The Court of Appeal has recently handed down its Judgment in the case of Chapelgate Credit Opportunity Master Fund Limited -v- Money and Others , which was an eagerly awaited decision for litigation funders. The outcome of the case is as follows:
The Arkin Cap should be considered when determining costs, but it is not binding on the Courts.
“……..I do not consider that the Arkin approach represents a binding rule. Judges, as it seems to me, retain a discretion and, depending on the facts, may consider it appropriate to take into account matters other than the extent of the funder’s funding and not to limit the funder’s liability to the amount of that funding”
For those unfamiliar with litigation funding and the Arkin Cap, this arises out of the Court of Appeal decision in Arkin -v- Borchard Lines Limited 2005. In that case, a company which had provided third party funding for an unsuccessful claim was ordered to pay the costs of the winning party, but only to the extent of the funding provided. The Arkin Cap has been a principle which has been regularly applied by the Courts since. The decision in Chapelgate will cause uncertainty for litigation funders, in a world which has significantly evolved since 2005.
The Judgment increases the requirement for litigation funders to properly engage costs lawyers. Funders should be engaging costs lawyers to scrutinise a law firm’s legal budget when they are applying for funding. Costs lawyers should also be retained to monitor costs versus budget (including the opponent’s costs) and to advise on costs management orders.
Costs management orders provide more certainty on detailed assessment (unless the order for costs is made on the indemnity basis). Such measures will ensure that the funder has the maximum control possible on both the costs of the firm they are funding and the opponent’s legal costs; the latter being important in the event that an adverse order for costs is made.
This blog was written by Andrew McAulay who is a Partner at Clarion and the Head of the Costs and Litigation Funding Team. Andrew can be contacted on 0113 336 3334 or at firstname.lastname@example.org
I posted a blog at the end of June about the case of MXX v United Lincolnshire NHS Trust (2018) (please follow this link to read the blog https://clarionlegalcosts.com/2019/06/25/ensure-consistency-between-your-costs-budget-and-bill-of-costs/).
In the Judgment of Master Rowley, there are some interesting points which I felt were appropriate to cite and share through this separate blog. Those points are as follows:
Master Rowley found that the inflated incurred costs amounted to improper conduct and said the following at paragraphs 57 and 58:
“57. The need to comply with the indemnity principle must be on page 1 of any introduction to the law of costs. It is fundamental throughout the issues regarding what sums can be claimed from one party by another. It is, or should be, engrained in everyone dealing with solicitor’s costs. Whether it is a detailed bill of costs that is being produced, a summary assessment schedule or even simply a breakdown in a letter being provided to the opponent, it is imperative that the costs set out as being payable by the opponent do not exceed the sums payable by the client to their solicitor. The case of Harold v Smith (1850) 5 H. & N. 381 is more than 150 years old but it remains correct that the sum claimed should not be a punishment to an opponent nor a bonus to the client (or solicitor) which is the effect of claiming more costs from the opponent than are payable by the client.
- I do not accept that the statement of truth for Precedent H is intended to be a composite statement or one akin to signing an estimate. If that was so, in my Judgement, the Statement would simply say that the document was a fair and accurate estimate of the costs which it would be reasonable and proportionate for the client to incur in litigation. But that is not what it says. It specifically refers to incurred and estimated costs separately and it seems to me that a solicitor signing a Statement of Truth has to consider whether the incurred costs figure is fair and accurate separately from whether the figures for estimated costs are fair and accurate. There is absolutely no reason why the incurred costs figure should not be accurate. There are many reasons to understand that the estimated costs figure is no more than educated guesswork. The change in the hourly rates for future work identified by Irwin Mitchell is one of those reasons.”
The importance of the indemnity principle (which I have blogged on previously and you can find here https://clarionlegalcosts.com/2019/02/12/the-indemnity-principle-what-is-it-is-it-important/) is clearly set out above at paragraph 57 of the Judgment.
At paragraph 58, it is clear that the signature of a Precedent H should not be taken lightly, it is a statement of truth and is not akin to signing an estimate, the signature on the Precedent H is not intended to be a composite statement. Paragraph 58 also indicates that the courts do not expect the incurred costs to be calculated incorrectly because of the inclusion of any incorrect hourly rate/s. However, the courts would be open to the use of composite rates for estimated costs given that hourly rates could clearly change (both upwards and downwards) over time. If you consider this applies to any budget that you are preparing, then make this clear in the assumptions to your budget, this will provide you with protection on detailed assessment and ensure transparency with the court and your opponent.
In the Judgment, Master Rowley did not find that the significant difference between the costs claimed in the bill and those in the costs budget (144-147 hours) amounted to improper conduct. Master Rowley said the following:
“61. Similarly, I do not think that the claimant’s approach to the amount of hours claimed in the budget and subsequently in the bill founds any significant criticism. My understanding of the limit of 1% of the total budget for the preparation of the precedent H was originally allowed for on the basis that clients would have been billed for the incurred costs by that point and so relatively little work would be needed to consider the incurred costs. If that is correct, it takes no account of matters dealt with under contingency arrangements such as a CFA when no bill will have been rendered by the time the Precedent H is prepared.
- It seems to me to be unrealistic to expect a party to vet the time recorded on a line by line basis in the manner suggested by the Defendant here. The bill of costs has taken nearly 100 hours to prepare and that involves a considerable greater sum than would be allowed by 1% of the budget. Whilst I accept Mr Bacon’s comment that the extent of the remuneration is not the touchstone for the effort that should be involved, it does seem to me to be a pointer as to the expectation of the time to be spent in preparing a budget. Most of the time will be spent in the estimation of future costs and much less will be spent in relation to incurred costs. Including items which are unlikely to be recoverable between the parties’ assessment runs a risk of the budgeting judge concluding that those costs are high and commenting about this in the CMO.
- I do not think that it can be said to be unreasonable for a solicitor to include in the budget, the time that the various fee earners have recorded on their system as being sums which the client is potentially liable to pay.
- Similarly, having considered that time to be vulnerable to challenge on a between the parties’ assessment, it can only be reasonable for the drafter of the bill of costs to exclude such time. Where, as here, the time is extensive, the incurred costs actually claimed between the parties will be significantly reduced. But that does not necessarily mean that something improper has occurred when the budget was prepared, in my view.”
Personally, whilst I cannot say that the discrepancy in time was improper, I struggle to accept the Master’s decision that there can be such a large discrepancy on detailed assessment (because the bill drafter excludes time when drafting the bill of costs). It is important that incurred costs are broadly correct in terms of time incurred and absolutely correct in terms of hourly rates. If not, it creates an incorrect starting point on detailed assessment and questions the signature of the costs budget. Furthermore, 1% can be a generous amount when preparing a high value costs budget (A £10 million budget would potentially allow a charge of £100,000 to prepare the costs budget).
The decision of the Master also troubles me for the following reasons:
- It is possible to prepare a budget as a bill of costs i.e. prepare a bill of costs which can be converted into a costs budget for the CCMC. Whilst this incurs greater cost, it effectively means that the costs are front-loaded so that the costs for drafting the bill at the conclusion of the matter are much lower.
- Lawyers have historically struggled with recording their time (and continue to struggle) in a way that reduces the time required to draft a bill of costs, not to mention time recording by using the phase, task and activity codes. It therefore surprises me that the Master seemed to accept an approach of calculating incurred costs by simply ‘lifting’ time from a time recording ledger. To my mind, time needs to be vetted correctly and incurred costs should not change significantly between those stated in the costs budget and those stated in the bill of costs.
- Where a costs management order has been made and the matter proceeds to a JSM or mediation, it can be possible for the parties to agree costs at the JSM or mediation based on the costs management order (Claimant providing some very basic updated figures). If the budget was not based on the accuracy expected within a bill of costs, then any breach of the indemnity principle would not be identified and there is a real risk that costs irrecoverable inter partes would potentially be recovered from the paying party.
- Furthermore, the Master’s approach is in real contradiction to the requirements of a document that contains a statement of truth, of which the budget is one of those documents.
It is therefore imperative that the incurred costs figure is not only calculated correctly in terms of the hourly rate but is calculated correctly (with no significant errors) in relation to inter partes incurred costs. When litigating, each party should be able to proceed on the basis that the incurred costs included in the budget are correct and can be relied upon. Whilst the Claimant substantially reduced the incurred costs in the MXX case (which was to the benefit of the Defendant), it does raise a real question over the costs management process if a party can change their incurred costs figure, which in this instance was by nearly 150 hours.
The aim of this blog was to share some of the wider points which arise from the Judgment of Master Rowley. I would be interested to hear any other people’s views and opinions which can be shared through this blog.
Please note that the case was the subject of an Appeal and I will blog separately (and shortly) in relation to the outcome of the Appeal. The outcome does not impact the points raised in this blog.
This blog was prepared by Andrew McAulay who is a Partner at Clarion and the Head of the Costs Litigation Funding Team. He can be contacted at email@example.com or on 0113 336 3334.
What is the Indemnity Principle?
A long-established principle which effectively means that a successful party cannot recover more in legal costs then they are liable to pay their solicitor under the terms of the contract with their solicitors.
Why does it exist?
To indemnify the winner for the reasonable legal costs incurred on the matter. In practice, the loser contributes to those costs.
If the indemnity principle did not exist, then a losing party could face a costs liability higher than the winner is liable to pay his solicitor. This would mean that a client would make a profit from the costs of the litigation which is not the intention of costs awards. The intention is to reasonably compensate the winner for the legal costs they have incurred.
Please note that there are some exceptions to the indemnity principle, for example, inter-partes claims for costs where the matter was funded by way of a Legal Aid Certificate, and fixed costs claims i.e. where the costs incurred are lower than the costs that can be claimed inter parties.
Key Case Law
Harold v Smith  5 H & N 381
Costs orders inter-partes are awarded as an indemnity to the receiving party. They are not awarded to impose a punishment on the party who pays them.
Gundry v Sainsbury 
The Court of Appeal confirmed the underlying principle set out in Harold v Smith. The solicitor had acted for no charge and tried (unsuccessfully) to seek costs from the opponent. The court held that the solicitor was not entitled to recover costs as there was no agreement from the client to pay.
J H Milner & Son v Percy Bilton Limited  1 WLR 1985
Retainer (contract for services by the solicitor) is fundamental to the right to recover costs. No retainer equals no entitlement to recover costs from clients (and therefore no entitlement to costs inter-partes).
Is the Indemnity Principle important?
Taking into account the above cases (which remain good authorities) the indemnity principle is clearly very important and something which every contentious lawyer should have a sound knowledge and understanding of. Failure to do so can lead to serious professional consequences.
The importance of the indemnity principle is best illustrated by the case of Bailey v IBC Vehicles Limited  3 All ER 570 where the Court said that the signature of a Bill of Costs is that of an officer of the Court and that mis-certification of the Bill is a serious (disciplinary) offence.
In that case Lord Justice Henry said:
“the signature of the Bill of Costs under the rules is effectively a certificate by an officer of the Court that the receiving party’s solicitors are not seeking to recover in relation to any item more than they have agreed to charge under a contentious business agreement. The Court can (and should unless there is evidence to the contrary) assume that his signature to the Bill of Costs shows that the indemnity principle has not been offended”.
When lawyers sign costs budgets, statements of costs for summary assessment and Bills of Costs it is therefore fundamentally important to ensure that there is no breach of the indemnity principle.
I am now going to consider two recent cases regarding the indemnity principle:
Gempride v Jagjit Bamrah & Law Lords of London Limited  EWCA CIV 1367
In this matter, the receiving party’s bill of costs claimed hourly rates higher than those which the client had agreed to pay their solicitor within the retainer. Furthermore, misleading information was provided in Replies to Points of Dispute in respect of the availability of before the event insurance.
The matter proceeded to the Court of Appeal where the Court imposed a penalty for the mis-certification of the Bill of 50% (Part 1 of the Bill of Costs only). Whilst the penalty in the end was not too severe, the real damage for the law firm was to its reputation.
HMRC v Gardiner and Others  EWHC 1716 (QB)
This matter related to an appeal by HMRC in respect of an order for them to pay the Respondents’ costs in tax appeal proceedings. The Respondents were amongst several tax payers challenging penalties imposed by HMRC for incorrect tax returns.
The Respondent’s tax advisors were at the forefront of the work carried out. Counsel was instructed to represent the Respondents and the fees were paid by their tax advisors. HMRC alleged a breach of the indemnity principle (no direct retainer). That argument failed and the key points were as:
- There was never an agreement that the Respondents would never pay Counsel’s fees;
- Counsel was there to represent the Respondents, not their advisors;
- No difference to a trade union funding arrangement; and
- The key is a liability to pay (the Respondents were liable to pay the fees that were incurred, but the tax advisors paid them).This is a useful case to rely on where costs have been paid by a third party and a challenge is raised that there has been a breach of the indemnity principle as a result.
As you can see from the authorities, the indemnity principle has been with us for some time. Lord Justice Jackson recommended the abolition of the indemnity principle in his Final Report in 2010. He was of the opinion that the indemnity principle caused more problems than it solved. However, in my view the indemnity principle should always be in place whilst we have a cost shifting environment in England and Wales. Otherwise, it could encourage inflated claims for costs and allow clients to profit on the costs of litigation and therefore increase claims for costs – which would be contrary to the whole purpose of the Jackson Reforms!
Do you have any views? – please feel free to share them.
This blog was prepared by Andrew McAulay who is a Partner at Clarion and the Head of the Costs and Litigation Funding team. Andrew can be contacted at firstname.lastname@example.org or on 0113 336 3334 or 07764 501252.
The case of HMRC -v- Gardiner and Others  EWHC 1716 (QB) is a case concerning an alleged breach of the indemnity principle.
The Respondents were amongst several tax payers challenging penalties imposed by HMRC for incorrect tax returns. EDF Tax Defence Ltd (“EDF”) were the tax advisors.
The Respondents were successful and HMRC were ordered to pay their costs.
EDF were at the forefront of the work carried out in the matter. Counsel was instructed to represent the Respondents and the fees were paid by EDF. HMRC therefore alleged a breach of the indemnity principle on the basis that the Respondents had not paid Counsel’s fees and that there was no direct retainer in place between the Respondents and Counsel.
The argument failed and the key points to note are as follows:
- There was never an agreement that the Respondent would not be liable for Counsel’s fees (see paragraph 30 of the Judgment – “The presumption that a client instructing a solicitor or representative to represent them will be liable for costs incurred for such representative may be rebutted by the paying party proving that there was a bargain between the client and the representative that under no circumstances was the client to be liable for costs”).
- Counsel represented the Respondents at the hearing, not EDF.
- The arrangement was no different to a trade union funding arrangement.
- The key for the indemnity principle is a liability to pay and not payment/discharge of the liability (see paragraph 30 of the Judgment – “It is liability to pay rather than who makes payment which is material”).
Had evidence been produced that the Respondents would never have been liable for Counsel’s fees, then the Court would have reached an alternative conclusion. This is therefore a useful case to rely on for parties seeking costs which have been met by a third party, but are facing indemnity principle challenges from a paying party.
This blog was prepared by Andrew McAulay who is a Partner at Clarion and the Head of the Costs Litigation Funding Team. Andrew can be contacted at email@example.com or on 0113 336 3334 or on 07764 501252.
Since the introduction of the Legal Aid, Sentencing and Punishment of Offenders Act 2013 (LASPO), solicitor/own client costs disputes have increased.
The case of Laurence Sprey -v- Rawlison Butler LLP  is a good case to read for anyone who would like to learn more about solicitor/own client costs disputes. The principal issue in the case concerned whether monthly invoices (case funded under a discounted conditional fee agreement) delivered by the law firm to the client were ‘statute invoices’. The ultimate decision was not they were not ‘statute invoices’; the invoices were therefore open to challenge/assessment and were not ‘time barred’ pursuant to s70 of the Solicitors Act 1974.
It has always been important for lawyers to have a good understanding of the Solicitors Act 1974, but that has increased post LASPO, particularly for those lawyers charging (and deducting) success fees and ATE insurance premiums from clients’ damages under post 1 April 2013 Conditional Fee Agreements.
Paragraph 4 on page 2 provides some very useful information in relation to the types of invoices that can be raised (many lawyers do not know that they regularly raise a “chamberlain bill”). Paragraph 6 on page 2 helpfully sets out the time limits for a challenge.
Solicitor/own client costs disputes often arise because the retainer, terms of business and invoicing are not consistent with the lawyer/law firms’ intention. It is important to make sure that you know what invoices you want to raise and you have a process that is consistent with that intention and delivers the invoice you want – without confusion and costs litigation!
At Clarion, we have significant experience in solicitor/own client costs disputes. Therefore, please do not hesitate to contact us if you have any questions.
This blog was prepared by Andrew McAulay who is a Partner at Clarion and the Head of the Costs and Litigation Funding team. He can be contacted at firstname.lastname@example.org or on 0113 336 3334.