Relief from sanctions granted despite 6-year delay in giving notice of funding

Prior to 1 April 2013, a party wishing to recover an additional liability from a paying party was required to comply with paragraph 9.3 of the practice direction on pre-action protocol, which provided:

“Where a party enters into a funding arrangement within the meaning of rule 43.2(1)(k), that party must inform the other parties about this arrangement as soon as possible and in any event either within seven days of entering into the funding arrangement concerned or, where a claimant enters into a funding arrangement before sending a letter before claim, in the letter before claim.”

Failure to comply with the practice direction led to the imposition of the sanction in CPR rule 44.3B(1); the disallowance of any additional liability for the period of default.

Many parties innocently interpreted the practice direction to mean that notification of a funding arrangement could be delayed until a letter before claim was served without incurring a sanction. Indeed, that interpretation was supported by the authors of The White Book at the time.

That interpretation was however rejected by Court of Appeal in Springer v University Hospitals of Leicester NHS Trust [2018] EWCA Civ 436, which clarified that notification had to be given ‘as soon as possible’. A party that fails to comply with the practice direction is required to seek relief from sanctions, where the approach will be the familiar three stage Denton test.

Springer was a case where the paying party was simply unaware of the existence of any additional liabilities for several years until notice was given in a letter before action. The breach was serious and significant and there was no good reason for it. Central to the decision to refuse relief from sanctions was the prejudice to the paying party in a lost opportunity to act in a different way, which it may have done had it been aware of the existence of the additional liabilities.

The receiving party in EXN v East Lancashire Hospitals NHS Trust & Anor [2022] EWHC 872 (QB) ended up in a similar situation; no notification of the additional liabilities was given until the letter before action was served some 6 years after the funding arrangement had been entered into. Like Springer, the breach was serious and significant and there was no good reason for it. However, where this decision can be distinguished from Springer was in the lack of prejudice to the paying party.

In EXN, the paying party had enquired about the method of funding the claim following a request for disclosure of medical records, and they were informed that the claim was being funded by a conditional fee agreement. Although that statement was insufficient notification because it failed to mention the existence of a success fee, in granting relief from sanctions the Court found that the only reason for the original enquiry about funding was to assess a vulnerability to paying a success fee. The paying party did not seek to clarify whether the funding arrangement provided for a success fee, and it did not file any evidence alleging that it had suffered any prejudice.

Although it has been 9 years since recoverable additional liabilities were abolished for most claims, some serious personal injury and clinical negligence claims can take many years to resolve and it might be that a paying party will be silent on any breach until there is a costs assessment; in EXN the funding arrangement was entered into in 2012, but the application for relief from sanctions was not heard July 2021 – some 7 months after the damages were agreed. This decision also demonstrates that even a clear breach of the practice direction may not be enough to deprive a receiving party of additional liabilities, if the paying party fails to demonstrate that they have suffered any prejudice.

Given that in both Springer and EXN, the reason for the breach was an innocent and common misinterpretation of a practice direction, there will no doubt still be many claims where this issue could arise.

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