Last week, the Supreme Court released its much-anticipated judgement in the case of Hirachand v Hirachand. The decision is set to have a major impact in the world of contentious trusts and estates. Here is what happened:
Background
The case concerns a claim under the Inheritance (Provision for Family and Dependants) Act 1975 (“1975 Act”). The appellant, Nalini Hirachand, challenged the decisions of the High Court and the Court of Appeal, which allowed the recovery of a proportion of the success fee incurred under a Conditional Fee Agreement (“CFA”) by the respondent, Sheila Hirachand, in her claim for reasonable financial provision from her deceased father’s estate. The High Court initially awarded the respondent a lump sum that included an amount for the success fee, which the Court of Appeal upheld. The logic for these decisions was that if Sheila was not awarded a contribution towards the success fee, she would need to meet it from her award, with the result that this would reduce the award to an amount which was no longer reasonable financial provision in all the circumstances of the case.
Key Issue
The primary legal question addressed was whether a success fee under a CFA could be considered a “financial need” under the 1975 Act, thereby allowing its recovery as part of the financial provision awarded from the deceased’s estate.
Supreme Court Decision
The Supreme Court overturned the decisions of the lower courts, ruling that success fees are not recoverable in claims under the 1975 Act. The Court held that including success fees in financial provision awards would contravene established legal principles and policies:
Policy against recoverability of success fees: The Court emphasized that success fees should not be recoverable in any litigation, including under the 1975 Act. This is to prevent issues that have been historically observed in personal injury litigation where success fees have distorted the litigation process and the bargaining position of the parties.
Costs regime integrity: The Court noted that permitting the recovery of success fees as part of an award, rather than via an award of costs, would undermine the existing costs regime, which is designed to ensure fairness and predictability in litigation costs.
Complications with Settlement offers: The recovery of success fees would introduce significant complications to the settlement offers made under Part 36 of the Civil Procedure Rules, making the Part 36 regime “virtually unworkable” (per Lord Richards) for claims under the 1975 Act. Part 36 contains a structured framework for settlement offers on the substantive dispute with costs dealt with separately, therefore adding success fees to what can be included in a settlement offer would serve only to disrupt the policy in favour of the promotion of settlement Part 36 is intended to achieve.
Inappropriateness of comparisons with divorce proceedings: The Court rejected comparisons between the costs awarded in divorce proceedings under the Matrimonial Causes Act 1973 and those under the 1975 Act, highlighting the materially distinct costs regimes governing these two distinct areas.
What this means for the industry
The decision has several practical implications:
- Lower recoveries for successful claimants under the 1975 Act: successful 1975 Act claimants who have brought claims via a CFA will no longer see their awards boosted to cover the success fee payable to their solicitors. Assuming they have no other means, the result will be that the success fee must be paid from the award of reasonable financial provision. If the success fee is large, such that they receive something short of the reasonable financial provision the court intended, it would seem that the Supreme Court’s view is that this is hard luck. It’s decision means that the principled application of the law, must take priority over the desire to avoid financial hardship for such claimants.
- Fewer marginal claims: there is likely to be a reduction in the number of smaller claims under the 1975 Act proceeding on a CFA basis, which may result in those claims not proceeding at all. Access to justice will therefore be impacted.
- Insurers are likely to benefit: it is possible to take out After the Event insurance to cover both the risk of paying an opponent’s costs in the event that a claim fails, and a success fee if a claim succeeds. This type of insurance is likely to become more popular in this area after the Supreme Court’s decision.
This is an important judgment reinforcing the principle that success fees should remain outside the scope of recoverable costs, maintaining the integrity and predictability of the costs regime in litigation, and avoiding the distorting effects on the litigation process that success fees can have. If you would like to discuss any aspect of the Hirachand judgement and how it might impact your position, please do not hesitate to get in contact with us to find out how Burges Salmon can assist.
This summary is not intended to be a full statement of the law on this topic and is not legal advice. It does not take account of any developments since it was last updated.
This briefing is current as at 23 December 2024
Written by Justin Briggs and Ben Jonsmyth