Referral Fees and Illegality: Litkraft Ltd v Cottrell

Litkraft Ltd v (1) Cottrell (2) Williams (3) Goldsmith [2023] EWHC 465 (Comm) has touched upon, but not decided, whether certain fee sharing arrangements could amount to a probited referral fee under section 56 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”).

The court did however decide that a contractual claim for unpaid fees brought by a Claims Management Company (“CMC”) against a firm of solicitors was not barred by an illegality defence based on alleged failures to comply with regulatory obligations falling on CMCs and solicitors.

The Claimant, Litkraft Ltd, was a CMC who entered into a contact with the three Defendants, trading together as a firm of solicitors called Goldsmith Williams Solicitors (“GWS”). Part of GWS’s business was representing clients in personal injury claims. Under several contracts between the parties Litkraft introduced personal injury clients to GWS. The litigation was a contractual claim by Litkraft against GWS for various categories of unpaid fees, said to total £569,446.

The judgment of HHJ Pearce (sitting as a Judge of the High Court) on several preliminary issues provides an insight into the particular fee arrangements between a CMC and a firm of solicitors engaged in personal injury work. The terms of the contract throughout the time of the parties’ relationship were a matter of dispute, but part of Litkraft’s case was described as follows:

[7] The Claimant’s case is that the 2013 Contract was varied with effect from around 29 January 2014 so as to require the Defendant to pay 17.5% of the costs recovered by GWS in High Value Cases (defined as cases where damages were in excess of £25,000 and the case was not being dealt with in a fixed costs regime), capped at £10,000; alternatively that a new contract was entered into by the Claimant and GWS obliging such payment in High Value Cases. In contrast, the Defendant denies that there was a concluded agreement as to payment for High Value Cases, whether by variation of the 2013 Contract or by the parties entering into a new contract.

One of the eleven preliminary issues for the High Court was defined as follows:

[15.5] Whether the contract asserted by the Claimant for the payment of percentage fees in High Value Cases is void for illegality as pleaded at paragraph 30 of the Defence (Issue 5 – Illegality).

The background to this issue was that GWS had pleaded that it would be a breach of the regulatory rules binding the parties if the percentage fees payable by GWS to Litkraft were not disclosed to the individuals pursuing the claims (“the Non-Disclosure Issue”), but in opening their defence at trial GWS had argued that the percentage fee based agreement as contended for by Litkraft would breach the ban on referral fees contained in section 56 of LASPO, so rendering the agreement unenforceable under section 57(6). Litkraft challenged whether the defence advanced in opening (“the LASPO Issue”) was available to GWS in light of the pleaded case raising the Non-Disclosure Issue (see [17] and [18]).

Ultimately HHJ Pearce decided that the LASPO Issue was not open to GWS at the preliminary trial, and an amendment to the Defence would be needed to advance it at any subsequent trial (see [21]). As it happened, the Non-Disclosure Issue also fell to be narrowed significantly as GWS had not pleaded and so could not argue that Litkraft had a contractual relationsship with the individual clients, imposing on them an express obligation to notify clients about the fees (see [26]).

HHJ Pearce decided the illegality issue (the Non-Disclosure Issue) in favour of Litkraft, and against GWS. The key finding was that Litkraft’s claim against GWS was not void for illegality applying Patel v Mirza [2017] AC 467 for the reasons set out at [154]-[162].

The judgment therefore provides an insight into a particular set of arrangements between a CMC and firm of solicitors engaged in the personal injury market. Whether the arranagements did amount to a ‘referral fee’ under LASPO was not decided by the court, but the judgment nonetheless provides a useful explanation of the respective regulatory obligations of parties in this context.