‘UKSC judgment in Hirachand – Success fees do not constitute ‘financial need’ under the Inheritance Act.’

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On 18 December 2024, the UK Supreme Court handed down its judgment (Hirachand v Hirachand & Anor [2024] UKSC 43 (18 December 2024). The court unanimously ruled that success fees do not constitute ‘financial need’ under the Inheritance Act. The leading judgment was delivered by Lord Richards. The Supreme Court Press Statement highlighted:

Lord Richards begins by dealing with whether the meaning of “maintenance” in s1(2)(b) of the 1975 Act is wide enough to include a sum to meet a liability for litigation costs. The Appellant argued that “maintenance” is restricted to everyday living expenses and could not therefore include litigation costs. Lord Richards rejects this submission, noting that it is well-established that payments to fund legal costs may constitute “maintenance” in proceedings under the Matrimonial Causes Act 1973 (the “MCA”) and finding that there are no grounds for excluding the payment of legal costs from the meaning of “maintenance” under s1(2)(b) of the 1975 Act [23]-[26].

Lord Richards provides a background to the rules and principles governing the recovery of costs in civil proceedings. The general rule, established by a consistent line of decided cases over a long period, is that the liability of one party to pay some or all of the costs incurred in the proceedings by another party is treated as a separate matter from the substantive relief sought in the proceedings. In other words, litigation costs can only be recovered by way of a separate costs order, not as part of a substantive award. This basic rule will apply unless a claimant can rely on a separate cause of action against the same respondent to recover costs [27]-[41].

This appeal concerns the recoverability of success fees under CFAs. CFAs have been allowed in all proceedings, other than criminal and family, since 30 July 1998 [43] but the approach towards recovery of success fees has varied since then. In 2010, Sir Rupert Jackson published a report identifying CFAs as “the major contributor to disproportionate costs in civil litigation” and recommending that, on public policy grounds, success fees cease to be recoverable. This led to the prohibition on the recovery of success fees by the addition of s58A(6) to the 1990 Act. [45]-[51].

Lord Richards considers the recovery of base costs in proceedings under the 1975 Act. Such proceedings are subject to the costs regime contained in the Civil Procedure Rules (the “CPR”). The recovery of base costs is dealt with under the CPR by way of an order for costs. It would undermine the costs regime and produce an incoherent result if a party could recover base costs as part of the substantive award [55]-[60].

Lord Richards proceeds to discuss the recovery of success fees in proceedings under the 1975 Act. The logical position, which serves to give effect both to the general principle as to the treatment of costs and to the policy underpinning s58A(6) of the 1990 Act, is to say that success fees are not recoverable as part of a substantive award in any civil proceedings, including those under the 1975 Act [61-66].

This position is supported by a consideration of Part 36 of the CPR. Part 36 is designed to encourage parties to make settlement offers and is based on the proposition that the parties’ costs are to be dealt with only through the operation of the costs regime. The provisions of Part 36 are virtually unworkable in accordance with their purpose of achieving settlements if success fees are recoverable as part of the substantive award [67]-[74].

Counsel for the Daughter argued that the prohibition in s58A(6) of the 1990 Act only applies if provision for payment of a success fee is made in “a costs order”, leaving it open for such provision to be made as part of the substantive award [77]-[78]. The Supreme Court finds that this submission fails for several reasons, including the fact that the order made by the judge in this case was a “costs order”, to the extent that it made provision for payment of part of the Daughter’s success fee [80].

In its judgment, the Court of Appeal drew an analogy with awards in financial remedy proceedings under the MCA, where a party can recover its legal costs as part of the substantive award, notwithstanding a general rule in such proceedings that the court will not make an order requiring one party to pay the costs of another party. This general rule is known as the ‘no order principle’ [86].

The Supreme Court does not accept that a valid parallel can be drawn between proceedings under the 1975 Act and financial remedy proceedings under the MCA. The costs regime in civil proceedings governed by the CPR is substantially different from that applicable to financial remedy proceedings.[93]. The analogy is also inapplicable as success fees are prohibited in family proceedings [94].

In oral submissions, counsel for the Daughter also made a submission by reference to Schedule 1 of the Children Act 1989. For the avoidance of doubt, the Supreme Court considers this is also a flawed analogy [95]-[99].

(Please note that references in square brackets are to paragraphs in the judgment).

See also my earlier blogs – Inheritance Act – 25% CFA cases – Hirachand v Hirachand (CA)(2021), in which  on 15 October 2021, I wrote:

‘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?

See also my blog on 25 May 2023 – ‘CFA fees in Inheritance Act claims’

The judgment of the Supreme Court therefore provides welcome clarity. The impact on Law firms whose ‘bread and butter’ is CFA work, is likely to be seismic. As a result, perhaps there will be an increase in the early mediation of these disputes.

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