If there is a CFA, then part of the success fee can be taken into account as a debt in making an award for maintenance under the Inheritance Act, i.e. before a decision is made about costs taking into account the making of any Part 36 or Calderbank Offer. Extracts from the judgment at First Instance are set out at the end of this post. See also my blogs:
In Hirachand v Hirachand & Anor  EWCA Civ 1498 (15 October 2021),Lady Justice King (with whom Lord Justice Singh and Sir Patrick Elias agreed) concluded:
‘Two issues arise on appeal:
ii) In determining the lump sum award payable to the Respondent, the judge included the sum of £16,750 as a contribution towards the Respondent’s liability to pay a Conditional Fee Agreement (“CFA”) success fee. The issue is whether it is wrong in law for a judge to include such a contribution in an maintenance-based award calculated by reference to the financial needs of a claimant. …
It is submitted on behalf of the Appellant that the inclusion in the award of all or part of the debt which is represented by the success fee cannot be regarded as “provision that is to be made to meet recurring expenses, being expenses of living of an income nature” as approved by Lord Hughes in Ilott (see  above). Ms McDonnell submits that contrary to the Appellant’s argument, the inclusion of the award of £16,750 towards part of the Respondent’s success fee was ‘directed at meeting day to day living expenses’. This, she says, is obvious from the context of the Respondent’s financial circumstances as found by the judge; she has no other means to discharge her debt other than from her income which, on any view, is and will remain very modest. Moreover, Ms McDonnell submits the judge expressly held that if he did not make such an allowance ‘one or more of C’s primary needs will not be met’.
I agree with the analysis of Ms McDonnell, but in any event in my judgment, the Appellant’s argument that a success fee is not a recurring expense falls at the first hurdle as when one reads on from the passage relied upon by Ms Stevens-Hoare taken from the passage In re Dennis incorporated into his judgment by Lord Hughes and highlighted at  above, it is quite clear that payment of a debt can form part of a maintenance payment.
It follows that, in my judgment, the judge was right in concluding that an order for maintenance could contain an element referable to a success fee. As already noted, on the facts of this case, the judge concluded that without such a contribution ‘one or more of the claimant’s primary needs would not be met’. As Lord Hughes re-emphasised in Ilott at : ‘The order made by the judge ought to be upset only if he has erred in principle or law’. In my judgment the judge did neither. The judge was entitled to regard the success fee as a debt capable of inclusion in a maintenance award. That being the case, it would be wrong for this court to interfere with the judge’s individual value judgment.
I am conscious, as was the judge, of the difficulty identified by Briggs J in Lilleyman, namely of the potential for undisclosed negotiations to undermine a judge’s efforts to make appropriate provision under the Inheritance Act. The civil litigation costs regime, unlike the approach in financial remedy cases, means that there is the potential for a situation where a claimant is awarded a contribution to her CFA uplift but is subsequently ordered to pay the defendant’s costs of the claim where, for example, the claimant won overall but failed to beat a Part 36 offer. I note however that this is likely to be less of a risk than might be thought at first blush to be the case given that under many CFAs the claimant is obliged to accept any reasonable settlement offer or an offer above a specified threshold or risk the solicitors withdrawing from the CFA. Conversely a success fee is frequently not payable in the event that the claimant, on advice, rejects a Part 36 offer or other relevant settlement offer but subsequently fails to beat that offer at trial.
The judge was alive to this tension and commented that he could not avoid some potential injustice to one side or the other. The judge therefore mitigated that potential injustice by taking a cautious approach towards the success fee liability and made an order which resulted in only a modest contribution of 25% towards payment of the success fee. In my view the judge’s cautious approach to this difficult aspect of maintenance cases where the claim is made on the back of a CFA contract cannot be faulted and only serves to highlight the imperative of the full engagement in the Part 36 process and the importance of the parties making realistic offers in order to settle these difficult and distressing cases.’
A costs order made in proceedings may not include provision requiring the payment by one party of all or part of a success fee payable by another party under a conditional fee agreement, see: Legal Aid, Sentencing and Punishment of Offenders Act 2012, s.44: Legal Aid, Sentencing and Punishment of Offenders Act 2012 (legislation.gov.uk), see also: CFA Success Fees in Claims under the Inheritance | Ashfords Solicitors; and sections 8 (Offers to settle) and 9 (Costs in 1975 claims) of Chapter 7 of ‘Inheritance Act Claims’ by Sidney Ross.
Is this decision likely to result in an increase in the making of hopeless (i.e. unmeritorious) claims using high success fees as leverage to negotiate a bigger settlement for Claimants, who on a forensic (i.e. legal merits based) analysis, have an unrealistic expectation of recovery at trial?
In effect, what the court has done, is to shift the litigation risk of a successful claimant being unable to pay their own irrecoverable legal costs (i.e. the success fee), on to the defendants. Does this mean that Part 36 Offers will now need to arithmetically include an amount for a contribution to a CFA success fee, e.g. of 25%?
In other words, has the court shifted the goal posts, to the advantage of unworthy claimants, at the expense of estates. If they have, is this likely to result in even more litigation and not less?
The uncertainty this decision has created is not limited to just a future merits based analysis of Inheritance Act claims, and its impact upon the drafting and effect of settlement offers, it also leaves both practitioners and judges adrift about how in principle a contribution is to be calculated, as quantification of the contribution in this case was based upon supposition. Making an educated guess in any case is an unreliable method of quantification, because a belief may subsequently turn out to be based upon a false premise. By contrast with an empirical method, ‘best thinking’ based upon supposition is both subjective and arbitrary. Consequently, it is prone to bias, which could result in an appeal.
Has this decision increased the litigation risks involved in these claims, by adding yet another element of uncertainty into what is already a rather muddled, incoherent and unstable equation?
If this decision results in the making of inconsistent judicial decisions, what damage has it caused to the integrity and rigour of the Jackson Reforms?
Has the court just pushed up the price of doing a deal in mediation, i.e. where mediation is preceded by the making of a Part 36 Offer?
I think it has.
The problem now, is working out in any given case, ‘by how much?’
Therefore, the earlier parties proceed to mediation, the better.
Conversely, where a Claimant refuses to enter into mediation/JENE, or walks out, there is an argument that the court should not make any allowance for a success fee in making an award for a successful claimant.
Since the court has the power to order mediation where parties do not consent, this is a tool that every judge should consider using at the first CMC, i.e. to contain the escalation of costs. However, if for example a Circuit Judge refuses an application for Mediation/JENE, i.e. because he or she thinks it is not appropriate (which can happen), unless your client appeals, the price will go up. Therefore, what is now needed, is judicial guidance about the consequences of refusing to enter into ADR in an Inheritance Act claim.
At First Instance, the Trial Judge, The Hon Mr Justice Cohen held:
‘36. I have to undertake a two-stage approach by asking two questions:
i) Did the will make reasonable financial provision for C;
ii) If not, what reasonable financial provision ought now to be made for C?
That those two tests are the correct approach was re-emphasised in Ilott v The Blue Cross and others  AC 545.
37. In answering both questions I must have regard to the factors set out at Section 3(1) of the Act, in particular I must have regard to the following matters:
a) The financial resources and financial needs which the claimant has or is likely to have in the foreseeable future;
b) … (immaterial);
c) The financial resources and financial needs which any beneficiary of the estate of the deceased has or is likely to have in the foreseeable future;
d) Any obligations and responsibilities which the deceased had towards any applicant for an order under section 2 or towards any beneficiary of the estate of the deceased;
e) The size and nature of the estate of the deceased;
f) Any physical or mental disability of any applicant for order under the said section 2 or any beneficiary of the estate of the deceased;
g) Any other matter, including conduct of the applicant or any other person, which in the circumstances of the case the court may consider relevant.
38. I have read but do not set out for the purposes of this judgment the other sub-sections to section 3.
39. Lord Hughes in Ilott acknowledged that the section 3 factors are applicable equally to both stages and there is in most cases a very large degree of overlap between them. He confirmed that in terms of addressing the stages in a judgment: “There can be nothing wrong, in such cases, with a judge setting out the facts as he finds them and then addressing both questions arising under the act without repeating them”.
40. The standard for what is reasonable financial provision (in cases other than spouse claims) is defined in Section 1 (2) (b) of the Act as: “Such financial provision as it would be reasonable in all the circumstances of the case for the applicant to receive for his maintenance”.
41. At paragraph 14 of Ilott, Lord Hughes explained that, “the concept of maintenance is no doubt broad but the distinction made by the differing paragraphs of section 1 (2) shows that it cannot extend to any or everything it should be desirable for the claimant to have. It must import provision to meet the everyday expenses of living”.
42. Lord Hughes then cited with approval the extract from Re Dennis (Deceased)  2 AR 140, where at paragraph 145 Browne-Wilkinson LJ (as he then was) said: “… the word “maintenance” connotes only payments which, directly or indirectly, enable the applicant in the future to discharge the cost of his daily living at whatever standard of living is appropriate to him. The provision that is to be made is to meet recurring expenses, being expenses of living of an income nature. This does not mean that the provision need be by way of income payments. The provision can be by way of lump sum, for example, to buy a house in which the applicant can be housed, thereby relieving him pro tanto of income expenditure. … “
43. Specific guidance for claims by adult children were considered in Ilott. At paragraph 19 Lord Hughes said this:
“19. For all other claimants [other than spouses], need (for maintenance rather than for anything else, and judged not by subsistence levels but by the standard appropriate to the circumstances) is a necessary but not a sufficient condition for an order. Need, plus the relevant relationship to qualify the claimant, is not always enough. In In re Coventry the passage cited above was followed almost immediately by another much-cited observation of Oliver J at page 475: “It cannot be enough to say ‘here is a son of the deceased; he is in necessitous circumstances; there is property of the deceased which could be made available to assist him but which is not available if the deceased’s dispositions stand; therefore those dispositions do not make reasonable provision for the applicant.’ There must, as it seems to me, be established some sort of moral claim by the applicant to be maintained by the deceased or at the expense of his estate beyond the mere fact of a blood relationship, some reason why it can be said that, in the circumstances, it is unreasonable that no or no greater provision was in fact made. “
20. Oliver J’s reference to moral claim must be understood … There is no requirement for a moral claim as a sine qua non for all applications under the 1975 Act, and Oliver J did not impose one. He meant no more, but no less, than that in the case of a claimant adult son well capable of living independently, something more than the qualifying relationship is needed to found a claim, and that in the case before him the additional something could only be a moral claim”. (Emphasis added).
44. Thus the first question before me is whether, in the circumstances, C’s financial position, difficult as it is, caused by reason of her suffering from a severe and debilitating mental illness which makes her unable to support herself and her two primary school age children, and which makes her dependent on state benefits and precarious financial support from her partner, means that the will did not make reasonable financial provision for C.
45. The more that I have contemplated this matter, the harder I have found it. There is no doubt that C is in a position of real need. But, on the other hand, C had cut herself off from her family some 10 – 20 years ago and has had no financial support from them for over 20 years save for the period 2007 – 2011. For these purposes I ignore the minor gifts that they provided her with on birthdays and other festivals.
46. How do I factor in the fact that C’s treatment of her family is largely to be explained by her psychiatric illness which she, rightly or wrongly, blames upon their treatment of her?
47. This is not a large estate and the priority must be to ensure that C’s mother, the beneficiary under the will, has sufficient funds properly to be maintained for the rest of her days. She is aged almost 80 and would have a normal life expectancy of 10 – 11 years. She has very severe health problems which do not bode well for her future, but the world contains many who have lived beyond their life expectancy.
48. The parties have not been able to agree that I should know of any Part 36 offers and so I will need to deal with costs as between the parties separately, but it is right that I should at this stage consider the Conditional Fee Agreement into which C has entered. …
50. As a matter of law, the other party to litigation cannot be ordered to pay the uplift. Yet, C asks me to make an order that the additional £48,175 success fee should fall on the estate as part of her award. As a result of the agreement which C had to enter into to fund the continuation of the litigation, she has incurred a liability which her solicitors can enforce so that her needs-based claim will be correspondingly reduced.
51. There are only two authorities which Ms Rogers has been able to trace where this appears to have been considered. The first in time was Re Clarke  EWHC 1193 and 1194 (Ch), a decision of Deputy Master Linwood sitting in the Chancery Division. In an Inheritance Act case he declined to increase his award to include a success fee on 5 grounds:
i) The calculation of damages is a matter of procedure carried out before costs are considered and has never included an element of costs;
ii) To allow it would contrary to legislative policy that the losing party should not be responsible for a success fee – s.58A(6) Courts and Legal Services Act 1980;
iii) It would amount to an increase in damages by way of costs;
iv) It may put a CFA funded litigant in a better position in terms of negotiation due to the risk of a substantial costs burden;
v) It would put a claimant in Inheritance Act proceedings in a better position than, say, a claimant in a personal injuries claim.
52. The second case is Bullock v Denton, an unreported decision of His Honour Judge Gosnell in the Leeds County Court in a judgment given just 9 days before this hearing. In that case the claimant had entered into both a Damages Based Agreement with her first set of solicitors and a Conditional Fee Agreement with her second solicitors and arguably might be liable under both agreements. The judge disregarded the potential DBA liability and considered the CFA. In that case there was a success fee representing a 50% uplift on costs which as at 7 June 2019 (i.e. almost a year before trial) stood at approximately £24,000 + VAT with a substantial (but unquantified) increase as a result of the trial. The judge allowed a figure of £25,000 in total in respect of the CFA by way of contribution. That was added to the claimant’s award.
53. As it is impossible for me to know how much the true liability by way of success fee was, I can only surmise, but it seems to me that what was awarded was bound to have been less than half the uplift to which the solicitors were entitled under the CFA.
54. It does not appear that HHJ Gosnell was referred to the decision in Re Clarke.
55. I accept that it is appropriate for me to consider this liability as part of C’s needs. I do so largely for case specific reasons. I am not making a large award (unlike in Re Clarke). It is not an award that permits of much elasticity. If I do not make such an allowance one or more of C’s primary needs will not be met. The liability cannot be recovered as part of any costs award from the other parties. The liability is that of C alone. She had no other means of funding the litigation.
56. I refer also to the obiter comments of Briggs J (as he then was) in Lilleyman v Lilleyman  1 WLR 2801 where the judge was faced with the risk in an Inheritance Act claim of the award being undermined by the effect of undisclosed negotiation offers. He said this: 26. I must in concluding express a real sense of unease at the remarkable disparity between the costs regimes enforced, on the one hand for Inheritance Act cases (whether in the Chancery or Family Divisions) and, on the other hand, in financial relief proceedings arising from divorce. In the latter, my understanding is that the emphasis is all on the making of open offers, and that there is limited scope for costs shifting, so that the court is enabled to make financial provision which properly takes into account the parties’ costs liabilities. In sharp contrast, the modern emphasis in Inheritance Act claims … The judge then went on to observe that the potential for negotiation offers to undermine a judge’s attempt to meet needs is a disadvantage to the sole litigation costs regime.
57. It was, of course, for that main reason that the making of Calderbank offers in matrimonial financial remedy cases was outlawed.
58. I intend to adopt the same approach as HHJ Gosnell. I think that it would not be fair on C for me to ignore completely her liability to her solicitors. But, I recognise that there is a risk of injustice to the estate, in particular if an appropriate Part 36 offer had been made, of which I am necessarily unaware at this stage of proceedings. In addition, I flag up that I do not know the precise terms of the agreement and what is the definition of “success”. If my award does not bring about the operation of the uplift, I will revisit this element of the award.
59. I cannot see how I can avoid some potential (and it is only potential) injustice to either C or the estate. All I can do is mitigate the potential by taking a cautious approach towards this liability.
60. Bearing that approach in mind and knowing what I do of the case, I cannot envisage how it could reasonably be thought that the chance of failure was a high chance. I propose to allow the figure, as part of C’s needs, of £16,750, which approximates to a 25% uplift.’