager will prepare a detailed client statement and if necessary, a plan of the locus along with photographs. As the case progresses, the panel solicitor may need witness statements and further information from the client. The solicitor should then progress the case, obtain medical notes, medical reports and counsel’s advice as required by the scheme. Settlement … The solicitor should be able to recover the cost of the insurance premium on behalf of the claimant and must endeavour to do so. The panel solicitor will also be able to reclaim the MLSS fee as a disbursement … [pages 265 – 266] … Initial client contact There is to be no contact with the client prior to acceptance of the case. Experience has shown that where clients are contacted prior to the acceptance of a case by a panel solicitor, who may then subsequently decide not to accept the case, the client is left confused, particularly when a second solicitor writes to confirm he is acting for him. Consequently it is now a mandatory part of the scheme that there is to be no client contact prior to acceptance of the case. The panel solicitor can of course speak to the claims manager prior to accepting a case. Contacting the claims manager prior to acceptance The panel solicitor is told the identity of the claims manager dealing with the case. The panel solicitor is at liberty to request additional information from the claims manager prior to the acceptance of the case. However, the claims manager must not be asked to carry out additional work, which is purely of a speculative nature. It is not in anyone’s interest to waste the claims manager’s time on a case that is unlikely to be accepted when that claims manager could be using that time to see a new client. If a simple phone call may help then by all means make it; otherwise, just return the case to the Data Processing Department as soon as possible. [page 269] … Acceptance of cases … MLSS will raise an interim invoice in respect of the work that the claims manager will carry out on the case. The panel solicitor will not be expected to discharge the MLSS invoice until 9 months from the date of the invoice. The panel solicitor should note, however, that payment of the MLSS invoice becomes due immediately upon conclusion of the case, irrespective of success or failure, should this occur prior to expiry of the 9 month credit period. … Regular client contact It is important that the client receive at least one letter every month from the panel solicitor, even if nothing has happened on the file. Incidentally, no reference should be made to "

MLSS" as the client will have no knowledge of that company (always use "Claims Direct"). [pages 272-2730] … The claims manager’s role Once the panel solicitor has decided to accept the claim, he should telephone the claims manager and discuss the case with him. This will assist the claims manager when it comes to the preparation of statements, since he will be able to ensure the points the panel solicitor feels are important are covered. As soon as the acceptance form is received by the Data Processing Department, MLSS will instruct the claims manager to produce a fully detailed client statement together with any other necessary documentation. The claims manager will have been provided with details of the panel solicitor who has accepted the case, and will be expected to supply these reports directly to the panel solicitor between 14 and 35 days of the acceptance notification. … The panel solicitor is urged to use the claims manager to obtain supportive witness evidence on claims, attend site inspections and, where necessary, ensure that the client attends for medical appointments for the purpose of obtaining medical reports. The claims manager will keep a register detailing all the work which he has done on each case. [page 275] … The initial medical report … The nominated medical reporting service will arrange an appointment for the client to see the agreed expert and will inform all relevant parties. The client will be informed in writing of the date and time of the medical appointment. The claims manager and the panel solicitor will also be informed and it is their responsibility to ensure that the client attends the appointment … [page 277] … Support provided by MLSS – support section This section of the Legal Department has a dedicated team which provides guidance and assistance to panel solicitors with respect to the procedures set out within the Operating Manual. It may also provide guidance and assistance to the panel solicitor on the day to day conduct of the cases. In addition this section considers the reports and requests for authority made by the solicitor under the guidelines set out in the manual, thus monitoring the progress of claims where the indemnity provided under the insurance policy may be affected. Costing section The costing section provides the solicitor with a final MLSS invoice with a detailed breakdown of costs in respect of the work undertaken by the claims manger when a case settles. It will also assist with the recovery of the MLSS invoice and should the panel solicitor experience any difficulty in such a recovery, he should seek out assistance from this section of the department. [page 296]"

[37]The eighth edition of the Operating Manual contains very similar provisions.

(a) "Initial acceptance of cases" states (4/1/11):

"Upon receipt of the faxed acceptance, MLSS will raise an interim invoice for £395 plus VAT in respect of the work that the Claims Manager will undertake on the case."

[38]Section 2.2 "The Claims Manager’s role" contains the following (4/1/12/13):

"Claims Direct offer a unique service in the market place by providing the client with a representative who is local to the and who can lead them through the complex process of making a claim. The Claims Manager therefore plays an invaluable role not only in obtaining new client instructions but also by maintaining regular contact with the clients many of who find the idea of dealing with a solicitor a daunting prospect. … As soon as the Acceptance Form is received by MLSS they will instruct the Claims Manager to produce a fully detailed Client Statement together with any other necessary documentation. The Claims Manager will have been provided with the name, address and reference number of the panel solicitor who has accepted the case, and will be expected to provide these reports directly to the panel solicitor within 21 days. … The panel solicitor is urged to use the Claims Manager to obtain supportive witness evidence on claims, attend site inspections and where necessary, ensure that the client attends for medical appointments for the purpose of obtaining medical reports. The Claims Manager will keep a register detailing all the work that they have done on each case. At the conclusion of the case MLSS will submit a breakdown of costs detailing the Claims Manager’s time (costed on the basis of an outdoor clerk) to the panel solicitor. Where the value of that work exceeds the sum of £395 already invoiced to the panel solicitor, a further invoice will be raised for the balance. This invoice will indicate the full level of the amount of work undertaken by the claims manager. The minimum charge for the work carried out by MLSS on all cases is £395 and where the panel solicitor is unable to recover all of that outlay from the Defendant, the panel solicitor will bear the shortfall. In circumstances where the Claims Manager’s time has been in excess of the initial invoiced amount of £395, the panel solicitor will receive an invoice in excess of £395 which they will be expected to attempt to recover. The panel solicitor should remit any excess recovered to MLSS. The MLSS Cost Drafting Department will provide support and assistance to the panel solicitor in respect of the recovery of the MLSS charges. No panel solicitor should deal with the taxation hearing where the costs of MLSS are in issue without first referring the matter to the Cost Drafting Department."

Issue 7(i) is the payment of £395 plus VAT to MLSS Ltd a referral fee? THE SUBMISSIONS OF THE PARTIES

[39]It should be explained that Mr Neish represented all the Defendants save in respect of one discrete consequence issue in respect of which Mr Hutton, for the First Defendants, put in a written submission. The Defendants’ position is that the compulsory payment of £395 by the panel solicitor to MLSS in respect of every Claims Direct case taken on is, at least in part, a referral fee, ie a fee paid by way of a reward or commission in return for the introduction by Claims Direct of the work to the panel solicitor. The Defendants do not seek to go behind the finding in my earlier judgment (at paragraph 199) that the £395 plus VAT was charged for work by claims managers in proofing witnesses and (where necessary) preparing sketch plans and photographs. They argue that the documents produced in relation to individual test cases show that such work was performed and that it was charged for within the £395 plus VAT invoices to panel solicitors by MLSS. They maintain however that this does not mean that this standard and compulsory fee did not also include a referral element.

[40]The Second and Third Defendants go on to argue that such a payment is a breach of the Solicitors Practice Rules 1990 and the Solicitors Introduction and Referral Code 1990 which they say leads to the result that the entire retainer, between the panel solicitor and a Claims Direct customer referred to the solicitor by Claims Direct in return for referral fees, is tainted with illegality and unenforceable.

[41]Those Defendants’ alternative position is that the entirety of the MLSS fee is tainted and is therefore irrecoverable. All three Defendants argue that at least the referral element of the MLSS fee is irrecoverable by the panel solicitor from his client and therefore irrecoverable from the Defendants.

[42]The Claimants’ position is that:a. the mere fact that a solicitor may pay a fee to an introducer does not of itself mean that that fee is a "referral" fee;

b. it is necessary for a fee to be in the nature of a reward before it falls within the definition;

c. if the introducer provides a service beyond mere introduction then a payment for that service will not be a referral fee;

d. therefore the Defendants need to show that in truth the payment was not for the service supplied but was (at least in part) a payment in the nature of a reward for the introduction;

e. once it is accepted that some valuable service has been provided it is not open to the Defendants to suggest that because they believe the sum paid by the solicitor was excessive for the work actually performed in any individual case this automatically makes the excess into a referral fee.

[43]Mr Charlton submitted, uncontroversially, that the starting pointed was to look at the meaning of "referral fee" in the Introduction and Referral Code. Mr Neish accepted the sort of test set out in the Practice Rules and characterised a referral fee as "a reward for the work". Who is the introducer?

[44]Since a referral fee is a reward to an introducer by commission or otherwise, Mr Charlton asks: who is the introducer? He suggests that it is in fact Poole & Co. Referral fees paid by one solicitor to another do not breach the Code.

[45]In response to this Mr Neish pointed out that Mr Poole was at the relevant time a director of both Claims Direct and MLSS. He referred to the Introduction and Referral Agreement between Poole & Co on the one hand and a firm of panel solicitors on the other (9A/7/61/62). The agreement recites:

"(a) The firm [Poole & Co] has entered into an agreement with Claims Incorporated Plc (hereinafter referred to as "the company") whereby the company has agreed to introduce and refer to the firm all accident cases generated or received by it. (b) The company specialises in the handling of accident claims through a national network of franchisees and informs persons of their rights to claim compensation. (c) The company has reached agreements with the customers to be responsible for the handling of claims and the collection of damages arising from these accidents. In addition the company has agreed to indemnify its customers in relation to the costs incurred by them in the pursuit of their claim in exchange for fees payable by the customer to the company. (d) As part of the standard agreement between the company and each of its customers the customer has authorised the company to appoint a firm of solicitors to assist in the handling and prosecution of the customer’s claims. (e) Whilst the company, in accordance with its agreement with its customers, has appointed the firm to represent all of its customers, the company within its agreement with the firm has authorised the firm to refer all or any of its customers to the panel solicitors. (f) The company are not "claims assessors" as defined by Rule 9 of the Solicitors Practice Rules 1990 and do not and will not in relation to claims for death and person injury receive a contingency fee."

[46]A little later the agreement deals with introduction and referral as follows:

"2.1 In consideration of the firm: 2.1.1 Introducing and referring accident claims to the panel solicitor; 2.1.2 agreeing to discharge his several obligations under this agreement. The panel solicitor hereby agrees to: 2.1.3 Pay the firm’s fees as stipulated in the Solicitors Operating Manual; 2.1.4 comply in all aspects with the terms of the Solicitors Operating Manual as amended from time to time by the firm; and [2.1.5] perform its several obligations as stated herein."

[47]The agreement goes on to set out the obligations of Poole & Co ("the firm") and then sets out the obligation of the panel solicitors, which include the following:

"4.4 The panel solicitor hereby instructs the firm to make a preliminary study of each accident claim referred to it and assess whether there are reasonable prospects of success. Further the panel solicitor hereby authorises the firm to decide whether any statement, photographs or sketch plan will be required to assist in winning the claim and at the panel solicitors expense arrange for such documentation to be produced. 4.5 The panel solicitor agrees to abide by the terms of the Solicitors Operating Manual as amended from time to time and so far as the same is not inconsistent with the terms herein. The panel solicitor hereby acknowledges that any serious breach or persistent minor breaches of that manual will result in a breach of this agreement. 4.6 Subject to the provisions of Clauses 3.5 and 4.1 above the panel solicitor agrees to use the services of such companies and organisations as the firm may from time to time recommend for the provision of expert reports and other support services to the panel solicitors in relation to the accident claims referred to it by the firm."

[48]Clauses 3.5 and 4.1 referred to above acknowledge the force of the Solicitors Practice Rules and indicate that neither party will do anything to breach those rules.

[49]The Claims Direct Prospectus, issued some time prior to July 2000, describes the Claims Direct Protect Scheme. Under the heading "Vetting" it states:

"Poole & Co is entitled to charge a panel solicitor a fee in respect of administrative and vetting services for each case accepted by that panel solicitor … this fee will be paid by the panel solicitor to Poole & Co, which will then pay the fee to the Group in return for vetting services provided by the Group …"

[50]Under the heading "Revenue", it states: "Under the Claims Direct Protect Scheme, once a potential claim has passed the Group’s vetting procedures and been accepted by a panel solicitor, the Group submits a loan application for £1,312.50 to the Bank on behalf of the Claimants. The funds provided by the loan are paid to LPL [Litigation Protection Ltd]. After deducting a fee to cover the cost of insurance and insurance premium tax, LPL pays the balance to the Group. The Group can also receive payments from panel solicitors, barristers and mobile doctors. In total the Group receives approximately £1,560 of gross revenue per claim but incurs direct costs of approximately £425 and indirect costs of approximately £475 per claim. The Group therefore makes gross profit per claim of approximately £660." (4/2/177)

[51]Mr Doona confirmed (transcript 18 June 2002, 55/22) that the £425 direct cost is the payment to the claims manager. Of that sum £395 was paid by the panel solicitor and £30 by Claims Direct.

[52]Under the terms of the Ninth Operating Manual which I have quoted, at paragraph 36, under the sub heading "Acceptance of Cases" it is made clear that the £395 is payable by the panel solicitor whether the case is won or lost. The passage which I have quoted from the Eighth Operating Manual at paragraph 38 makes it clear that the panel solicitor bears any shortfall. The £395 is not, it seems, covered by the ATE policy.

[53]Mr Neish then referred to a research paper prepared by Charterhouse Securities dated 15 September 2000 (4/1/IX/123-126). This paper, under the heading "Financial Analysis and Valuation" states: "The average income stream from a Claimant’s case that is accepted can be broken down as shown in the following table: Table 2: Estimated income per post-event insurance case Insurance policy income 1,100 Payment from solicitors 395 Payment from Poole & Co for vetting services 73 Payment from medical agency from referrals 40 Payment from barrister’s from referrals 15 Total income 1,623

[54]Mr Raincock giving evidence during the Tranche 1 hearing was asked about the nature of the £395 payment. He said, among other things:

"I have got no specific breakdown of what it [the £395] was"

. Certainly some of it would have been what was called a referral fee, although it is objectionable language at the moment … Fundamentally you were paying for a lead and within the lead we provided you with a certain amount of information …" (Tranche 1 transcript, day 5, p.144-145)

[55]Mr Raincock was later asked what element of the £395 was a referral fee. He replied: "I have absolutely no idea. That was nothing to do with me. That was a contract between Claims Direct and the panel solicitor. Nothing to do with me whatsoever. Q. Where does the reference to referral fee come from? Is there a document that you created [which] referred to referral fee? A. You asked me what it was and there are various euphemisms for referral fees in the market at the moment because the Law Society Rules do not allow referrals. Q. But do you agree that it the £395 is not purely a referral fee because I read to you precisely what the panel solicitors Operating Manual says .. A. There are elements, yes, and there is an element of duplication …" (Transcript day 5, p.150-152)

[56]Mr Raincock is, as I have stated in my earlier judgment, an expert in his field. He is intelligent and articulate and very well aware of the difficulties surrounding the Law Society’s Introduction and Referral Code. He was, as Mr Neish submitted, at the head of the developing business model and fully informed and authoritative on the subject. In my view Mr Raincock was well aware that the £395 was, at least in part, a referral fee paid by the solicitor to Claims Direct through MLSS in order to obtain the work.

[57]Mr Neish submits and I accept, that, taken together with the terms of the agreement between Poole & Co and the panel solicitor and the Operating Manual, this information makes it clear that the payment of £395 (and the £72.50 paid to Poole & Co) was in fact part of the Claims Direct income stream. The cases belonged to Claims Direct, not to Poole & Co. Poole & Co was not the introducer, rather it was an intermediary. It was MLSS, of which Mr Poole was a director, which distributed the work through Poole & Co and which was the true introducer. What did the £395 plus VAT cover?

[58]Mr Charlton’s alternative argument, if MLSS was found to be the introducer, is that no Defendant suggests that the whole of the £395 paid to MLSS is a referral fee, because part of it was for work actually done by MLSS. The Claimants’ case is that it is not a referral fee at all because nobody knows in advance what work is to be done by MLSS and sometimes the work done may be worth as much as, or more than, the £395.

[59]Mr Charlton argues that the burden is on the paying party to show what element of the £395 is a referral fee; but his position is that it is a fixed fee and not a referral fee. He submits that the Claims Direct Scheme allows and encourages the panel solicitor to use the claims management services supplied by MLSS. Those services are in fact used, and, since there is no suggestion of sham, he argues that there is no need for him to produce evidence to show what the charge is for. In short he argues that it is a block fee charged at the outset for work to be done. If there is a shortfall this does not necessarily mean that the surplus is a referral fee.

[60]He identified three points to be considered in resolving this issue:a. What did the individual solicitor understand at the time he took on the obligation to pay £395 to MLSS?

b. When judging whether or not there has been a breach of the professional rules it is irrelevant to look at subsequent events, ie it would not be right to use hindsight.

c. Even if it were appropriate to consider the amount of work done by MLSS in each case this should be done on a solicitor and client basis not on a between the parties basis since the outcome might be significantly different.

[61]Mr Charlton submitted that it could not be said that any solicitor in the Test Cases would never require the claims manager to provide £395 worth of work. He disagreed with Mr Neish’s submission that in pretty well every case the solicitor would know in advance what he would want the claims manager to do.

[62]Referring to the Operating Manual (both editions) Mr Neish argued that in order to obtain each client introduced by Claims Direct, the panel solicitor had to agree in advance to pay MLSS £395 plus VAT against an invoice automatically raised by MLSS when the case was accepted. He points out that this figure is payable in full whatever the nature or facts of the case and whatever the nature or extent of the work actually performed by the claims manager. It is common ground between the parties that any part of the £395 which cannot be justified on the basis of the work done by the claims manager is irrecoverable. Mr Neish also points out that, although the eighth edition of the Operating Manual provides that MLSS would provide a breakdown of costs detailing the claims manager’s time to the panel solicitor, and that the claims managers were required to record their time on Cost Action Reports, such reports only appear in three of the Test Cases (Gore, Warner and Wilson). He also asserts that only six of the 15 remaining Test Cases (Benton, Sly and Morgan, in addition to the three named above) is there any evidence as to time spent/cost/value of the work done by the claims managers in the Test Cases. How the system worked in practice

[63]Both counsel sought to establish their respective positions by reference to individual Test Cases. Mr Charlton referred to the cases of Gore, MacAvoy, Wilson, Sly and Goodfellow. Mr Neish referred to the cases of Benton, Gore, Sly, Warner, Wilson and Morgan. The purpose of the exercise, so far as the Claimants were concerned, was to demonstrate that the work undertaken by the claims manager could be worth as much as or more than the £395 plus VAT. The Defendants for their part wished to demonstrate that the work undertaken could not be valued at anything approaching that figure. I will refer to the cases of Gore and Sly which both counsel dealt with.

[64]The case of Gore (9B/6/106) was an employers’ liability claim where the Claimant, who lived in Wigan, had slipped on an onion skin at work. The claim settled for £3,000 following an admission of liability without the issue of proceedings. The accident took place on 22 March 1999 and the claim was settled in March 2000.

[65]A brief chronology is as follows: 22 March 1999 - accident occurred. 13 December 1999 - the claims manager completed the Claims Direct application form on an initial visit to see the Claimant (p. 186-196). 15 December 1999 - the claims manager prepared a file note (p. 183-184). 7 February 2000 - case eventually accepted by Messrs Kenneth Bush of Kings Lynn (p. 172-179). 11 February 2000 - MLSS invoiced Kenneth Bush for £395 plus VAT using their standard invoice (p.198). 5 March 2000 - the claims manager took the Claimants’ statement (p. 181- 182).

[66]The MLSS standard invoice reads:

"To the provision of enquiry agents services. To include liasing with the client throughout obtaining witness statements, sketch plans and photographs as appropriate, obtaining information and documentation relating to losses. Reporting throughout."

[67]There is also a note at the bottom of the invoice:

"The debt arising under this invoice has been assigned to Investec Bank (UK) Ltd … whose receipt is the only valid discharge. If this invoice is not found to be correct in all respects Investec Bank (UK) Ltd must be notified immediately."

[68]Mr Charlton pointed out that the invoice was intended to relate to future work as well as to work done to date, ie between 13 December 1999 and 11 February 2000.

[69]The claims manager set out the work he had done and the time taken on the Claims Manager’s Costs Action Report (p. 161). This form demonstrates that between 13 December 1999 and 28 February 2000 the claims manager had spent 3½ hours in attendance upon the client and in preparation of notes and claim form, had had four telephone conversations with the client and had written four letters to the client and the solicitor. In addition he had spent 3 hours in travelling a distance of 80 miles. Mr Charlton submitted that this work, charged at paralegal rates of £65 per hour, plus £7.50 per letter and telephone call, comfortably exceeded the charge of £395 plus VAT (a figure of £482.50 plus VAT, £566.94).

[70]Mr Neish sought to discount the work undertaken by the claims manager prior to the invoice from MLSS, which he said could only be in respect of future work. He also sought to discount the travelling time in respect of the claims manager visiting the client. It was argued by Mr Neish that even on the solicitor and client basis this travelling would not be recoverable from a client. The answer to that of course depends on the terms of the retainer. The client is entitled to agree whatever terms he or she likes with the solicitor.

[71]Ms Gore’s case was not accepted by the solicitors until 7 February 2000. After acceptance the claims manager again travelled to see her in order to draw up her witness statement. Mr Neish points out that he had all the details already on the application form and file note, that the case was entirely straightforward and that solicitors would normally have undertaken this work in any event. Accordingly, by Mr Neish’s calculations, the only valued work reasonably incurred was 1 hour in respect of the witness statement and the eight letters and telephone calls which he calculated at £125 plus VAT (£151.50). In the solicitors’ claim for costs the MLSS fee was claimed as a disbursement (in accordance with the Operating Manual).

[72]The case of Sly (9B/10/302) concerned a minor accident in which the Defendant drove over the Claimant’s foot while reversing out of a parking space. The accident occurred in October 1999 and was settled without the issue of proceedings in June 2001 for £4,085.07. The accident occurred in Birmingham where the Claimant lived. The claims manager apparently came from Tamworth in Staffordshire and the case was accepted on 14 March 2000 by Messrs Hodgkinsons solicitors of Skegness. The claims manager saw the Claimant on 22 November 1999 and completed the application form (p. 317-326). He subsequently completed a file note (p. 315). The solicitors requested that the claims manager obtain a detailed statement from the Claimant (p. 309-310) and also asked the claims manager to attempt to obtain statements from other potential witnesses (p. 305-308). Liability was denied.

[73]The MLSS invoice, in identical terms to that used in the case of Gore, was sent to the solicitors (p. 328). It does not bear a date, but is stamped "paid 13 Dec 2000".

[74]On 13 February 2001 the claims manager prepared what he called a Costing Report (p. 302). This showed that between 22 November 1999 and 23 October 2000 he had spent 17 hours in attendance upon the Claimant and preparing her statement and two further witness statements. He had travelled 80 miles but the travelling time was not broken down. He also mentions "various phone calls to Ms Sly and witnesses 45 minutes". On 25 July 2001 MLSS forwarded a more detailed breakdown to the solicitors. This is not in the standard form and reads as follows:

"The client sustained personal injury as a result of a road traffic accident. Attending on client, obtaining full initial instructions and compiling case management report – 1 hour 15 minutes. Attending on client, obtaining details of proof of evidence and compiling same – 1 hours. Letters written – 2. Telephone calls – 2. Travel time – 1 hour 30. Disbursements Travelling (limited to 60 miles) £21.60. VAT £3.78. £395.00 VAT at 17½% £69.13 Overall total (inc VAT)£464.13"

[75]In respect of this claim for costs Mr Neish, again excluding travelling time and work done prior to the solicitors’ acceptance of the case, suggested that the valued work would be 2 hours and came to a figure of £130 plus VAT (£157.58) as the cost of the work done.

[76]It seems that in this case the claim for the MLSS fee was treated as profit costs rather than a disbursement. There seems little consistency in the test cases in the way in which the MLSS fee was treated.

[77]As I have stated both Mr Charlton and Mr Neish took me through other test cases seeking to demonstrate their particular point of view, but there is no need to set them out here. Is the MLSS fee a disbursement or profit costs?

[78]Dealing first with the way in which the MLSS fee is to be treated: the Operating Manual makes it clear that the intention was that the fee should be claimed as a disbursement (8/2/B/78/266). The correct treatment of disbursements and profit costs has been the subject of a considerable amount of litigation. Lord Langdale, in the case of Re: Remnant (11 Beav 603, 613), laid down the following rule:

"That those payments only, which are made in pursuance of the professional duty undertaken by a solicitor, and which he is bound to perform, or which are sanctioned as professional payments, by the general and established custom of the profession, ought to be entered and allowed as professional disbursements in the bill of costs."

At that time other payments made by a solicitor as agent for the client were properly recorded in the cash account not in the solicitors bill. Section 67 of the Solicitors Act 1974 now provides, in respect of disbursements:

"A solicitor’s bill of costs may include costs payable in discharge of a liability properly incurred by him on behalf of the party to be charged with the bill …"

[79]And chapter 20 of the Law Society’s Guide to the Professional Conduct of Solicitors (Eighth Edition) states at paragraph 20.01: "Duty to pay agent’s fees A solicitor is personally responsible for paying the proper costs of any professional agent or other person whom he or she instructs on behalf of a client, whether or not the solicitor receives payment from the client, unless the solicitor and the person instructed makes an express agreement to the contrary".

[80]It is now not at all uncommon for a solicitor to pay money for services as agent for the client and then to bill the client in respect of that payment. Such a payment is not strictly a professional disbursement but is treated as a disbursement for the sake of convenience. In those cases where the client is able to pay, solicitors frequently ask for money from the client to cover those payments which the solicitor proposes to make on the client’s behalf. In my judgment, if any of the MLSS fee is recoverable it should be treated as a disbursement not as part of the solicitors’ profit costs. In my view the solicitor can charge as profit costs only that work undertaken by him or a member of his firm in the capacity of solicitor. If a task is delegated to a solicitor agent that too is chargeable as part of the principal solicitor’s profit costs. Where tasks are delegated to other non solicitor bodies any charge which those bodies make must be treated as a disbursement incurred by the client through the agency of the solicitor (see In Re Blair & Girling

[1906] 2 KB 131

CA). Where a solicitor, for example, instructs an enquiry agent to carry out certain work and perhaps to obtain a witness statement, the enquiry agent’s charges will be paid by the solicitor as agent for the client and will be treated as a disbursement in the solicitor’s bill. If the enquiry agent fails properly to carry out the solicitor’s instructions, or carries them out negligently, the solicitor will not in normal circumstances be liable for the negligence of the enquiry agent and the client may be able to withhold payment of the fee or to pay a reduced fee. (The solicitor may of course have been negligent in his selection of enquiry agent.) If, on the other hand, the solicitor (in his own capacity rather than as agent for the client) instructs another solicitor to act as his agent, for example to interview a distant witness, the solicitor agents’ charges are not entered in the solicitor’s bill as a disbursement but appear as part of the principal solicitor’s profit costs (see paragraph 4.6(9) of the Costs Practice Direction). One of the reasons for this is that the principal solicitor remains liable for the acts of his agent, and another is that any agency charge is borne by the principal solicitor. It forms part of that solicitor’s overheads. Is the whole MLSS fee a recoverable disbursement?

[81]Other questions arise when one considers the nature of the MLSS invoice. In my judgment the invoice, which is sent as soon as the panel solicitor has accepted the case, can refer only to future work, ie to work done after the solicitor has been retained. In order for a disbursement to be recoverable it must have been made by the solicitor on the client’s behalf or be an out of pocket expense of the client personally (see Re: Remnant [1849] 11 Beav 603 at 611; Re: Buckwell & Berkeley

[1902] 2 Ch 596

CA and Brown v Barber

[1913] 2 KB 533

). In the Claims Direct Test Cases no client has ever been called upon to pay the MLSS fee. Indeed the client does not even know of the existence of MLSS.

[82]Solicitors can only pay disbursements as agent for a client if they are authorised to do so by the client. Prior to the acceptance of the case by the solicitor there is no client and therefore no authority. It is quite clear therefore that any recoverable element of the £395 plus VAT could only be in respect of work undertaken by the claims manager after the case has been accepted. It may well be that, once the case has been accepted, the claims manager carries out work, on the instructions of the solicitor, for which it is appropriate to make a charge, the cost of which may be recoverable as a disbursement. On the evidence before me, applying the above principles, none of the cases contain details of work which would bring the amount properly chargeable near to the figure of £395 plus VAT. If not, what is the MLSS fee?

[83]It is quite clear that the £395 plus VAT is the price which the panel solicitor must pay in order to obtain the work. If the panel solicitor is not prepared to pay, the work goes elsewhere. This is not a question of client choice but of MLSS effectively selling work to panel solicitors. Panel solicitors have the option of rejecting a case, if for some reason they do not wish to take it on, but if they do wish to take it on they cannot avoid having to pay the fixed price.

[84]The payment of the £395 plus VAT is therefore a referral fee, the consequences of which I will consider further in due course. The Claimants’ position

[85]At paragraphs 42 and 60 I set out the position as argued on behalf of the Claimants by Mr Charlton. It is now possible to deal with those points.a. The mere fact that a solicitor may pay a fee to an introducer does not of itself mean that that fee is a referral fee. Accepted.

b. It is necessary for a fee to be in the nature of a reward before it falls within the definition. Accepted.

c. If the introducer provides a service beyond mere introduction then a payment for that service will not be a referral fee. I consider this further under the heading of consequences.

d. The Defendants need to show that in truth the payment was not for the service supplied but was (at least in part) a payment in the nature of a reward for the introduction. Rejected. In my judgment the onus is on the Claimant, if the payment is recoverable at all, to show that it was, at least in part, for work the cost of which is recoverable.

e. It is not open to the Defendants to suggest that because the sum paid by the solicitor was excessive for the work actually performed, this automatically makes the excess into a referral fee. For the reasons given I am satisfied that the payment is in fact a referral fee. Whether any part of the money paid is recoverable will be examined under the heading of consequences.

[86]Mr Charlton posed three further questions:a. What did the individual solicitor understand at the time he took on the obligation to pay the £395 to MLSS? The solicitor can have understood only that this was the price which had to be paid in order to obtain the work.

b. When judging whether or not there has been a breach of the professional rules it is irrelevant to look at subsequent events, ie it would not be right to use hindsight. Accepted. It would be clear from the outset to the solicitor that the fee payable was a referral fee.

c. Even if it were appropriate to consider the amount of work done by MLSS in each case this should be done on a solicitor and client basis not on the between the parties basis. If it be the case that any part of the fee paid to MLSS is recoverable, it will have to be borne in mind that these Test Cases take place in the course of a detailed assessment between the parties on the standard basis. Accordingly the tests of reasonableness and proportionality would apply.

[87]It is necessary to deal also with a point raised by Mr Charlton concerning proceedings before the Solicitors Disciplinary Tribunal in April 2002 in respect of the solicitor Mr David Tubby (authorities 5). It was asserted against Mr Tubby, among other things, that he had paid commission to introducers of work contrary to Section 2(3) of the Solicitors Introduction and Referral Code 1990. Investigation had shown that in 25 cases payments of £100 had been made in each case to an accident management company. These payments were described as "report fees". I quote from paragraphs 57 and 58 of the Report: "57. Copies of the Reports were before the Tribunal. They consisted of pro formas in which an amount of details about a case had been inserted. There was before the Tribunal no evidence as to the circumstances in which or by whom such forms were completed. The respondents said they were produced by the accident management company but the applicants showed that in none of the 25 matters was there any evidence of any report being so produced. The applicant claimed that the sums paid were fees to the accident management company in exchange for introductions to the respondent but this was denied by the respondent.

[58]The respondent denied that he paid introduction fees. He recognised that such a payment would breach the introduction and referral code. The respondent had sought guidance from the Law Society and it had been confirmed to him that the payments were made in accordance with the Introduction and Referral Code 1990."

[88]The Tribunal found the following facts:

"117. The respondent made payments to accident management companies which introduced road traffic accident victims to him as clients. It appeared that accident management companies sought to assist the victims of road traffic accidents. They used pro formas the proper completion of which would give full details of the accident and related aspects of the matter which would in effect constitute the initial instructions of the respondent and enable him immediately to pursue the clients claims. The Tribunal had before it no evidence as to the way in which those pro formas were completed. The Tribunal find that a completed pro forma did constitute a formal report and it would have been necessary to spend some time and effort in making sure that all requirement information was contained in the report. In the absence of any evidence to the contrary the Tribunal finds that the accident management companies completed the pro forma and the payment of £100 was in respect of the completion of the report and that this was a reasonable average sum to pay. The Tribunal did not find that the payments of £100 amounted to the payment of commission for the introduction of work contrary to the Introduction and Referral Code 1990."

[89]The Tribunal’s findings, so far as relevant, were:

"With regard to Allegation 10 the Tribunal found that payments made by the respondent to accident management companies were proper for the preparation of a report and were not a commission paid for the introduction of work. The Tribunal noted that the respondent had taken the Law Society’s advice in this connection and clearly had been anxious not to fall foul of the Introduction and Referral Code."

[90]Mr Charlton relied on the amount of work done by the claims manager in these cases to assert that the £395 was a reasonable average sum to pay and that it could not be inferred from the size of that sum, or from the Operating Manual, that the amount paid was a referral fee. I have already stated, at paragraph 82, that the amount of work done by the claims manager does not warrant a charge of £395.

[91]Mr Neish pointed out that had the Disciplinary Tribunal found that the amount paid by Mr Tubby had been not a reasonable one, the result would have been otherwise.

[92]I am not persuaded that any guidance can be obtained from the case of Mr Tubby. The Tribunal made it clear in its findings that there was no evidence before it. The respondent had taken the trouble to check with the Law Society that he was not breaching the Code and the amount which he paid in each case was relatively modest. There appears to have been no investigation of when the work was done for which payment was made, nor whether that payment was properly a disbursement of the solicitor, nor whether it was a necessary pre condition to the solicitor obtaining the work. For the reasons which I have given, the case of Mr Tubby does not alter my view that the payment of £395 plus VAT to MLSS is a referral fee. Issue 7 (ii) If so does the solicitors agreement to pay them breach the Introduction and Referral Code? (iii) If so what are the consequences?

[93]In respect of this issue the Claimants originally sought to rely on the imminent introduction of the Enterprise Act 2002, Section 207 of which repeals Schedule 4 of the Competition Act 1998. Mr Charlton accepted however that the effect of this could not be retrospective and, since the relevant section has not been brought into force, he did not pursue the point. He also suggested that the Law Society was about to abandon the Introduction and Referral Code. As it turned out the Law Society Council at a meeting a few days after this hearing decided to retain the Code.

[94]Mr Charlton also sought to rely on what he referred to as the European Dimension (see paras 63 to 69 of the Claimant’s replies), suggesting that the Solicitors Practice Rules and the Solicitors Introduction and Referral Code, to the extent that they ban payment or receipt of referral fees, are anti-competitive and a breach of Article 81 of the Treaty establishing the European Community. At paragraph 15 of the Claimant’s closing note he wished to reserve the Claimant’s position "to await further directions in the event that the point becomes necessary to develop after the court’s decision on the other issues."

[95]Mr Neish quite properly took the point that Mr Charlton had not argued this point in his opening submissions, he in turn had not replied to it, nor had he prepared any argument in reply and he objected to Mr Charlton seeking at the end of the case to reserve the Claimants’ position so that, should this decision not be in the Claimants’ favour, it might be possible to come back and argue the issue from another angle. I took the view that my decision should be final and only given after I had heard all the arguments. Had the European point been argued further, an adjournment would have been inevitable, and, given the way the case had been presented on behalf of the Claimants, there would inevitably have been a costs sanction. In the event Mr Charlton, on instructions, decided not to pursue the European point.

[96]Mr Charlton argued that even if the payment of £395 to MLSS was a breach of the Code, it did not make the retainer illegal. In his submission the only possible consequences of there being a breach of the Solicitors Practice Rules was the potential imposition of a professional penalty following formal complaint to the Law Society. He suggested that a breach of the Code did not render the retainer unenforceable and suggested that there was nothing objectionable about the terms of the retainer itself. He drew a distinction between the effect upon the agreement between the introducer and the solicitor on the one hand, which he concedes may be rendered unenforceable by breach of the Code, and the agreement between the solicitor and client which contains no illegal terms and under which the client is obliged to pay for MLSS services "at least on a quantum meruit basis cf Mohamed v Alaga & Co".

[97]It will be remembered that the Second and Third Defendants argue that breach of the Code taints the entire retainer and renders all fees payable to the panel solicitors irrecoverable or that it taints the entirety of the MLSS fee so as to make that fee irrecoverable. All three Defendants take the point that at least the referral element of the MLSS fee is irrecoverable. The Defendants rely on the decisions of the Court of Appeal in Awwad v Geraghty & Co

[2001] QB 570

and Mohamed v Alaga & Co

[2001] WLR 1815

. Mr Neish accepted that the agreement which breached the Code was not the retainer between the solicitor and the client but the panel solicitors’ agreement with MLSS that he/she would pay a referral fee in return for Claims Direct introducing the client. Mr Neish also argues that since the retainer arose out of, and would not have existed but for the agreement to pay the referral fee, the whole of the retainer is tainted and as a matter of public policy the court should not permit the panel solicitor to enforce the retainer against the client. He relies on what Schiemann LJ said in Awwad (at 594):

"… if an agreement is against public policy … then it should not be enforced by the courts. It would be inappropriate to leave enforcement of this policy purely to the disciplinary processes of the professional body."

In the Awwad case the agreement between the solicitor and the client was unlawful.

[98]In my judgment the fact that the tainted contract is that between the panel solicitor and MLSS provides the answer. There does not appear to be any objectionable feature in the contract between the solicitor and the client. The fact that the solicitor would not have had the client had the referral fee not been paid does not in my view taint the retainer itself.

[99]Schiemann LJ (at 594) went on to say:

"… I would hesitate to say, in the absence of full argument, that any breach of the rules in the course of reaching a fees agreement necessarily involved forfeiting all possibility of enforcing the agreement."

[100]Mr Neish argued that the court was here referring to other breaches of other practice rules and he suggested that following the Court of Appeal’s decision in Mohamed v Alaga & Co enforcement of a retainer tainted by breach of the rules would have been regarded by Schiemann LJ as contrary to public policy.

[101]In the Awwad case the solicitor had purported to enter into an illegal retainer with the client. The retainer was unlawful and unenforceable. Any claim for payment based on a quantum meruit also failed, Schiemann LJ stating (at 596):

"… In my judgment this attempt [to obtain payment on a quantum meruit basis] should fail. If the court for reasons of public policy refuses to enforce an agreement that a solicitor should be paid it must follow that he cannot claim on a quantum meruit. The position in the Mohamed case was totally different. The interpreter was blameless and no public policy was infringed by allowing him to recover a fair fee for interpreting; the public policy element in the case only affected fees for the introduction of clients. In the present case, what public policy seeks to prevent is a solicitor continuing to act for a client under a conditional normal fee arrangement. That is what Ms Geraghty did. That is what she wishes to be paid for. Public policy decrees that she should not be paid."

[102]In the Claims Direct Test Cases the agreements between the panel solicitors and the clients appear to be perfectly proper. The agreement between the panel solicitor and MLSS to pay a referral fee is unlawful. In my judgment this system is a direct breach of Section 2(3) of the Introduction and Referral Code 1990:

"Solicitors must not reward introducers by the payment of commission or otherwise …"

The solicitor cannot charge his client for it and the Defendants do not have to pay it. I express no view as to whether MLSS might have a claim on a quantum meruit against the solicitors following the decision in the Mohamed case.

[103]Given my decision above that the whole of the referral fee is irrecoverable, it is not necessary for me to deal with the First Defendant’s submission that only that part of the £395 which is actually in respect of the referral should be irrecoverable. Issue 7(iv) Is the fee to MLSS irrecoverable for any other reason?

[104]Under this head the Defendants argue that, in so far as any part of the payment made is a referral fee, there is no reasonable basis upon which the Defendant should be required to pay to the Claimant sums which have not been paid by that Claimant for legal services or for services otherwise related to the conduct of the case. In any event the Defendants argue that the £395 is irrecoverable save to the extent that the Claimants prove that:(a) it does not pay for the same work as any part of the £1,000 paid as part of the premium (the duplication point) and/or

(b) the work performed by the claims manager in a particular case has a value of £395 when considered on normal assessment principles in accordance with CPR 44.5.

[105]The Claimants’ position is that the issues are fact sensitive and must be decided by the application of CPR 44.4 and 44.5. It may be the case that work has been done by a claims manager on the instructions of a panel solicitor who has accepted a case, which would in normal circumstances be recoverable as a disbursement. Given the circumstances of the Claims Direct Scheme the onus would, in my view, be on the claimant to show what work had been undertaken and why the cost of it should be recoverable.

[106]The Defendants argue that fast track cases need to have predictable costs and that I should therefore arrive at a benchmark figure to provide at least a starting point for the assessment of the value of the work done by claims managers. Mr Hutton at paragraph 12 of his written submissions suggests that it would be appropriate to allow 2½ hours work at £65 per hour, a total of £162.50 plus VAT.

[107]Mr Charlton described this approach as unreal and suggested that there might in some cases be extensive work.

[108]Having considered the work undertaken by the claims manager in the various cases referred to during argument I am satisfied that an appropriate starting point for the claims manager’s work is the figure of 2½ hours put forward by the Defendants. The cost of doing this work would be recoverable if it is subsequently held that breach of the Referral Code does not render the entire referral fee irrecoverable. It would however be open to a Claimant to prove, by normal evidential means, that work to a greater value had been carried out by the claims manager in a particular case.

[109]With regard to the duplication point this does not arise given my earlier judgment. That judgment is presently the subject of an appeal to the Court of Appeal whose decision is awaited. It has to be recognised that it may prove necessary for this point to be re-argued once the Court of Appeal decision is known. I will hear further submissions from parties should the need arise once the Court of Appeal has delivered its decision. The matter may be restored on the written application of any party. Issue 7 (v) Is any part of the payment made to MDL irrecoverable for non referral fee reasons?

[110]The position with Mobile Doctors Ltd has been greatly clarified by the evidence of Matthew Game (9A/8/75). Mr Game describes the history of his company and, at paragraphs 21 to 23 of his statement, the involvement of the company with Claims Direct. At paragraph 25 he states (9A/8/82): "The arrangement between ourselves and Claims Direct as to the fact that we paid any commission and the amount, was a normal commercial arrangement between the two of us and I would expect an arrangement of this nature to exist when anyone was providing bulk work and understand that this is common practice with our competitors in the industry as well. By Claims Direct providing volume referrals we did not need to spend time and money on advertising and promotion.

[26]As far as I am aware panel solicitors had no knowledge of this arrangement, nor was there any reason why they should …"

[111]Three agreements between Mobile Doctors Ltd and Claims Direct have been produced showing that Mobile Doctors agreed to pay Claims Direct £40 per case in all cases (clause 6.3, agreement 31 July 1998 (9A/1/7)). This arrangement was subsequently changed to a fee of £40 for a specialist referral and £30 for a GP referral (clause 6.3 agreement 1 August 1999 (9A/2/28)). The fee was then increased to £50 for a specialist and £40 for a GP (clause 4.1 agreement 11 May 2001 (9A/3/38)).

[112]Mobile Doctors Ltd produced a pricing structure which set out the fee payable depending upon the type of report to be obtained. Mr Game explained in his statement (paragraph 24) that the fee charged under the Claims Direct scheme was the same as that charged to any other client coming to them direct. Many of the liability insurers use the services of MDL and are charged at the same rate. Mr Game explained:

"The "commission" therefore came out of our own margin. However, from our point of view we were happy to absorb this because of the large volume of work that was going to come through."

[113]It is not within the power of this court to disallow the sum which MDL pays to Claims Direct for each case referred. The real question to be decided is whether and to what extent the charge made by MDL for obtaining the report is reasonable and proportionate.

[114]There is no doubt that MDL carries out a certain amount of correspondence, which, had they not been involved, the solicitor would have had to do. To the extent that this work is carried out at the same or a lower cost than if the solicitor had done it, it is recoverable. The judgment of His Honour Judge Cook in Stringer v Copley (Authorities/4) is trite costs law. I agree with Judge Cook that there is no principle which precludes the fees of a medical agency being recoverable between the parties provided it is demonstrated that their charges do not exceed the reasonable and proportionate costs of the work if it had been done by the solicitors. There may however be, within MDL’s fixed charge, an element in the nature of an administration fee which is not recoverable. Mr Charlton argues that if the fee charged is reasonable the court should look no further but merely allow the fee as claimed. I further agree with Judge Cook when he states (at p.8):

"… It is important that [medical agencies] invoices … should distinguish between the medical fee and their own charges, the latter being sufficiently particularised to enable the costs officer to be satisfied that they do not exceed the reasonable and proportionate costs of the solicitors doing the work."

[115]The Judge also raises concerns about the proper treatment of VAT. I part company with the Judge in his finding that the fees of medical support agencies "could also be treated as though the work had been done by the solicitors and charged accordingly". For the reasons I have already given (at paragraphs 78 to 80) I am of the view that such expenditure should be treated as a disbursement. I am reinforced in that view when it is remembered that a large part of the MDL fee is that charged by the expert. The expert’s fee cannot on any reading be part of the solicitor’s profit costs. Judge Cooke based his view on the decision in Smith Graham (A Firm) v The Lord Chancellor’s Department [1999] NLJ R1443 QBD. The basis of that decision (on which I sat as an assessor with Mrs Justice Hallett) was that the retired police officer could be treated for the time being as the temporary employee of the solicitors who throughout remained responsible for the conduct of the case and for the conduct of the retired police officer.

[116]Mr Neish argues that since it is not possible to break down the cost charged by MDL I should have regard to the fact that the fee was sufficient to enable MDL to pay £40 or £50 to Claims Direct in respect of every case and it would therefore be appropriate to disallow such an amount.

[117]Mr Charlton argues, correctly, that this would be an improper departure from the normal procedure on detailed assessment. The principle is clear, namely that the administration element of any fee charged by MDL is not recoverable. It will therefore be necessary for the receiving party to obtain from MDL in every case a properly broken down fee note showing the actual fee paid to the expert, the amount charged for correspondence and telephone calls and the administration element. In deciding what proportion of that fee is recoverable the court will have to take into account the solicitor’s correspondence with MDL which would not have occurred had they not chosen to instruct MDL.

[118]I appreciate that this requirement may cause considerable difficulty, both in respect of these Test Cases and in respect of other cases which MDL are involved and in which the fee paid to them is challenged. Since the paying parties in the large majority of cases are the liability insurers, who themselves use the services of MDL, I express the hope that some sensible solution can be found to enable the administration fee element to be identified so that it is not necessary, in every detailed assessment where such a fee is challenged, for MDL to have to produce the detailed breakdown to which I have referred. In my experience an administration fee of £15 is not uncommon in such cases, but I have no evidence before me in these cases and make no finding to that effect. I should make it clear that there is no criticism of MDL for charging their customers an administration fee, it is merely that such a fee is not in my view recoverable between the parties, firstly because it is not costs of the action and secondly because it fails the test of necessity when considering the question of proportionality. SUMMARY

[119]I summarise my findings as follows: The Solicitors Practice Rules 1990 and the Solicitors Introduction and Referral Code 1990 take effect as subordinate legislation governing the practice and conduct of solicitors.

[120]Poole & Co was not the introducer of the client to the solicitor, rather it was an intermediary. It was MLSS which distributed the work through Poole & Co and which was the true introducer.

[121]The MLSS fee should be treated as a disbursement in the solicitor’s bill not as part of the solicitors profit costs.

[122]The MLSS invoice, which is sent as soon as the panel solicitor has accepted the case, can refer only to future work, ie to work done after the solicitor has been retained. In order for a disbursement to be recoverable it must have been made by the solicitor on the client’s behalf or be an out of pocket expense of the client personally.

[123]The fee of £395 plus VAT paid to MLSS is the price which the panel solicitor must pay in order to obtain the work. The payment is a referral fee.

[124]The payment to MLSS is a direct breach of Section 2(3) of the Solicitors Introduction and Referral Code 1990. It is irrecoverable from the client and therefore irrecoverable from the paying party.

[125]If it is subsequently held that breach of the Referral Code does not render the entire referral fee irrecoverable, the cost of 2½ hours work by the claims manager is an appropriate starting point.

[126]The administration element of any fee charged by MDL is not recoverable. PTH\40\Claims Direct Tranche 2

Claims Direct Test Cases Tranche 2 Issues [2003] EWHC 9005 (Costs)

(a) "Initial acceptance of cases" states (4/1/11):

Cited in 2 later judgments