England and Wales High Court (Senior Courts Costs Office) Decisions

IN THE HIGH COURT OF JUSTICE
SENIOR COURTS COSTS OFFICE

		Clifford's Inn, Fetter Lane London, EC4A 1DQ
		16/01/2018

Master James :

1. This matter came before the Court for the resolution of Preliminary Issues as to the Claimants' (Receiving Parties') retainer.
2. Without reciting the full factual background (which is set out in the Claimants' first Skeleton Argument, dated 1 September 2017 and the Defendants' first Skeleton Argument also of 1 September 2017) the facts upon which this Judgment must bear, are that on 19 March 2015, the Claimants entered into a Damages-based Agreement ("DBA") with Candey, under which Candey would receive 50% of such proceeds as were recovered in the claim. On 22 June 2016, the Defendants were informed of the existence of this DBA. On 2 November 2016, less than two weeks before a Trial listed to take place on 14 November 2016, the Claimants entered into a Conditional Fee Agreement ("CFA") with Candey, to replace the aforementioned DBA. The matter settled in the Claimants' favour for £625,000 inclusive of VAT and interest (but excluding costs) on Saturday 12 or Sunday 13 November 2016 (there seems to be some confusion but the precise date matters not). As the first day of Trial was on a Monday, settlement was reached on the eve of Trial if not quite at the door of the Court.
3. I have, in addition to the Claimants' and Defendants' first Skeleton Arguments both of 1 September 2017, had regard to a second Skeleton Argument of the Claimants (headed "Further Note of Argument") dated 4 September 2017, as well as to the Defendants' second Skeleton Argument dated 4 September 2017.
4. I have endeavoured to set out the respective parties' arguments in a sensible order below, they are drawn from these four documents and from the Bundles, as well as the submissions made by Mr Stacey and Mr Patel during the Hearing.
5. In their Points of Dispute, the Defendants (Paying Parties) asserted that they should not be held liable for anything more than the amount generated had the original DBA remained extant at the time of settlement, further stating that they had believed that the DBA was still in existence when they settled the matter.
6. The amount which the Defendants state they would be liable to pay under the DBA, would be a maximum of £250,000 plus disbursements other than Counsel's fees; that figure is not controversial between the parties. Nor is the fact that the Defendants were informed that the matter was being funded under a DBA but were not then informed that the Claimants had switched to a CFA some ten days before settlement was agreed upon.
7. The subject of this Judgment is, put simply, whether the Claimants should be held to the terms of the DBA, at least as far as their party and party recovery from the Defendants, is concerned. It should be noted that this decision would (if it went the Defendants' way) have a salutary effect upon the Claimants' costs; as drawn these are stated at £523,032.76 and a "cap" of £250,000 plus disbursements would therefore clearly leave the Claimants with a six-figure hole in their costs recovery. Equally this decision (if it went the Defendants' way) would likely end the matter as, with costs as drawn at £523,032.76, if they were subject to a "cap" as above referred-to, the Defendants would have to reduce the costs below that "cap" on an item-by-item assessment before they would see any benefit from that exercise.
8. The Defendants point out that the amount originally pleaded was for £4.5 million based upon a quantum meruit or alternatively a success fee of 5% based upon the sale of shares in Eastern Airways International Limited (D1) owned by Bryan Huxford (D2) and Richard Lake (D3), and upon a pleaded case that D2 and D3 had received £75 million (£4.5 million therefore comprising 5% or £3.75 million, plus VAT).
9. Had the claim succeeded at or around that figure, the Defendants say, Candey would have received half, or £2.25 million so that even after deduction of disbursements (excluding Counsel's fees) and VAT, they would have recovered a sum considerably over £1 million for their own costs under the terms of the DBA.
10. However, when it transpired that the share sales in dispute realised £26,500,000, the amount claimed at 5% fell from £4.5 million to £1,325,000 (which, confusingly, equates to exactly 5% of £26,500,000 but this time with no VAT added). Thus, Candey's maximum recovery (50%) likewise fell from well over £1 million to £662,500 and given that the costs now claimed for a settlement pre-Trial are £523,032.76 one can readily see that on those figures Candey did not have much of a "cushion" to cover the expense of a contested Trial even if it had resulted in a recovery of the full £1,325,000. Had a Trial awarded anything much less than that figure, Candey would have incurred a loss on the Trial which (the Defendants say) is why the Claimants were encouraged to change to a CFA. This (they say) is not fair; Candey entered into the DBA on the basis that they would have walked away with costs worth about double the work actually done, had their valuation of £4.5 million been accurate and it is not (the Defendants say) right that, upon realising that valuation was almost 350% of the correct figure, Candey should renegotiate terms to the Defendants' detriment. In effect, the Defendants say, Candey are hoist by their own petard; they were prepared to take a hefty profit had matters gone their way and should now be compelled to take a (somewhat less hefty) loss in consequence of their having gone the Defendants' way so far as valuation is concerned.
11. The Defendants (by Mr Shail Patel of Counsel) assert that they had factored into their considerations when settling the matter, the payment of costs that would be due under the DBA that they had believed was then in place. In other words, when agreeing to settle at £625,000 they had in mind (by reference to the maximum claim permissible under a DBA pursuant to the 2013 Regulations) no more than a further 50% on top of that by way of reimbursement of the Claimants' costs through detailed assessment.
12. By operation of the indemnity principle, since the Claimants could not recover from the Defendants any more than they were obliged to pay their own Solicitors, even if Candey's actual time spent/work done came to a much higher figure (such as £523,032.76) per the DBA Candey could not bill the Claimants more than the 50% DBA "cap" (or £250,000 plus disbursements as on these facts it has been calculated). Therefore the Claimants, who are only entitled to an indemnity for what they must pay their own Solicitors, could not look to the Defendants for more than that amount either if the DBA were binding.
13. The Claimants accept that the Defendants were not told about the switch from DBA to CFA shortly before the Hearing (and, as it turns out, even more shortly before the settlement). However, they assert that this matters not, and give several reasons for this.
14. First and foremost, the Claimants (through Mr Dan Stacey of Counsel) assert that both the DBA and the CFA are valid and enforceable retainers and that there is no effective ground upon which the Defendants can criticise the Claimants for the decision to switch from one form of funding to the other in and of itself.
15. They go on to point out that the claim for time spent/work done is the same as would have been advanced under the DBA and that the only difference would be the operation of the "cap" under the DBA, which was no longer a binding agreement/binding term between the parties at the time of settlement. Hence it would be quixotic to limit the Claimants' recovery by reference to the DBA "cap" when they themselves had agreed to lift that "cap" by entering into a CFA, ten days before the matter settled.
16. Furthermore, the Claimants state, the "cap" would not have been in either party's contemplation at or around the £625,000 settlement mark (£250,000 plus disbursements) on 2 November 2016, since the figures under discussion at that time were very different.
17. As to the Defendants' allegation that they had factored the DBA "cap" into their considerations (and hence presumably relied upon it in settling the case) it was asserted that there was no evidence of any such reliance. No Witness Statement exhibiting file notes or solicitor/client communications, had been produced for the Court's attention, and none of the party and party correspondence around the settlement gave any indication that the DBA was a factor. If in fact the continued existence of the DBA were so crucial to the Defendants (say the Claimants) it is "odd" that they did not contact Candey to check upon its status prior to settling.
18. The Claimants point out that, post-LASPO there is no obligation to tell an opponent in a case such as this about their funding arrangements, since the reason for doing so – warning their opponent that additional liabilities such as Success Fees and ATE Premiums may be mounting up – no longer exists. Therefore, if the Defendants settled upon the basis that the DBA "must" still be in place or else they would have heard about it, that is the Defendants' hard luck. I am putting this rather more bluntly than Mr Stacey did, but that is what it amounts to; the Claimants object to having their costs halved because the Defendants received bad advice on costs. That is, if in fact they received such advice at all, given the absence of any evidence as to what advice they did or did not receive and what reliance they did or did not place upon it.
19. The Defendants seek to rely upon Kellar v Williams [2004] UKPC 30 in which the Privy Council held that where a costs agreement was amended after Judgment (and hence after the making of the Costs Order) the Paying Party could elect to pay costs under the old agreement or the new, as best suited their client (quoting from paragraph 20 of that decision):

"They could do so on the ground, as the Chief Justice correctly held, that that amendment had come into existence subsequent to the making of the costs basis and so could be disregarded by the paying party if he wished."

20. Hence, for example, if the replacement costs agreement had some fatal flaw (such as to invalidate it entirely) then per the above case it would appear that the Paying Party could treat that as the extant agreement and seek to knock it out completely; the Receiving Party could not elect to rely upon the earlier and possibly valid agreement in defiance of the Paying Party's right to choose.
21. The Defendants cited this principle as applied by then Senior Costs Judge Hurst in Oyston v Royal Bank of Scotland [2006] EWHC 90053 (Costs) in which the learned Judge stated that, "Following the decision of the Privy Council in Kellar, it cannot be right that a Deed of Variation can be used to impose a greater burden on the Paying Party than existed before Judgment. The fact that the Client is in agreement, is of no assistance."
22. The Defendants further cited Warby J in Radford v Frade [2016] 4 Costs LR 643 in which the learned Judge stated that, "The underlying rationale is in my judgment that the effect of a Costs Order is to create a liability, subject to Assessment, those costs which a party has paid or is liable to pay at the time the Order is made. The liability to pay costs crystallises at that point and, although its quantum will remain to be worked out, that process must be governed by the liabilities of the Receiving Party as they stand at that time. To allow enforcement of a retrospective agreement which increases those liabilities would be to alter retrospectively the effect of the Court's Order."
23. Finally on the Kellar principle, the Defendants cited the current Senior Costs Judge, Master Gordon-Saker, in JN Dairies v Johal Dairies (23 August 2011) whereby, prior to an Appeal Hearing, the Receiving Party went from a private retainer to a retrospective CFA with a 100% uplift. The learned Judge stated that, "While it may or may not have been reasonable as between Burges Salmon and the Claimant and as between Burges Salmon and leading and junior Counsel to enter into bargains which amount to "double or quits" in respect of work already done, in my judgment it was not reasonable as between the parties. It was not reasonable to incur, overnight, a liability to pay significant sums – to pay almost twice as much as would otherwise have been payable had these arrangements not been entered into."
24. I should add that, as will be seen below, this case involves a CFA "lite" and a post-LASPO one at that, so that Master Gordon-Saker's understandable concern as to incurring "double or quits" costs as between Solicitor and Client or as between the parties, does not apply since there is no Success Fee involved. Instead what Candey and the Claimants did was to move from a DBA whereby Candey would at best be paid a fraction of what the case had actually cost to run, to a CFA under which Candey could at least try to recover the true cost of the action (bearing in mind that on the Standard Basis a recovery at something between two-thirds and three-quarters of the Bill would not be unusual).
25. The Defendants acknowledge, per Mr Patel's Skeleton Argument, that the decisions cited all relate to the position after a Costs Order has been made; they submit that it should also apply after a deemed Costs Order has been made by the acceptance of a Part 36 offer within the relevant period and whilst I am not called upon to decide that specific point I can see that there is some force in that argument.
26. However, Mr Patel goes on to state that the Kellar principle must surely apply where (as he states was the case here) there is a Part 36 offer open which the Receiving Party intends to accept and indeed does accept the following day; surely, he says, that is an abuse of the Kellar principle.
27. I do not agree with Mr Patel's characterisation of how this case concluded. The case was very near to Trial (as of Wednesday 2 November 2016, the date upon which the CFA was entered into, there were seven working days to Trial) but it was not at Trial, much less post-settlement as in Kellar and the other cases above.
28. Nor (say the Claimants) was the case certain to settle on 2 November 2016. The parties' respective positions on that date, per their offers, were as follows:

28 Sept 2015	Defendant's offer	£155,000 (Part 36 offer)
9 September 2016	Claimant's offer	£1,250,000 plus costs (Calderbank offer)
7 October 2016	Defendant's offer	£350,000 incl. costs and interest (Calderbank offer)
21 October 2016	Defendant's offer	£300,000 plus costs (Part 36 offer, relevant period expired 11.11.16)

29. It will be seen from the above that the parties were at least £950,000 apart as of 2 November 2017. Given that the £350,000 figure offered on 7 October 2017 was stated to include costs and interest, whilst I do not have an exact figure for costs as at 2 November 2016, the final costs figure of £523,032.76 indicates that the costs some two weeks prior to that date must have been well into six figures.
30. Mr Patel certainly opines that "By late October 2016 Candey must have had somewhere near £0.5m of WIP (plus VAT and Counsel's fees)" but that is likely to be an overstatement if their total (party and party) bill including VAT and Counsel's fees is now £523,032.76. Equally, if the Defendants valued the matter at £155,000 on 28 September 2015, their Calderbank offer of £350,000 including costs and interest made just over a year later, could have been viewed by the Claimants as an offer of £155,000 damages plus £195,000 costs. The Claimants have not asserted that they viewed it as such, but a figure of £195,000 costs has at least as much basis in fact as Mr Patel's £0.5m; that is not a criticism of his approach but is given just to indicate what the parties' respective positions may have been prior to settlement.
31. Based on the Defendants' earlier October offer, the parties would certainly have been well over a million pounds apart, and just below a million pounds apart on their later October offer. I was shown correspondence during the Hearing that made it very clear that shortly before the matter settled, and therefore evidently on 2 November 2016, the Claimants' firmly stated position was to fight on for the full £1,250,000 plus costs, whilst the Defendants were standing upon their Part 36 offer of £300,000 plus costs. In fact, as stated above, the matter settled in the Claimants' favour for £625,000 inclusive of VAT and interest (but excluding costs) on Saturday 12 or Sunday 13 November 2016, almost two weeks after the Defendants' offer of £300,000.00.
32. The Claimants' case is that this change from DBA to CFA was not a mere tactical step to take advantage of a near-certain settlement; as far as they were concerned, the matter might well have fought on to Trial and the outcome thereof could not be predicted merely because a Defendants' Part 36 offer had been made; I have to say that based upon the facts and figures above referred-to I accept that submission. The Claimants did not receive an offer of £300,000.00, craftily change their retainer and then accept that offer a day later; they received an offer of £300,000.00, changed their retainer but fought or at least negotiated on for almost two more weeks, until the eve of Trial when they settled over the weekend for more than double what the Defendants had on the table at the time that the retainer was changed.
33. As such I do not find that the Claimants fall foul of the Kellar principle on the facts of this case and nor do I find that, once a Part 36 offer has been made, settlement is a near certainty. The number of cases in the SCCO in which the Paying or Receiving Party seeks the costs of a fully contested Assessment Hearing, based upon an effective Part 36 offer made prior to that Assessment taking place, are just one illustration of how that works in practice and I am sure both Mr Patel and Mr Stacey will be aware of cases in which a Paying Party makes a Part 36 offer on a commercial basis which is not accepted, and then goes on successfully to defeat the entire claim (e.g. in the SCCO by finding a flaw in the retainer). The syllogism that a Part 36 offer equates to a near certainty of settlement of the case, simply does not work.
34. The second limb of the Defendants' attack upon the Claimants' funding arrangements hinges upon whether or not those arrangements were reasonable. The Defendants aver (per Mr Patel's Skeleton Argument) that the lack of any evidence of what led the Claimants to abandon the DBA in favour of the CFA means that the Court has no proper basis upon which to decide that it was reasonable to make that switch and to incur those further liabilities. No evidence had been given of what (if any) advice Candey had given to the Claimants and Mr Patel sought to invoke the so-called Pamplin procedure whereby the Claimants could be put to their election as to whether to rely upon the advice given, in which case they must disclose it.
35. Mr Patel refers (at paragraph 37(3) of his Skeleton) to the Replies raising more questions than they answer, in that they stated that "…the effect of the change in the Claimants' retainer in costs was unknown at the time it was discussed…any outcome was entirely speculative…" In short, says Mr Patel for the Defendants, how could the Claimants have been properly advised at all, if the outcome was "…entirely speculative…"?
36. The Claimants rely upon Surrey v Barnet and Chase Farm Hospital and others [2016] EWHC 1598 (Foskett J with SCJ Gordon-Saker). In that case it was held that:

i) There is a need for Paying Parties to raise a genuine issue before any investigation into the reason for the change in funding, advice given etc., will be undertaken (see paragraph 110).

ii) Foskett J warns against a detailed assessment becoming "…an arena for a wide-ranging inquiry into the decision-making processes as between the Claimant and his Solicitors…" (paragraph 99 refers).

37. The Claimants assert that the Defendants do not even reach the threshold of establishing a genuine issue on the reasonableness of the change in funding from DBA to CFA, and that in fact they are simply trying to obtain a windfall from the late change in funding, which would leave the Claimants with a six-figure shortfall in their costs recovery. They add that if I were to entertain this argument to any extent Candey would have to put in evidence as to which they might well be hamstrung as the advice in question would be privileged and (I assume) they could not guarantee that the Claimants would agree to waive privilege.
38. In his paragraph 38 Mr Patel asserts that the Claimants have been left much worse off than if they had stuck with the DBA unless the CFA were a CFA "lite". In fact, the CFA is indeed a CFA "lite," in other words a CFA where the base costs are, as usual, conditional upon achieving a "win" but where there is not the added filip of a Success Fee payable out of the Claimants' damages (rather than by the Defendants; in this CFA which, being dated 2 November 2016, was post LASPO by over three and a half years, there would be no prospect of passing that Success Fee on to the Defendants as was proposed in the JN Dairies case).
39. Mr Patel's paragraph 38 attempts to number-crunch the new agreement to show that the Claimants have been left much worse off and in particular states that if the DBA had remained in place, the Claimants would have had a "cap" of some £280,000.00 on what they must pay to Candey, with a further £60,000.00 to White and Case (previous Solicitors) but that, "…[they] would have had an Order for Assessment of the full £583k, making it that much more likely that [their] costs liability would be covered by [their] recoveries, without a shortfall, or with a smaller one."
40. By the operation of the Indemnity Principle, if the maximum that the Claimants are obliged to pay Candey is £280,000.00 then the maximum that the Defendants must pay to the Claimants to reimburse their legal fees, would likewise be £280,000.00. The Claimants cite the case of General of Berne Insurance v Jardine Reinsurance Management Limited [1998] 1 WLR 1231 on this issue.
41. What Mr Patel is saying is that, with a Bill at £583,000.00, the chance of the Defendants getting it reduced as far as £280,000.00 let alone below that figure and hence leaving the Claimants with a shortfall to make up, is minimal. I have already referred above to the fact that if I decided that the DBA should stand and the "cap" operate, that would likely be the end of the matter because the Defendants (if they take a realistic approach) are fairly likely to leave it at that rather than trying to reduce the £583,000.00 figure below £280,000.00 over a contested Detailed Assessment – for example if they took two days and got it down to £300,000.00 they would not actually see any benefit and would be extremely ill-placed to argue against paying the full costs of the line-by-line Assessment which would likely run well into five figures.
42. Mr Patel refers again to JN Dairies stating that, as Candey would have received no fees at all upon losing the case even under the DBA, they could not say that it was reasonable to change to a CFA because they were not "giving up" anything (in JN Dairies it could at least be said that fees for which the Solicitors originally had a private retainer, would be put in jeopardy by a switch to CFA funding since, absent a "win" those fees would not be recoverable).
43. Having considered this matter long and carefully I again find in favour of the Claimants. The change in funding arrangements from a DBA to a CFA is not objectionable per se, as the Claimants (per Mr Stacey's first Skeleton Argument) submitted.
44. I agree with the Claimants' submission that the Defendants have not raised a "genuine issue" as far as reasonableness is concerned and therefore for present purposes, it was not for me to decide upon the attraction to the Claimants of an award of full damages plus full costs, or at least of costs on the standard basis to be Assessed if not agreed under a CFA, rather than of full damages out of which costs to a maximum of half of the damages award must be paid and with the Defendants' liability to repay those costs likewise "capped" at half the damages award under the DBA, but it seems straightforward enough. It is not that the Claimants would wish to "punish" the Defendants by incurring an extra costs burden just in order to pass it on to them, but why should the Claimants not take the opportunity to ensure that their Solicitors were paid (and that the Defendants were liable to pay) something much closer to what the case actually cost to run? There is not the "double or quits" attempt, as in JN Dairies to add a large, retrospective Success Fee to the costs; rather the attempt was to remove a "cap" which may have left Candey with an unrealistic recovery. In fact, if the case had settled at above a certain figure (Candey put it at £950,000) they would actually be worse off than had they stayed with the DBA.
45. Nor, for present purposes, was it for me to decide upon the specific point of whether the Defendants could have reduced these costs considerably had they settled the case sooner. However, the fact that their first offer of £155,000.00 was roughly 25% of the ultimate settlement figure, does not give the lie to such an inference.
46. There was also some argument before me at the Hearing as to whose "fault" it was that Candey and/or the Claimants had so overstated the value of the case at the outset. The Defendants asserted that the value could easily have been ascertained from publicly-available documents (relating to the disputed share sales) and the Claimants asserted that if the Defendants had wished to see an end of the matter they could have been forthcoming with this information at a much earlier stage.
47. These may be matters upon which I have to rule if the matter comes back for a line-by-line Assessment, when questions of reasonableness, proportionality and conduct may be relevant to the quantum rather than the principle of the Claimants' costs recovery.
48. However, upon the specific question of whether it is against the Kellar principle to switch from a DBA to a CFA in the way that the Claimant has done here, I find that it was not, and on the question of whether it was reasonable to do so I find that the Defendants have not reached the threshold of a genuine issue (per Surrey v Barnet and Chase Farm Hospital and others) and as such my comments above to the effect that it does not at first blush seem unreasonable, are perhaps obiter.