The rules about costs in civil proceedings are nightmarishly complicated and keeping up with recent developments has become a full time job. We begin 2017 with an up-to-the-minute guide to some of the more confusing concepts.
1 What is the indemnity principle?
The indemnity principle underpins the rules governing the recovery of costs. It provides that the receiving party cannot recover more costs from the paying party than he would be liable to pay his own solicitors. It doesn’t matter that he might not end up paying his solicitors if he loses; it is the liability to pay that matters (
Times Newspapers v Burstein). If a solicitor enters into a funding arrangement with his client which breaches the relevant statutory requirements concerning conditional fee agreements (CFAs) or damages-based agreements (DBAs), the funding arrangement will be unenforceable. The indemnity principle means that in these circumstances no costs can be recovered from the other side except paid disbursements.
2 Does the indemnity principle have anything to do with indemnity costs?
Not really. Indemnity costs are costs ordered by the court to be paid on the indemnity rather than the standard basis and include all costs that are reasonably incurred, with any doubt being resolved in favour of the receiving party. A claimant can recover indemnity costs if they make a successful Part 36 offer. Either party can obtain an order for indemnity costs in their favour where the conduct of the litigation by the other party has been shocking. Claimants pursuing speculative, weak, opportunistic or thin claims are particularly at risk as illustrated by
Excalibur Ventures LLC v Texas Keystone Inc. Applying for indemnity costs has become more attractive than even because it enables the receiving party to bypass the new proportionality test.
3 When are costs proportionate?
When they’re not too high. Beyond that, however, it’s hard to come up with even a basic rule of thumb for applying the new proportionality test introduced without any accompanying guidance in April 2013. In
Kazakhstan Kagazy Plc v Zhunus the court said that the correct standard was the lowest amount of costs that a party could reasonably have been expected to spend to ensure its case was conducted and presented proficiently. However, in
May v Wavell Group Plc this approach was said to be too generous to the receiving party where the sums in issue are modest. In
BNM v MGN Limited the Senior Costs Judge went further and held that the new proportionality test applies to success fees and ATE premiums and not only to base costs as was the case under the old test. Applying the new test in this privacy claim, he held that a proportionate figure for the claimant’s recoverable costs was only half of the costs he had deemed reasonable. The claimant’s appeal has been leapfrogged to the Court of Appeal.
4 What is front loading and why is it a problem?
Front loading occurs when parties incur significant costs at the beginning of a dispute. Pre-action protocols were introduced with the Civil Procedure Rules in 1999. Complying with a protocol – there are now 13 plus a general practice direction - can require the potential defendant to incur significant costs investigating the merits of a claim which they are unable to recover if the potential claimant decides not to issue proceedings or does issue but abandons parts of the claim (
McGlinn v Waltham Contractors Ltd). Penalties may apply if a party fails to comply. The new
Pre-Action Protocol for Construction and Engineering Disputes, which came into force on 14 November 2016, attempts to address concerns about front loading and allows the parties to agree not to follow the protocol.
5 Can success fees still be recovered in any types of claim?
Success fees can be recovered from the losing party where the CFA was entered into before 1 April 2013, where the CFA relates to insolvency-related proceedings and was entered into before 6 April 2016, and where it relates to publication and privacy proceedings or a mesothelioma claim. The Supreme Court is to consider whether the CFA regime is compatible with the Article 10 right to freedom of expression in a leapfrog appeal by the publishers in several phone hacking cases in
Frost v MGN Ltd.
6 Are contingency fee agreements now allowed?
Up to a point. Contingency fee agreements entitling a lawyer to take a cut of their client’s damages are familiar to us from US litigation but prior to the introduction of damages-based agreements (DBAs) they have only been lawful under English law for employment and other tribunal work classed as non-contentious business. DBAs entitle the solicitor to take a share of any damages recovered but the percentage cannot exceed 50 per cent at first instance (35 per cent in an employment case and 25 per cent in a personal injury case). Costs are recoverable from the other side on the conventional basis (hourly rate and disbursements) subject to the indemnity principle. This means that the defendant’s liability for costs is capped by the level of the contingency fee.
7 What has happened to damages-based agreements?
They’re still out there but take-up by solicitors is small because there are lots of problems with the DBA Regulations 2013 which haven’t yet been sorted out. One factor making them less attractive for lawyers is that, while partial or hybrid CFAs (where a reduced hourly rate is payable whatever, plus a success fee in the event of success) are allowed, hybrid DBAs are not permitted by the Regulations. This means that an arrangement whereby the client agrees to pay a fixed fee plus a contingency fee is unlawful. The solicitor may not therefore be able to recover any sums from the client or, because of the indemnity principle, from the losing party. One claim funded by a standard DBA succeeded in December and this may encourage others to give them a try (
Harlequin Property (SVG) Ltd v Wilkins Kennedy). The Civil Justice Council prepared a detailed
report about the problems with the Regulations in 2015 but there’s been no response from the Ministry of Justice.
8 What are costs-only proceedings?
The parties settle a dispute pre-action and while the potential defendant agrees to pay the potential claimant’s costs they cannot agree on a figure. Either party can begin costs-only proceedings to obtain a detailed assessment of the claimant’s costs. The costs-only procedure (see CPR 46.14) involves issuing a Part 8 claim form to obtain an order so that detailed assessment can begin. You can’t bypass issuing a claim but the process can be speeded up if the order is made by consent.
9 What on earth is the Arkin cap?
Where a commercial third party funder supports a claim for profit they are required to contribute to the defendant’s costs if the claim fails and the claimant is unable to do so. The contribution is capped at the sum contributed by the funder – this is known as the
Arkin cap after
Arkin v Borchard Lines Ltd. This has been in the news recently because the Court of Appeal in
Excalibur Ventures LLC v Texas Keystone Inc rejected the funders’ appeal against the decision that they were liable to pay the defendant’s costs on the indemnity basis. The court confirmed that funds provided for security for costs should be taken into account in the same way as funds provided to pay the claimant's costs when applying the Arkin cap. It’s also worth noting the decision in
Essar Oilfield Services Ltd v Norscot Rig Management Pvt Ltd that an arbitrator’s general power to award costs includes the power to award the costs of third party funding in an appropriate case. These costs cannot be recovered from the losing party in court litigation.
10 What is the relationship between costs budgets and detailed assessment?
If only we knew – this one is still up for grabs although District Judge Lumb has recently given us his views in
Merrix v Heart of England NHS Foundation Trust. His analysis favours defendants wishing to reduce a successful claimant’s costs bill below the approved budget figures. He concluded that there is nothing in the CPR saying that a budget is a cap or a fixed amount: it is an available fund. Detailed assessment is still available to enable the court to apply the proportionality test and to consider eg hourly rates which are expressly excluded from consideration at the budgeting stage. In his view the approach taken in the early cases of
Henry v News Group Newspapers and
Troy Foods v Manton is correct and later comments in
Slick Seating Systems v Adams and
SARPD Oil International Ltd v Addax have not done away with the need for detailed assessment.
