New rules apply when referring PI clients to your private client team

Many PI lawyers refer their clients to their firms’ Private Client team where members of the same firm will then set up a PI trust and act as professional trustee.

In a recent judgment, the High Court has raised concerns about safeguarding the interests of clients who recover large damages awards and then set up a PI trust with the same firm of solicitors acting as professional trustees.

These issues were considered in the case of OH –v- Craven [2016] EWHC 3146 (QB), which was heard in November last year.

Background

The Court was asked to determine two applications to the Court Funds Office for a significant payment out to two different PI trusts.

A – An adult with capacity setting up a PI trust

A, was a young adult who was involved in a serious cycling accident which left him with limited mobility, severe communication difficulties and some cognitive impairment. It was assumed by his solicitors that he lacked capacity to manage his finances and therefore, the settlement figure of nearly £2.5million was approved by the court and paid into the Court Funds Office (CFO).

An application was submitted to appoint a deputy and at that stage a capacity expert advised that A did have sufficient capacity to manage his finances.

A then instructed his PI solicitors to set up a PI trust in order to retain his entitlement to means tested benefits and provide support with the financial management of his settlement. He appointed a trust corporation formed by his litigation solicitors as the only trustees of the PI trust and he understood that his solicitors would charge fees for acting as trustees.

He then applied to the Court to have the funds paid from the CFO to his trustees.

O – A child whose litigation friend sets up a PI trust

O, was involved in a traffic accident when he was 10 years-old and sustained a head injury and subsequently amputation of a limb. A claim was brought on his behalf by his mother as his litigation friend and the claim settled for just under £2 million. The award was paid into the CFO because O was still a minor.

There was no evidence to suggest that O would lack capacity when he reached the age of 18 and it was therefore agreed with his litigation friend that a PI trust should be set up and that the trustees should be solicitors from the same law firm that had dealt with the claim.

O’s litigation friend then made an application to the court for the money held by the CFO to be paid out to the trust.

Concerns of the judge

In both cases, the judge sensed that there was a surprise from the applicants that the court would do any more than “rubber stamp” the applications.

The judge was concerned that large funds in the care of the court should be paid-out to trusts with professional trustees who will manage the trust for profit.

The judge was also concerned that no real inquiry had taken place as to whether the applicant had made a free, informed decision and that an independent decision making process had not been demonstrated to the court.

The focus of the judgment was that the litigation solicitors will have established a relationship with the claimant/litigation friend who has relied upon their expert advice for some time. However, if the client is being recommended to use the same firm as trustees, the firm has a conflict of interest because they stand to profit from the arrangement.

The litigation solicitor must rebut the presumption of undue influence.

The judge referred to the fact that these cases often involve vulnerable clients.

Judgment

In determining how the solicitor can rebut the presumption of undue influence, the judge ruled as follows:

1. Where the value of the settlement is over £1 million and the litigation firm proposes a PI trust with their in-house corporation acting as the trustees, a separate partner in the firm should instruct Chancery Counsel of not less than five years call to advise the client of the advantages and disadvantages of the proposed trust and the trustee arrangements.

2.The cost of the opinion should be paid for by the firm.Counsel’s opinion should be put in as evidence:

• at the settlement approval hearing, if it is proposed that the award should be paid to trustees, or
• on any application for payment out of funds held by the CFO.

3. Where the trust fund exceeds (say) £3 million, serious thought should be given to appointing a family member as a “protector” whose consent would be required:

• To approve any change in the remuneration rates of the trustees,
• To approve the remuneration of any investment advisors when they are engaged,
• To exercise any power which would deprive the beneficiary of income or capital that they would normally be entitled to.

In the case of A, the judge communicated with A and gave him independent advice as to his options. A still wanted to appoint his solicitors’ trust corporation as trustees and therefore the court approved the payment from the CFO to the trustees.

In the case of O, the judge said that he was not satisfied that the litigation friend had been able to make a free choice and that the procedure outlined above should be followed and then the matter restored for directions.

The court must be satisfied that the decision to appoint the same firm of solicitors as professional trustees is untainted by undue influence.

Comment

The effect of this judgment is to ensure that clients have an opportunity to review all available options and the terms of the trust and the likely fees of the professional trustees. The client should not be transferred from one legal team to another within the same firm without having a chance to consider other options.

Currently, if all the trustees are professional trustees, there is no requirement to send bills to the client and therefore the fees charged by professional trustees are unchecked.

The value limits: the court gives an example of £3 million without specifying that this is the definitive limit. It is therefore left to practitioners to decide when these recommendations should be followed.

Periodical payments: Does the value of the trust fund include the capitalised value of periodical payments? I think that this will depend on whether the PPs are used to cover expenditure each year. The court refers to invested capital so it appears that PPs can be ignored for the purposes of valuing the trust fund.

Does this apply to all professional trustees? The judgment only refers to in-house trust corporations, but it would seem reasonable to infer that the court would expect the recommendations to be followed where all the trustees are professional trustees from the firm that dealt with the litigation.

What is counsel’s advice likely to cover? The judge expressed some concern that many PI trust deeds include inappropriate trustee powers. The judge also described the pros and cons of depositing the award with the CFO instead of setting up a trust. There is an argument that the CFO performs the role of professional trustee free of professional fees. Clients should certainly be made aware of this option. The judge also states that there may be many other trust corporations who could act as professional trustees.

In my view, counsel’s advice is likely to cover:

• A review of the terms of the proposed trust;
• A review of the expertise of the proposed trustees;
• A review of the estimated fees of the proposed trustees over the life of the trust;
• A review of other available types of trust and options;
• A comparison between the services provided by the CFO and the operation of a PI trust;
•  A recommendation to the client to make enquiries as to the terms and fees of other companies providing services as professional trustees.

What will counsel’s advice cost? I have made enquiries with one set of Chancery chambers. They estimated that the cost of such an opinion for a simple trust, by a junior level counsel would be around £1,000 plus VAT. However, if the trust is more complex this could go up to £3,000 plus VAT. Of course all chambers will have to be flexible and competitive in this emerging area. This sum cannot be charged to the client and therefore cannot be claimed from the defendants.

Protector: The role of the protector would offer the client some independent scrutiny of the professional fees charged to the trust. An alternative would be for the client or another lay person to be appointed as co-trustee.

Deputies: The judge did not mention that these rules should also apply to the appointment of deputies. In my view, deputyship cases do not present the same areas of concern for the following reasons:

• If a client lacks mental capacity, the only option is deputyship. Therefore, there are not a variety of options to consider, and
• There are a lot more safeguards in place in deputyship proceedings: the appointment of the deputy is made by the court, the actions of the deputy are supervised by the Office of the Public Guardian and the fees of the deputy are audited by the court.

This article first appeared in PI Focus; April 2017