Proportionality – a common sense decision from Master Rowley

In the case of BNM v MGN Limited [2016] EWHC B13 (costs) the Senior Costs Judge applied the new test of proportionality to post Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) additional liabilities. The claim was for defamation and therefore the additional liabilities (despite being incurred post 1 April 2013) were recoverable inter partes (additional liabilities for defamation and mesothelioma cases remain recoverable inter partes post LASPO).

In BNM the Senior Costs Judge based his decision on the fact that pursuant to CPR 44.3(7) the old test of proportionality was not preserved for additional liabilities incurred post 1 April 2013. The key paragraphs from BNM on this point are as follows:

28 – It seems to me that the intention was that the rules as to the recoverability of additional liabilities would be preserved in relation to those additional liabilities which remain recoverable after 1 April 2013. However, the old test of proportionality was not preserved in relation to those additional liabilities. Had that been intended it could have been achieved quite easily by a further exception in CPR 44.3(7).

31 – A consequence of the reduction of the base costs to a proportionate figure will be that the success fee, a percentage of those base costs, also reduces. It would be absurd and unworkable to apply the new test of proportionality to the base costs, but the old test of proportionality to the success fee.

32 – Ring fencing and excluding additional liabilities from the new test of proportionality would be a significant hindrance on the court’s ability to comply with its obligation under CPR 44.3(2)(a) to allow only those costs which are proportionate.

In the case of King v Basildon & Thurrock University Hospitals NHS Foundation Trust [2016] EWHC B32 (Costs) Master Rowley reached a difference conclusion, albeit the additional liabilities in this care were incurred pre 1 April 2013 i.e. pre LASPO. Master Rowley’s decision was primarily based on the definition of costs in the CPR post 1 April 2013. The useful paragraphs of Master Rowley’s judgment to consider are as follows:

23 – The key phrase in the new proportionality test in 44.3 (5) states that “costs incurred are proportionate if they bear a reasonable relationship to ….”. The word “costs” as now defined refers to profit costs and disbursements but does not include additional liabilities. Given that the proportionality test in 44.3 (5) only applies to work carried out since that definition of costs has come into being, the obvious interpretation is that it only relates to the base costs of a CFA. It is not clear to me why additional liabilities should necessarily be caught by a test which is based on a definition recast specifically to exclude such liabilities.

24 – In my view, treating the word “costs” as only referring to base costs fits in with the provisions of Part 3 in relation to costs budgeting which were also brought into the CPR in April 2013. For example, in rule 3.15 the court “may manage costs to be incurred by any party in any proceedings” and in doing so will make a costs management order. Such an order will record the extent to which budgets are agreed between the parties and, to the extent they are not agreed, will record the court’s approval after making appropriate revisions. “The court will thereafter control the parties’ budgets in respect of recoverable costs”. Precedent H, which sets out the costs to be managed, expressly excludes any additional liabilities that may still be recoverable between the parties. Consequently, the only interpretation of the recoverable costs which the costs management order is controlling, is that they are the base costs of a CFA as set out in the Precedent H. The court is required to set a budget which is specifically described as allowing reasonable and proportionate costs notwithstanding that it excludes additional liabilities.

25 – In my judgment, being consistent with the costs management arrangements and avoiding bizarre outcomes in bills which involve both proportionality tests, point towards the rules being interpreted as continuing to require the court to assess the base costs and additional liabilities separately.

 26 – Furthermore, the purpose of the Jackson reforms in initiating a sea change could have resulted in Parliament disallowing the recoverability of success fee and ATE premiums from 1 April 2013. But it did not do so and has allowed for the run-off of recoverable success fees and premiums in the main and the continued recoverability of success fees or premiums in particular instances. It seems to me that the fact that additional liabilities are still allowed for by the provisions of CPR rule 48.1 simply means that they remain in existence. It does not mean that they have to be assessed in the aggregate with the base fees using a test which has no recognition of additional liabilities. This is particularly so when aggregation will render those additional liabilities effectively irrecoverable in practice”.

The approach of Master Rowley has recently been followed by Master Brown in the case of Murrells, Estate of v Cambridge University NHS Foundation Trust [2017] EWHC B2 (Costs).

The following are useful extracts from the Judgment:

33(7) – …It seems likely that they will have entered into such arrangements in the reasonable expectation that the additional liabilities would continue to be recoverable as they were pre-LASPO. To apply the new test to additional liabilities in the way contended for would, however, require many litigants to submit to a substantial, if not complete, disallowance of their additional liabilities as against the other party or parties to the litigation, while at the same time the liability to pay an insurer or the lawyers the additional liability would be preserved. If that were right, it would inevitably lead to many litigants, including – it might be observed – victims of mesothelioma, having to give up deserving claims or defences. I agree with Master Rowley: in these circumstances, the defendant’s contention cannot be reconciled with transitional provisions and the clear will of Parliament. The intention must have been to provide, at the very least, an orderly retreat from the old funding scheme.

34 – In the circumstances, I respectfully disagree with the decision of Master Gordon-Saker in BNM as to the application of the new proportionality test to additional liabilities and therefore also as to the need to aggregate base costs with additional liabilities.

The case of BNM is currently on its way to the Court of Appeal, with a hearing date expected for October 2017. Hopefully, this will bring some clarity to the position, but until then expect lots of costs litigation over the point. Hopefully, the Court of Appeal will not simply address the additional liabilities in BNM, but also address the position of pre-LASPO additional liabilities in the context of the King case.

Personally, I think the position adopted by the Senior Costs Judge represents a drafting error in relation to CPR 44.3(7). The intention of LASPO in my view was very clear:

  1. Additional liability incepted pre 1 April 2013 = recoverable inter partes and not subject to the new test of proportionality
  2. Additional liability incepted post 1 April 2013 = not recoverable inter partes
  3. Additional liability (defamation and mesothelioma cases) incepted post 1 April 2013 = recoverable inter partes and not subject to new test of proportionality

Surely, it was never the intention for additional liabilities at 1 and 3 above to be recoverable only for them to be crippled by the new test of proportionality (resulting in a non-recovery)?  Surely, it was never the intention to specifically ‘carve out’ defamation and mesothelioma claims only for the additional liabilities to then be squashed on detailed assessment due to the new test of proportionality? This is particularly relevant in defamation cases where costs can easily dwarf damages.

What all this does show is the problems that can be caused when even minor changes are made to the CPR. I say this in the context of a significant extension of fixed costs on the horizon. There are fixed costs disputes every day at the moment in relation to portal cases and fast track injury cases where the numbers in dispute are very small. Where the numbers in dispute are large i.e. in multi-track fixed costs cases then this will undoubtedly cause satellite litigation, for example arguments about location, what stage the case settled and disbursements.

LJ Jackson thinks that fixed costs will bring certainly, but if Defendants (paying parties) are prepared to exploit a ‘gap in the rules’ as highlighted in the BNM case then expect Costs War 2 post implementation of fixed fees! The Courts are going to be busier than ever, which would be contrary to what LJ Jackson and the governments wants.

LJ Jackson maybe about to score an ‘own goal’ with his planned extension of fixed fees……

This Blog was prepared by Andrew McAulay, who is a Partner and the Head of the Costs and Litigation Funding Team at Clarion. He can be contacted on andrew.mcaulay@clarionsolicitors.com or on 0113 336 3334.

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Should the additional liabilities be included in the budget to allow the proportionality test to be applied correctly?

Following the case of BNM v MGN Ltd (3rd June 2016) where it was found that the after the event insurance should be taken into account when assessing whether the costs were reasonable and proportionate, should the additional liabilities now be included in the budget to ensure that the proportionality test is applied properly at the budget stage?

According to the recent decision in  Various Claimants v MGN Ltd (21st July 2016) the Defendant accepted that under CPR, the Claimants are not obliged to disclose the amount of the success fee or ATE insurance as this could reveal the prospects of success. However, they referred to the case of  BNM v MGN Ltd (3rd June 2016) and argued that to enable the court to assess the reasonableness of the budget and apply the proportionality test then the additional liabilities now needed to be included in the budget.

Despite the court recognising that by taking into account the additional liabilities this allows a prospective view of proportionality, rather than a retrospective view, thus fulfilling the courts costs management duties, the court disagreed with the Defendant, referring to the provisions within the CPR, specifically the precedent H form and the precedent H guidance notes, concluding as follows:

  • I do not consider that the apparent change in the approach to proportionality on assessments (if there is one) means that there should be a change to the approach on the occasion of budgeting. The reasons for this are based on both the provisions of the rules and the Practice Direction and on the practicalities.
  • The provisions for costs budgeting are to be found in Part II of CPR 3. The procedures are dealt with in Practice Direction 3E. Paragraph 2(a) requires the court to have regard to the overriding objective and paragraph 6(a) provides:

“Unless the court otherwise orders, a budget must be in the form of Precedent H annexed to this Practice Direction.”

  • The first page of that precedent contains a summary which is amplified in the following pages. Below the summaries of costs under various headings there is included the following wording:

“This estimate excludes VAT (if applicable), success fees and ATE insurance premiums (if applicable), costs of detailed assessment, costs of any appeals, costs of enforcing any judgment and [complete as appropriate]”

Therefore, in light of the emerging case law on proportionality, the approach to the inclusion of additional liabilities remain the same and should be excluded from the precedent H.

Sue Fox is the Head of Costs Budgeting in the Costs and Litigation Funding department at Clarion Solicitors. You can contact her at sue.fox@clarionsolicitors.com and 0113 336 3389, or the Clarion Costs Team on 0113 246 0622.

Coventry v Lawrence – The Outcome

It’s a case that everyone has being waiting for and it proved to be fairly anti-climatic in the end. For those who want to refresh their memories we wrote an extensive article on the background of the Coventry case which you can read by clicking here.

The full Judgment of Coventry -v- Lawrence [2015] UKSC 50 was published yesterday confirmed that nothing will change and that the recovery of additional liabilities did not breach the European Convention on Human Rights. The Supreme Court commented as follows:

“The scheme as a whole was a rational and coherent scheme for providing access to justice to those to whom it would probably otherwise have been denied. It was subject to certain safeguards. The government was entitled to a considerable area of discretionary judgment in choosing the scheme that it considered would strike the right balance between the interests of appellants and respondents whilst at the same time securing access to justice to those who would previously have qualified for legal aid. It had to find a solution to the problem created by the withdrawal of legal aid. The government has now produced three different schemes. Each was produced after wide consultation. Each has generated considerable criticism. As already indicated, once civil legal aid was constrained to the extent that it was in 1999, it became impossible to come up with a solution which would meet with universal approval. This is relevant to the question whether the 1999 Act scheme struck a fair balance between the interests of different litigants.”

This should put to bed any arguments over the recoverability of any success fee / ATE Premium on pre-Jackson cases. The outcome shouldn’t come as a big surprise to lawyers. Notably Lord Mance stated as follows;

In the above circumstances, I reject the respondents’ challenge to the system of costs whereby they are potentially liable in respect of success fees agreed and ATE premium incurred by the appellants. The position must, as Lord Neuberger and Lord Dyson have said, be considered as a whole. The system had a legitimate aim, the present is on its face an extreme and unusual case. It is difficult to conceive of any solution which would cater for such cases, without imperilling the whole system. The system has been repeatedly endorsed by domestic courts over a decade. Litigants and their lawyers have justifiably relied upon its validity.

The Judgment prevents any complications for Claimants seeking to recover a success fee and also prevents a hefty bill for the UK government who could have found themselves having to remedy the success fees and ATE Premiums already paid and to be paid as part of on-going pre-Jackson cases.

The Supreme Court invariably made the right decision but what Coventry has done is to place in everybody’s mind the disproportionate nature of the old costs regime and only seeks to reinforce the importance of costs management (and perhaps even the extension of fixed fees) in the years to come.  I end this article the same as I ended my previous analysis of this case and it is one of Lord Neuberger’s original comments that has stuck with me the most;

“The fact that it can cost two citizens £400,000 in legal fees and disbursements to establish and enforce their right to live in peace in their home is on any view highly regrettable. The point is reinforced when one takes into account the value of their home,

which is less than £300,000 (coupled with the effect of the nuisance on that value,

£74,000 at the most)

[…]

These figures are very disturbing.”

Regardless of the judgment yesterday, one thing is clear, the figures are very disturbing indeed.

Do you agree with the Supreme Court’s decision? Let us know in the comments below.

Coventry –v- Lawrence – The Immediate Aftermath and why Additional Liabilities on pre-Jackson cases are still recoverable

Most lawyers will likely be familiar with the unexpected judgment provided by the Supreme Court in the case of Coventry and others v Lawrence and another (No 2) [2014] UKSC 46 concerning the recovery of success fees and ATE premiums. The Supreme Court found that the recovery of additional liabilities from defendants may breach the European Convention on Human Rights. The ramifications are potentially both huge and costly.

Before we consider what might happen it is useful to consider what has already happened.

Background

At its simplest the Coventry case was a claim for nuisance by the owners of a bungalow against the occupiers of a stadium 850 yards away which was used for motor racing and resultantly caused lots of noise. The Claimant’s initially won the claim then lost at the Court of Appeal before winning in the Supreme Court where an injunction against the defendants and damages totalling £20,700.00 were ordered. The Claimants got an order that 60% of their costs should be paid by the defendants.

This led to a second issue to be considered in relation to the level of costs sought. The Supreme Court recorded that the claimants had base courts that amounted to £398,000.00 together with a 100% success fee and an ATE premium of circa £350,000.00. In essence the total costs claimed exceeded £1,000,000.00 and the defendant would have been liable for 60% of the costs claimed which would amount to over £640,000.00, 32 times larger than the damages awarded. This was before appeal costs were even taken into consideration.

The lead judgment of Lord Neuberger summed up the all of costs claimed as being “disturbing” and “highly regrettable”. The case in this respect was clearly highly unusual.

The Arguments – For and Against

On the day of the hearing it was argued for the defendants before the Supreme Court that the extent of their costs liability infringed the defendants’ rights under the European Convention on Human Rights (ECHR) to both a fair trial under Article 6, and to peaceful enjoyment of possessions under Article 1 to the 1st protocol. The defendants specifically referred to the judgments of MGN Limited –v- United Kingdom (2011) and Dombo Beheer BV v Netherlands (1994) in that article 6 would be infringed if the court required the defendants to pay 60% of the success fee and the ATE Premium.

In MGN v UK, the Strasbourg Court held that there was a violation of article 10 (freedom of expression) in respect of the payment of additional liabilities. In this case, however, the violation occurred given the wealth of Naomi Campbell (the Claimant in the original claim against MGN) who it was argued did not need a CFA as she could have utilised alternative means of funding. It was indeed noted by the Court that the law had a legitimate aim of achieving the widest public access to legal services for civil litigation. It was found in this case that the requirement to pay success fees was disproportionate. The Supreme Court commented on Coventry that “in the present case, by contrast, article 10 does not apply and it is apparent that the [claimants] needed the protection of a conditional fee agreement and recoverable ATE premium in order to be able to bring their claim.”

The case of Dombo Beheer BV v Netherlands dealt with the issue of article 6 specifically. In the case of Dombo Beheer BV it effectively provided that one side in a trial should not have an unfair advantage. The Supreme Court stated that it was “by no means clear that the general observation [held in Dombo Beheer BV] would necessarily support the defendants’ argument.” If the claimants did not have access to legal representation by way of a CFA then arguably the claimants right to a fair trial could itself be undermined.

The Supreme Court went on to refer to the case of Callery v Gray [2002] where the House of Lords “effectively confirmed that, subject to reasonableness, success fees and ATE premiums were recoverable”. It was further noted that in Campbell v MGN Ltd (No 2) [2005] that whilst the House of Lords determined that the recovery of additional liabilities (in line with the 1999 Act costs recovery regime) did not infringe article 10, the Strasbourg Court found that it did. The Supreme Court therefore found that the issue of whether the 1999 Act costs regime and specifically the right to recover any success fee and ATE premium from the unsuccessful defendant infringed the EHCR should be open for the Supreme Court to reconsider.

The case was adjourned in order to allow the UK government to present its case to the Court before any ruling was made.

The main counter argument will be based around the principle of ‘Access to Justice’.  Indeed the Supreme Court refers to this explicitly and even accepted that the Claimants needed a Conditional Fee Agreement which provided for the recovery of a success fee and ATE premium in order to bring the claim.

The Supreme Court’s key issue appears to be that the Court has no way in which to reign in any additional liabilities claimed. Whilst the court can state that the base costs are disproportionate and too high the same cannot be said for the success fee or the ATE premium. This is because the CPR and 1999 Act have the effect of requiring the defendants to pay any success fee and ATE premium in full, subject to the same having been reasonable but irrespective of proportionality. Indeed the Costs Practice Direction (CPD) 11.5 further states that “in deciding whether the costs claimed are reasonable and (on a standard basis assessment) proportionate, the court will consider the amount of any additional liability separately from the base costs”. CPD 11.9 adds further to this that “a percentage increase will not be reduced simply on the ground that, when added to base costs which are reasonable and (where relevant) proportionate, the total appears disproportionate.” It certainly seems that far from the tentative arguments put forward by the defendants resonating with Lord Neuberger it is in fact the astonishing level of “very disturbing” costs claimed that struck a chord. It is important to note at this stage that the level of any success fee (where the success fee isn’t fixed) / ATE premium can be reduced / challenged at assessment.

We are faced with the question of whether the recoverability of additional liabilities really ever solved the issue of ‘access to justice’ for all? The fact that Woolf’s reforms were replaced by the Jackson reforms would seem to indicate that Woolf’s reforms were not perfect. Clearly additional liabilities formed part of an attractive proposition to lawyers allowing them to take on cases which they may not have otherwise done so but it equally lead to some exuberant cost claims. It is accepted that many claims are no longer as lucrative as they once were with profit margins dropping as a result of Jackson’s reforms. Indeed there is now an on-going debate about whether Jackson is actually undermining access to justice, granted this is another matter but it is interrelated in the greater context of Coventry, that been would a declaration of incompatibility be at logger heads with access to justice? Would the inability to recover a success and ATE Premium have prevented the claimants from bringing their claim?

What happens next?

It is unclear what will happen next and what any longstanding implications may be.

On the most simplistic level a seven judge Supreme Court will hear the matter on February 9th and 10th 2015;  the ‘costs D-day’.

Any decision would only apply to CFAs entered into before 1 April 2013. If it is determined that the relevant UK legislation was incompatible with the ECHR and / or Article 1 First Protocol then the government could face significant claims by defendants for the return of additional liabilities that they were unlawfully forced to pay. Exact figures aren’t know but its feeling would no doubt be felt at next year’s general elections as the next government could be faced with a legal bill running into billions of pounds.

The Human Rights Act 1998 section 4 (6) states that a declaration of incompatibility does not “affect the validity, continuing operation or enforcement of the provision in respect of which it is given and is not binding on the parties to the proceedings in which it is made.” Significantly, it appears that a declaration of incompatibility would have no material effect on the legality of the recoverability of additional liabilities for pre-Jackson CFAs.

What happens to the recovery of additional liabilities now?

For post 1 April 2013 CFAs there will be no change, as post-LASPO retainers abolished the recoverability of additional liabilities from a defendant. There may, however, be potential issues relating to pre 31 March 2013 CFAs.

I have seen defendants already seeking to rely upon the uncertainty of the Coventry case to argue that assessments should be adjourned until the Supreme Court’s ruling is given. There is nothing to support that the court would adjourn any assessment hearing but equally it is not 100% clear that the court wouldn’t order an adjournment.

It is my opinion that any additional liabilities will continue to be recoverable in the interim period. There is existing law for the court to apply and even in the event that the recovery of additional liabilities is found to be unlawful any remedy would be against the UK government so the question will be why should a defendant refuse to pay?

A paying party may wish to reference Coventry to create uncertainty and risk. In claims which carry an unfixed success fee or a high value ATE Premium it could potentially lead to some claimants taking a ‘deal’ or discount but I simply cannot see the court taking the position that an assessment should be adjourned, particularly given that the wording of the Human Rights Act 1998 section 4 (6) seems to effectively guarantee the recovery of additional liabilities even if the same has to remedied by the government.

Conclusion

It is regrettable that the Supreme Court is looking at this issue now. Jackson has sought in many respects to deal with the issues that the Supreme Court has found to be so glaring with the abolishment of the recovery of success fees and ATE premiums from defendants and the introduction of costs budgeting and the new stricter test for proportionality.

There is already talk of extending fixed costs to claims up to £250,000.00 (which in my opinion in turn opens the doors for fixed costs to be extended to all claims) and it is clear that there is an agenda to stamp out excessive costs claims. It is just a shame that this is now happening ‘after the event’.

I would welcome people to share their own experiences with Coventry, have you found defendants referencing the case and are you concerned about the potential retrospective abolishment of the recovery of additional liabilities?

As the ‘costs D-day’ draws closer I thought this excerpt from Lord Neuberger’s judgment drives home why the Supreme Court is considering the issue of the recoverability of additional liabilities;

“The fact that it can cost two citizens £400,000 in legal fees and disbursements to establish and enforce their right to live in peace in their home is on any view highly regrettable. The point is reinforced when one takes into account the value of their home,

which is less than £300,000 (coupled with the effect of the nuisance on that value,

£74,000 at the most)

[…]

These figures are very disturbing.”

If you have any questions or queries in relation to this blog please contact Sean Linley (sean.linley@clarionsolicitors.com and 0113 336 3327) or the Clarion Costs Team on 0113 2460622.