Scottish Court of Session Decisions

At advising, on 19 December 1997, the opinion of the court was delivered by Lord Prosser.

OPINION OF THE COURTmdash;In this action, the pursuers Quantum Claims Compensation Specialists Limited seek payment of £49,350, as the amount due to them by the defender Thomas Powell in terms of a contract for services. The sheriff at Aberdeen allowed a proof before answer; but the sheriff principal allowed an appeal by the pursuers against that interlocutor, and granted decree against the defender for payment of the sum craved, with appropriate interest. The defender now appeals against that interlocutor. It is to be noted that the sheriff principal also dismissed a counter-claim, but it is not suggested that any separate issue arises in that respect. At the hearing of the appeal, the appellant appeared on his own behalf.

In March 1988, the appellant was injured in an accident, and, thereafter, he took steps to make a claim for damages. He explained to us that there were complications in regard to the assessment of damages, although liability was not apparently disputed. Having received advice from a solicitor, to the effect that the resolution of the claim might take a considerable time, he went on to the pursuers, who are a company carrying on business in the negotiation, settlement and if necessary the prosecution of claims for damages for their clients, against third parties. He was aware that they had successfully resolved substantial claims for others, and he told us that, when he approached them, they indicated that his claim should be resolved within perhaps six months. He told us that early resolution of his claim was of great importance to him, and that he was not greatly concerned at what he might have to pay in order to achieve this. While the appellant's perception of matters at that stage is not essentially a matter for us, it affords a background to the frustration and dissatisfaction which he has subsequently felt, early resolution of the claim not having been achieved, and a substantial course of litigation having ensued. At all events, he entered into a contract with the pursuers and respondents, in February 1992, instructing them to process his claim into litigation, and saying: ‘I understand that in the event that we are successful I will pay 20 per cent of the amount recovered plus VAT to you, out of which you will meet the cost of the agents who are representing me. In the event that we are not successful I understand that you, in addition to meeting your own agents' costs, will also meet any cost awarded against me, plus VAT for the agents for the defenders.’

At the original debate before the sheriff, and in the appeals to the sheriff principal and to this court, the issue turns upon the first plea-in-law for the defender, to the effect that the contract between the parties is void and unenforceable as a pactum de quota litis, and the pursuers' fourth plea, to the effect that the defender's averments in support of this plea are irrelevant. While the point of course arises from the pleadings, its resolution does not turn upon details of averment, but upon the fundamental question, as to the scope of the juridical concept of a pactum de quota litis. It is accepted by the pursuers and respondents that a pactum de quota litis is indeed unenforceable; but their position is that the appellant's contract with them is not such a pactum, this being apparent from the parties' pleadings.

Before turning to the legal issue, it is useful to put matters in context. The pursuers and respondents (‘Quantum’) are a limited company. At the relevant time, there were two directors of the company, Mr Frank Lefevre, a qualified solicitor with a practising certificate, and Mr George Clark, who was not a solicitor. The company's shares appear to have been held by Mr Lefevre and members of his family. The company's relevant place of business was at 70 Carden Place, Aberdeen. That was also the address of a firm of solicitors, known as The Frank Lefevre Practice. Between 1988 and the contract in February 1992, the appellant had made contact with Quantum, and they had subsequently handled his claim: the details of events over this period are not entirely clear from the pleadings, but Quantum had been doing work for the appellant, and it appears that they had engaged a firm of solicitors, Alastair Gibb & Company, Aberdeen to deal with the actual litigation which became necessary. The partner of that firm handling the matter was a Mr Budge, who subsequently moved to, and became partner of, The Frank Lefevre Practice. It is apparent that the appellant was already, rightly or wrongly, feeling the frustration and dissatisfaction which we have mentioned, by the time the contract was put in writing in February 1992. It is worth noting that the appellant apparently gained the impression that Mr Budge had some connection with Quantum, but this was erroneous; and he also indicated to us that with Quantum and The Frank Lefevre Practice operating at the same address, he had not been clear, when dealing with Mr Lefevre, whether Mr Lefevre was wearing his Quantum hat, or his other hat, as a partner of or consultant with The Frank Lefevre Practice which bore his name. We make no comment as to these possible confusions or uncertainties, beyond observing that the shared address, and the evident possibility that Mr Lefevre might be playing a role through the solicitors' firm, as well as a director of Quantum, would give rise to a need for very considerable care if clients were not perhaps to be confused. In fact, it appears that on Mr Budge moving from Alastair Gibb & Company to The Frank Lefevre Practice, he brought the appellant's case with him, and continued to be the person responsible for it, after his move to The Frank Lefevre Practice.

We turn to the fundamental issue of law. The scope of the pactum and the question of whether the type of contract entered into by Quantum with their clients might be such a pactum and unenforceable were matters which came before the Court of Session, in a case raised by the Law Society of Scotland against Quantum and Mr Lefevre, and which resulted in a declaratory interlocutor in October 1991. That interlocutor, however, was pronounced in the context of certain undertakings, and essentially reflected an agreed disposal of the case. We mention the matter only to confirm that it affords no assistance to us on the issue of law in the present case.

Reference was made to a substantial number of authorities, both before the sheriff and on appeal to the sheriff principal. However, in the appeal to this court from the sheriff principal, the appellant (apart from clarifying the general background in the way that we have already briefly described) restricted his submissions to a request that we should recall the interlocutor of the sheriff principal, and restore that of the sheriff, providing us also with written statements of his position, to which we shall return. Moreover, counsel for Quantum did not ask us to consider the authorities, with a view to reaching conclusions as to their specific effect. Instead, he proceeded upon the basis of a substantial number of concessions as to the scope of the pactum; and by accepting that its scope was broad, and indeed perhaps broader than the sheriff principal may have held, he made it unnecessary to consider more restrictive interpretations of the law, while still contending that Quantum's nature and function, and the contract which they had entered into with the appellant lay beyond even the widest possible boundaries of the unenforceability which flows from the pactum. It is thus convenient to approach the matter by considering the propositions which were thus accepted or conceded by counsel for Quantum. We consider first two specific points as to the nature of bargains which are struck down, before turning to the major issue, which relates essentially to the question of who may, and who may not legally enter into bargains of the type in question.

First, in the court below it was argued that the present contract was not a pactum de quota litis, because the agreement was not that the pursuers should receive an actual part of any amount paid to the appellant, but that they should receive a fee calculated as a percentage of that amount. The sheriff principal expresses the opinion that it is by no means clear that it is an essential element of the pactumthat the agent is to receive a portion of the actual subject matter of the case, rather than a sum calculated by reference thereto. He says that he would not have been inclined to sustain the appeal on that ground. Counsel for Quantum was content to proceed upon the basis that this was sound, and it is unnecessary for us to deal with that matter further.

Secondly, Quantum originally argued in the courts below that the rule applied only to cases where the sum in question was eventually awarded in virtue of a decree of the court: it was said that it did not apply to a case such as the present, where the matter ended by extra-judicial settlement. Again, that issue was not pressed by counsel for Quantum: he was content to proceed upon the basis that if a particular contract was otherwise unenforceable, as being a pactum de quota litis, it was not to be regarded as enforceable merely because the claim was settled by agreement rather than by decree being taken. While the sheriff principal has taken a more restrictive view, seeing an actual law suit as an essential element, it is not necessary for us to express any view upon the matter.

These points having been taken out of dispute in this way, we can turn to the fundamental issue. As a starting point, we would emphasise, as the sheriff principal does, the basic principle, that parties of full legal capacity may enter into whatever contract they please, provided that the contract is not made illegal by statute or by some rule of common law. The prohibition against a pactum de quota litis is thus a restriction upon the normal freedom of contract. And more specifically, in the context of claims and litigation, neither statute nor common law imposes any bar upon third parties and claimants ‘getting together’, with an agreement that the third party will handle and perhaps fund pursuit of the claim, if necessary by litigation, in return for a percentage share of what one may call the winnings. Indeed, it may be of considerable importance to a claimant, if he is to be able to vindicate his claim effectually, to obtain assistance of this kind, and to grant to the third party, in return for the risk and expenditure undertaken, a percentage share, and perhaps a substantial percentage share, of what is eventually recovered. In principle, and in general, bargains of this type are not regarded by the law as obnoxious, or requiring any curtailment of the normal freedom in contract. (One may note in passing that where such a bargain has been entered into, other legal obligations or liabilities may arise—for example, those which affect a dominus litis. But that is a different matter, not affecting the general freedom to contract.)

The unenforceability of a pactum de quota litis does not therefore flow from any unacceptable characteristic of the bargain as such. What the law treats as unacceptable, and therefore renders unenforceable, is the presence of a stipulation of this type in a contract which regulates the rights and obligations of a claimant or litigant on the one hand, and on the other hand, a third party whose particular function or role differentiates him from third parties in general, and provides a basis for saying ‘others may enter into bargains such as this—but not you’. If one is to identify, in a satisfactory way, the category or categories of persons who are thus debarred from entering into a bargain of this type, it will plainly be desirable to find a basis or ratio for such a denial of freedom to contract, founded upon some relevant characteristic of the persons in question, or of the function or role which they are performing. It is however more convenient to start by looking at particular classes of person whose freedom to contract in this way has been, or is conceded by counsel for Quantum to be, limited by the law as to pactum de quota litis.The initial, undisputed category is that of advocates. By extension, the prohibition covers solicitors—not only in relation to cases conducted by them, in the sheriff court, but also where they are not ‘pleading’, but are the solicitors instructing counsel in the Supreme Courts. By a more significant extension, perhaps, it was conceded that not only those solicitors were debarred; so too was the ‘country’ solicitor, who engages another solicitor in another area, to conduct litigation, either personally or by instructing counsel. That such a solicitor is debarred from entering into a pactum de quota litis is significant, since he is not directly involved in or conducting the legal proceedings, but occupies a role which could be described as ‘advisory’ in relation to the client, and perhaps ‘controlling’ in relation to those who handle the litigation on his instructions. While emphasising that one was still concerned with a qualified member of the legal profession, engaged by the client, counsel for Quantum conceded that the category of persons debarred from entering into a pactum de quota litismust also include, along with the Scottish ‘advisory’ country solicitor, an English solicitor, who engaged Scottish solicitors and perhaps counsel to conduct litigation. We would observe that the sheriff principal is perhaps taking a more restricted view; but having regard to the authorities as a whole, and subject to what we say as to the ratio for the categorisation, we are content to proceed upon the basis of these concessions.

Counsel for Quantum further accepted that the unenforceability of a pactum de quota litis would apply not only to individual advocates or solicitors, but to partnerships of solicitors fulfilling any of the roles to which we have referred. Moreover, he said that he would accept that if one envisaged a mixed partnership (for example, of solicitors and accountants) or an incorporated company, providing the services of solicitors, or even of both solicitors and non-solicitors, then these too would be debarred from entering into a pactum de quota litis if and when (but only if and when) the function or role being performed by such a partnership or limited company was truly the same as the function or role being performed, in the situations we have already described, by an advocate or solicitor conducting litigation, or a solicitor instructing the conduct of litigation from ‘the country’ or from across the border or elsewhere. The basis for this concession is essentially to be found in what was said to be the underlying principle or ratio for the unenforceability of the pactum de quota litis—to which we now turn.

What one may call the original or narrow ratio for the prohibition against the pactum de quota litis is closely tied to those actually conducting litigation, and the possible mischief of ‘stirring up and too much eagerness in pleas’. As the sheriff principal points out, advocates and solicitors so engaged in litigation are officers of the courts in which they plead, and have duties, not only to their clients, but also to the courts. In such a context of public duties, it is understandable that the pactum de quota litis, giving the pleader a financial interest in the outcome of the case which he is presenting, may be seen as objectionable. But the prohibition has apparently been seen as applicable not merely to this category, who are officers of court, but also to the ‘country’ solicitor instructing them. It does not appear to us nor was any concession made by counsel for Quantum, that the various expressions used in the decided cases, such as Writer, Law Agent, Legal Advisor and the like are being used to denote anyone other than a qualified legal practitioner; nor does it appear (nor is it conceded) that unenforceability is envisaged as arising in any context other than that of a client engaging such a qualified practitioner, for professional services. But it does appear (and is conceded) that, in such a context, the services need not be the ‘front-line’ services of conducting the litigation or negotiating with the other party, but may be limited to the ‘back-room’ services of advice, investigation and engaging others to perform ‘front-line’ functions.

Counsel for Quantum submitted that if one was engaging a qualified lawyer to carry out such advisory or supportive functions, in relation to an actual or perhaps potential litigation, then not only could that lawyer properly be described as a ‘legal advisor’, he was a professional lawyer engaged in a professional matter relating to litigation. It was understandable as a matter of principle that he would be required to stick to that function, and should not be free to combine it with a personal interest in the amount which might be recovered. While in a sense, persons other than qualified lawyers might carry out a virtually identical role, such other persons could never properly be described as ‘legal advisors’, and more significantly, would by definition never be both a lawyer engaged to act as a lawyer in connection with a legal claim or litigation, and at the same time (and unacceptably) a participant with the client, having a personal interest in the amount recovered. The crucial matter was not therefore the work being done, but the fact of being engaged to do that work as a professional lawyer, who as a professional should not become involved personally, effectively as a principal as well as agent. Counsel for Quantum acknowledged that the principle thus expressed ran wider than the narrow issue of ‘the stirring up and too much eagerness in pleas’. Specifically, he acknowledged that one mischief which should be avoided, in the fulfilment of professional work by a solicitor, was the risk that with a personal interest in amounts recovered, and a personal liability if nothing was recovered, there might be a pressure to enter into a settlement at a figure which was quite inadequate from the client's point of view, although better than nothing from the solicitor's point of view. But that was in effect simply an example of the need not to combine personal interest with the fulfilment of a solicitor's professional obligations to his client.

Against that background, counsel for Quantum submitted that there was no basis upon which one could hold that Quantum's contract was in the unenforceable category of pactum de quota litis. Quantum was quite simply a limited company, not a solicitor or firm of solicitors. Not only did the company engage a solicitor or firm of solicitors, for the conduct of litigation; but even in relation to those functions fulfilled by Quantum itself, that company was plainly not a solicitor, nor was Mr Lefevre acting as a solicitor when he did anything for or as the company. There was no conflict between the company's pecuniary interest under the contract, and fulfilment of any independent professional role. They had no professional role. The appellant had engaged them to fulfil the role which the company was fulfilling for him, and they quite simply did not fall within the limited category of persons—qualified lawyers—who were debarred from combining those functions with the professional functions of a lawyer acting for this client.

In the document lodged by Mr Powell, and effectively being treated as his grounds of appeal, he emphasises that Mr Lefevre is a qualified lawyer and indeed practising law, and that he is a member of the legal profession. He suggests that, as a director of Quantum, Mr Lefevre might have decided that the company was paramount, and must come before the appellant himself, as client, in the relationship of solicitor and client. The force of what is set out in this document is somewhat reduced, owing to the appellant's apparent misapprehension as to Mr Budge having a role both in the solicitor's firm and in Quantum. Nonetheless, the point he is making appears to us essentially to be the undesirability of a practising solicitor combining his solicitor's role, in relation to a claim or litigation, with a pecuniary interest in the amount eventually to be recovered. That is indeed the ratiounderlying the unenforceability of a pactum de quota litis,when entered into by a solicitor who has such a professional role in relation to a claim or litigation. In a further document, which effectively constituted the appellant's submissions to the court, Mr Powell draws attention to the controls which exist on the behaviour of solicitors, and the absence of comparable controls in relation to limited companies. Drawing attention to the vulnerability of potential litigants, and their dependence on those they use to claim or negotiate their claims, he notes the possible disadvantages of using a limited company for this purpose, rather than solicitors who are subject to control. Expanding upon this point, he points out that anyone can set up as a claims specialist, that the vast majority of claims are resolved by negotiation rather than going to court, and that while of course there are people who are ethical and trustworthy and keep their word, there are others interested only in money. In that context, he points out the interest of the general public, and the possible need for protection and control, rather than simple market forces. Specifically in relation to Quantum, the appellant's presentation to the effect that Quantum is owned by a solicitor, Mr Lefevre, and that he ‘should not be able to "get around the Rule"’. The sheriff principal's decision is criticised for distinguishing between lawyers and others, with regard to agreements of this type, when these are not enforceable between the lawyer and his client. It is submitted that equally they should not be enforceable between an ‘unqualified claim handling company’ and its client.

It is no doubt true that there are risks for those who enter into contracts of this type. But it seems to us that this is really only one example of a much broader truth: that there are risks whenever one enters into a contract with another party to fulfil certain services, and that it is in general a matter for any person to identify for himself the risks inherent in the course that he is thinking of adopting, and to decide whether those risks are outweighed by the advantages—perhaps very considerable—which are available to him if he does adopt that course. In many areas, Parliament has thought fit to introduce protective measures. But it is not for this court to reach or express a view as to the need for protective measures in any particular area of contract. Considering the law as it is, and starting with the relatively broad restriction on freedom of contract acknowledged by counsel for Quantum, it appears to us that the ratio for that restriction is indeed specific to professional lawyers who have taken on a professional role for their clients in relation to a claim or litigation, and who are debarred from combining that function with a pecuniary interest in the amount to be recovered. While counsel for Quantum was prepared, as a matter of theory, to envisage a corporate body trying to combine both the professional role and the pecuniary interest, and was prepared to concede that if that happened, the contract would be unenforceable, that hypothetical situation is in our view, as counsel for Quantum submitted, still crucially different in principle from the situation with which we are presented in this case. In a matter of this kind it might well be legitimate to ‘tear aside the veil’ and have regard to underlying realities, rather than the strict structures of corporate existence. To that extent, we can sympathise with the appellant's emphasis on the fact that Mr Lefevre is a shareholder and director, and that the skills he brings to the service of the company are skills apposite to a lawyer, and acquired as a lawyer. In all these circumstances, it is perhaps in lay terms legitimate for the appellant to see the distinction between the company and Mr Lefevre as rather unreal, the services provided by the company as services which Mr Lefevre could have provided as a lawyer, and his decision to provide them not as a lawyer, but through the vehicle of the company, as in some sense ‘getting round the Rule’.

But if a rule has identifiable limits and more particularly if it is founded upon a conflict of interest within those limits, it is not for a court to extend those limits into an area where that conflict does not arise. While we have expressed our unease at the possibility of confusion, arising from the shared address, the name of the Lefevre practice and the fact that Quantum were instructing the Lefevre practice to fulfil those roles which required a solicitor, that possible confusion does not alter the realities. And while the services which Quantum had undertaken, by their contract with the appellant, were apparently services which might have been provided by solicitors, it must be emphasised that they are services which also might be provided by persons other than solicitors. While we have some misgivings at seeing a qualified and indeed practising solicitor doing what he might apparently otherwise have done as such a practising solicitor, but doing it instead (no doubt with others) as an executive of a non-solicitor company, that is something which calls for consideration (if at all) by others: it does not bear upon the issue of law which is the concern of the court. We are not persuaded that either the company or Mr Lefevre has the crucial combination of roles or conflict of interests which debar a solicitor, in the exercise of his practice, from taking this kind of pecuniary interest in the outcome of a claim or litigation in which he has been engaged by a client to fulfil his professional solicitor role. The rule that a pactum de quota litis is unenforceable is in our opinion limited in its application to solicitors who have undertaken professional obligations, and who must not stipulate for this form of remuneration for fulfilling those obligations.

On the whole matter, we are satisfied that the appellant has not made a relevant case of unenforceability, and we will therefore refuse the appeal and sustain the interlocutor of the sheriff principal.