Recovering the cost of litigation funding in international arbitrations

International arbitrations are substantial cases which involve substantial claims. A team of leading counsel, junior counsel and suitable experts does not come cheap and even if solicitors can be found to act on a contingency basis, disbursements are likely to have to be funded by the client.

It is at this point that litigation funding comes into its own, but the price to be paid for the financial assistance of a litigation funder is likely to be heavy. To what extent can this be recovered from the other side, if it lends itself to victory in the arbitration ?

The centuries old prohibition against maintenance and champerty is now fast fading, most obviously since the passage of the Criminal Law Act 1967 but also due to the respectability given to the practice by numerous appellate decisions in England and Wales, developments on the international scene and most latterly the Jackson Report.

Although there are many uncertainties about costs awards in international arbitrations, in some respects the power of an arbitrator when it comes to questions of costs, is far wider than that of a High Court judge sitting in the Commercial Court.

In particular, it remains of interest to consider what might fall within the scope of “other costs” in section 59 the Arbitration Act 1996? It cannot mean all types of economic loss that might be sustained in litigation. The statutory focus is narrower than that, but it might be stretched widely enough to include the cost of litigation funding, or for example the recovery of ATE premiums

In ordinary litigation, the cost of litigation funding is a paradigm example of a cost of funding that has never been recoverable. Other examples are the cost of general or bridging loans, or less obviously, success fees and ATE premiums, which required statutory intervention through the Access to Justice Act 1999, to be recoverable as a cost inter partes.

Instead, the solution adopted by Parliament initially, to compensate a successful party who has made expenditure on legal costs during the course of litigation is an award of interest.

An award of interest compensates the successful party for the loss of use of their money, whilst funding legal costs. This is not and has never been an indemnity for the successful party, for their economic loss or opportunity costs of funding the litigation. Instead the principles of such an award are governed by established legal principles.

Through the passage of the Judgment Act 1838 initially and then formulated through caselaw over the years, a mature and established body of principles has been developed through caselaw to award interest on costs initially from the date of an award, then latterly through further statutory intervention by a power to award pre-judgment interest on costs.

But the incidence of interest and the rate and the court’s discretion in these areas, is circumscribed by legal principles as described below. It is important to note that although an award of interest on debt or damages is primarily compensatory in nature, the award of interest proceeds on wholly different lines to an award of damages. The court is exercising a discretion, but as a judicial discretion, it must be exercised judicially in accordance with principle.

Other factors than purely the purely compensatory have informed these principles as is set out in the caselaw. It should be noted that after judgment any award of interest on costs is set by the Judgment Act 1838 at a statutory rate of 8% simple interest.

In the decision of Hunt.v.RM (Douglas) Roofing Limited Lord Ackner noted the following when explaining why interest on costs should be awarded from the date of the order for costs, and not the date of a certificate of taxation quantifying the sum. It also explained the purpose of such a rule: to provide justice to the client who has funded the litigation and to avoid barristers, solicitos and expert witnesses involuntarily funding the costs of litigation. Had it been possible to claim as an item of costs the cost of funding, an award of interest would be otiose and serve no purpose:

The Court of Appeal in K. v. K. (Divorce Costs: Interest) [1977] Fam. 39 misapprehended the nature of the amendment made to the new form by the Rules of the Supreme Court (Revision) 1965, for the reasons already stated. The decision in Pyman’s case [1884] W.N. 100 as to the effect of the Rules of 1883, as approved by the Court of Appeal in Boswell’s case, 57 L.J.Ch. 101 was correct. Accordingly the incipitur rule prevails. I respectfully agree with the observations of the Court of Appeal that a satisfactory result cannot be achieved in every case, but in my judgment the balance of justice favours the incipitur rule for the following reasons. 1. It is the unsuccessful party to the litigation who, ex hypothesi, has caused the costs unnecessarily to be incurred. Hence the order made against him. Since interest is not awarded on costs incurred and paid by the successful party before judgment, why should he suffer the added loss of interest on costs incurred and paid after judgment but before the taxing master gives his certificate? 2. Since, as the Court of Appeal rightly said in the Erven Warnink case [1982] 3 All E.R. 312 payments of costs are likely nowadays to be made to lawyers prior to taxation, then the application of the allocatur rule would generally speaking do greater injustice than the operation of the incipitur rule. Moreover, the incipitur rule provides a further necessary stimulus for payments to be made on account of costs and disbursements prior to taxation, for costs to be more readily agreed, and for taxation, when necessary, to be expedited, all of which are desirable developments. Barristers, solicitors and expert witnesses should not be expected to finance their clients’ litigation until it is completed and the taxing *416 master’s certificate obtained. If interest is not payable on costs between judgment and the completion of taxation, then there is an incentive to delay payment, delay disbursements and taxation. 3. It is common ground between the parties that the unsatisfactory situation illustrated in K. v. K. can be simply dealt with by an express agreement between the solicitor and his client that any interest recovered on costs and disbursements after judgment is pronounced but before the taxing master’s certificate is obtained, which costs and disbursements have not in fact been paid prior to taxation shall as to the interest on the costs belong to the solicitor, and as to the interest on disbursements be held by him for and on behalf of the person or persons to whom the disbursements are ultimately paid.

For the sake of completeness I should add that Mr. Goldblatt strongly argued that an order for payment of costs to be taxed cannot be a judgment debt within section 17 of the Act of 1838 because until taxation has been completed, there is no sum for which execution can be levied. This point appears to have been raised in the Erven Warnink case and disposed of at the end of the judgment on the basis that the courts have accepted since its enactment, that section 17 does apply to such a judgment and accordingly the law has gone too far for that argument. I agree. This acceptance is because a judgment for costs to be taxed is to be treated in the same way as a judgment for damages to be assessed, where the amount ultimately ascertained is treated as if it was mentioned in the judgment – no further order being required. A judgment debt can therefore in my judgment be construed for the purpose of section 17, as covering an order for the payment of costs to be taxed.

The Court of Appeal in Motto.v.Trafigura Ltd made the following observations on the prohibition on the recovery of the costs of funding and why the cost of borrowing was not an item of “costs” that could be recovered under an order for costs.

Instead the Court of Appeal held that the position under the CPR was the same as under the RSCL the cost of borrowing to pay solicitors bills was not recoverable as costs and although the CPR has introduced an express power to award interest on costs prior to the order for costs:

104 The issue here is whether the costs of and in connection with the work undertaken by Leigh Day, counsel, costs draftsmen and insurers in establishing and setting up the conditional fee arrangements and/or the ATE insurance policy are recoverable, and whether the costs of subsequent dealings with the ATE insurers are recoverable. The Judge held that they were recoverable, and the defendants appeal against this conclusion.

 105 The defendants rely, as they did before the Judge, on the well established general rule, perhaps most clearly considered in Hunt v Douglas Roofing (1987) 132 Sol Jo 935 , that the cost of funding litigation, in the sense of interest paid on the money borrowed to pay solicitors bills submitted in connection with the litigation, was not recoverable under the old rules relating to costs – RSC Order 62 . The Judge (rightly in my opinion) accepted that this principle applied equally in relation to the CPR (although there is now an express right under the CPR to interest on costs incurred). However, he held that the costs of drafting and preparing the CFAs for this case, and explaining them to potential claimants, and advising them in that connection, were recoverable as were the costs of negotiating and arranging the ATE insurance.

 106 I agree with the Judge that the costs which are sought to be claimed under this head are distinguishable from the interest in a case such as Hunt 132 Sol Jo 935 . Interest on sums borrowed to pay litigation costs is not money payable to solicitors for work done for the ultimate benefit of the client, whereas it is easier so to characterise sums incurred by solicitors in preparing and advising on a CFA and arranging ATE insurance, or on subsequently dealing with the insurers. I also see the force of the point that a solicitor acting for a (CFA and ATE insurance)-funded claimant should be able, as a matter of policy, to recover the costs sought under this head from the defendant if the claim is ultimately successful.

 107 Nonetheless, both (i) interest paid on money borrowed to pay litigation costs and (ii) costs incurred in connection with a CFA and ATE insurance are ultimately attributable to the need of a litigant to fund the litigation as opposed to the actual funding of the litigation itself.

If litigation funding falls outside the scope of “other costs” as defined by section 59, it remains an intriguing issue as to how far, the cost of this form of financial assistance can be claimed back by way of an enhanced award of interest from the arbitrator under section 49 of the Arbitration Act 1996.

Keen readers of the Act will note that under the provisions of those sections compound interest can be sought, and interest rates are at large.

 

Costs awards in international arbitrations

What is a more cost effective way of litigating an international trade dispute?

Court proceedings in the Commercial or Admiralty Court?

Or an arbitration often taking place in London, perhaps with English law as the substantive law and before an English arbitrator?

Leaving aside the fact that the question on one analysis, might beg the counter-riposte “how long is a piece of string?” it is possible to note from the rules and criteria that apply to arbitral awards of costs, that they have the potential to be far more costly, due to the unpredictability they engender in respect of what  award of costs might be made by the arbitral tribunal.

In the courts of England and Wales, awards of costs although discretionary in nature are made within well trammelled grooves of principle. The key principles are contained within the Civil Procedure Rules 1999 and the patina of case law which adds a sheen to the bare wording of the rules.

As has been observed in other contexts, a judicial discretion gives a judge a discretion to do what he must. In the context of international arbitrations held in London, it is often the case, that no such clarity will be found.

This is because an arbitrator’s power to award costs will often be open textured in a way not countenanced by the Civil Procedure Rules: not only will the  terms of the arbitration agreement be largely silent about the basis on which costs may be awarded, or the international body of rules invoked by the arbitration clause contain a very broad discretionary basis for the making of an award of costs, but the procedural provisions contained within the Arbitration Act 1996, which will apply unless the parties have agreed the contrary are themselves elliptical.

The unfortunate consequence of broad unfettered discretion is that it is quite hard to predict how costs will be awarded in any given case, and particularly how the quantification of those costs will be assessed, given that some enabling provisions seem to go beyond pure legal costs. Adding to the uncertainty, is the fact that rarely will it be apparent at the start of the arbitral process, what interest rate will be applied to awards of costs and from when.

I will go on to consider each of these provisions which have something to say about costs in turn, starting with the agreement made by the parties to go to arbitration.

In a sense the mischief starts with the arbitration clause contained within the contractual documentation, which gives an aggrieved party a right to go to arbitration. Although the clause will be clear as to which set of international rules apply, the procedure for appointing an arbitrator, the place of the arbitration and the law which will govern it, the clause will usually be silent as to the costs provisions, or more particularly silent as to the basis on which a discretionary power to award costs should be exercised.

I cannot help thinking that in a sense, the easiest way to reduce uncertainty in arbitrations heard in London, is to ensure that specified in the agreement, are clauses spelling out the basis on which an award of costs will be made, and possibly incorporating the principles of English law which govern an award of costs in the courts of England and Wales.

Equally, it is quite rare to see a clause which does justice to the basis on which an award of interest should be made: in circumstances where the Arbitration Act 1996 gives an arbitrator a discretion to award compound as opposed to simple interest, this can result in huge sums changing hands, depending on how long it has taken since a dispute has arisen to go to arbitration.

Looking at some of the more familiar sets of international rules, one is immediately struck by how little they each have to say on the question of costs. Starting with the International Chamber of Commerce (ICC) Rules of Arbitration 2012, in respect of the ICC rules, the relevant provisions are articles 36 and 37. Article 36 is concerned with the costs of the arbitration itself including paying the arbitrators,  whilst article 37 deals with the larger questions of costs between the parties:

Article 37 says

1 The costs of the arbitration shall include the fees and expenses of the arbitrators and the ICC administrative expenses fixed by the Court, in accordance with the scale in force at the time of the commencement of the arbitration, as well as the fees and expenses of any experts appointed by the arbitral tribunal and the reasonable legal and other costs incurred by the parties for the arbitration.

2 The Court may fix the fees of the arbitrators at a figure higher or lower than that which would result from the application of the relevant scale should this be deemed necessary due to the exceptional circumstances of the case.

3 At any time during the arbitral proceedings, the arbitral tribunal may make decisions on costs, other than those to be fixed by the Court, and order payment.

4 The final award shall fix the costs of the arbitration and decide which of the parties shall bear them or in what proportion they shall be borne by the parties.

5 In making decisions as to costs, the arbitral tribunal may take into account such circumstances as it considers relevant, including the extent to which each party has conducted the arbitration in an expeditious and cost-effective manner.

6 In the event of the withdrawal of all claims or the termination of the arbitration before the rendering of a final award, the Court shall fix the fees and expenses of the arbitrators and the ICC administrative expenses. If the parties have not agreed upon the allocation of the costs of the arbitration or other relevant issues with respect to costs, such matters shall be decided by the arbitral tribunal. If the arbitral tribunal has not been constituted at the time of such withdrawal or termination, any party may request the Court to proceed with the constitution of the arbitral tribunal in accordance with the Rules so that the arbitral tribunal may make decisions as to costs.

The criteria could not be broader: unlike English law, there is no starting point that the “loser pays”. Similarly, when one considers the American Arbitration Association (AAA) International Arbitration Rules 2014, there is a criteria of “reasonableness” but no provision for a “loser” pays rule.

Article 34: Costs of Arbitration

The arbitral tribunal shall fix the costs of arbitration in its award(s). The tribunal may allocate such costs among the parties if it determines that allocation is reasonable, taking into account the circumstances of the case.

Such costs may include:

  1. the fees and expenses of the arbitrators;
  2. the costs of assistance required by the tribunal, including its experts;
  3. the fees and expenses of the Administrator;
  4. the reasonable legal and other costs incurred by the parties;
  5. any costs incurred in connection with a notice for interim or emergency relief pursuant to Articles 6 or 24;
  6. any costs incurred in connection with a request for consolidation pursuant to Article 8; and
  7. any costs associated with information exchange pursuant to Article 21.

Again, where there is detail, it tends to be focused on determining the arbitrators fees and the basis on which they should be paid by the parties, in eg the further article 35.

The London Court of International Arbitration Arbitration Rules 2014 go further than the alternatives I have looked at to apply the English model of cost attribution and recoverability, but do not contain the numerous and detailed provisions that experienced litigators expect to see in parts 36, and 44 to 47 in the Civil Procedure Rules.

Article 28 provides 28.1     The costs of the arbitration other than the legal or other expenses incurred by the parties themselves (the “Arbitration Costs”) shall be determined by the LCIA Court in accordance with the Schedule of Costs. The parties shall be jointly and severally liable to the LCIA and the Arbitral Tribunal for such Arbitration Costs.

28.2     The Arbitral Tribunal shall specify by an award the amount of the Arbitration Costs determined by the LCIA Court (in the absence of a final settlement of the parties’ dispute regarding liability for such costs). The Arbitral Tribunal shall decide the proportions in which the parties shall bear such Arbitration Costs. If the Arbitral Tribunal has decided that all or any part of the Arbitration Costs shall be borne by a party other than a party which has already covered such costs by way of a payment to the LCIA under Article 24, the latter party shall have the right to recover the appropriate amount of Arbitration Costs from the former party.

28.3     The Arbitral Tribunal shall also have the power to decide by an award that all or part of the legal or other expenses incurred by a party (the “Legal Costs”) be paid by another party. The Arbitral Tribunal shall decide the amount of such Legal Costs on such reasonable basis as it thinks appropriate. The Arbitral Tribunal shall not be required to apply the rates or procedures for assessing such costs practised by any state court or other legal authority.

28.4     The Arbitral Tribunal shall make its decisions on both Arbitration Costs and Legal Costs on the general principle that costs should reflect the parties’ relative success and failure in the award or arbitration or under different issues, except where it appears to the Arbitral Tribunal that in the circumstances the application of such a general principle would be inappropriate under the Arbitration Agreement or otherwise. The Arbitral Tribunal may also take into account the parties’ conduct in the arbitration, including any co-operation in facilitating the proceedings as to time and cost and any non-co-operation resulting in undue delay and unnecessary expense. Any decision on costs by the Arbitral Tribunal shall be made with reasons in the award containing such decision.

28.5     In the event that the parties have howsoever agreed before their dispute that one or more parties shall pay the whole or any part of the Arbitration Costs or Legal Costs whatever the result of any dispute, arbitration or award, such agreement (in order to be effective) shall be confirmed by the parties in writing after the Commencement Date.

28.6     If the arbitration is abandoned, suspended, withdrawn or concluded, by agreement or otherwise, before the final award is made, the parties shall remain jointly and severally liable to pay to the LCIA and the Arbitral Tribunal the Arbitration Costs determined by the LCIA Court.

28.7     In the event that the Arbitration Costs are less than the deposits received by the LCIA under Article 24, there shall be a refund by the LCIA to the parties in such proportions as the parties may agree in writing, or failing such agreement, in the same proportions and to the same payers as the deposits were paid to the LCIA.

Moving abroad again, the Stockholm Chamber of Commerce (SCC) Rules 2010 provide for an award to shift costs from one side to another, but again does not expressly include a “loser pays” rule.

Article 44 Costs incurred by a party

Unless otherwise agreed by the parties, the Arbitral Tribunal may in the final award upon the request of a party, order one party to pay any reasonable costs incurred by another party, including costs for legal representation, having regard to the outcome of the case and other relevant circumstances

Finally, the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules 2010 moves to define both what costs are recoverable and the basis on which they will be awarded in articles 40 and 42:

Article 40

1.The arbitral tribunal shall fix the costs of arbitration in the final award and, if it deems appropriate, in another decision

2. The term “costs” includes only:

(a) The fees of the arbitral tribunal to be stated separately as to each arbitrator and to be fixed by the tribunal itself in accordance with article 41;

(b) The reasonable travel and other expenses incurred by the arbitrators;

(c) The reasonable costs of expert advice and of other assistance required by the arbitral tribunal;

(d) The reasonable travel and other expenses of witnesses to the extent such expenses are approved by the arbitral tribunal;

(e) The legal and other costs incurred by the parties in relation to the arbitration to the extent that the arbitral tribunal determines that the amount of such costs is reasonable;

(f) Any fees and expenses of the appointing authority as well as the fees and expenses of the Secretary-General of the PCA.

3. In relation to interpretation, correction or completion of any award under articles 37 to 39, the arbitral tribunal may charge the costs referred to in paragraphs 2 (b) to (f), but no additional fees.

Article 42

1. The costs of the arbitration shall in principle be borne by the unsuccessful party or parties. However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case.

2. The arbitral tribunal shall in the final award or, if it deems appropriate, in any other award, determine any amount that a party may have to pay to another party as a result of the decision on allocation of costs.

It can be seen that these rules, referenced in the arbitration clause, simply lack the precision of part 44 of the Civil Procedure Rules 1998, but also fail to incorporate such provisions as part 36, leading the writer to observe in many costs submissions to arbitrators, the parties trying to argue that part 36 style consequences should be applied by way of a discretionary decision of the arbitrator, or other instances of the rules should apply by way of analogy.

Given the lack of express provision made in either the arbitration clause or the international rules, in many cases it is the unadulterated provisions of the Arbitration Act 1996 which govern the award of costs. In effect the Arbitration Act 1996 serves as the source of procedural rules governing arbitrations, though large parts of the Act can be disapplied by the parties.

The starting point  is to define what are costs for the purposes of the arbitration: this finds its expression in section 59 and keen readers will note the terms of section 59(1)(c) which permits the recovery of legal or “other” costs. The limits of “other costs” have not been finally defined: whether they will include management time, is moot, whether they could be stretched to include ATE premiums or litigation funding costs is doubtful.

59.— Costs of the arbitration.

(1) References in this Part to the costs of the arbitration are to—

(a) the arbitrators’ fees and expenses,

(b) the fees and expenses of any arbitral institution concerned, and

(c) the legal or other costs of the parties.

(2) Any such reference includes the costs of or incidental to any proceedings to determine the amount of the recoverable costs of the arbitration (see section 63).

Section 61 governs the principles on which an award of costs can be made:

61.— Award of costs.

(1) The tribunal may make an award allocating the costs of the arbitration as between the parties, subject to any agreement of the parties.

(2) Unless the parties otherwise agree, the tribunal shall award costs on the general principle that costs should follow the event except where it appears to the tribunal that in the circumstances this is not appropriate in relation to the whole or part of the costs.

This is a clear expression of the English rule and provides some discretion for making a “different order”, though it should be noted that the circumstances such as an offer to settle, or conduct, or delay, which might justify such an order are not defined as circumstances which should have this effect within the statute.

Section 63 deals with the recoverable costs of the arbitration and also the mechanism by which costs can be determined. Assuming that an arbitrator determines the principle of costs, there is no reason why he has to determine the costs by way of carrying out an assessment himself: instead the matter of adding up the pounds and pence can be transferred to the SCCO:

(1) The parties are free to agree what costs of the arbitration are recoverable.

(2) If or to the extent there is no such agreement, the following provisions apply.

(3) The tribunal may determine by award the recoverable costs of the arbitration on such basis as it thinks fit.

If it does so, it shall specify—

(a) the basis on which it has acted, and

(b) the items of recoverable costs and the amount referable to each.

(4) If the tribunal does not determine the recoverable costs of the arbitration, any party to the arbitral proceedings may apply to the court (upon notice to the other parties) which may—

(a) determine the recoverable costs of the arbitration on such basis as it thinks fit, or

(b) order that they shall be determined by such means and upon such terms as it may specify.

(5) Unless the tribunal or the court determines otherwise—

(a) the recoverable costs of the arbitration shall be determined on the basis that there shall

be allowed a reasonable amount in respect of all costs reasonably incurred, and

(b) any doubt as to whether costs were reasonably incurred or were reasonable in amount

shall be resolved in favour of the paying party.

(6) The above provisions have effect subject to section 64 (recoverable fees and expenses of arbitrators).

(7) Nothing in this section affects any right of the arbitrators, any expert, legal adviser or assessor appointed by the tribunal, or any arbitral institution, to payment of their fees and expenses.

The provisions on interest contained in the Arbitration Act 1996 are also of note because of the scope for an award of compound interest and because the wording of the section 49(4) contrasted with section 49(3) seems to contemplate that an award of interest on costs, should only run from the date of the award, and not as can now be done in the High Court, from an earlier date.

Set against that, the scope for an award of interest on costs on a compound basis, running until the costs are assessed, could be eyewatering in terms of its scope and far more costly than 8% simple interest under the Judgment Act 1838:

(1) The parties are free to agree on the powers of the tribunal as regards the award of interest.

(2) Unless otherwise agreed by the parties the following provisions apply.

(3) The tribunal may award simple or compound interest from such dates, at such rates and with such rests as it considers meets the justice of the case—

(a) on the whole or part of any amount awarded by the tribunal, in respect of any period up to the date of the award;

(b) on the whole or part of any amount claimed in the arbitration and outstanding at the commencement of the arbitral proceedings but paid before the award was made, in respect of any period up to the date of payment.

(4) The tribunal may award simple or compound interest from the date of the award (or any later date) until payment, at such rates and with such rests as it considers meets the justice of the case, on the outstanding amount of any award (including any award of interest under subsection (3) and any award as to costs).

(5) References in this section to an amount awarded by the tribunal include an amount payable in consequence of a declaratory award by the tribunal.

(6) The above provisions do not affect any other power of the tribunal to award interest.

So what could be done to reform these provisions and make awards of costs more settled and predictable in international arbitrations ?

In my opinion there is no need to try to argue for greater precision in the next round of arbitral rules, published by the organisations noted above.

These rules are made by pan-national bodies or emanate from countries, such as the USA with its lack of a cost shifting tradition or civil law countries, with intricate regimes of fixed and limited costs, to whom the English common law tradition of costs shifting, which can trace its roots back to the Statute of Westminster in 1275 is an alien concept.

Nor is there any need for a reform to the Arbitration Act 1996: since this Act only applies in its full rigour, where the parties do not agree alternatives to its default provisions, the answer it seems to me, lies in greater precision in the arbitration clauses which are drafted by lawyers and bind the parties.

If those clauses were specific about the powers of an arbitrator to award costs, perhaps in the case of a London arbitration governed by English law, incorporating the principles of the Civil Procedure Rules 1998 and specifying or delineating the basis on which interest, including interest on costs could be awarded, that would serve tremendously to reduce uncertainty.

Costs, unreasonableness and the RTA Protocol

Sometimes cases fall out of the Pre-Action Protocol for Low Value Personal Injury Claims in Road Traffic Accidents, as they are withdrawn by claimants solicitors who contend that the insurers are raising complex issues of law and fact.

From what I have seen, these issues typically arise in the context of a claim for credit hire, where there is a substantial claim for “vehicle related” damages.  This raises in turn interesting questions as to whether credit hire claims should be pursued within the Portal or whether insurers can effectively ask for  them to be excluded, and then litigated on the Small Claims track. To what extent can a claim be divided in this way to facilitate costs saving on the part of the insurers?

When a claim is taken out of the Protocol, the insurers will usually contend that the claimant has acted unreasonably and that the costs of any part 7 proceedings should be irrecoverable and the claimant limited to those elements of costs prescribed by the Protocol. How does the court adjudicate on these competing arguments and with what criteria?

The relevant rule is 45.24 In essence the Appellant must be judged to have acted unreasonably in withdrawing the claim from the MOJ Portal. Reasonableness connotes a spectrum of conduct/available decisions open to a party. Provided the decision to withdraw the claim was within that spectrum, the decision will be reasonable.

The key to resolving this issue is to consider the scope of the Protocol and the sort of dispute that it envisages can be properly conducted within its constraints, both procedurally and in terms of costs.

As a general proposition a dispute which requires disclosure, cross examination, a forensic enquiry into the issues, and the expenditure of costs to properly investigate and litigate the case is a case which is suited for the part 7 procedure, rather than the part 8 procedure leading to a stage 3 hearing as contemplated by the Protocol.

Similarly a dispute which requires substantial work by solicitors to gather evidence or deal with disputes of fact or legal argument, and the expenditure of legal costs, in sums which exceed by some margin the limited costs contemplated by the Protocol would fall outside its scope.

Looking at the “old” Protocol, for simplicity’s sake, per paragraph 1.1(6) of the Protocol, vehicle related damages includes damages for PAV and hire. Per paragraph 4.3 of the Protocol:

A claim may include vehicle related damages but these are excluded for the purposes of valuing the claim under paragraph 4.1

See also paragraph 6.4: the claim for vehicle related damages may be dealt with by a third party, or it may be dealt with by the legal representative named in the CNF. It is important to note what are vehicle related damages: they include elements of credit hire damages.

The reference within the Protocol to industry agreements, is a reference to the ABI GTA initiative, where subscribing insurers and claims handling organisations (credit hire companies) have agreed a tariff for the settlement of claims: see more generally the ABI GENERAL TERMS OF AGREEMENT (GTA) BETWEEN SUBSCRIBING INSURERS (Insurers) AND CREDIT HIRE ORGANISATIONS (CHOs).

However, if the insurer in a case, or the credit hire company is not a party to this agreement, then the Agreement has no application. It is not the case that claims involving elements of credit hire are otherwise to be “hived off” from a claim on a general basis. The claimant is entitled to include such a head of loss within the CNF.

Paragraph 7.26 provides that a stage 2 settlement pack must be sent to the defendant’s insurer which includes evidence of pecuniary losses. There then follows scope for a series of offers/counter offers.

It is important to note that in context, this will include such things as receipts, invoices and similar “proof”. This is material that simply provides confirmation of loss and a basis for valuation of the claim.

It is not meant to encompass relevant material which might fall within the scope of standard disclosure, eg bank statements, or contentious witness statements which would form the basis for evidence in chief and cross examination at a contested trial. Had it been so contemplated then no doubt, that could have been included in this version of the Protocol.

Detailed issues of mitigation, and arguments on evidence for example are not contemplated in this procedure.

There is no scope for the insurer to serve evidence contra the claimant’s evidence. There is no provision for a forensic trial of strength at stage 3. As contemplated by the Protocol, stage 3 disputes can be “paper” exercises, where parties who disagree on a valuation, can seek the court’s judgment.

However the claim may leave the Portal, if the requirements of paragraph 7.67 are met:

Where the claimant gives notice to the defendant that the claim is unsuitable for this Protocol (for example, because there are complex issues of fact or law in relation to the vehicle related damages) then the claim will no longer continue under this Protocol. However, where the court considers that the claimant acted unreasonably in giving such notice it will award no more than the fixed costs in rule 45.29.

Complex is not an absolute term, but a relative concept. Some cases are more complex than others. The word “complex” must be read in context: complex must mean of sufficient complexity to make it unsuitable for resolution with the Protocol, if necessary by a stage 3 hearing. It does not require that a case break new ground or establish some new legal principle or require a 3 day time estimate, for it to fall without the quick and cheap Protocol process.

It is also noteworthy that the example given as to why a claim may exit the Protocol, is because of issues of fact or law arising from any vehicle related damages. Credit hire claims often require disclosure of a claimant’s financial circumstances, bank statements and the like, rates evidence and cross examination.

A severely restrictive approach is taken to evidence in Practice Direction 8B. See in particular 6.4, 7.1 and 8.2 and 11.3. In brief, an insurer cannot file evidence. If the claimant wishes to put in additional evidence per paragraph 7.2, the case will continue as a part 7 claim.

So the key in any case is whether the insurer has raised issues of fact or law of sufficient complexity to justify the case being taken out of the Protocol procedure.

In this context complexity of law and fact means a degree of complexity greater than that suitable for resolution within a stage 3 hearing. It is necessary to consider which issues are properly capable of resolution within stage 3 and which consequently are not.

Insurers benefit from the Protocol, as if they promptly admit liability and make sensible offers, even if the case goes to a stage 3 hearing, their liability for costs is capped at the fixed costs prescribed by part 45.

Equally, however, insurers are sometimes keen to investigate and defend claims, to challenge causation and quantum or to put forward alternative evidence: but in so doing they are taking the case beyond the very limited scope of the Protocol, and the scope of a stage 3 hearing. There is a plain tension between settling claims cheaply and speedily and embarking on a forensic investigation, at greater length and greater cost.

Accordingly, it is not possible for an insurer to have his cake and eat it: they can accept the evidence put forward in the Portal and then argue for a different valuation to that contended for by the claimant at a stage 3 hearing. If however they dispute the evidential foundation, raise issues of credibility or wish to rely on their own evidence, then the matter goes beyond the scope of stage 3. It should be noted that a claimant (or any potential witness) does not need to attend a stage 3 hearing.

What is not permissible, is to seek to enlarge the scope of the Protocol, so that disputes which are properly disputes apt to fall within part 7 are shoehorned into stage 3, so that the insurer can mount a forensic challenge risk free as to costs. In such a scenario, the exception of the Portal scheme subsumes the norm of county court proceedings and the insurer through its conduct will be able to practically mount the sort of defence best dealt with, in a part 7 claim at the claimant’s cost.

So insurers who serve part 18 requests, or ask for disclosure of bank statements or put forward alternative rates evidence within the Protocol, are  raising matters which cannot be dealt within the Protocol and which would justify a case being removed from it.

Accordingly, any case must be carefully evaluated to determine whether it should be quickly settled, or the risk taken that a forensic investigation will cause a case to exit the Portal with any potential savings on damages dwarfed by a bill for part 7 costs.

Conditional Fee Agreements and capital

A key problem in obtaining effective justice in litigation is the inequality of arms which will often exist between a well funded defendant and an impecunious claimant. Or to put it another way, the imbalance of capital between two parties which enables the richer party to buy better lawyers, better experts and generally turn its financial advantage into strategic or tactical advantage within the litigation.

From this perspective the key to enhancing access to justice is to facilitate access to capital for the purposes of the litigation by the economically weaker party. This should enable them to pay for lawyers, pay for experts, pay court fees, and make provision for funding any adverse costs consequences which might follow from an unsuccessful court case. There can then be a reasonable prospect that the provision of capital will remove the inequality of arms and the production of a more “just” result.

Now capital used in a broad sense could be provided in a number of ways. In the closing years of the twentieth century and still more so, in the first two decades of the twenty first century the state has lost interest in providing capital through a state funded Legal Aid scheme.

This has not caused the need for capital to diminish: far from it, but rather has required the provision of capital from the private sector. Litigation funding provided by third parties, external to the litigation is one such source of capital: and I believe that developments to date have only scratched the surface of what such external capital can do.

Enabling lawyers to fund (part) of the litigation through making their own fees deferred and conditional on success, is another crucial source of capital for litigation funding, where the lawyers effectively provide capital to an impecunious claimant.

In such circumstances their own client can expect to pay an economic “rent” by way of a success fee for the provision of the capital. From 2000 to 2013 this “rent” could be externalised through the scheme of additional liabilities which existed under the Access to Justice Act 1999.

Accordingly I believe it is entirely possible to view the Costs Wars of this period as a struggle by defendants whether insurance companies, public authorities or private litigants to exclude the introduction of capital into litigation by their opponents, using tools such as champerty, maintenance and consumer protection provisions coupled with the indemnity principle to achieve this end.

Even the mundane struggle to decrease levels of costs through for example the introduction of fixed costs, the Ministry of Justice Portal and more restrictive rules on the recovery of costs generally can be viewed as exercises both in capital conservation and capital restriction.

Although the above analysis is unashamedly economically determinative (positively Marxist in fact) it does shed a light on why 700 years of prohibition on contingency fee arrangements was discarded within the span of a single generation of lawyers: the urgent and pressing need to introduce a source of capital into the system which was readily to hand.

I consider how this came about as an inevitable result of the state being unwilling to provide the capital  to litigants that they required to access a sophisticated and complex system of laws through appropriately skilled lawyers.

Since the Statute of Westminster of 1275, the common law of England and Wales set its face firmly against the introduction of contingency fees (based on payment by results) holding at various times that they “inherently immoral”, “deeply corrupting” or “definitely sinister”. In effect conditional fee agreements were held to be contrary to public policy and would not be permitted. In this context, Conditional Fee Agreements, were not only unenforceable between the parties to them, they could properly be regarded as illegal contracts too.

However, a Green Paper published in 1989, the then Lord Chancellor, Lord Mackay put forward a Green Paper, on contingency fees, inviting consideration of funding litigation by contingency agreements.

The paper reflected two elements which have underpinned the development of the law on conditional fee agreements: namely public funding constraints which have led to the effective abolition of Legal Aid for personal injury claims and a perception that an increasingly broad spectrum of society, was precluded from obtaining access to justice, by not qualifying for Legal Aid by reason of financial ineligibility, yet still lacking the resources to fund lawyers to act in litigation.

In this context, public policy, began to shift. The Green Paper, ultimately led to the introduction of the Courts and Legal Services Act 1990, which contained the first incarnation of section 58[3], permitting Conditional Fee Agreements. It should be noted that that section imposed certain requirements which had to be met, for the Conditional Fee Agreement to be enforceable and in particular created the notion of the “specified percentage” or success fee, which a lawyer would be permitted to charge their client subject to a cap on the amount created by secondary legislation. Further section 58(8) specifically prohibited the success fee from being recovered from the losing side to litigation, under a costs Order. It would remain a solicitor-own client charge.

In parallel with the change of public policy expressed in clear and unambiguous terms by the enactment of the Courts and Legal Services Act 1990, the attitude of the judiciary to Conditional Fee Agreements, began to change, and was expressed most famously in the case of Thai Trading.v.Taylor where it was sought to develop the common law to permit the making of Conditional Fee Agreements. As Millett LJ (as he then was) noted:-

Current attitudes to these questions are exemplified by the passage into law of the Courts and Legal Services Act 1990. This shows that the fear that lawyers may be tempted by having a financial incentive in the outcome of litigation to act improperly is exaggerated, and that there is a countervailing public policy in making justice readily accessible to persons of modest means. Legislation was needed to authorize the increase in the lawyers reward over and above his ordinary profit costs. It by no means follows that it was needed to legitimize the long-standing practice of solicitors to act for meritorious clients without means, and it is in the public interest that they should continue to do so…

The problem with Thai Trading, is equally well known. In the case of Hughes.v.Kingston upon Hull City Council the view taken by the Divisional Court was that the decision of the Court of Appeal and in particular the views of Millet LJ could not stand by reason of the earlier decision of the House of Lords in Swain.v.The Law Society. The matter was put beyond doubt, in the case of Awwad.v.Geraghty & Co (a firm) where Schiemann LJ stated:

I share Lord Scarman’s reluctance to develop the common law at a time when Parliament was in the process of addressing those very problems. It is clear from the careful formulation of the statutes and regulations that Parliament did not wish to abandon regulation altogether and wished to move forward gradually. I see no reason to suppose that Parliament foresaw significant parallel judicial developments of the law. I add that, on the judge’s findings in the present case, it appears that this understanding was shared by the solicitor who successfully endeavoured to prevent the conditional normal fee agreement from being evidenced in writing.

I would therefore hold that acting for a client in pursuance of a conditional normal fee agreement, in circumstances not sanctioned by the statute, is against public policy. IN those circumstances, I would also reject the submission that the Rules were ultra vires, a submission which was premised on the assumption that the Rules sought to forbid what was permitted under the common law.

The effect of the judgment in Awaad was to preclude the common law from having any role to play in the development of Conditional Fee Agreements. Henceforth, they were to be solely creatures of statute.

The statutory power contained in section 58 of the Courts and Legal Services Act 1990, was not implemented until the Conditional Fee Agreements Order 1995 which permitted that three particular types of proceedings would be permitted, namely personal injury claims, insolvency matters and applications under the European Convention on Human Rights to be conducted under Conditional Fee Agreements. The maximum permitted increase on fees would be 100%. A further statutory instrument contained the detailed provisions for implementation of section 58.

Government policy continued to evolve and with the publication of a consultation paper, by Lord Irvine, the then Lord Chancellor in March 1998 it was intended to (a) extend the scope of Conditional Fee Agreements to all types of civil proceedings (excluding family cases) to remove Legal Aid from all personal injury claims (excluding medical negligence) and to introduce recoverability: the proposal that success fees and after-the-event insurance premiums would be recoverable from the losing side to litigation, repealing the prohibition contained in section 58(8).

The proposals, including the notion that success fees should be recoverable from the losing side won the day. These proposals were made manifest in the Access to Justice Act 1999, which heavily amended the Courts and Legal Services Act 1990. The current provisions are to be fund in a revised section 58, a new section 58A. Further detail was contained in the Conditional Fee Agreements Order 2000, the Conditional Fee Agreements Regulations 2000, the Access to Justice (Membership Organisations) Regulations 2000 and the Collective Conditional Fee Agreements Regulations 2000.

The switch to recoverability, prompted an explosion of satellite litigation called the “Costs Wars”, whereby losing parties, funded by the insurance industry, challenged the quantum of recoverable uplifts, and fought detailed technical challenges to the form and content of conditional fee agreements, alleging breach of the formality requirements embodied in the secondary legislation, which in turn mean the agreements were unenforceable, and hence applying the indemnity principle, no costs were payable as the liability of the lay client to their instructed lawyer, under an unenforceable Conditional Fee Agreement was “nil”.

This in turn led to an attempt to simplify the formality requirements with the Conditional Fee Agreement (Miscellaneous Amendments) Regulations 2003 and then the outright abolition of the formality requirements by the Conditional Fee Agreements Revocation Regulations 2005 with effect from the 1st November 2005.

From 2005 to 2013, the formality requirements for an enforceable Conditional Fee Agreement were only that it had to be made in writing and contain a success fee not greater than 100%.

Although that position has changed since LASPO 2012 and the perceived need to regulate Conditional Fee Agreements, each of the legislative developments from 1990 to 2012 can be characterised as a liberation or constriction on the free flow of capital.

Conditional Fee Agreements are here to stay as an essential source of capital. Litigation funding from third party funders will undoubtedly increase, moving from funding individual cases into funding or buying, “books” of cases, with an increasingly porous dividing line between third party funders and legal expense insurers.

But perhaps the most far reaching development of all, will be the  market liberalisation of legal services which will facilitate the introduction of capital into litigation funding on an unprecedented scale. Thus the Legal Services Act 2007 and the changes it has introduced will prove extremely far reaching, perhaps far more so than the removal of the prohibition on contingency agreements.

With law firms bloated by private equity or stock market funding inequalities of arms may well disappear, though new problems of consumer choice and consumer protection can be readily expected to develop between over mighty law firms and their individual clients.

Varying ATE premiums and LASPO

One of the mysteries of the last two years, has been the absence of challenges by paying parties to the recovery of staged ATE premiums incurred after 1st April 2013 by purported variations of a contract of ATE insurance after that date which significantly increase the premium claimed to be recoverable.

Section 46 of LASPO 2012 amends the Courts and Legal Services Act 1990 in the following way:

(1) In the Courts and Legal Services Act 1990, after section 58B insert—

“58C Recovery of insurance premiums by way of costs

(1) A costs order made in favour of a party to proceedings who has taken out a costs insurance policy may not include provision requiring the payment of an amount in respect of all or part of the premium of the policy, unless such provision is permitted by regulations under subsection (2).

 (2) The Lord Chancellor may by regulations provide that a costs order may include provision requiring the payment of such an amount where—

(a) the order is made in favour of a party to clinical negligence proceedings of a prescribed description,

(b) the party has taken out a costs insurance policy insuring against the risk of incurring a liability to pay for one or more expert reports in respect of clinical negligence in connection with the proceedings (or against that risk and other risks),

(c) the policy is of a prescribed description,

(d) the policy states how much of the premium relates to the liability to pay for an expert report or reports in respect of clinical negligence (“the relevant part of the premium”), and

(e) the amount is to be paid in respect of the relevant part of the premium.

 (3) Regulations under subsection (2) may include provision about the amount that may be required to be paid by the costs order, including provision that the amount must not exceed a prescribed maximum amount.

 (4) The regulations may prescribe a maximum amount, in particular, by specifying—

(a) a percentage of the relevant part of the premium;

(b) an amount calculated in a prescribed manner.

 (5) In this section—

“clinical negligence” means breach of a duty of care or trespass to the person committed in the course of the provision of clinical or medical services (including dental or nursing services);

“clinical negligence proceedings” means proceedings which include a claim for damages in respect of clinical negligence;

“costs insurance policy”, in relation to a party to proceedings, means a policy insuring against the risk of the party incurring a liability in those proceedings;

“expert report” means a report by a person qualified to give expert advice on all or most of the matters that are the subject of the report;

“proceedings”includes any sort of proceedings for resolving disputes (and not just proceedings in court), whether commenced or contemplated.”

(2) In the Access to Justice Act 1999, omit section 29 (recovery of insurance premiums by way of costs).

(3) The amendments made by this section do not apply in relation to a costs order made in favour of a party to proceedings who took out a costs insurance policy in relation to the proceedings before the day on which this section comes into force.

The relevant provisions of the Civil Procedure Rules 1998 state:

48.1.—(1) The provisions of CPR Parts 43 to 48 relating to funding arrangements, and the attendant provisions of the Costs Practice Direction, will apply in relation to a pre-commencement funding arrangement as they were in force immediately before 1 April 2013, with such modifications (if any) as may be made by a practice direction on or after that date.

(2) A reference in rule 48.2 to a rule is to that rule as it was in force immediately before 1 April 2013.

In respect of ATE policies, the definition of a pre-commencement funding arrangement is as follows:

(ii) a funding arrangement as defined by rule 43.2(1)(k)(ii) where the party seeking to

recover the Insurance premium took out the insurance policy in relation to the proceedings before 1 April 2013;

It is apparent from the terminology used in the primary legislation and the Civil Procedure Rules that the recoverability of the policy premium hinges on the question as to whether the policy in relation to the proceedings in which the costs order was made was “taken out” prior to the 1st April 2013.

Accordingly the starting point is that if an insurance policy was taken out prior to the 1st April 2013, which must mean if the contract of insurance was made prior to the 1st April 2013, then the insurance premium will be recoverable as an item of costs.

There are then two arguments which have to be considered: the first relates to the question of whether the above sections should be read as a statutory limitation on recovery of premiums agreed after 1st April 2013, the second on whether there is scope for the application of the doctrine of variation.

Dealing with the first of these points, the argument is that the effect of section 58C by its reference to the costs insurance policy in relation to the proceedings before the day on which this section comes into force” means that when assessing costs the court must look at the insurance policy as it was prior to 1st April 2013.

That in essence the effect of the statutory section is to freeze in amber the premium agreed before the 1st April 2013 and as a matter of statutory interpretation there is no scope for a variation which has the effect of increasing the recoverable premium.

This means that whilst the parties might still be able to vary the terms of the contract of insurance, that is not actually the real issue: the paying party would argue that there is a statutory prohibition on recovery of increased premium incurred when the same is more than the premium of the policy “taken out” before the 1st April 2013.

The receiving party would argue that provided an insurance policy was effected prior to the 1st April 2013, a “trigger point” for recoverability is reached and provided the contract can be varied, if that results in an increase in the premium, that will still be recoverable, as the statute is concerned with when the policy was “taken out”, not with what premiums were incurred or when the premium was incurred. That is the first point.

The second is to consider if there is no such statutory bar, what the position in law is in relation to amendments/alterations. An insurance contract is still subject to the general law of contract.

This includes the doctrines of variation and rescission and novation. It follows that if a policy is altered or amended, so that it is varied in accordance with the common law doctrine, it remains the original policy which was taken out pre-1st April 2013 and the fact it has been altered/amended does not mean that the premium will be irrecoverable.

Conversely if an alteration or amendment amounts to a rescission of the of existing policy of insurance and the creation of a new policy of insurance after 1st April 2013 then that will not be a policy “taken out” for the purposes of section 58C.

Accordingly it is necessary to consider the law on the common law doctrine of variation closely. The starting point must remain the case of Morris.v.Baron and Co [1918] AC 1. Starting with the speech of Lord Dunedin at page 25

My Lords I find myself unable to subscribe to this view. The difference between variation and rescission is a real one, and is tested, to my thinking by this: In the first case there are no such executory clauses in the second arrangement as would enable you to sue upon that alone if the first did not exist; in the second you could sue on the second arrangement alone, and the first contract is got rid of either by express words to that effect, or because, the second dealing with the same subject matter as the first but in a different way, it is impossible that the two should be both performed. When I say you could sue on the second alone, that does not exclude cases where the first is sued for mere reference, in the same way as you may fix a price by a price list, but where the contractual force is to be found in the second by itself.

Lord Atkinson noted at page 31:

Moreover, rescission of a contract, whether written or parol, need not be express. It may be implied, and it will be implied legitimately, where the parties have entered into a new contract entirely or to an extent going to the very root of first inconsistent with it.

At page 38 Lord Parmoor stated:

It is necessary further to inquire whether the conditions have been so changed in their essential character that there is a substantial inconsistency, such as to lead to the inference that the parties did intend to rescind the earlier contract of September. It is not possible to lay down any general principle, but where the alteration is such that the conditions of the earlier contract cannot be restored without placing one of the parties under a permanent and substantial disability there is a strong prima facie probability of an intention to rescind. This factor applies in the present case and is supported, not only by the acts and conduct of the parties at the time, but by the whole course of their subsequent acts and conduct.

In the case of British and Beningtons.v.North Western Cachar Tea Company Limited [1923] AC48. At page 62 Lord Atkinson noted this

A written contract may be rescinded by parol either expressly or by the parties entering into a parol contract entirely inconsistent with the written one, or if not entirely inconsistent with it, inconsistent with it to an extent that goes to the very root of it.

At page 67 Lord Sumner said:

Morris v Baron & Co determines the second point, a case which we have only to appreciate and apply. The question is whether the common intention of the parties on May 12, 1920, was to “abrogate”, “rescind” “supersede” or “extinguish” the old contracts by a “substitution” of a “completely new” and “self contained” or “self subsisting” agreement, “containing as an entirety the old terms, together and as modified by the new terms incorporated”.

He concluded at page 68

It was, however, argued before your Lordships that, even so, the old contracts were discharged because a varied contract is not the old contract, and as you cannot have a new and varied contract and an old and unvaried contract regulating the same thing at the same time, the old contract, like other old things must be discarded. As a matter of formal logic, this may possibly be so, but such was not the view taken by this House in Morris.v.Baron since, if their Lordships had thought that any variation whatever would make a new contract and discharge the old one, they would have said so expressly and would not have dealt with the extent and completeness of the changes, as they did. The variation may be a new contract, so as to make writing, duly signed indispensable to its admissibility, for this is a matter of form and of the words of the statute, but the discharge of the old contract must depend on intention, tested in the manner settled in Morris.v.Baron & Co.

Commenting on the law in the case of Ginns.v.Tabor [1995] WL 1082518 Auld LJ stated that it was:

Whether a subsequent agreement amounts to a rescission or a variation of an earlier one depends on the intention of the parties indicated by the terms of subsequent agreement and from all the surrounding circumstances. See United Dominions Trust (Jamaica) Ltd.v.Shoucair [1969] 1 AC 340.However, rescission will be presumed when the parties enter into a new agreement so inconsistent with the earlier one that it goes to its very root. See British & Beningtons Ltd.v.NW Cachar Tea Co Ltd [1923] AC 48 per Lord Atkinson at 62. A new agreement of that kind may have that effect even though it is executory, as here.

However, even if there is no statutory prohibition on the recovery of an increased premium, were a contract of insurance to be “varied” so that a limit of indemnity of £50,000 becomes £100,000, with a consequent doubling in the premium, even if reliance can be placed on the doctrine of variation, this could be argued in turn to be so fundamental a change that it goes to the root of the contract, indicating that instead of a variation there has in truth been a rescission and novation and the premium is irrecoverable accordingly.

Conditional fee agreements and liens

Some years ago, at a solicitor-own client detailed assessment, I was told by my professional client that her policy was to obtain 75% of her fees on account and to regularly bill her client on an interim basis, to ensure that never more than 25% of her fees were outstanding. As she remarked to me at the time she had no interest in being a “busy fool”. She had a wise policy.

In personal injury litigation now largely funded by way of Conditional Fee Agreements, as a matter of practicality such a policy is not possible. The reason our current system of financing litigation costs exists is because most clients cannot afford to pay for legal representation on a privately paid basis and the state is unwilling to underwrite legal fees through a comprehensive Legal Aid scheme. Solicitors depend on succeeding in cases and obtaining their costs by payment from a third party.

Sometimes during the course of such litigation a relationship between a solicitor and client breaks down. The client may not co-operate and the solicitor terminates the Conditional Fee Agreement. The client may become dissatisfied and wish to change solicitors, himself terminating the retainer. The client may go on to instruct alternative solicitors. In such circumstances the Conditional Fee Agreement will usually give the former solicitors an entitlement to send the client a bill for their fees and disbursements.

What is a bill of costs in these circumstances? It is what is called a statute bill. It must comply with section 64 of the Solicitors Act 1974. But the client (absent being in receipt of an interim payment from the third party) is unlikely to be able to pay it until the end of the case.

In such circumstances, a lien over the client’s file will assume crucial importance in ensuring that the entitlement of the former solicitors to be paid is safeguarded.

A solicitor’s lien, is one of those creatures of the common law that everyone has heard of, but no one is quite sure what it means. It is accordingly appropriate to consider what a lien is and how it works.

The starting point in modern authority, concerns the position where a client discharges his solicitor and may be taken from the case of Leo Abse and Cohen v Evan G Jones Builders Limited 1984 WL 282817 where Eveleigh LJ noted as follows:

Now, a solicitor who is discharged by clients in the case is entitled to hold the papers until his fees are paid. There are exceptions to that position, of course. There nearly always are exceptions to any proposition, and one exception is that rights of third parties are affected. An instance of that is to be found in the case of Belaney v. French, reported in (1872) 8 Chancery Appeal Cases at page 918 , in which the head-note reads: “Solicitors for the trustees of an estate which is under the administration of the Court have not, after their discharge, such a lien for costs and money advanced in the suit as will enable them to refuse production of documents which are required by the receiver for the management of the estate”. In the present case there is no third party interested in this matter; so that it is simply a case of asking whether grounds exist for depriving the Solicitor of his lien.

In the case of Hughes v. Hughes, reported in 1958 Probate at page 224, Lord Justice Hodson said at page 227: “There is no doubt that a solicitor who is discharged by his client during an action, otherwise than for misconduct, can retain any papers in the cause in his possession until his costs have been paid: see In re Rapid Road Transit Co., 1909 1 Chancery, page 96. This rule applies, as the authorities show, whether the client’s papers are of any intrinsic value or not …”. At page 229 he said: “As the matter stands, we do not think there is an existing or potential third party interest which should override the solicitor’s lien. This lien should be preserved in the public interest in order that litigation may be properly conducted with due regard to the interest, not only of litigants, but also of the officers of the court who serve those interests”.

However the situation is different where it is the solicitor who ends the retainer, and much depends on whether the litigation is ongoing, or is concluded. In such circumstances, the usual practice is that the lien is relieved, on receipt of undertakings from the new firm of solicitors.

The starting point in modern authority to support this proposition, is the case of Gamlen Chemical Ltd.v.Rochem Ltd [1980] 1 WLR 614, where solicitors discharged themselves from acting for their client, who instructed new solicitors, Oliver J made the following Order:

Upon the undertaking of counsel for the defendants Rochem Ltd., Rochem International Ltd. and Rochem (Equipment) Ltd., on behalf of the solicitors for the said defendants (1) to hold all papers and documents delivered to them by Amhurst, Brown, Martin & Nicholson under this order subject to the lien of the said Amhurst Brown, Martin & Nicholson for costs (2) to afford the said Amhurst, Brown, Martin & Nicholson and their costs draftsman reasonable access to the said papers and documents for the purpose of preparing their bill of costs (3) to defend this action in an active manner and (4) to re-deliver the said papers and documents to the said Amhurst, Brown, Martin & Nicholson after the conclusion of this action. Let the said Amhurst, Brown, Martin & Nicholson so soon as may be reasonably practicable and in any event forthwith upon the receipt by them of written authorities from the defendants” — then a number of defendants are named — “deliver (on oath if required) to Douglas Goldberg & Co. all papers in this action and all other documents in the custody or power of the said Amhurst, Brown, Martin & Nicholson relating to this action and belonging to the said defendants or any of them.”

An appeal against that Order was dismissed by the Court of Appeal: Goff LJ noting the effect of earlier authority:

Mr. Ormrod cited three cases in support of that analysis, and we have been referred to one of them, namely Heslop v. Metcalfe (1837) 3 My. & C. 183 which seems to me to be of the utmost significance in this case, and to afford conclusive reasons why we should not at this late stage reverse the decision in Robins v. Goldingham, because Heslop v. Metcalfe shows quite clearly that in those days the court had fully adverted to the factual effect upon the lien on the making of such an order, and to the hardship which it would impose upon a solicitor. Lord Cottenham L.C., giving judgment, said at pp. 188–190:

“Undoubtedly, that doctrine may expose a solicitor to very great inconvenience and hardship, if, after embarking in a cause, he finds that he cannot get the necessary funds wherewith to carry it on. But, on the other hand, extreme hardship might arise to the client, if, — to take the case which is not uncommon in the smaller practice in the country, — a solicitor, who finds a poor man having a good claim, and having but a small sum of money at his command, may go on until that fund is exhausted, and then, refusing to proceed further, may hang up the cause by withholding the papers in his hands. That would be great grievance and means of oppression to a poor client who, with the clearest right in the world, might still be without the means of employing another solicitor. The rule of the court must be adapted to every case that may occur, and be calculated to protect suitors against such conduct … I then take the law as laid down by Lord Eldon, and, adopting that law, must hold that Mr. Blunt is not to be permitted to impose upon the plaintiff the necessity of carrying on his cause in an expensive, inconvenient and disadvantageous manner. I think the principle should be, that the solicitor claiming the lien, should have every security not inconsistent with the progress of the cause.”

In the same case Templeman LJ noted this:

I entirely agree. This appeal illustrates the difficulties which arise when a client and his solicitor part company in the midst of litigation. A solicitor who accepts a retainer to act for a client in the prosecution or defence of an action engages that he will continue to act until the action is ended, subject however to his costs being paid. That principle was re-affirmed in Bluck v. Lovering & Co., 35 W.R. 232, 233.

If before the action is ended, the client determines the retainer, the solicitor may, subject to certain exceptions not here material, exercise a possessory lien over the client’s papers until payment of the solicitor’s costs and disbursements. Thus, in Hughes v. Hughes [1958] P. 224, 227–228, Hodson L.J. said:

“There is no doubt that a solicitor who is discharged by his client during an action, otherwise than for misconduct, can retain any papers in the cause in his possession until his costs have been paid … This rule applies, as the authorities show, whether the client’s papers are of any intrinsic value or not, …”

The solicitor himself may determine his retainer during an action for reasonable cause, such as the failure of the client to keep the solicitor in funds to meet his costs and disbursements; but in that case the solicitor’s possessory lien, i.e. his right to retain the client’s papers of any intrinsic value or not, is subject to the practice of the court which, in order to save the client’s litigation from catastrophe, orders the solicitor to hand over the client’s papers to the client’s new solicitors, provided the new solicitors undertake to preserve the original solicitor’s lien and to return the papers to the original solicitor, for what they are worth, after the end of the litigation.

This practice was settled many years ago, and as Goff L.J. has shown, from the citation which he gave of Heslop v. Metcalfe, 3 My. & C. 183, 188, there are convincing reasons why the practice should be followed, and it has been followed, at least in the cases Goff L.J. has cited, Webster v. Le Hunt (1861) 9 W.R. 804; Robins v. Goldingham, L.R. 13 Eq. 440, and is to be found also in the argument of counsel in Hughes v. Hughes [1958] P. 224.

What this means, is that where litigation is ongoing, papers should normally be handed over, subject to a lien to be preserved by an undertaking.

This means in turn that the starting point, is that the papers should be produced subject to the lien. But that is not the end of the matter, as the court retains a discretion to enable the former solicitors to ask for an undertaking or indeed, seek an Order containing terms, which can go beyond the “usual” undertaking noted above.

The lien, and the notion of  undertakings, is subject to an exception. The equitable jurisdiction in Slatter.v.Ronaldsons [2002] 2 Costs LR 267 indicates that the court might retain a residual discretion, if the facts warrant it, to order delivery up of the papers but I doubt that would be exercised commonly, at all, where it is the client who has chosen to end the retainer.

Supposing the new firm of solicitors breaches its undertaking? The case of Udall.v.Capri Lighting Ltd [1988] 1 QB 907 indicates that although a claim for compensation can be made, any award of compensation is discretionary, rather than a right.

On parting company with the client, the wisest solution is to get payment in full, in line with the terms of the Conditional Fee Agreement. But the client may well show empty pockets.

In such circumstances careful consideration must be given to both billing the client and taking care to obtain an appropriate undertaking from any new firm of solicitors prior to handing over any file.