'One-stop-shop' of litigation and fund management raises presumption of undue influence

31 Jan 2017


The claimants, in their respective personal injury proceedings, applied for an order that the sums paid into the Court Funds Office following settlement should be paid out to the trustees of private personal injury trusts established, or to be established, for their benefit. In both instances the trusts were arranged by the firm that had conducted the litigation and where the sole trustees were members of that firm.

A’s case [“AKB”]

A received damages of £2.5m following a serious cycling accident. At that time A lacked capacity. The order made following the settlement approval hearing required an application to the Court of Protection for the appointment of a Deputy.

During preparation of that application, a rehabilitation medicine consultant formed the view that the claimant had capacity and had expressed a wish to manage his own property and affairs. The existence of capacity was subsequently confirmed by a psychiatrist who stated in his opinion: It therefore seems appropriate to me to suggest that a trust structure with a professional trustee will be appropriate here. I am not suggesting that this would be a remedy for lack of capacity, but a mechanism to provide the support envisaged by the [MCA 2005].”

As a consequence, A provided his solicitors with a nominal sum to create a trust in his name and appointing a trust corporation formed by his litigation solicitors as the sole trustee.  

Norris J summed up the application before him as:

“The position in A's case is therefore that an adult capable of managing his affairs with support has made an application to the Court for an order directing payment out of the Court Funds Office to the trustees of a trust, those trustees being connected with the solicitors who have conducted the litigation.”

O’s case [“OH”]

O was 10 years old at the time of a road accident. He suffered a limb amputation, left sided hemiplegia and concentration and memory issues. He lacked capacity but only due to minority (there was no evidence to suggest he would lack mental capacity to manage his own affairs when becoming 18). A settlement of just under £2m was paid into the Court Funds Office.

In discussion between the litigation lawyer and the litigation friend it was agreed that O’s best interests would be best served by the funds being transferred to the trustee of a bare trust, that trustee being a trust corporation operated by the litigation solicitors.

Again Norris J summed up the application before him:  

“The position in O's case is therefore that a litigation friend acting on behalf of a person whose lack of capacity arises only from minority and not from lack of mental capacity, has made an application to the Court for an order directing payment out of the Court Funds Office to the trustees of a trust, those trustees again being connected with the solicitors who have conducted the litigation

Risk of undue influence

The judge commented that the applications seemed to have been under an assumption that they would be routinely agreed. A had capacity and was simply asking the court to give him his money. O’s litigation friend was simply asking the court to do what she had been advised was in O’s best interests. However, the court was not there to apply a rubber stamp and had to be satisfied informed choices were being made.

Reference was also made to the duties of the litigation friend. The litigation friend should not merely lend his name to an application for formal purposes as if devoid of responsibilities. There is a requirement to take all measures for the benefit the defendant which involves the assumption of an obligation to take all steps in the interests of the claimant under proper legal advice.

The value of personal injury trusts in allowing investment management and protection of state benefits was recognised. However, steps had to be taken to ensure free and informed choices were being made particularly where the monies moved into the hands of sole trustees who not only had authority over how the monies were to be used but stood to gain financially from so doing.

A focus of the judge’s concern was the situation where the firm of solicitors who had acted in successful litigation, and would have established a relationship of trust and confidence with the claimant and litigation friend, suggested a further transaction out of which its associate would derive a personal benefit, even though there were many other trust corporations who could provide the same services.

Although the solicitors in the applications denied that the arrangements were in pursuit of an “integrated business model”, rather about client convenience through providing a “one stop shop”, it was, in the judge’s words, “a shop that stocks only one product”.

The law presumes a solicitor has influence over his client. The settling of  a large sum of money into a trust connected to the litigation solicitor with associated charges, gives rise to a rebuttable presumption that the influence has been undue. It would be necessary to show that undue influence had not arisen and the burden (and cost) of that would rest with the solicitor. Typically, that might involve independent advice demonstrating that the claimant or litigation friend had been able to weigh up matters and exercise free will when agreeing to the arrangements.

The safeguard against undue influence

Norris J proposed that the presumption of undue influence should be rebutted in the following ways:

  1. Where the litigation firm proposes that damages of more than £1m are to be settled into a trust and its in-house corporation is a trustee, an independent partner in the firm should instruct Chancery counsel of not less than five year’s standing to provided independent advice, at the solicitor’s expense, to the claimant or litigation friend. This advice would cover the advantages and disadvantages and provisions of the proposed trust. The advice should be before the court when application was made to release funds to a trust.

  2. Where the funds exceed £3m, a family member or independent professional should be appointed as a “protector” whose consent would be needed to any changes in trustee remuneration, engagement of advisers and the exercise of any powers under the trust deed.

Outcome of the applications

A, who had capacity, was able to be questioned by the judge and in the light of A making the decision that he was happy with the arrangements the application to release the funds was accepted.

In respect of O, the judge was not happy that the support of the litigation friend to the arrangements arose from an “unconstrained and free choice”. The procedure set out above had to be followed and the application re-listed when the litigation friend has received and acted on the independent advice.

Relevant to catastrophic injury claims

  1. At the core of these cases is the issue of influence implicit in the relationship between solicitor and client and that in certain circumstances that influence may appear undue until shown otherwise.

  2. The concept of a “one stop shop” whereby the claimant litigation solicitors provided additional services before and after settlement is well known. However that is precisely the circumstances in which the risk of undue influence might arise and the business benefit obtained by “associates” of the litigation lawyer parallel within and beyond the claim, needs careful scrutiny.

  3. The case did not involve a Deputy appointment. However, the same issues may be said to arise where "in-house" Deputies are selected- the need to be sure that the litigation friend has made a choice in the best interests of the claimant, aware of alternatives, is as relevant in this context as it is when agreeing to the terms of a trust. It is also a concern of the defendant where those costs form part of the damages claim.
  4. In those cases where the question of whether a Deputy or trust should be the arrangement meeting the best interests of the claimant, it would be questionable if the rival cost of each were simply based on the charges of an in-house operation. Both the need of the litigation friend for informed choice in the arrangements, and the comparison of the costs as well as the appropriate level of damages needs a broader view of alternative providers. As a first step the question is whether the use of the in house services reflects a free and informed choice.

  5. Where more than £1m is settled into a trust, the costs that will be incurred by a litigation firm in rebutting the presumption of undue influence where an in house arrangement is intended, should not be regarded as damages or costs of the damages claim and therefore not recoverable from the defendant.

  6. It isn’t clearly stated in the judgment, but it is possible to read into it that the requirement for independent Chancery counsel advise for “£1m or more”, continues to apply for cases over £3m but then an additional measure, the appointment of the protector, is required.

  7. If the judges proposal for the appointment of a “protector” where damages exceed £3m leads to additional costs in association with the administration of the trust, these costs should not be recoverable from the defendant as they are the consequence of the choice by the claimant or litigation friend of the in-house model which has given rise to the need for that role. Though not actually said, it is arguable that the costs of the “protector” are comparable to the obtaining of Chancery counsel advice, in other words costs to be borne by the solicitor to rebut the presumption of undue influence. As a fall-back position it could be argued that the role should be performed by a family member to avoid any additional costs whilst still providing protection.

The appropriateness of in house arrangements is something BLM is continuing to look and further updates will be released.

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Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to customers of BLM. Specialist legal advice should always be sought in any particular case.

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