England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		17th January 2011

 


Mr Justice Akenhead:

Introduction

1. I handed down my judgement in this adjudication enforcement case on 22 December 2010, reported at [2010] EWHC 3366 (TCC). In financial terms, the judgement was for some £42,000; although the claimed figure was for just over £100,000, some £67,000 was paid by the Defendant on 22 November 2010, before the hearing. I had to deal with the question of costs, which I was asked summarily to assess. Although I have informed the parties of the arithmetical result of that assessment, I reserved judgement because issues were raised about Conditional Fee Agreements ("CFAs") and After the Event Insurance ("ATE Insurance") and the extent and scope of their recovery.
2. It is now not infrequently the case that claimants, seeking the enforcement, usually summarily, of adjudication decisions, are securing CFAs and, less commonly, ATE Insurance. It is difficult to avoid an inference, sometimes at least, that this is being done so as to impose greater economic pressure on the defendant to settle early, even in circumstances in which the defendant might have a reasonably arguable defence to the summary enforcement. It must be borne in mind that the large majority of adjudication enforcement Claims, statistically, are successful. This is because there are very limited grounds upon which to challenge adjudicators' decisions and there is a body of case law both in the Court of Appeal and at first instance which underpins this. It must also be remembered that most adjudication enforcements are resolved within one month of issue of the proceedings and with a substantive hearing lasting two hours or less. The costs of a successful claimant, depending obviously on the complexity of the issues, will often be assessed at between £6,000 and £12,000.

This Case

3. The details and history of this case are set out in the judgement handed down on 22 December 2010 (reported at [2010] EWHC 3366 (TCC)). In summary, the Second Adjudicator, by way of a revised decision, decided that Mr Wishart should pay Redwing £100,602, plus VAT, together with adjudicator's fees of £9,900, including VAT.
4. Mr Wishart had taken a number of jurisdictional points before the Second Adjudicator, only one of which was pursued in the Court proceedings, namely that to do with overlap between the First Adjudication decision and the Second Adjudication. The Slip Rule point accounted for £21,479.50, whilst the overlap point accounted for £33,641.30, although the two sums duplicate each other.
5. Following Mr Wishart's failure to honour the decision, the sums being payable within seven days, Redwing decided that it wished to issue proceedings. On 3 November 2010, Redwing entered into a CFA with its solicitors. In effect, Redwing, if it lost the proceedings, would only be liable to pay the other side's costs. If it won, it paid the solicitors' basic charges, disbursements, the success fee and the premium for ATE Insurance. The success fee was 100% of the solicitors' basic charges. The basic charges were not in any way discounted from the normal hourly rates of the firm.
6. The proceedings were issued the following day on 4 November 2010, together with a summary judgement application. The Court gave directions on 4 November 2010 and fixed the oral hearing for 2 December 2010. Unusually, no notification was given at that stage by the Claimant of the CFA. Indeed notification was not given to Mr Wishart until 19 November 2010. Informally, on 12 November 2010, Redwing's solicitors told Mr Wishart's solicitors that they were undertaking the proceedings on a CFA and were in the process of obtaining ATE Insurance.
7. On 16 November 2010, Redwing entered into an ATE Insurance with Templeton Insurance Ltd. The total sum insured was £20,000 of which £15,000 related to the "Opponent's costs" whilst £5,000 related to "Own Disbursements".
8. On 18 November 2010, Mr Wishart's solicitors served a witness statement from Mr Oakes. Paragraph 4 refers to the fact that Mr Wishart accepted that he was liable to pay £66,960.70 plus interest from 2 November 2010 together with the fee for the issue of proceedings; indeed the money was paid on 22 November 2010. By that statement, the two points which were the subject matter of the substantive judgement were raised and supported. On 24 November 2010 Redwing's solicitors served the second statement of Mr Quigley which addressed the points raised.
9. Before the formal handing down of the judgement, Redwing served its Statement of Costs which totalled something over £40,000. The solicitors' basic fees were £13,282.50, doubled by 100% for the success fee under the CFA to £26,565. To that was added the ATE Insurance premium of £8480, together with Counsel's fees and other disbursements.
10. At the handing down and costs hearing, there being no issue but that Redwing was entitled to its cost on a standard basis, I allowed for 38 hours of the solicitors' time at an average rate of £200 per hour and Counsel's fees of £5,000, an application fee of £105 and photocopying costs of £359.25. I fixed those as reasonable in all the circumstances. I deal below with the legal and factual issues relating to the CFA and ATE Insurance.

The Law

11. CPR Part 44.3 and 44.4 provide as follows:

"44.3-(1) The Court has discretion as to-

(a) whether costs are payable by one party to another;

(b) the amount of those costs; and

(c) when they are to be paid.

44.4(1) Where the court is to assess the amount of costs (whether by summary or detailed assessment) it will assess the costs-

(a) on the standard basis; or

(b) on the indemnity basis,

the court will not in either case allow costs which had been unreasonably incurred or are unreasonable in amount…

(2) Where the amount of costs is to be assessed on the standard basis, the court will-

(a) only allow costs which are proportionate to the matters in issue; and

(b) resolve any doubt which it may have as to whether costs were reasonably incurred or reasonable and proportionate in amount in favour of the paying party."

12. The Costs Practice Direction provides materially as follows:

"11.4 Where a party has entered into a funding arrangement the costs claimed may, subject to rule 44.3B, include an additional liability.

11.5 In deciding whether the costs claimed are reasonable and (on a standard basis assessment) proportionate, the court will consider the amount of any additional liability separately from the base costs.

11.6 In deciding whether the base costs are reasonable and (if relevant) proportionate the court will consider the factors set out in rule 44.5.

11.7 Where the court is considering the factors to be taken into account in assessing an additional liability, it will have regard to the facts and circumstances as they reasonably appeared to the solicitor or counsel when the funding arrangement was entered into and at the time of any variation of the arrangement.

11.8(1) In deciding whether a percentage increase is reasonable relevant factors to be taken into account may include:

(a) the risk that the circumstances in which the costs fees or expenses would be payable might or might not occur;

(b) the legal representative's liability to any disbursements;

(c) what other methods of financing the costs were available to the receiving party…

11.9 A percentage increase will not be reduced simply on the ground that, when added to base costs which are reasonable and (where relevant proportionate), the total appears disproportionate.

11.10 In deciding whether the cost of insurance is reasonable relevant factors to be taken into account may include:

(1) where the insurance cover is not purchased in support of a conditional fee agreement with a success fee, how its cost compares with the likely cost of funding the case with a conditional fee agreement with a success fee and supporting insurance cover;

(2) the level and extent of the cover provided;

(3) the availability of any pre-existing insurance cover;

(4) whether any part of the premium would be rebated in the event of early settlement;

(5) the amount of commission payable to the receiving party or his legal representatives or agents."

13. In Kris Motor Spares Ltd v Fox Williams LLP [2010] EWHC 1008 (QB), Mr Justice Simon sitting with assessors on a costs appeal considered the recoverability of ATE Insurance premiums. Mr Justice Simon in his judgement said:

"32. I have been referred to a number of cases in which the Court of Appeal and the House of Lords have considered the costs of legal expense insurance: Callery v. Gray No.1 [2001] 1 WLR 2112 (CA), Callery v. Gray No.2 [2001] 1 WLR 2142 (CA), Callery v Gray (Nos 1 & 2) [2002] 1 WLR 2000 (HL); Rogers v Merthyr Tydfil County Borough Council [2007] 1 WLR 808 (CA).

34. On the proper construction of s.29 of the Access to Justice Act 1999 and the applicable Civil Procedure Rules, ATE insurance premium can in principle be recovered as part of a party's costs, see Callery v. Gray No.1 (CA) above, at [100]. In that case the Court did not feel able to express any view on the reasonableness of ATE premium; and for that reason, directed an inquiry before Master O'Hare, following which the Court would give a further judgment. It was following the report of Master O'Hare that the Court of Appeal revisited the question of the reasonableness of ATE premium in Callery v. Gray No.2 (above).

35.There is no presumption that the premium is reasonable, unless the contrary is shown. Master O'Hare, who had investigated premiums for different classes of business, concluded that 'it was reasonable to presume as a starting point that a premium was reasonable unless the contrary was shown.' The Court of Appeal in Callery v. Gray No.2 rejected this approach at [69].

We do not think it correct to start with Master O'Hare's presumption. When considering whether a premium is reasonable the court must have regard to such evidence as there is, or knowledge that experience has provided, of the relationship between the premium and the risk and also the cost of alternative cover available. As time progresses this task should become easier.'

36. Two points should be noted. First, the amount of the premium in that case did not strike the Court as 'manifestly disproportionate to the risk' [70]; and secondly, the Final Report of Lord Justice Jackson does not suggest that an assessment of the general reasonableness of premiums for ATE insurance has become any easier.

37. When Callery v. Gray was considered by the House of Lords, there were expressions of concern that the new funding regime should not 'confer disproportionate benefits on ... After the Event Insurers ...', see for example Lord Bingham at [10], Lord Nicholls at [14-16], Lord Hope at [60]

38. The point was expressed clearly by Lord Hoffman at [43-44]:

43 … ATE insurers do not compete for claimants, still less do they compete on premiums charged. They compete for solicitors who will sell or recommend their product. And they compete by offering solicitors the most profitable arrangements to enable them to attract profitable work. There is only one restraining force on the premium charged and that is how much the costs judge will allow on an assessment against the liability insurer.

44. Again, the costs judge has absolutely no criteria to enable him to decide whether any given premium is reasonable. On the contrary, the likelihood is that whatever costs judges are prepared to allow will constitute the benchmark around which ATE insurers will tacitly collude in fixing their premiums. In its submissions to Master O'Hare, Temple said that the court "should not arrogate to itself the functions of a financial regulator of the insurance industry": see [2001] 1 WLR 2142, 2164, para 22. I am sure that is right, because the costs judge is wholly unequipped to perform that function. But that does not mean that some form of financial regulation is not necessary. Such regulation is normally considered necessary in those parts of the economy in which market forces are insufficient to produce an efficient use of resources. And that seems to me to be the position in ATE insurance, in which the premiums are not paid either by the claimants who take out the insurance or by the solicitors who advise or require them to do so.

39. This paradox that the cost of premiums is only confined by the amount decided as reasonable by judges who are not in a position to decide what is reasonable, was picked up by the Court of Appeal in Rogers v. Merthyr Tydfil (above) at [116-117], under the heading, 'Evidence justifying the ATE premium claimed.'

117 ... District judges and costs judges do not, as Lord Hoffmann observed in Callery v Gray (Nos 1 and 2) [2002] UKHL 28 at [44]; [2002] 1 WLR 2000, have the expertise to judge the reasonableness of a premium except in very broad brush terms, and the viability of the ATE market will be imperilled if they regard themselves (without the assistance of expert evidence) as better qualified than the underwriter to rate the financial risk the insurer faces. Although the claimant very often does not have to pay the premium himself, this does not mean that there are no competitive or other pressures at all in the market. As the evidence before this court shows, it is not in an insurer's interest to fix a premium at a level which will attract frequent challenges.

44. I have concluded that in a case where the issue is raised as to the size of the premium there is an evidential burden on the paying party to advance at least some material in support of the contention that the premium is unreasonable. I have reached this conclusion in the light of the cases which I have cited, and in particular Rogers v. Merthyr. Despite the doubts about the operation of the Market, the Court of Appeal was satisfied that it was not in the insurer's interest to fix a premium at a level which would attract frequent challenges; and that a Master was not in a better position than the underwriter to rate the financial risk that the insurer faced. Where a real issue was raised the Court envisaged the hearing of expert evidence as to the reasonableness of the charge. If an issue arises, it must be raised by the paying party. This is not to reverse the burden of proof. If, having heard the evidence and the argument, there is still a doubt about the reasonableness of the charge that doubt must be resolved in favour of the paying party, see (for example) Lord Scott of Foscote in Callery v. Gray (Nos 1 & 2) at [126]. In the present case, no evidence was deployed by KMS which might have assisted the Master; and Fox Williams received no further requests for information. On the material he had it cannot be said that the Master Rogers's conclusion on the level of premium was wrong."

14. There are also some procedural requirements (CPR 44.15.1) that the party with a CFA or ATE insurance must provide information about in accordance with the Practice Direction. Paragraph 19.2(2)(a) requires that a claimant with a funding arrangement in place before starting proceedings must file a notice of that arrangement. CPR 44.3B(1) provides:

"Unless the court orders otherwise, a party may not recover as an additional liability-

(c) any additional liability for any period during which that party failed to provide information about a funding arrangement in accordance with a rule, practice direction or court order."

15. One can draw all this together:

(a) In relation to CFAs and ATE Insurance, the basic costs rules and practice about reasonableness and proportionality apply. Thus, to the extent that the mark-up or uplift under the CFA or the premium for the ATE Insurance is unreasonable or disproportionate, it should be disallowed, at least on a standard assessment.

(b) A CFA percentage increase will not be reduced simply on the ground that, when added to base costs which are reasonable and (where relevant proportionate), the total appears disproportionate.

(c) A primary factor in considering the reasonableness of the percentage increase must be the prospects of the claimant succeeding on its claim. This is to be judged primarily as at the date that the CFA is entered into. The greater the prospects of success, the lower the reasonable and proportionate percentage will be. It is difficult to be prescriptive about this however and there is no magic sliding scale. Where the chances of success, judged objectively at the time when the CFA is entered into, are about even or less, the greater the justification will be for a 100% mark-up. Where the chances of success are great, there will almost invariably be a strong feeling that the CFA mark-up should be significantly discounted. Where the claimant was as good as bound to win, no mark-up may be allowed.

(d) Similar considerations apply to the ATE Insurance. It must be a reasonable presumption that premiums are linked to an assessment of risks and the prospects of success in the litigation. The premium which can be allowed on a costs assessment can be adjusted downwards to reflect the fact that at the time when the insurance was entered into the prospects of success were good or high.

(e) Having regard to the judgement of Mr Justice Simon in the Kris Motor case (which addressed a detailed assessment of costs), it may well be that somewhat different considerations apply on a summary assessment, particularly in a relatively low value claim, where it would be disproportionate to expect what would in effect be expert evidence to be adduced as to the unreasonableness of the premium. As he said at Paragraph 35 of his judgement, there is no presumption that the premium is reasonable. On a summary assessment at least, one should be able to look at the amount of costs cover provided by the ATE Insurance and compare it with the premium to form some realistic view as to the assessment of risk which must have been taken by the insurer. One must bear in mind that on a standard, as opposed to an indemnity, basis of costs assessment, the burden of proof as to what is reasonable is on the party entitled to the costs to establish what is reasonable.

(f) The notification requirements relating to funding arrangements are and are considered important. The use of the word "must" in CPR 44.15.1 and Paragraph 19.2(2)(a) of the Practice Direction is used and CPR 443B(1) use of the connotation of failure to comply with the notification requirements suggests that. The reason is that a potential paying party may wish to make its dispositions, as soon as it knows formally what costs risk it faces. Those dispositions may include simply admitting liability as soon as possible or paying in to court. It should follow that, unless there is a good reason for non-notification in accordance with the rules, the default position to be adopted by the Court is that set out in CPR 443B(1). Thus, generally, the successful party should not recover for its enhanced CFA percentage uplift for the period before the notification.

16. It is also necessary to consider whether and to what extent CFAs and ATE Insurance have any part to play in adjudication enforcement cases, particularly in the TCC. There is no exemption, as such, in the Rules for these cases. It must follow that parties are entitled to enter into such funding arrangements in such types of case. However, it needs to be borne in mind that the large majority of reported cases on adjudication enforcements are successful and indeed in almost every case the claimants are sufficiently confident to pursue summary judgement applications on the basis that there is no realistic defence. It must follow that courts, particularly the TCC which deals with virtually all such cases, will think long and hard about allowing substantial CFA mark-ups, particularly when there is a summary judgement application by the party with the CFA. It is important that claimants do not use CFAs and ATE insurance primarily as a commercial threat to defendants. It is legitimate for the Court to ask itself whether, in any particular case, a CFA or ATE Insurance was a reasonable and proportionate arrangement to make.

Discussion

17. It was said that Redwing was unable to pay for its own costs of and occasioned by the enforcement proceedings. That was just an assertion, there being no evidence about it. Given that the value of the works in question were about £1million, I can not infer that this was the case. Given that the onus of proof is on Redwing, I can not find that the reason for entering into the CFA was an inability to pay. What can be presumed however is that, as with almost every contractor in the country during these times of economic hardship, it is probably the case that there would be some cash flow problems. I do not consider that it was unreasonable, as such, of Redwing to enter into a CFA and obtain ATE Insurance.
18. There appears to have been no good reason why notification of the CFA did not take place, as is usual, when the Claim Form was issued on 4 November 2010. It may be that Redwing or its solicitors felt that they had to await the securing of the ATE Insurance but that would not be a good reason. It should follow that Redwing should not be entitled to the extra mark-up on solicitors' fees incurred before the formal notification on 19 November 2010.
19. Whilst the CFA refers to the success fee (100% of the solicitors' basic fees) which is said to have been based on the solicitors' assessment of the risks of the case, no such assessment has been provided to the Court, if indeed it was ever committed to paper. I have formed the clear view that the risks were limited:

(a) The very fact that Redwing and its solicitors pursued a summary judgement application suggests strongly that they were of the view that Redwing stood good chances of succeeding.

(b) Judged at the time when the CFA was entered into, there was little or no chance that Redwing would actually wholly fail in the proceedings which it issued. This is because there were only two arguable points against enforcement which were the two which were argued and these only accounted for some 40% of the adjudicator's decision. Thus, it was almost inevitable that, at the very least, Redwing would have succeeded in securing a judgement for the sum of £66,960.70 eventually paid on 22 November 2010 by Mr Wishart, which was the sum within the adjudicator's decision which was not affected by the two points argued before this court. There had been several other jurisdictional points which had been raised before the adjudicator but on their face they seem to have been weak points which in the result were rightly not even argued before the Court.

(c) So far as the two points which were argued are concerned, the slip rule point was not a very good point. Although arguable, it suffered from the obvious weaknesses highlighted in the substantive judgement at Paragraphs 35 to 39.

(d) The other point was more substantial, relating as it did to an overlap between the wording used in the First Adjudication decision and one of the issues within the dispute referred to the Second Adjudicator. That was reasonably arguable and had some limited prospect of success.

(e) Overall, whilst the chance of losing the case, judged as at the time when the CFA was entered into was nearly nil, there was still a costs risk if one took into account or foresaw the possibility of what actually happened, namely Mr Wishart paying out what was not seriously in issue, and then fighting the case on the two issues upon which he did fight it. If one was assessing the chances only on these two issues, one would have been in the range of 60-70%. However, one can not ignore the fact that, as at the date of the CFA, the perception in Redwing's camp should have been that it was almost bound to be successful on its Claim at least for some £70,000 and that would carry, all things being equal, the bulk of the costs.

20. As for the ATE Insurance, on its face the premium was very high for a case which at the time it was arranged, 16 November 2010, before there was any hint from Mr Wishart's legal team that it was going to accept liability and pay out just under £70,000 of the £100,000 claim, Redwing was likely to be the substantial winner. A premium of £8,480 for cover of £20,000 appears substantially excessive, judged at that time.
21. As indicated to the parties at the conclusion for the costs hearing, I had and do form the view that Redwing should have 20% of the CFA uplift and of the ATE Insurance premium. The reasons are as follows:

(a) A 20% uplift of basic solicitor's charges is reasonable in circumstances in which the Claimant was virtually bound substantially to "win" its Claim, judged at the time when the CFA was entered into, with the only real risk being that the Defendant might do what it did, namely pay out what he was virtually bound to lose and fight the balance, the risk of losing of which was somewhere between 30 and 40%.

(b) In relation to the ATE Insurance premium, there being no presumption that it was reasonable and bearing in mind that this is a summary assessment of costs on a standard basis, whilst one can understand why a claimant might well want the safety net of such insurance, the risk of losing, judged at the time when it was entered into, was sufficiently low to undermine the reasonableness of imposing anything near 100% of it on the paying party in this case. In the absence of any evidence from the Claimant as to the reasonableness of the premium but without deciding that as such the premium is itself unreasonable, I have formed the view that it would only be reasonable to make Mr Wishart pay 20% of the premium. I must and do presume that a wholly unrealistic assessment of risk was made to justify the imposition of a premium of some 42% of the insured amount. I have a very real doubt that anything more is reasonable.

(c) Particularly in relation to the allowance for the CFA mark-up, I have taken into account in a broad brush manner the fact that part of Redwing's costs were incurred before it formally notified Mr Wishart that a CFA was in place and that it would not be entitled to any mark-up on cost incurred before 19 November 2010.

Decision

22. It follows from the above that so far as costs are concerned that Redwing is entitled to costs on a standard basis but there should only be a 20% mark up or enhancement of the solicitor's charges as I have allowed them and only 20% of the ATE Insurance premium allowed, together with the other allowances which I have made on this summary assessment.