England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
Queen's Bench Division
Swift J
[2013] EWHC 1023 (QB)

		Royal Courts of Justice Strand, London, WC2A 2LL
		27/03/2014

Lady Justice Sharp :

Introduction

1. On 21 December 2012, following an earlier judgment on liability in respect of the eight lead claims of the Phurnacite Workers Group Litigation (PWGL) brought by these claimants, Swift J ordered that the defendants should pay 80 per cent of the claimants' costs of the action as agreed or assessed. Although there was then agreement that costs and disbursements would be subject to interest from the date of judgment in the usual way, there was not agreement on a further claim by the claimants for pre-judgment interest on disbursements. The litigation had been substantial. The trial on liability took more than six weeks, and the claimants' disbursements exceeded £787,500. The pre-judgment interest on disbursements issue was dealt with at a hearing on 24 March 2013, and on 3 May 2013, Swift J made a costs order which is the subject of this appeal. She ordered that the defendants pay pre-judgment interest on disbursements at the rate of 4 per cent above base rate.
2. It is not disputed that the claimants are entitled to interest on their paid disbursements. The narrow issue which arises for determination on this appeal relates to the rate of interest. The defendants contend the judge was wrong to have regard to the circumstances of the claimants when determining the rate of interest. They assert that given the way the claimants financed the litigation disbursements, interest should have been calculated by reference to the circumstances of their solicitors, Hugh James, rather than that of the claimants; and absent evidence to the contrary, Hugh James should be equated to a first class borrower so as to attract the conventional measure for such a borrower of 1 per cent above base rate.
3. For the reasons that follow I would hold that the judge was entitled to make the order she did, and I would dismiss the appeal.

Relevant background

4. The claimants in this case are former industrial workers of modest means who had worked at the defendants' works in South Wales and who brought personal injury claims against the defendants. Their solicitors in the litigation were (and are) Hugh James, a medium-sized firm based in Cardiff.
5. The claimants entered Conditional Fee Agreements (CFAs) with Hugh James drafted on the Law Society's model, which provided that payment of the solicitors' charges was conditional on success, but disbursements were payable, win or lose (albeit the expectation in such cases would be that if the claimants lost, the disbursements would be claimed against ATE insurance, not from the claimants).
6. There are a number of ways by which disbursements can be funded. A claimant with adequate means may pay the disbursements as the case progresses, or obtain a loan, from a bank for example, to do so. There are (or at least were before the Jackson reforms) commercial organisations which funded disbursements at a commercial rate of interest: the Law Society ran one such scheme referred to in Tankard v John Fredericks Plastics [2009] 1WLR 1731. The solicitors might fund the disbursements themselves by absorbing the cost as part of their overheads or by providing funding in return for payment of increased hourly rates of remuneration or an additional uplift in their success fee under a CFA.
7. In this case however, Hugh James agreed to fund those disbursements but only if their clients entered a disbursement funding agreement (the agreement/s) with the firm. We were told, as was the judge, that this form of agreement was novel, at least in relation to personal injury actions.
8. The agreements were in identical form for each of the lead claimants. Each was expressed to be a Credit Agreement exempted from the Consumer Credit Act 1974 and it was noted that payment of disbursements was subject to the CFA.
9. Under the agreements Hugh James agreed to provide the claimants with credit (i.e. the principal) in such sums as were required from time to time to pay disbursements up to a maximum of £5,000, though it could increase that amount should it prove necessary for the progression of the claim. If the case was successful, the credit would be repaid by the defendants or if it was unsuccessful, by the claimants' insurers. The charge for credit (i.e. the interest) was 4 per cent above base rate. Clause 5 of the agreement provided that the client would be responsible for payment of the charge for credit if the case was successful and would pay it to Hugh James after the damages had been received by Hugh James on the client's behalf.
10. Before the hearing, the defendants wished to satisfy themselves that the agreements were genuine and valid agreements for the payment of interest. They accordingly asked for, and the judge ordered, the disclosure of the agreements themselves and of the provisions in the CFAs relating to the obligation to pay disbursements, and interest or credit charges on those disbursements. The defendants also wrote to Hugh James asking why it was said that the agreements were exempt agreements for the purposes of the Consumer Credit Act 1974. In a letter dated 20 March 2013, Hugh James replied. They said the claimants' case was that the agreements were exempt because they did not provide regulated credit. They went on to say: "The claimants' repayment obligations are expressly contingent on recovery of interest from your client and principal either from your client or their ATE insurer. A debt which is contingent on the occurrence of a future event – such as the availability of a third party indemnity – does not qualify as credit within the meaning of the relevant legislation."

The hearing and the judgment below

11. By the time of the hearing, a number of matters were not in contention or were common ground. First, it was not suggested that these were anything other than genuine and valid agreements. Secondly, the defendants conceded that the claimants were in principle entitled to pre-judgment interest on disbursements. Thirdly, the parties agreed that though these were personal injury claims it was appropriate to adopt the approach taken in the Commercial Court to assessing the appropriate rate of interest on costs. Fourthly, the defendants accepted 4 per cent above base rate was not an excessive or unreasonable rate of interest to charge for borrowing by claimants who were private individuals of modest means. Their argument was however that in reality the claim for interest was not one made by the claimants, who were never at risk of having to pay any interest, but was a claim made by Hugh James. The agreements therefore were no more than a device to enable Hugh James to recover interest on disbursements they were funding at a rate of their choosing. There was no evidence before the court as to Hugh James' financial position or the rate at which they were able to borrow money or indeed that they had borrowed any money. Thus it was argued, there was no evidence to displace the usual presumption applied in the Commercial Court that the appropriate rate of interest was 1 per cent above base rate; and this was the rate which the judge should award.
12. At paragraphs 9 to 16 of her judgment, the judge set out the relevant law in relation to the issues she had to decide. It is not suggested before us that there was any error in her analysis though it is helpful to refer to the position in summary which I do at paragraphs 17 and 18 below.
13. The judge then gave the following reasons for rejecting the defendants' argument.

"24. The defendants' argument was that the imposition of the credit charges was a device to enable Hugh James to charge interest on the monies advanced on the claimants' behalf. It is of course true that, if the credit agreements had not existed, no interest would have been payable. However it does not follow that the claim for interest is in effect a claim by Hugh James, rather than by the claimants. The position is in reality no different from that which would have existed if the claimants had taken out loans from a bank to fund their disbursements and had agreed to pay interest to the bank. In that event, they would clearly have been entitled to claim from the defendant the monies paid by way of interest. In the PWGL, Hugh James fulfilled the role of a bank but on terms more advantageous to the claimants than those which would have been offered by the bank.

25. The defendants relied on the fact that, pursuant to the credit agreements, the claimants were not required actually to pay out any interest as their claims proceeded and would not have been required to do so at all if their claims had failed. However, the fact that, under the credit agreements, the claimants' liability to pay the credit charges was contingent on the success of their claims does not seem to me to alter the nature of the agreements. The fact is that the agreements provided that, since the claims have succeeded, the claimants are liable to pay credit charges. That being the case – and absent any suggestion that the agreed rate of interest was excessive or unreasonable – I consider that the appropriate rate of interest on pre-judgment disbursements is 4 % above base rate."

The contentions on this appeal

14. Mr Walker QC acknowledges before us, as he did before the judge, that if the claimants had had to borrow money in the open market to fund their disbursements, the rate of interest they would have been charged would have been much higher than that charged under the agreements. But he says the judge was wrong to look at the position of the claimants for the purpose of determining the appropriate rate of interest to award. It is clear from what was said in the letter dated 20 March, that the claimants would not have to repay interest unless they recovered it from the defendants. Thus, they were never at risk of having to pay interest, a point he says the judge accepted as can be seen from her reasons for refusing permission to appeal. It follows that the claimants' claim for interest was effectively a subrogated claim by the solicitors who funded the litigation and that the claimants' liability to pay interest was notional rather than real. This should have led the judge to assess the rate of interest by reference to the solicitors' circumstances rather than those of the claimants.
15. Further, he says had it not been conceded that the claimants' liability to repay interest was contingent on the recovery of interest from the defendants, as the 20 March letter said, the defendants would or at least could have pursued an argument before the judge that the agreements were unenforceable under the Consumer Credit Act 1974.
16. Mr Williams for the claimants submits the defendants' arguments before the judge were misplaced, as is the even narrower point now taken in relation to the 20 March letter on this appeal. The fact that the lender was Hugh James, rather than, say a bank was irrelevant. In neither case could it be said the claim for interest on pre-judgment disbursements was a claim by the lender rather than the borrower. The agreement between the claimants and the solicitors was a genuine agreement as the defendants acknowledged, which gave rise to a real liability on the part of the claimants to pay interest in the event that they won their claims, which they did. The letter of the 20 March contained an obvious misstatement of the position, and the proposition that this led the defendants disadvantageously to change their position at the hearing, is not borne out by their reply to the letter or by what was said at the hearing below. The proper comparator for interest purposes therefore was the typical borrowing cost for borrowers of the claimants' class, that is, private individuals. On that footing, the rate of interest was a transparently modest one; and it wasn't rendered unreasonable because Hugh James agreed to waive interest if none was recovered.

Discussion

17. The power to order interest on costs, including pre-judgment interest on costs is derived from CPR 44.2 (6) (g). The equivalent rule was CPR 44.3(6)(g) before the Jackson reforms. The rule provides that the court may order "interest on costs from or until a certain date, including a date before judgment". The purpose of such an award is to compensate a party who has been deprived of the use of his money, or who has had to borrow money to pay for his legal costs. The relevant principles do not materially differ from those applicable to the award of interest on damages under section 35 A of the Senior Courts Act 1981. The discretion conferred by the rule in respect of pre-judgment interest is not fettered by the statutory rate of interest, under the Judgments Act 1838, but is at large. Ultimately, the court conducts a general appraisal of the position having regard to what is reasonable for both the paying and the receiving parties. This normally involves an assessment of what is reasonable having regard to the class of litigant to which the relevant party belongs, rather than a minute assessment which it would be inconvenient and disproportionate to undertake. In commercial cases the rate of interest is usually set by reference to the short-term cost of unsecured borrowing for the relevant class of litigant, though it is always possible for a party to displace a 'rule of thumb' by adducing evidence, and the rate charged to a recipient who has actually borrowed money may be relevant but is not determinative. See F & C Alternative Investments Ltd v Barthelemy (No 3) CA [2013] 1 WLR at paragraphs 98, 99 and 102 to 105; Bim Kemi AB v Blackburn Chemicals Ltd [2003] EWCA Civ 889 at 18 and for example, Fiona Trust & Holding Corporation v Privalov [2011] EWHC 664 (Comm).
18. The rate may differ depending on whether the borrower is classed as a first class borrower, an SME or a private individual. Historically at least, first class borrowers, have generally recovered interest at base plus 1 per cent, unless that was unfair or inappropriate though in the light of recent interest rate developments there is no presumption that base rate plus one per cent is the appropriate measure of a commercial rate of interest: see The Commercial Court Guide at para J14.1 (page 67). SMEs and private individuals have tended to recover interest at a higher rate to reflect the real cost of borrowing to that class of litigant: see for example, Jaura v Ahmed [2002] EWCA Civ 210, F & C Alternative Investments Ltd and Attrill v Dresdner Kleinwort Ltd [2012] EWHC 146 (QB).
19. As I have said, here the defendants did not take issue with the rate of 4 per cent above base rate if the relevant comparator was the claimants, rather than Hugh James. During the course of argument before us, Mr Walker also accepted that he could not have complained if having adopted the approach for which the defendants contended, the judge had then exercised her discretion by awarding the claimants interest at the rate of 2 or 3 per cent above base rate. The margin of difference between the parties, and the amount accordingly at stake is therefore small, even if the judge erred in the manner suggested by the defendants. But I do not accept that she did so.
20. These were personal injury actions brought by claimants of modest means for their own benefit. They needed to fund their claims and they borrowed to finance their disbursements at what was conceded to be a reasonable interest rate for private individuals in their circumstances, certainly in comparison to what would have been charged in the open market.
21. Under clause 5 of the agreement, payment of the interest was contingent on the claim being successful and damages actually being received. But as Mr Williams submits, this does not mean that the arrangements were "unreal" or "notional". The claimants did borrow money from Hugh James. It funded disbursements of over £787,500, a very substantial outlay for a medium-sized firm of solicitors on any view. The claimants won their claims and recovered damages. In the events which had happened, the liability had crystallised. Their interest liability was therefore no longer contingent. It was entirely real. Having succeeded, they were liable to pay for the funding advanced to them and the interest charged upon it.
22. During the course of argument Mr Walker suggested by reference to what was said in Giles v Thompson [1994] 1 AC 142, that disbursement funding agreements such as those entered into here, might be champertous and/or that that they might give rise to a breach of the indemnity principle. As Mr Williams points out, the law on costs has undergone some fundamental changes since Giles v Thompson was decided; and it is also difficult to follow the argument that the indemnity principle would not be satisfied if the contractual liability was real even in the limited circumstances contemplated. However, these issues were not raised before the judge or in the defendants' grounds of appeal or skeleton argument for this appeal, and I do not consider it is open to the defendants to raise them now.
23. As for the letter of the 20 March, which Mr Walker placed at the forefront of his submissions, I am unable to accept that the claimants made some form of binding concession in that letter which overrode the literal meaning of the agreement, which is the sole point upon which it seems to me, this appeal turns. The claimants' case as presented to the judge both orally, and in their written argument was based on the agreement. The fact that the defendants chose to make various concessions at the hearing does not mean that the claimants conceded there was no contractual liability to pay interest to their solicitors; and it clear, as I have said, that they did not make such a concession. The letter contained, as Mr Williams submits, an obvious misstatement of the effect of the agreement, which was what the court below was concerned to construe.
24. Nor do I accept that the letter led the defendants not to pursue a point which might otherwise have been to their advantage (i.e. whether or not the agreements were exempt under the Consumer Credit Act 1974). The correspondence between the parties and the transcript of the hearing before the judge show that their decision had nothing to do with the letter. It was made because the defendants thought the court would give permission for the agreements to be enforced, as it had powers to do under the Consumer Credit Act, even if the defendants' argument that the agreements were not exempted from its provisions was correct. The defendants did not take the point therefore because they decided it would get them nowhere.
25. We are concerned in this appeal with what the judge said and decided in her judgment, rather than seeking to unpick or construe her short reasons for refusing permission to appeal. There is no doubt to my mind that in her judgment, the judge accepted that the relationship between the claimants and their solicitors was governed by the agreement, and that the agreement, properly construed, gave rise to a real rather than a notional liability. As I have indicated, I think she was right to do so.
26. There were further arguments canvassed before us as to the consequences that would follow if the appeal were to be allowed, in particular as to the adequacy of evidence relating to Hugh James' circumstances before the judge, and whether the matter could be dealt with by this court or would have to be remitted to be dealt with by the judge; but in the light of my conclusions on the main point argued, if my Lord and Lady agree, it is unnecessary to consider those matters further. For the reasons given, I would dismiss this appeal.

Lady Justice Gloster:

27. I agree.

Lord Justice Patten:

28. I also agree.