Third Party Funders – Exposure to Legal Costs

The Court of Appeal has recently handed down its Judgment in the case of Chapelgate Credit Opportunity Master Fund Limited -v- Money and Others [2019], 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.

Paragraph 38:

“……..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 mcaulay@clarionsolicitors.com

A PART 36 OFFER WHICH EXCLUDES INTEREST MAY BE VALID

A Part 36 offer in detailed assessment proceedings may be valid where it excludes interest under the Judgments Act 1838.

In Horne -v- Prescot (No.1) Ltd [2019] EWHC 1322 (QB) the Court held that a Part 36 offer on costs which excludes interest is a valid Part 36 offer, contrary to Ngassa -v- The Home Office [2018] EWHC B21.

CPR 36.5(4) states that a “part 36 offer… [for] a sum of money will be treated as inclusive of all interest…” In Ngassa it was held that therefore an offer which purported to exclude interest was not a valid Part 36 offer and therefore would not attract the consequences of Part 36.

However, in Horne the judge found that in detailed assessment proceedings, interest accruing under section 17 of the Judgments Act 1838 does not form part of the claim for costs, as it is a statutory entitlement in respect of which the Court is not required to make any finding. Therefore, unlike interest which may form a part of substantive proceedings (for example interest under the Late Payment of Commercial Debts (Interest) Act 1988) which forms part of the claim and must be Ordered by the Court, Judgments Act interest does not form a part of the “claim” for costs, and is not required to be ordered by the Court (though it may be disallowed).

Whilst the judgment in Horne is both legally sound and eminently sensible, as CPR 36 was not drafted with detailed assessment proceedings in mind (indeed until 2013 it was not possible to make a Part 36 offer in costs proceedings and is only now applicable due to a modification to Part 47 specifically applying Part 36 to detailed assessment) practitioners should bear in mind that Horne is a first instance decision and a different court on a different day may find differently. It may be prudent for practitioners to continue to include interest in Part 36 offers on costs until further authority clarifies the position. It is however a useful judgment to deploy where there is any dispute as to the validity of an offer.

Matthew Rose is an Associate in the Costs and Litigation Funding Department at Clarion Solicitors. You can contact him at matthew.rose@clarionsolicitors.com and 0113 222 3248. You can contact the Clarion Costs Team on 0113 246 0622.

Ensure consistency between your Costs Budget and Bill of Costs

Consistency and a true connection between Costs Management and Detailed Assessment is essential for the successful recovery of costs on Detailed Assessment.

If a costs budget is prepared incorrectly, which creates a disconnection between the costs budget and bill of costs, then you can expect a costs law obstacle course and a heavy migraine on detailed assessment.

The case of MXX -v- United Lincolnshire NHS Trust [2018] is a great example, which is summarised below:

Background, Retainer and Hourly Rates

The Claimant instructed her Solicitors in 2012 and the matter was funded by way of a Conditional Fee agreement with the rate for the conducting lawyer (Grade A) agreed at £335 per hour.

In August 2013 the rate for the conducting lawyer increased to £460 per hour (this was an error). In January 2015 the hourly rate was reduced to £350 (effective from May 2014). It was increased to £360 in 2015 and £365 in 2016.

The substantive proceedings related to a high value injury claim, with quantification being resolved in November 2016. The claim was subject to a Costs Management Order dated 2 March 2015.

Detailed Assessment Proceedings were commenced in March 2017 and the bill of costs totalled circa. £1.3 million.

Background to the Costs Management Order

At the CCMC, the District Judge dealt with estimated costs and correctly stated that the incurred costs were for detailed assessment. The hourly rate included in the costs budget for the conducting lawyer was £465 per hour.

In respect of the estimated costs, the Judge indicated a composite rate of £280 per hour, which the parties then used to agree the estimated costs for each phase.

Discrepancies between Budget and Bill

Following the commencement of detailed assessment proceedings, the Defendant compared the costs budget (Costs Management Order) with the bill of costs and noted the following discrepancies:

  • Substantial differences in relation to hourly rates.The hourly rate included in the costs budget for the conducting fee earner was £465.00 per hour, but in the bill of costs hourly rates of £335.00 and £350.00 were claimed; and
  • The bill of costs included roughly 144 to 147 hours less time for incurred costs than the costs budget.

The Defendant had legitimate concerns and made an Application for an Order pursuant to CPR 44.11, arising out of what the Defendant described as a mis-certification of the Claimant’s costs budget in the substantive proceedings.

Decision

It is well worthwhile reading the Judgment and the very articulate submissions advanced by both parties. This will help you to fully understand the decision, which was as follows:

  1. The Master did not find that the errors regarding the rates for the conducting fee earner (in respect of estimated costs) or the significant time discrepancies in relation to the time included in the costs budget and the bill of costs amounted to improper conduct.
  1. However, the Master did find that there was improper conduct in relation to the inflated rate/s claimed within the budget (as incurred costs).The Master had previously dealt with a case with some similar issues (Tucker v Griffiths & Hampshire Hospitals NHS Trust 2017) and decided to apply the same sanction in this case as he did in that case, which was to disallow the items claimed in the bill of costs which related to the Costs Management Order.The Defendant had submitted that the Claimant’s bill of costs should be reduced by 75% due to the errors, but the Master said:“Whilst those behind the Defendant in both cases may have considered the sanction in Tucker to be insufficient, it seemed to me to be the only appropriate sanction. There is nothing wrong with the Bill in terms of the indemnity principle. The problem lies with the budget. I consider it to be entirely appropriate to impose a sanction in respect of the work which caused the problem.That work is the non-phase time spent creating and maintaining the budget. It would be wrong in my view retrospectively to disallow some of the budget itself”.

    The decision in this case (and in the case of Tucker) are both cases which were before Master Rowley at the Senior Courts Costs Office. Another Court/Judge could reach a different conclusion and I certainly expect to see this issue again before the Courts for the following reasons:

Lawyers do not time record consistently within their respective departments and firms, which means that discrepancies between budgets and bills will continue to regularly occur and a different Judge/Master may well adopt a more stringent approach;

Costs Budgets are regularly being prepared by non-specialists and prepared very “late in the day”, which leads to errors; and

There is a misconception that the costs budget is a more flexible document than a bill of costs i.e. the statement of truth to a bill of costs carries more weight than a statement of truth to a bill of costs.It is very important that all lawyers (and law firms) approach Costs Management consistently and understand the importance it has on detailed assessment. If that is done, then it leads to a consistent bill of costs, less obstacles on detailed assessment and no migraine – but maybe a headache!

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 mcaulay@clarionsolicitors.com or on 0113 336 3334

NB There are some other interesting points and views in the Judgment which I will cover in a further blog.

 What do Court of Protection Costs draftsmen actually do?

The legal world of costs is not the biggest or most well-known, and it’s often the case that many lawyers aren’t sure what Draftsmen actually do. This is especially true if the costs are related to the Court of Protection, as it’s another area that isn’t particularly familiar to many, with some potentially not even knowing which costs are assessed, or how.

The previous blog in this series focused on the Bill of Costs and the process of claiming your costs and ultimately getting paid. This blog will instead breakdown the process of what goes into a Bill of Costs within the Court of Protection world and how the Costs Draftsmen – and women – here at Clarion can help.

Process for creating a Bill of Costs

  1. Arranging the file

Once we receive a file from one of our clients, it’s opened within our case management system and we assess how long the Bill will take to draft and which one of the Draftsmen would be best suited to do it. We review various points including: the specific needs of the client, the amount of work in progress (WIP) on the file received, the complexities involved, and the workload of the Draftsmen involved to determine who in our team is best placed to prepare the Bill of Costs. There are 10 of us who deal with Court of Protection costs on a daily basis.

  1. Drafting the Bill

Thereafter, once the file is allocated, our job is to match up entries on the file and billing ledger and cost the file as appropriate. At Clarion, we review the file of papers on a page by page basis, for completeness. The costs are calculated electronically to ensure absolute accuracy and we will make note of any issues identified, to be raised with the client. We are fully aware of the restrictions and court requirements as to what is and is not recoverable in Court of Protection cases. As a result, we will use our experience and discretion to put the bill of costs together in a way that the Court will be happy with, which is fundamental for our clients’ reputations.

  1. Reviewing the file and the Bill of Costs

Once the whole file is efficiently costed, the Draftsman reviews the file and ledger once more and notes any missing entries on the ledger that are not evidenced in the file. We also check if there are things within the file that could be included in the Bill of Costs, that the fee earner didn’t know could be recovered. If there is anything missing from the file, the client is informed, giving them the opportunity to provide the documents required, to ensure that a complete log of evidence is submitted to the Court.

  1. Collating and arranging the Bill of Costs and bundle

Once all the information is present and the Bill of Costs complete, Clarion prepares the Form N258B, which is a request for detailed assessment of the costs, if they are payable out of a fund. We also draft a comprehensive letter of advice, informing the client of possible reductions and guidance to improve costs recovery going forward. All documents are returned to the client, enabling them to easily submit them to the Court for assessment.

  1. The assessment

The matter is thereafter assessed by the SCCO on the Standard Basis, and Clarion will consider the outcome of the assessment, to determine if it is reasonable or not. Clarion can also assist with requests for reassessment if the outcome is not as expected.

If you would like further information about this process, then please do not hesitate to get in contact.

 

Joshua Sidding is a Paralegal in the Court of Protection Team of the Costs and Litigation Funding Department at Clarion Solicitors. You can contact him at Joshua.sidding@clarionsolicitors.com and 0113 222 3245, or the Clarion Costs Team on 0113 246 0622.

You can also take advantage of our free telephone advice service – available outside of office hours – by calling 07764 501252

THE INDEMNITY PRINCIPLE – WHAT IS IT? IS IT IMPORTANT?

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 [1860] 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 [1910]

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 [1966] 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 [1998] 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 [2018] 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 [2018] 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:

  1. There was never an agreement that the Respondents would never pay Counsel’s fees;
  2. Counsel was there to represent the Respondents, not their advisors;
  3. No difference to a trade union funding arrangement; and
  4. 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.


    Summary

    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 andrew.mcaulay@clarionsolicitors.com or on 0113 336 3334 or 07764 501252.

COSTS PAID BY A THIRD PARTY – BREACH OF THE INDEMNITY PRINCIPLE?

The case of HMRC -v- Gardiner and Others [2018] EWHC 1716 (QB) is a case concerning an alleged breach of the indemnity principle.

Background

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.

Costs proceedings

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:

  1. 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”).
  2. Counsel represented the Respondents at the hearing, not EDF.
  3. The arrangement was no different to a trade union funding arrangement.
  4. 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 andrew.mcaulay@clarionsolicitors.com
or on 0113 336 3334 or on 07764 501252.