The case of Forster v Reynolds Porter Chamberlain LLP  EWCH 1150 (Ch) should serve as a warning to solicitors and other professionals of the need to keep the interests of their clients paramount and the potentially severe consequences of not doing so.
The claimant was the inventor of a rather useful sounding device called the 'Stayput Tag', designed to allow easy identification of clothes' owners.
To exploit the potential of her invention, the claimant enlisted investors from two individuals whom the judge later described as 'slippery and untrustworthy' ("the Investors").
The Investors managed to obtain majority hold of the claimant's company and thereafter dismissed her.
Litigation ensued between the claimant and the Investors and the claimant instructed the defendant law firm to represent her.
The defendant agreed to work for the claimant in this matter under a conditional fee agreement (CFA) which incorporated a 100% success fee and was backed by ATE insurance, both of which would have been recoverable from the other side if successful as this case pre-dated the Jackson reforms.
The terms of the CFA put the claimant at the back of the queue when distributing any settlement money recovered from the Investors, with counsel and the defendant entitled to payment of any unrecovered costs first. The defendant then encouraged the claimant to sign a loan agreement with a third-party funder ("the Funder") to fund her expert witness fees, thereby also putting the Funder ahead of her in the queue for recompense out of any settlement.
This CFA arrangement became a particular issue when the defendant's costs reached over £5.3m and, after strong encouragement from the defendants, she agreed to settle her claim against the Investors for £350,000 plus payment of 80% of her costs.
To make matters worse, in the end the claimant only recovered £50,000 from the Investors. This low recovery, and the events that led to it, formed the basis of the claimant's case against the defendants.
The claimant alleged several breaches of duty by the defendant, including failure to keep her adequately informed regarding increased legal costs, acting in a conflict of interest and failure to follow her instructions.
Inadequate costs information and failure to follow instructions
By the time settlement was reached, the defendant's fees were so high that the settlement sum would not allow the claimant any kind of recovery if the CFA were to be strictly enforced. The judge found that the defendant failed to keep the claimant adequately updated about the level of costs being incurred.
The defendant had also refused to act on the claimant's instruction to enforce the terms of the settlement against the Investors after they initially failed to pay. The judge found that the defendant was not entitled to refuse to act in accordance with its client's instructions.
The judge rejected the defence that the CFA allowed the defendant to prioritise its own interests. While the CFA allowed some rights to the defendant, in common with all legal retainers, at its core was an express term which that required them to always act in the client's best interests.
Loss of Chance
As a result of the failure to enforce the settlement, the claimant argued she had lost the chance to recover the full £350,000 from the Investors.
The defendant argued in defence that the claim was worthless because the claimant had not been entitled to payment of that £350,000 in any event due to the huge shortfall in recovery on costs which had to be paid for first.
The claimant argued that at no point was she made aware of these circumstances, and in fact was given 'clear assurance' that she would receive her share of £350,000. The judge found that the defendant did give this assurance in order to persuade the claimant to accept the terms of settlement with the Investors and the defendant was estopped (barred) from arguing that the loss of chance claim was worthless.
Conflict of Interest
The defendant did not disclose to the claimant that it had an existing relationship with the Funder, with which the defendant invested, and which was also one of its clients.
The funding agreement gave the Funder control over settlement and enforcement of the litigation. This was, according to the judge, an 'intractable' conflict of interest. In the judge's mind, this was 'the clearest' breach of duty. He found that, had the claimant been properly advised, she would never have signed the funding agreement.
Fallibility of witness evidence and the value of file notes
The judge's analysis of the witness evidence will be all too familiar to professional negligence specialists who regularly must contend with poorly kept and partial files. The defendant had been unable to produce any adequate file notes of important discussions and client meetings which the judge would expect to be documented.
This contrasted to the evidence of the claimant, who, despite being described as 'highly strung', had taken considerably detailed notes of her meetings with the defendants.
As is so often the case when a court has a choice between two conflicting versions of events, one supported by contemporaneous documents and one not, the judge generally preferred the claimant's evidence.
The judge assessed the claimant's prospects of recovering the full £350,000 from the Investors at 55% recovery and so awarded her damages of £192,500.
This case serves as a warning, not just to law firms, but to all professionals across the UK as to the importance of:
- Capturing all important conversations in writing, whether by way of file note or follow up correspondence;
- Informing clients of any potential conflict of interest as soon as even a risk of one arises; and
- Providing clients with full and detailed information as regards the benefits and potential downfalls of any funding or fee arrangement.