Tag: Litigation

Does a paying party have to pay VAT on costs if an insurer is no longer trading?

ujjainimistryLeave a comment

The case of Shmuel Moller & Ors v One Touch Solution Limited & Anor [2026] was a routine summary assessment of costs arising from an interlocutory hearing where the Court was required to undertake a focused examination of VAT recoverability where the receiving party was in liquidation.

Background information

The proceedings arose out of a commercial claim brought by the Claimants against One Touch Solution Limited and its insurer, Hiscox Insurance Company Limited. During the litigation, the Claimants were granted permission to amend their statement of case.

The Court ordered that the Claimants should pay the Defendants’ reasonable costs of responding to the amendment, including the costs of preparing an amended defence, such costs to be assessed if not agreed.

By the time the costs issue arose, One Touch Solution Limited had entered creditors’ voluntary liquidation. This gave rise to a dispute as to whether VAT on the Defendants’ legal costs was recoverable as part of the costs order. The Claimants argued that VAT should not be included because it was recoverable by the Defendant (or its estate). The Defendants contended that liquidation meant VAT was irrecoverable and therefore payable by the Claimants.

The Court was therefore required to determine, in the context of a costs assessment, whether VAT on the relevant legal services was recoverable where the receiving party was a company in liquidation, and whether any additional costs should be awarded in relation to the VAT dispute itself.

The Parties’ arguments

The Claimants argued that VAT was only recoverable if the receiving party cannot recover it as input tax from HMRC and that the First Defendant had been VAT-registered at the relevant time legal services were supplied. They also argued that the liquidation did not change the VAT position; insolvency and VAT deregistration on liquidation does not automatically render VAT irrecoverable.

Furthermore, they argued that in respect of the First Defendant’s costs that were funded by the insurer, the insurer was not the entity that incurred the legal services and had no independent right to recover VAT as costs.

The Defendants argued that VAT was irrecoverable and therefore recoverable from the Claimants as part of the costs order. They stated that the liquidation rendered VAT irrecoverable and that VAT could not be recovered in an ordinary way.

Conclusion

The Court held that the First Defendant’s liquidators can recover VAT by filing appropriate VAT returns, meaning neither Defendant has suffered a recoverable loss for VAT in their costs. The Court’s decision was based on the wording of the Regulation 111(5) of the Value Added Tax Regulations 1995. The wording clearly supported the Claimant’s position, and it was held that the Defendants’ position flew in the face of the regulation and was unexplained.

The Claimants sought £1,000 (excluding VAT) for the costs of preparing submissions on the VAT issue. The court noted that the issue had been fully argued in correspondence, the Claimants succeeded on the point, and the Defendants could have avoided further costs by addressing it clearly at the earlier hearing.

Although the Court did not hear submissions from the Defendants on these costs, it found that the Claimants were clearly successful, that the usual CPR Part 44 costs principles applied, and that the amount claimed was reasonable and proportionate.

Accordingly, the Court ordered the Defendants to pay the Claimants’ costs of £1,000, subject to the Defendants’ right to apply in writing to set aside or vary the order, with any such application to be determined on the papers and with modest further costs expected.

Key Takeaways

Although the decision in Moller is not groundbreaking, it is a timely reminder that insolvency does not simplify VAT issues—it often complicates them. VAT recoverability turns on tax entitlement, not litigation status and insurers cannot assume VAT will be recoverable from the opposing party.

VAT on costs remains a technical issue requiring proper analysis. Treating it as an afterthought can prove an expensive mistake.

The Court rejected the common assumption that where a company is in liquidation, VAT on its legal costs must be irrecoverable and therefore payable by the opponent as part of a costs order.

Therefore, the key principle remains unchanged: VAT is only recoverable as part of costs if the receiving party cannot recover it as input tax. Liquidation or VAT deregistration does not, without more, make VAT irrecoverable.

Ujjaini Mistry is a Paralegal in the Civil and Commercial Costs Team at Clarion Solicitors. You can contact the team at civilandcommercialcosts@clarionsolicitors.com.

Can the paying party go to prison for not paying costs owed?

ujjainimistryLeave a comment

The appeal of Smith v Kirkegaard [2024] EWCA Civ 698 involved a contempt application and consideration of whether non-compliance with an order for costs amounted to a contempt of court punishable by committal to prison.

Case Background

In 2018, Respondent – Mr Kirkegaard, discontinued his original claim for libel against Appellant – Mr Smith, because four allegedly defamatory blogs, published by Mr Smith, were deemed to be ‘expressions of opinion’ at a preliminary hearing in 2019. This meant that a claim for libel was likely to fail. Mr Kirkegaard was ordered to pay half of Mr Smith’s costs, which were summarily assessed in the sum of £13,500 and payable within 14 days of the order. But this was not paid.

Following discontinuance of the claim in May 2020, Mr Smith was thereby entitled to his costs of the action. A final costs certificate was issued by the SCCO in September 2021 in the sum of £26,668.43 to be paid by Mr Kirkegaard; this was endorsed with a penal notice. This was also not paid.

Mr Kirkegaard failed to make any payments under the costs orders despite several attempts by Mr Smith to enforce them, including initiating enforcement proceedings in Denmark and Germany, investigating public records, and filing an application to be questioned about assets. Mr Smith alleged that Mr Kirkegaard evaded service by hiding his location generally.

Application to commit for contempt.

In July 2023 Mr Smith proceeded to file a contempt application, alleging that Mr Kirkegaard had made a false statement regarding his named address and had failed to pay two costs orders. This was dismissed by the judge for a range of issues. Permission to appeal this decision was however granted by Warby LJ in March 2024.

Was the failure to pay costs enforceable in contempt proceedings?

It was determined that a failure to pay a costs order could not be pursued by contempt proceedings.

Mr Smith relied on Australian case law (PT Garuda Indonesia Ltd v Australian Competition and Consumer Commission [2020] FCA 685) to argue that the court could treat a deliberate failure to pay a judgment debt as contempt if they had the means to pay. This argument was based on the fact that in March 2020, Mr Kirkegaard had proffered to have an annual income of £72,000 and could make £500 monthly instalments.

The Appeal Decision

Lord Justice Dingemans dismissed Mr Smith’s line of argument on the basis there is a different procedural and statutory regime relating to non-payment of judgment debts in England and Wales.

Although CPR 81.4 provides for enforcement by an order for committal for disobedience of a judgement or order, the Debtors Acts 1869, effectively abolished committal to prison for non-payment of judgment debts, apart from some exceptions in sections 4 and 5.

LJ Dingemans suggested that the section 4 exceptions and Section 5 as a whole, did not apply in this case. The default remains a contempt in these circumstances, but not punishable by committal.

Conclusion

LJ Dingemans, LJ Bean and LJ Asplin all agreed that the non-payment of the costs order was a contempt of court, but it could not be enforced by imprisonment for contempt.

The courts have developed other remedies, such as the freezing order, to help creditors enforce judgment debts. The courts may also exercise a discretion not to permit a defaulting party to participate in further proceedings – but that did not arise in this case.

Clarion’s Costs and Litigation Funding team can be contacted at civilandcommercialcosts@clarionsolicitors.com

No Fixed Costs until October 2023

Joanne ChaseLeave a comment

The introduction of Fixed Costs in most cases with a value up to £100,000, which was originally expected in April 2023 has now been pushed back to October. Speaking to the Civil Justice Council on 18 November 2022 Lord Bellamy said:-

We’re very conscious of how important it is to get this right… a little more time… will give the sector more time to adjust

Lord Bellamy – Civil Justice council, 18 November 2022

Fixed costs are controversial amongst some in the legal sector. Lord Bellamy accepted that fixed costs required a “complex set of rules” and it “hasn’t been easy”. Many practitioners remain skeptical that fixed costs as currently proposed are workable. In particular, some have pointed out continuing satellite litigation in relation to the existing Fixed Costs regimes in RTA and EL/PL claims as evidence that Fixed Costs do not reduce the volume of litigation.

Whilst some may breathe a sigh of relief, this is only a delay. Lawyers should use this time to prepare and test their business models to ensure that they are robust. There should be particular emphasis on reviewing client contracts and retainers to reflect the changing market and the Belsner judgment.

Should you have any questions, you can contact the team at CivilCosts@clarionsolicitors.com

Departure from Guideline Rates not justified (even on the indemnity basis)

Joanne ChaseLeave a comment

In Eurohome UK Mortgages 2007 1 Plc & Ors -v- Deutsche Bank AG, London Branch & Anor [2022] EWHC 2408 (Ch) the court ordered the Third Claimant (‘C3‘) to pay the Defendants’ costs on the indemnity basis. The judge summarily assessed the costs.

The costs related to an application by the Defendants to strike out the claim. The basis of the application was that, in part, that C3 had no standing in the proceedings. C3 did not engage with the application, serve evidence, or attend the hearing. Accordingly, the court ordered that C3 pay the Defendants’ costs on the indemnity basis.

The Defendants claimed costs of £72,287 for the application. The Defendants’ solicitor claimed an hourly rate of £710 per hour as against a guideline rate of £512. Considering the rates Mr Justice Miles held that:-

These are guidelines and are not fixed but they are an important starting point. I do not think this is a case of such complexity to justify a departure from the guideline rates.

Para 49

Following the increase to the guideline hourly rates in 1 October 2021, courts have been much less willing to allow uplifted rates. Solicitors should be prepared to factor this into their advice to their clients.

Should you have any questions, you can contact the team at civilandcommercialcosts@clarionsolicitors.com.

High Court gives guidance on delegation and recovery of costs

Joanne ChaseLeave a comment

In Rushbrooke UK Ltd -v- 4 Designs Concept Ltd [2022] EWHC 1416 (Ch) the Court gave guidance in relation to the principle of delegation when considering the reasonableness of costs. Where there has been insufficient delegation, it is likely the court will find costs are unreasonable. The key findings are at paragraph 14.

The Judgment

The starting point is that solicitors should delegate work:

I am unhappy with the notion that everything here has been done by a single Grade A fee-earner. One of the important skills of a solicitor is to know how to delegate.

Drawing on his 30 years’ experience in practice HHJ Paul Matthews went on to say:

In my experience as a commercial litigation solicitor, there were no cases in which no work could have been delegated.

In his judgment, whether or not there was a junior fee earner to delegate the was not relevant:

Sometimes it is said that, well, there was no one else to delegate to… the answer to that plea is of course that, as between himself and his solicitor the client is quite entitled to insist on a grade A fee earner doing everything. On the other hand, they are not entitled to require the opponent to pay for it. The question is whether the costs are reasonably incurred and reasonable in amount. Reasonableness takes into account of potential delegation.

In relation to the burden of proof the judge held:

It is not for the paying party to have to identify work which could have been done by a more junior fee earner.

Summary

Delegation should be the rule not the exception. The receiving party will have to justify a decision not to delegate. The test of whether an item could have been delegated is objective; if it was suitable for delegation then it should be allowed at a lower rate even if there was no fee earner to delegate to.

Should you have any questions, you can contact the team at civilandcommercialcosts@clarionsolicitors.com.

Client not bound to consider solicitor’s interests under a CFA when settling – Candey -v- Bosheh

Joanne ChaseLeave a comment

In Candey Limited -v- Bosheh & Salfiti [2022] EWCA Civ 1103 the Court of Appeal held that a client is not bound to consider their solicitor’s interests when settling a claim.

Background

In summary, Bosheh (the client, “C”) entered into a CFA with Candey Limited (the solicitor, “Sol”). The relevant term of the CFA was “…if… we obtain an order or agreement that our hourly rate costs… be paid by your opponent then we shall be entitled to recover those costs from your opponent, and you are always liable to pay these costs to us to the extent that we recover them from your Opponent. You will always seek to recover costs by order or agreement”. During the course of the primary litigation Sol received an offer from their opponent by which C would receive up to £1m, and that neither party would pay the other’s costs.

Sol advised C that any money paid to C under the terms of that settlement would go to Sol in payment of its legal fees. C did not accept that this was a correct interpretation of the CFA terms. The claim was ultimately settled on a drop hands basis.

Following settlement, Sol terminated its retainer with C and commenced proceedings alleging inter alia breach of its duty of good faith in failing to seek a settlement on terms that Sol would be paid.

Judgment

Finding for C, the High Court found that a retainer between a solicitor and client is not subject to a duty of good faith (para 84). This finding was upheld by the Court of Appeal which added “There is no authority that supports the proposition that, when retaining a solicitor to act for him or her, the client owed that solicitor a duty of good faith. The absence of authority is perhaps unsurprising: it is a startling concept. Many would say that, if a duty of good faith was applicable at all, it would arise the other way round and be owed by the solicitor to the client” The Court continued at paragraphs 53 – 54 that:–

  1. First, Mr Bompas’ answers demonstrate the potential conflict of interest that can arise under a CFA between the client and the solicitor where the terms are drafted in such a way that the solicitor’s costs recovery is itself dependent on the client recovering something – anything – from the proceedings… Such conflicts cannot be resolved by an implied duty owed by the client to consider the solicitor’s financial interests rather than his own; it is for the solicitor to ensure that such conflicts do not arise in the first place.
  1. Secondly, it is self-evident that, irrespective of any duty of good faith, the client cannot be in breach because he or she chooses a settlement which they perceive to be as good as or better for them than the one that obviously suits the solicitor. Any other conclusion would fundamentally alter the solicitor/client relationship. In the present case, the Boshehs were quite entitled to conclude that a ‘drop hands’ settlement was certainly not a substantially less advantageous (and arguably a better) deal than the earlier proposal made by the Sheikh.”

Summary

The judgment highlights the risks to solicitors acting under a CFA. Solicitors should check their client retainers to ensure that they minimise the risk that a client may settle the proceedings on terms that prevent them being paid. Whilst it is difficult to imagine wording which would provide complete protection, a clause within the CFA to the effect that if the claim is settled on terms where there is no specific provision for costs, the solicitor will be entitled to be paid their costs capped at a percentage of the settlement sum agreed.

Should you have any questions, you can contact the team at civilandcommercialcosts@clarionsolicitors.com.

Compulsory mediation could be extended to all claims in the County Court

Joanne ChaseLeave a comment

Under current government proposals mediation will be compulsory in all claims allocated to the small claims track. However, it is also considering whether to extend that requirement to all claims in the County Court. You can consider the proposal and have your say via the Consultation Paper. 

The Proposals

The proposals seek to tackle low levels of uptake of mediation and drive a culture shift in attitudes to litigation. The paper makes it clear that there will be no requirement to settle. Furthermore, as the current small claims mediation service (SCMS) is court sponsored and therefore costs neutral to the parties, it will not be an “onerous” obligation.

In reality, costs of mediation will be passed on to all court users through court fees. It will only be costs neutral if it succeeds in reducing the number of cases going to trial. 

The Role of Mediation in Settlement

Statistics show that mediation has a high success rate (up to 86%). But we should be wary of the assumption that mandatory referral to mediation will reduce the number of cases going to court by a similar amount. About 96% of civil cases in England settled outside court. However, 1.2 million claims were issued in the Civil Courts in 2020 but in the same year there were only 16,500 mediations (1.38%). This means that at least 94.62% of all of all claims settle other than by mediation.

It is questionable what benefit mandatory mediation will bring to the vast majority of cases which would have settled anyway. Particularly if court fees increase to fund it. And in those cases where agreement is not possible mandatory mediation will simply be a box ticking exercise.

The Report gives the mandatory mediation scheme in Ontario, Canada as an example of how mandatory mediation can be successful. But a 2001 report showed that mandatory mediation resulted in “full settlement of 40% of cases earlier in the process”. Overall, around 98% of cases settle before trial in Ontario.

Summary

Mediation is a useful tool for parties who want to settle. Indeed, it can force parties to review the weaknesses of their case and make settlement more likely. However, making it mandatory it is unlikely to make a significant difference to the number of cases proceeding to trial and any benefits will probably be outweighed by the costs.

You can have your say by visiting the Consultation, which closes on 4 October 2022.

Should you have any questions, you can contact the team at civilandcommercialcosts@clarionsolicitors.com.

Multiple Claimants under New Fixed Costs rules

Joanne ChaseLeave a comment

The Fixed Recoverable Cost Consultation Paper published in 2019 proposed that in claims with multiple claimants “…where the cause of action is the same and the claim itself is either similar or subsidiary to the principle claim… we propose that the [Fixed Recoverable Costs] for each additional claimant should be set at 10% of that for the principal claimant”. At the time of writing we do not know what final form the Rules will take. However, they will need to be worded carefully to avoid injustice where there are multiple claimants who are separately represented, for example where there is contributory negligence.

Separate Representation

At a Judicial Panel hosted by Park Square Barristers on 12 July 2022 I asked how the court would approach multiple claimants who were separately represented. In particular I pointed out that the rule appeared to be predicated on the assumption that subsidiary claimants would benefit from sharing work from the primary claim and in reality additional claimants do not necessarily generate significantly more work. This is clearly not the case where parties are separately represented.

DDJ Rafferty and Recorder Richard Paige both agreed that in these circumstances the sensible approach would be that separately represented claimants would not be limited to 10% of the fixed costs.

Court’s Jurisdiction to remedy injustice

The court’s power to remedy any defect or injustice in the FRC rules may be limited. In Aldred -v- Cham [2019] EWCA Civ 1780 the claimant argued the court should allow a disbursement for an opinion obtained for approval of a settlement on behalf of a protected party under CPR 45.12(2)(c). CPR 45.12 sets out various disbursements the court may allow, and (2)(c) allows the court to award any disbursement incurred as a result of “…a particular feature of the dispute”.

In Aldred the Court of Appeal held that the claimant’s status as a protected party was a feature of the claimant, not a feature of the dispute, and that the court could not therefore allow the disbursement. In effect the court held that in the case of fixed costs the court is bound to applying the letter of the rules, and that deficiencies or injustice is a matter for the Rules Committee.

Conclusion

It will be important for practitioners to carefully consider the wording of the rules once they are published. Solicitors considering representing claimants in situations such as this should be careful to advise of the possibility of a limit on recovery of costs if the rules are unclear. Fixed costs rules are generally interpreted strictly, and lawyers should not assume that injustice may be remedied by appeal.

Should you have any questions, you can contact the team at civilandcommercialcosts@clarionsolicitors.com.

Contracting Out of Fixed Costs

Joanne ChaseLeave a comment

In Doyle -v- M&D Foundations and Building Services Ltd [2022] EWCA Civ 927 the Court of Appeal held that a consent order which provided that the Defendant would pay the Claimant’s costs “to be the subject of detailed assessment if not agreed” was an agreement to contract out of the Fixed Costs regime. The Claimant’s costs were therefore to be assessed on the standard basis.

Background

The Claimant was an employee of the Defendant. The Claimant was injured during the course of this employment whilst working on a building site. The Claimant commenced a claim against the Defendant under the Pre-Action Protocol for Low Value Personal Injury (the EL/PL Protocol).

The Defendant made a Part 36 offer. As it was less than 21 days before trial the Claimant responded stating that quantum was agreed but the terms of settlement would need to be set out in an Order. The agreed order provided that the Claimant’s costs would be “subject of detailed assessment if not agreed”.

Analysis

The Court distinguished the case from Ho -v- Adelekun [2019] EWCA Civ 1988 on the basis that in that case it had been clear that the parties intended to compromise on Part 36 terms (which would have engaged Part 45). In this case, the Claimant had expressly stated that the Part 36 offer was rejected.

The Order did not include the words “on the standard basis”. The Court rejected the Defendant’s argument that this meant the Court should assess the fixed costs. It held that where costs are “assessed” they are inherently not “fixed”. The meaning of “costs to be subject to detailed assessment” was therefore that costs be assessed on the standard basis.

Conclusion

The Court held that “if parties wish to settle on [a fixed costs basis] it is easy enough to say so.” Parties should ensure that the basis of settlement / assessment is clear. An agreement for costs to be assessed is an agreement to contract out of fixed costs.

Should you have any questions, you can contact the team at civilandcommercialcosts@clarionsolicitors.com.

Part 36 Rewards

Dominic ReganLeave a comment

HOCHTIEF V ATKINS ( 2019) EWHC 3028 ( TCC) saw a claimant who bettered their Part 36 quantum offer by just  £4,500 secure  an uplift of £65,000 and interest at 6% above base plus indemnity costs.

JLE V WARRINGTON NHS TRUST (2019) 1WLR 6497  –  On 21 June 2018 the claimant made a Part 36 offer in the sum of £425,000, inclusive of interest, in respect of the Bill of Costs. That offer accordingly expired on Friday 13 July 2018, i.e. the last working day before the hearing commenced.  Master McCloud assessed the bill inclusive of interest in the sum of £431,813.05, i.e. £421,089.16 plus £10,723.89 interest. The claimant therefore beat her Part 36 Offer by just under £7,000.

Had the Court  granted the default Jackson 10% uplift the claimant would receive an additional £43,181-30.

The Master considered this to be unjust given that the offer was made late on and it was only bettered by a slender margin .The Master was plainly troubled by the disparity between the amount by which the offer was beaten (£7,000) and the consequential uplift ( 6 times as much ).

She thus  declined to award the uplift. The claimant successfully appealed to Stewart J who made the award. The defendant ought to have paid up and settled. It only had itself to blame . The offer was plainly good.

In TELEFONICA  V OFFICE FOR COMMUNICATIONS (2020) EWCA Civ 1374 the claimant had bettered its offer by £4.5m or 9% yet received no more interest than would have been payable had it made no offer at all. The Appeal Court endorsed the view of Stewart J in JLE ( above ) that it would be highly unusual for the Court to grant some benefits but to withhold others .This was particularly so on the facts of this £54m case. Indemnity costs and an additional £75,000 “was an almost trivial uplift and any significant enhancement in overall relief would only have been achieved by the award of additional interest on the principal sum “ ( paragraph 42).The Judge was in error by regarding the award of 2 trivial enhancements as justification for not awarding the major enhancement, uplifted interest. The Appeal Court corrected the omission and so Telefonica gained  a useful extra £900,000.

Some Judges at first instance had flirted with the concept of withholding some of the rewards, adopting a pick and mix approach. The Appeal Court made it abundantly clear that the victor  ought to  receive each of the four enhancements pursuant to CPR 36.17(1)(b).There is nothing in the Rule which undermines or lessens entitlement to the others. The rewards are a composite package. All of them  ought to be bestowed .

On a practical note I surmise that Sir Rupert Jackson would agree. An approach which encouraged arguments about dividing up the spoils would be a blatant incentive for the paying party to raise challenges in the hope of shaving something off. Finality and certainty are secured by this approach.

HOCHTIEF was a good offer on quantum. JLE was a good one on costs. These examples demonstrate why it is crucial for a receiving party to make good, early offers to settle. We do !

You can find out more about our services here or you can contact the Costs and Litigation Funding team at CivilCosts@clarionsolicitors.com.