In this post Anis Waiz, solicitor and head of commercial litigation at Curtis Law Solicitors, continues his critical review of current case law.
In this case the High Court considered an important issue namely where a represented party loses mental capacity in the course of proceedings, does such loss of capacity terminate their solicitor’s retainer?
In the context of solicitors conducting personal injury claims pursuant to conditional fee agreements entered into before 1 April 2013 (for which , success fees continue to be recoverable from defendants pursuant to s.44(6) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012), the issue was of great importance.
At first instance the court held that as a matter of law, supervening incapacity automatically frustrated and thus terminated a contract of retainer.
Whilst the claimant sought to appeal the reality was that the real economic interest in success of the appeal lay with the claimant’s solicitor.
In 1999 the claimant underwent an operation which resulted in serious personal injuries. In 2002 the claimant, then a patient acting through her father as her litigation friend, brought the proceedings claiming damages for negligence.
In 2005 the parties agreed that judgment be entered for the claimant for damages to be assessed on the basis of 95% liability.
At a later stage in 2005 the claimant had regained mental capacity and an order was made that she carry on the proceedings without a litigation friend. The claimant’s legal aid certificate was discharged and the claimant entered into a conditional fee agreement with her solicitors.
However by February 2007 psychiatrists determined that the claimant no longer had mental capacity to conduct her own affairs and could not provide instructions in relation to her ongoing claim. Thus an application was made to the Court of Protection for the appointment of a receiver. The Court of Protection duly made an order, expressly providing that the receiver had authority to conduct the proceedings on the claimant’s behalf. Pursuant to s.66 of the Mental Capacity Act 2005 (“the 2005 Act”), receivers automatically became Court of Protection deputies.
The Claimant sent a copy of the CFA to the Deputy’s assistant and at a later stage wrote to the assistant noting that the case was on a conditional fee basis.
In 2009 the Claimant’s solicitors enquired of the Deputy "Do you feel that a new [CFA] is needed now that you have taken over conduct or do you just assume any contractual relationship that [the claimant] was already in?"
Whilst it appears a draft of a new conditional fee agreement was prepared by the solicitors in March 2009, bearing the date 4 July 2007 neither the solicitors nor the Deputy was able to locate an executed version of the agreement.
The case was eventually settled and approved by the court in 2010 following which the claimant’s solicitors submitted a Bill of Costs. Parts of the Bill of Costs related to the period when the claimant was acting through the Deputy (“the Deputy Costs”) claiming payment on the basis of the CFA, including a 25% success fee.
The Defendant in its points of dispute claimed no costs were recoverable in relation to the Deputy Costs and as a result of the claimant’s mental incapacity; the CFA had automatically terminated prior to the Deputy Costs, leaving the claimant’s solicitors without any retainer.
At first instance the court considered Yonge v Toynbee  1 KB 215, a case in which solicitors had conducted a defence for a client whilst unaware that he had lost mental capacity shortly before the action commenced. The headnote noted:
"Where an authority given to an agent has, without his knowledge, been determined by the death or lunacy of the principal, and, subsequently, the agent has, in the belief that he was acting in pursuance thereof, made a contract or transacted some business, with another person, representing that, in so doing, he was acting on behalf of the principal, the agent is liable, as having impliedly warranted the existence of the authority which he assumed to exercise, to that other person, in respect of damage occasioned to him by reason of the non-existence of that authority."
The court concluded that Yonge v Toynbee was clear authority that the loss of capacity in itself the contractual arrangements and thus it necessary for the Claimants to show that the process that they entered into is one that would show the retainer was maintained.
The court also noted Findley v Barrington Jones  EWHC 90130 (costs), in which the Senior Costs Judge held that the effect of Yonge v Toynbee was that where a claimant lost capacity so that he was no longer able to give instructions, the contract of retainer was at that point frustrated.
Accordingly the court held that the Deputy had not entered into any new contract with the solicitors on behalf of the claimant and had not adopted the CFA. Therefore the claimant’s solicitors would be deprived of their costs and disbursements as set for the Deputy Costs.
The reader is referred to the judgment in respect of a number of issues raised by the claimant’s solicitors which are not relevant to the key issue of capacity and termination.
There were a number of grounds as follows:
1. That the supervening lack of capacity on the part of the claimant did not frustrate or otherwise terminate the CFA (“the Capacity/Frustration Issue”)
2. if the CFA was frustrated, it was adopted by the Deputy following his appointment;
3. Alternatively, the claimant was liable for the solicitors reasonable fees because the services were necessary within the meaning of section 7 of the 2005 Act (which came into force on 1 October 2007) and, prior to that, within the common law concept of "necessaries";
The Capacity /Frustration Issue
There was no dispute that the CFA was valid when executed and covered all work up to February 2007. The High Court considered the following points were considered:
1. In law the supervening mental incapacity of a principal has the effect of terminating the actual authority of his agent (see. in Drew v. Nunn (1879) 4 QBD 661 at 666 ). An agent’s actual authority terminates automatically and immediately upon the mental incapacity of his principal.
2. The High Court noted that whilst an agent’s authority arises from a contract (e.g. a solicitor’s authority under the contract of retainer between the solicitor and his client), whether termination of the principal’s authority by reason of supervening mental incapacity also has the effect of terminating the underlying contract is a further issue.
3. Yonge v. Toynbee considered only the question of the consequences of a solicitor’s lack of authority and did not consider, let alone decide, whether the underlying contract of retainer terminated on the client’s mental incapacity. In Drew v. Nunn there was no contract at all between principal and agent (who were husband and wife).Accordingly the giving of instructions and the consequent authority of a solicitor to act on behalf of a client according to those instructions is central to the contract in question, but the manner and capacity in which those instructions is given is not.
4. The supervening inability to give instructions personally, with the likelihood that a deputy will be appointed, does not change the nature of the contract of retainer, radically or even significantly.
5. The intervening incapacity of a party did not terminate a solicitor’s retainer. Whilst such incapacity did have the effect of removing the authority of the solicitor to act for the duration of that incapacity, such authority can be restored when a deputy is appointed and provides instructions to the solicitors in that capacity, or otherwise if and when the claimant regains capacity.
6. There was no reason, as a matter of authority or legal principle, why an inability to instruct solicitors in the intervening period should be taken to have the effect of immediately ending a solicitor’s retainer.
The defendant sought to argue that the practical effect of the termination of the solicitor’s authority is that the contract of retainer could no longer be performed due to an event outside the control of either party and thus the contract was frustrated and therefore automatically and immediately discharged. They relied upon Findley v Barrington Jones.
The High Court considered the relevant test for frustration as set out in Davis Contractors Ltd. Fareham Urban District Council  AC 696 at 729). The classic statement of Lord Radcliffe
“Frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract…..".
The High Court applied the five propositions set out by Bingham LJ In J. Lauriitzen AS v. Wijsmuller BV (The Super Servant Two)  1 Lloyd’s Rep 1 and held that termination of a solicitor’s authority by reason of mental incapacity did not, in itself and in the usual case, frustrate the underlying contract of retainer. It was clear that a retainer such as the CFA in that case, entered into with a person known to have fluctuating capacity, was not frustrated by the loss of such capacity.
The reader is referred to the judgment for the various grounds but it was observed by Mr Justice Phillips that it would give rise to an unjust and unreasonable result to treat a retainer as terminated by reason of a fleeting period of incapacity. To do so would be contrary to the principle that the doctrine of frustration should be confined within narrow limits and could not be lightly invoked: it would result in the frequent termination of retainers (on the basis of arguments advanced by a non-party to the contract, such as the defendant) where neither party wished that to be the outcome and neither saw any difficulty in continuing to perform their obligations.
The 2005 Act
As to whether the solicitors were able to rely on the 2005 Act the High Court noted:
1. If the claimant had herself instructed the directly in order to obtain their necessary services, the solicitors would (in the absence of a valid CFA) have been entitled to recover reasonable fees for those services.
2. Section 7 of the 2005 Act is designed to protect persons who provide necessary good and services directly to persons lacking capacity, including day to day matters which a deputy may well not be able to deal with on a patient’s behalf.
3. In this case the solicitors were not instructed directly by the claimant after March 2007, but by or through the Deputy, in those circumstances, even in the absence of a valid CFA, the question of "capacity" simply does not arise and s.7 of the Mental Capacity Act can have no application.
The Claimant’s appeal was allowed with a consequence that the defendant’s application to strike out the Deputy Costs was dismissed.
This is a very useful decision and one no doubt welcomed by solicitors. A number of points can be made:
1. The normal rule (see Imperial Loan Co. v Stone  1QB 599) is that contracts entered into by an incapacitated person are not void but only voidable, and only then if that person can show he was, at the time of contracting, incapable of knowing what he was doing, and that the other party was aware of the incapacity: see Bowstead & Reynolds on Agency 19th edition, paragraph 2-009.
2. As a contract is not void even if one party lacked mental capacity when it was made, subsequent mental incapacity can not in itself automatically terminate the contract as a matter of operation of law.
3. The High Court has drawn a distinction between the authority of an agent (the solicitor) where a party is incapacitated and the underlying nature of the contract of retainer. The giving of instructions and the consequent authority of a solicitor to act on behalf of a client according to those instructions is central to the contract in question, however, the manner and capacity in which those instructions is given is not.
4. Incapacity could have the effect of removing the authority of the solicitor to act for the duration of such incapacity. However, such authority can be restored when for example a deputy is appointed and provides instructions to the solicitors, or otherwise if and when the client regains capacity.