Hirachand Supreme Court judgment clarifies use of conditional fee arrangements in 1975 Act cases

The Supreme Court delivered judgment in Hirachand v Hirachand shortly before Christmas confirming that success fees under conditional fee agreements ('CFAs') can no longer be recovered as part of an applicant's award under the 1975 Act.

Decision

The applicant in this case was the deceased's daughter.  The trial judge had found in her favour (i.e. that the Will did not make reasonable provision her).  He awarded her £138,918 including £16,750 'to meet … a reasonable CFA mark-up [i.e. success fee]' on the basis that the daughter had a liability to pay the uplift and so it formed part of her financial needs.

The widow appealed and Court of Appeal upheld the trial judge's decision.

The Supreme Court's starting point was that proceedings under the 1975 Act are subject to the Civil Procedure Rules ('CPR') costs regime, in which (i) costs are dealt with separately and not as part of the substantive relief, and (ii) the usual outcome being that the losing party is ordered to pay the winning party's costs (subject to assessment which will usually result in some reduction) but may vary that, for instance to penalise poor conduct.  

There has never been any suggestion that this general principle does not apply to 1975 Act claims, nor – the Court found – any reason why the principle should not apply.  The Court found at paragraph [63] that, by contrast, 'If it were right that a success fee was recoverable in an award under section 2 of the 1975 Act, it is difficult to see why, in principle, the excess of the claimant’s liability for base costs over the amount allowed on assessment, or their entirety if no order for costs was made, would not also be recoverable.'  

In other words, if the court makes an order in respect of a claimant’s costs, but decides not to award the claimant all their costs, it would 'make a nonsense of the rules about costs' if the claimant could recover the shortfall as part of their substantive relief.  

The Court also emphasised that the CPR provisions which reward parties for making and beating settlement offers during proceedings, in particular the provisions of CPR Part 36, would be 'virtually unworkable in accordance with their purpose of achieving settlements if success fees are recoverable as part of the judgment sum' (paragraph [70]).  The parties cannot know whether or not a claimant will be liable to pay a success fee until the case has been decided, and the amount of the success fee itself will depend upon the costs incurred up to and including the trial (plus, if a judge were able to make a provision for a success fee as part of deciding the case, the parties could not predict whether the judge would award the whole success fee owed or only part).  This combination of unknown factors would make it extremely difficult for parties to assess the reasonableness of offers they make or receive. 

The Court of Appeal had drawn an analogy between the 1975 Act and proceedings under the Matrimonial Causes Act ('MCA'), in which the court is permitted to provide for legal costs as part of the substantive relief.  The Supreme Court rejected this, finding that there is a 'crucial distinction' between the costs regime in family proceedings under the MCA, and the CPR costs regime which applies to the 1975 Act.  Further, success fees are not permitted in family proceedings and there was no basis to assume that, if success fees were permitted, the MCA regime would allow them to be recovered.

The Court concluded (paragraph [82]) that 'The important policy reason for this common law principle [ie the separation between substantive relief and the costs regime] is to uphold the integrity and coherence of the costs regime. This principle was part of the legal background against which the 1975 Act was passed and there is nothing in the Act to suggest that it was not to apply.'  

Where are we now?

The Supreme Court's decision restores the position as it stood pre-2020, when the case was originally decided.

In the period since 2020, during which the prospect of recovering the success fee has made CFAs attractive vehicles for 1975 Act claimants, we have noticed an increase in solicitors not only willing to represent applicants pursuing weak claims, but also less willing to compromise because the risks for the defendant beneficiaries are that much greater.  If applicants could expect to recover their success fees out of the estate rather than their own funds, the potential financial risk to them of pursuing claims to trial was significantly reduced.  Conversely, defendants have felt greater pressure to settle rather than run the risk of having to fund a potentially large – but, until the end of the proceedings, unquantifiable – success fee liability.

The hope is that the Supreme Court's decision causes the more bullish applicants and their legal advisors to take a realistic view at an earlier stage.  Applicants who are sensibly advised will recognise the risk that success in the substantive claim is a pyrrhic victory once the success fee is deducted.

The Supreme Court does note in its judgment that the power under section 5 of the 1975 Act, which allows a judge to grant interim relief, could be used to fund an applicant's legal costs.  If this decision makes CFAs less appealing for applicants, it may be that instead we see an increasing number of applications for interim relief where there are sufficient funds in the estate.  But that remedy ought not to be available to the speculative claims that, until now, the Hirachand decisions have encouraged.

Click here to read the Supreme Court's decision.