Damages Based Agreements cannot be used by Defendants who do not bring a counterclaim

In Tonstate Group Limited v Wojakovski and others [2021] EWHC 1122 (Ch) the Defendant’s solicitors (the Solicitors) applied for a charge over the Defendant’s 12.5% shareholding in the Claimant company (the Company). The charge was sought as security for sums said to be owed under a Damages Based Agreement (DBA). The DBA was a one-page agreement comprising 9 short paragraphs, the second said that, in the event that the Defendant recovers any “Proceeds” (i.e. “you recover damages, monies, costs incurred by your previous lawyers, other sums and /or derive any benefits… in or arising out of … the current Court proceedings”), the Solicitors would receive “Payment” defined as “25% of the Proceeds + VAT”.

The Court rejected the Solicitor’s claim.

The Defendant had previously held 50% of the shares in the Company prior to the settlement of proceedings in which he relinquished 75% of his shareholding, leaving him with only 12.5%.

The Judge considered the phrasederive any benefits [from the litigation]” and found that the Defendant’s ownership of the shares, which pre-dated the litigation, could not be characterised as a benefit derived from the proceedings: “At most, what [the Defendant] derived from the proceedings was the avoidance of a detriment to the extent that he retained [12.5% of] the Shares”.

The Judge noted that the DBA was entitled “Damages Based Agreement” and noted that the “the essential feature of damages is that they are recovered from another party in the proceedings”.  Further, the DBA later stated that the Solicitors would be entitled to no payment at all if the Defendant did not recover any monies (which was seen as an important indication of the parties’ intentions as to the scope of the DBA).

The Judge next looked as whether the agreement was enforceable (i.e. in the event that “Proceeds” included the retention of the Shares). Pursuant to the DBA Regulations of 2013 the DBA “must not require any amount to be paid” other than “that part of the sum recovered in respect of the claim or damages awarded that the client agrees to pay the representative” (emphasis added).

In summary:

(1) on the proper interpretation of the DBA, the Solicitors were only entitled to payment if the Defendant recovered something from the litigation (retention of the Shares, held pre-litigation, was not a recovery); and (2) a DBA must be limited to “payment [as] a proportion of the amount recovered by the client in the proceedings” (emphasis added).

The judgment confirms that DBAs should not be used by those acting for defendants (at least not unless the defendant is pursuing a counterclaim seeking a recovery from the claimant).

No costs in Small Claims track appeal, and no retrospective re-allocation

In Smith v RBS [2021] EWHC Civ 977, RBS sought permission to bring an appeal against a PPI judgment. The claim, in Bodmin County Court, was allocated to the small claims track and judgment was entered in a sum under £2,000, comprising repayment of PPI premiums, interest and small claims track costs.

RBS sought to appeal on two grounds: (1) the PPI contract had been terminated before 6 April 2007 (i.e. before s 140A-C of the Consumer Credit Act 1974 came into force); and (2) the claim was time-barred under s 9 of the Limitation Act 1980.

Mrs Smith contended that, if permission to appeal was granted, the grant should be subject to a condition pursuant to CPR 52.6(2)(b) that RBS pay her reasonable costs of the appeal. Mrs Smith, in her written submission, stated in a footnote that “this is a prospective costs order… distinguished from [authorities] where the Court of Appeal (expressing regret at the outcome) held that there could be no costs order in favour of the successful party in a case proceeding on the small claims track after determination of … appeal …”.

The Permission to Appeal (PTA) was considered by a single Judge. She granted permission subject to the condition that RBS was to pay Mrs Smith’s reasonable costs of the appeal, to be agreed between the parties or, in default of agreement, determined by the Court.

Mrs Smith filed a notice of application in respect of the condition to cap (in reality to fix) the costs at £136,656 inclusive of VAT. RBS cross-applied to set aside the condition on the ground that there was no jurisdiction to impose a costs condition on an appeal in a case which was tried following allocation to the small claims track.

The Court of Appeal considered its own jurisdiction, noting that “the full court does not sit on appeal from the single Lord or Lady Justice (LJ) who granted permission”.

Accordingly, the Court could only discharge or vary the PTA if there was a compelling reason to do so – but it noted that if the condition was one which the Judge, determining the PTA, had no power to impose, that is a compelling reason to set it aside.

The Court held that, under CPR 27.14(2), a court may not award costs in a case allocated to the small claims track, noting that CPR 27.14(2) is “clear, and extends to the costs of an appeal”. Therefore, in respect of cases on the small claims track, the Court has no power to make an order for costs.

While the Court considered situations in which it may impose a condition on a party’s continuing participation in a case, it drew a distinction between the imposition of (i) a condition which it would not ordinarily make, and (ii) a condition which it could never make because statute or a rule of court expressly prohibits it.

Mrs Smith sought an alternative way of upholding the condition – she asked the Court to re-allocate the case to the fast track or multi track. This received short-shrift because it was too late (such application would have needed to be made in the County Court), as “Appeals in [the Court of Appeal] do not proceed on the small claims track, fast track or multitrack: these are county court concepts. [The Court of Appeal] cannot rewrite the history of the case”.

The costs condition was set aside.

Too late – The absence of promptness is fatal to an application to vary a budget

In Persimmon Homes Limited & Taylor Wimpey UK Limited and Osbourne Clark LLP & Osbourne Clark (a firm) [2021] EWHC 831 (Ch) the High Court dismissed the Claimants’ bid to double an approved costs budget.

The Claimants (hereafter ‘the Developers’) brought a £10m claim against the Defendants (‘OC’) for professional negligence.

The Procedural chronology was:

  • CCMC before a Deputy Master on 18 November 2019;
  • The Deputy Master adjourned the CCMC part-heard to 3 December 2019;
  • On 3 December 2019 the Deputy Master approved the Developers’ budget in the sum of £1.45m;
  • The CCMC order (3 December 2019) provided for a further CMC;
  • The first further CMC was heard on 26 August 2020 and adjourned to 7 January 2021;
  • On 3 December 2020 the Developers submitted their Precedent T to OC and subsequently issued their application to vary their budget on 21 December 2020;
  • The second further CMC proceeded on 7 January 2021; and
  • The application to vary came before the court on 18 January 2021.

CPR 3.15A

The judgment set out the differences between CPR 3.15A and the ‘old’ PD3E 7.6. In short, CPR 3.15A contains peremptory language – ‘must’ is in place of ‘shall’ (i.e. a mandatory requirement) – and there is an explicit requirement for promptness.

The Judge set out ‘the threshold test’ that: (i) the applicant must satisfy the court that there has been a significant development in the litigation since the last approved budget which warrants a revision to the approved budget, and (ii) that the ‘particulars of variation’ (i.e. the Precedent T) has been submitted promptly both to the other side and to the court.

It is only once the threshold test has been met that the court may then consider the exercise of its discretion to ‘approve, vary or disallow the proposed variations’.

The Variations

The Developers sought to increase their approved budget from £1.45m to £2.36m citing three ‘significant developments’: (1) requests for further information (RFIs); (2) further CMCs and (3) disclosure – the latter being by far the biggest issue.

In brief, the disclosure issue was that the parties had, prior to the first CCMC, been unable to agree the approach to disclosure under PD51U – the Developers basing disclosure on Models A and B (‘adverse documents’ and ‘Limited disclosure’) – although on or about 18 November 2019 the parties agreed Model C (‘Request-led Search based disclosure’).

The Developers filed a revised costs budget on 29 November 2019 which, the Developers said, was still based on Model A and B disclosure. On 3 December 2019, the Deputy Master approved the Disclosure Review Document (‘DRD’) based on Model C and the Developers’ revised costs budget.

Crucially, in light of the DRD, the Developers did not seek to vary or amend the costs budget before the CCMC order was sealed.

Leading Counsel for the Developers argued that the change to Model C in November 2019 was a significant development in the litigation which warranted a revision to the costs budget to the disclosure phase of £581k and to the later phases of £585k – a total increase of £1.167m across the budget as a result of the change to Model C.

The problem, for the Developers, was that the parties knew that disclosure would proceed under Model C from 18 November 2019 – ‘[the Developers] allowed the CCMC to continue on 3 December 2019 including the approval by the Deputy Master of a Model C DRD and their costs budgets which, they say, did not take into account the change to Model C. This allowed the Deputy Master and OC to proceed on what they say was the wrong basis. They did not seek time to amend the costs budget whether under PD51U or at all’.

In answer to the question of promptness, it was argued that it was only when viewing the disclosure exercise in retrospect that it was then possible to accurately understand the costs and the impact on later phases oof the budget. This was not accepted by the Judge who said ‘this approaches the purpose of costs and case management from the wrong end. It is primarily a prospective not retrospective exercise’.

Counsel for OC made a number of submissions: that the change to Model C was known before the budgets were approved (i.e. not a change which occurred after the last approved budget); that a variation to a budget is not intended to enable a party to add-in costs that they should have included in their original budget after the event. However, the principal argument was that application was too late, such that it failed the threshold test.

The decision

In respect of each ‘significant development’ cited by the Developers, the threshold test was not met because the application was not submitted sufficiently promptly. In respect of the RFIs the Precedent T was made ten months after the event. In answer to the Developers’ submission that an application can be made retrospectively (after the costs have been incurred), the judge re-stated that prompt action, upon identifying a significant development, is key. The application was too late.

As to the further CMCs, the application was submitted four months after the first further CMC took place. This was not prompt and it, too, failed the threshold test.

The second further CMC was interesting because the application (issued on 31 December 2020) preceded the CMC (on 7 January 2021). The question was whether the application was made promptly. The Judge said it was not – the second further CMC was listed on 26 August 2020 and the application – four months after the Order fixing the second further CMC – was issued too late.

As to Disclosure, the Court found that the Developers knew on 18 November 2019 that they were going to have to undertake disclosure on a different basis to the assumptions set out in their costs budget – at which point ‘the onus switched to the Developers to make their position clear to both OC and the Deputy Master rather than allowing the Deputy Master to cost and case manage, on their case, on the wrong basis’.

The change to Model C preceded the budget and was therefore not a significant development (given it was already known at the time the budget was approved) but, in any event, the application, 12 months after the change to Model C, was too late.

Comment

The absence of promptness is fatal to an application to vary a costs budget. The Judge noted that the case ‘emphasises the need for the parties to keep their costs budgets under review and to use the tools available to them’.

Late acceptance of Part 36 offer does not allow defendant to escape liability for costs

As we have considered previously (‘Acceptance of Part 36 offer after end of relevant period (CPR 36.13(40) – right to detailed assessment’), an automatic liability (deemed order) for costs is only triggered if a Part 36 offer is accepted within the ‘relevant period’ (CRP 36.13(1)).

Where a Part 36 offer is accepted after the end of the ‘relevant period’ there is no deemed order and ‘the liability for costs must be determined by the court unless the parties have agreed the costs’ (CPR 36.13(4)(b)).

If the parties cannot agree, the Court ‘must, unless it considers it unjust to do so, order that the claimant be awarded costs up to the date on which the relevant period expired and the offeree do pay the offeror’s costs for the period from the date of the expiry of the relevant period to the date of acceptance’ (CPR 36.13(5)).

The case

In Pallet v MGN Limited [2021] EWHC 76 (Ch) the Defendant deliberately delayed acceptance of the Claimant’s Part 36 offer until one day after the end of the ‘relevant period’. This was designed to enable the Defendant to escape rule 36.13(1) – that ‘the Claimant will be entitled to the costs of the proceedings’ – and to argue that, under rule 36.13(4)(b), the Claimant should be deprived of (some of) her costs.

Part 36.13(5) sets out the order which the court must make (when a part 36 offer is accepted after expiry of the ‘relevant period’) ‘unless it considers it unjust to do so’.

The Defendant looked to Part 36.17(5) (listing the matters which the court must take into account when considering whether it would be ‘unjust’ to make the ‘usual’ order per Part 36.13(5)) and argued that, in particular, the ‘conduct of the Claimant with regard to the giving of or refusal to give information for the purposes of enabling the offer to be made or evaluated’ should be taken into account.

The Defendant argued that the Claimant was culpable of a ‘serious failure’ to engage with the settlement process. It was submitted the Claimant waited to put forward an offer, wasting the chance of earlier settlement.

The Claimant countered that none of the Defendant’s offers were adequate and that she required disclosure before making her offer.

The Defendant was unsuccessful – the Judge found that the Defendant had failed to discharge ‘the heavy burden … of showing that it would be unjust to apply the normal Part 36 consequences’. The Claimant was awarded her costs of the proceedings.

Comment

The case reveals a potential lacuna in the rules – if a party accepts a Part 36 offer within the relevant period the costs consequences are prescribed and certain (the Claimant will be entitled to the costs of the proceedings), but if that same offer is accepted only one day after the end of the relevant period the Defendant may argue that the Claimant should only recover part of her costs.

The resulting argument will turn on whether it is ‘unjust’ to allow the ‘normal’ part 36 consequences to follow (per CPR 36.13(5)) and the Judge said that establishing this is a ‘heavy burden’. Accordingly, we consider, in the vast majority of cases (as in the Pallet decision) the ‘normal’ Part 36 consequences will follow.

However, the rules, as drafted, do provide a route to a perverse position – that the offeror could be in a worse position by the offeree accepting a Part 36 offer deliberately late. It is very likely that we will see this tactic used again (the Judge made it plain that the case has turned on its own facts’), in situations where a party wishes to run an argument that its opponent’s conduct should enable the court to depart from the usual costs order.

Stone me! An enduring significant development?

BDW Trading Ltd v Lantoom Ltd [2020] EWHC 2744 (TCC) concerns the supply of allegedly substandard stone by the Defendant, a supplier of stone from its quarries, to the Claimant, a house builder.

Issues were dealt with prior to a pre-trial review (PTR), leaving the only matter outstanding at the PTR (heard on 2 October 2020) being the parties’ costs budgets (see “The Application” below).

By way of background, costs budgets had been approved at the first case and costs management conference (CCMC) in October 2019. In March 2020, the Claimant sought an increase of £90,000 for the disclosure phase. This was because the Claimant’s costs budget was based on an assumption that fewer than 50,000 documents would be produced, with no more than 15,000 inspected. However, it transpired that the true figures were 250,000 and 70,000 respectively.

The Claimant asserted that this amounted to a “significant development”. The Defendant initially did not agree to the increase sought but, when the Claimant applied for revisions to the directions, including an increase in the budget, this was agreed by consent order (whereby both parties’ budgets were increased).

The Second Wave

Disclosure took place in April 2020 and witness statements were exchanged in June 2020. The Claimant sought a £55,000 increase for the witness statement phase. The Defendant refused, averring that the increase was already captured in the previously agreed increase in the disclosure phase, and that the budget for witness statements would be nearly doubled and was not reasonable or proportionate.

The Application

The Claimant applied for an increase (which, by the time of the application had grown to £70,000) for the witness statement phase, and an increase (of £106,000) for the expert report phase. This was done on a “Precedent T” citing, in respect of witnesses, the greater number of documents which were considered with the witnesses, the greater number of statements in the “first round of witness statements” (3 to 6), the number of “supplemental statements” (6), and the impact of Covid-19.

In relation to experts, the Claimant’s precedent T cited inter alia the greater number of documents which the experts had to review, and the need for the Claimant’s experts to visit additional sites, being those visited by the Defendant’s experts (which the Claimant has not anticipated).

The Defendant submitted that the developments were not significant, saying the Claimant had merely underestimated the documents, the significant aspect of that was already reflected in the agreed increases for the disclosure phase.

However, the Judge accepted that four to five times more disclosure than anticipated was a significant development. Further, the consequences of this was not captured by the Claimant’s increase in the disclosure phase – there are “knock-on effects of the avalanche of documents“ beyond the disclosure phase.

The Judge found that the Defendant had, already, accepted that the greater disclosure was a “significant development” in the litigation: “It was implicitly, if grudgingly, accepted as such by the defendant when it agreed to the consent order of 28 April 2020, which also uplifted the defendant’s costs budget for the disclosure phase, following the same logic”.

The Judge noted that, while the additional witness evidence was “not prolix, repetitive or irrelevant”, the increase claimed was excessive – £50,000 was allowed.

As for the experts phase, the perusal of more documents than expected flowed from the “significant development”, but the visiting of more sites by the Defendant’s experts than the Claimant had expected “falls the other side of the line from the plethora of documents. The visiting by experts of more sites than expected does not appear to me to be a direct consequence of the additional documents.

The Judge undertook a “broad brush apportionment” of the increases relating to the documents (which he allowed) and the site visits (not allowed).

Comment

This is another case where a decision has been made as to what constitutes a significant development. Interestingly it re-iterates that a ‘significant development’ could have a knock-on effect on multiple phases. Given that disclosure takes place soon after a party’s budget is approved, parties are well-advised to revisit the budget at that stage to check that the assumptions underlying the budget remain good.

Upwardly varying a budget provides security to the receiving party. The case for costs management – reviewing costs against the Approved Budget to ensure that the Approved Budget continues to reflect the costs of the work that has been, and will need to be, undertaken – and for varying a budget, where a significant development warrants such revision, is self-evident and compelling.

Briefly, on Covid-19 – the additional time occasioned by virtual meetings is likely offset by the saving of travelling time – in other words, for the purposes of budgeting, the impact of “Covid-19 cuts both ways”.

Appealing to the Arts

It was wrong to strike out points of dispute (PoDs), filed as part of a detailed assessment, in response to a failure to comply with an order to make an interim payment, without firstly making an unless order.

In Astor Bristol Ltd and Ors v Bristol School of Performing Arts Ltd [2021] UKUT 43 (LC) the respondent, BSPA, successfully rectified the title of a property. Following the conclusion of the claim the appellants, AB, were ordered to pay BSPA’s costs on the indemnity basis and to make an interim payment, of £48,185, by 22 May 2020.

On 5 June 2020, the First-tier Tribunal (‘FTT’) refused AB’s application for an extension of time to make the interim payment.

Meanwhile, BSPA filed its bill of costs, claiming £142,502, and AB filed PoDs. Had all of AB’s points been successful, AB would have had to pay £72,458.

On 9 July, BSPA applied for what it called “debarring and/or unless orders” because of AB’s failure to make the interim payment. The FTT – having refused AB an extension to the seven days to respond – chose the former, striking out the PoDs already filed and awarding the claimed costs in full, as well as the costs of the application.

The FTT judge said her order was made under the FTT’s “wide powers to manage litigation … in accordance with the overriding objective”.

On appeal, the Upper Tribunal found that the FTT did not have the jurisdiction to make the order: “Rule 3 [of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013 (the “FTT Rules”)] sets out the overriding objective, and rule 6 gives the FTT power to regulate its own procedure, but the rules then go on to make specific provisions about a particular order, and those specific provisions govern the FTT’s jurisdiction to make that particular order.

“Neither rule 3, nor rule 6 nor rule 8 gives the FTT power to strike out the whole or part of proceedings otherwise than in accordance with rule 9.”

The Judge stated that the FTT could have struck out the PoDs, in response to the failure to make an interim payment, but only by first making an unless order in compliance with rule 9(3)(a) of the FTT Rules. The FTT did not do this and accordingly there was no jurisdiction to strike out the PoDs.

After the flood

In Municipio de Mariana & Others v BHP Group PLC and BHP Group Ltd [2021] EWHC 146 (TCC) the High Court struck out a claim, brought in England by more than 200,000 Brazilian claimants in relation to the collapse of the Fundao Dam in Brazil in 2015. The case is believed (at least in terms of the number of parties involved) to have been the largest action ever brought in an English court.

In brief, the existence of parallel proceedings concerning the same matters in Brazil rendered the English proceedings an abuse of process.

Issues based order

The Court set out the principles applying to Issues based orders noting inter alia that the Court’s aim is to “make an order that reflects the overall justice of the case” and that, while costs should follow the event, there is no automatic rule requiring reduction of a successful party’s costs if he loses on one or more issues.

In any litigation, especially complex litigation, any winning party is likely to fail on one or more issues in the case.

In the present case, the defendants narrowed the scope, and abandoned part, of the case which they were presenting. The Judge said that this came about not because the abandoned part was doomed to fail – rather, the defendants were “distilling the thrust of their contentions [so that] the Court would thus be best equipped to deal with the point proportionately”.

The defendants were entitled to their costs per the general rule in CPR 44(2) – “that the unsuccessful party will be ordered to pay the costs of the successful party”.

Interim payment on account

The court assessed an interim payment on account of costs (per CPR 44.2(8), noting the “proper approach” as set out in the guidance notes in the White Book that:

the determination of “a reasonable sum” involves the court in arriving at some estimation of the costs that the receiving party is likely to be awarded by the costs judge in the detailed assessment proceedings or as a result of a compromise of those proceedings

and noting that this is not “the “irreducible minimum” of what may be awarded on detailed assessment” but “would often be … an estimate of the likely level of recovery subject, to an appropriate margin to allow for error in the estimation”.

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Costs caps at CPR 3.15(5) are exclusive of VAT

In Marbrow v Sharpes Garden Services Ltd [2020] EWHC B26 (Costs) (10 July 2020) Senior Costs Judge Gordon-Saker clarified an issue which arises on inter-partes assessments: whether or not the caps formerly at paragraph 7.2 of the CPR Practice Direction 3E (now at CPR 3.15(5)) include VAT.

By way of a reminder, CPR 3.15(5) provides:

“Save in exceptional circumstances—

(a) the recoverable costs of initially completing Precedent H (the form to be used for a costs budget) shall not exceed the higher of—

(i) £1,000; or

(ii) 1% of the total of the incurred costs (as agreed or allowed on assessment) and the budgeted costs (agreed or approved); and

(b) all other recoverable costs of the budgeting and costs management process shall not exceed 2% of the total of the incurred costs (as agreed or allowed on assessment) and the budgeted (agreed or approved) costs”.

Senior Costs Judge Gordon-Saker found that “To my mind the caps provided by paragraph 7.2 cannot include VAT because they are expressed as percentages of figures which do not include VAT. All of the figures set out in a budget exclude VAT – as Precedent H makes clear. 2% of £100,000 excluding VAT, would be £2,000 excluding VAT.”

Senior Costs Judge Gordon-Saker also derived assistance from Friston on Costs (3rd Edition) at paragraph 12.133: “While there is no authority on the point, it is likely that the percentage limits are exclusive of VAT. This is because Precedent H is designed in such a way as to discourage VAT being recorded therein, so it would seem odd if the costs were payable on a VAT-inclusive basis. Moreover, if it were not a VAT-exclusive limit, then a VAT-registered litigant would have the advantage over a non-VAT registered litigant – and that would be a curious state of affairs.”

Benefits of Part 36 do not apply to detailed assessment costs

In Natalie Best v Luton & Dunstable Hospital NHS Foundation [2021] EWHC B2 (Costs) (29 January 2021) the court considered whether a Claimant can rely upon the additional rewards for beating a Part 36 offer in detailed assessment proceedings.

Costs Judge Leonard concluded that the costs of detailed assessment proceedings do not, for the purposes of CPR 36.17(4), fall within “any issue that arises in the claim”, therefore the Claimant could not claim any uplift.

Despite the Claimant beating her Part 36 offer (£52,000.00) for costs of assessment by a substantial amount (£6,119.80), the Judge concluded that Part 36 had no application because CPR 47.20(7) “does not provide that the determination of the costs of detailed assessment proceedings is itself to be regarded as an independent claim”.

If the Claimant was correct then acceptance of a Part 36 offer for costs of the detailed assessment would result in a deemed order for costs under CPR 44.9(1)(b) which could result in a further Bill of costs dealing with the costs of the detailed assessment. This could create “an indefinite cycle of Part 36 offers and new detailed assessment proceedings”.

Underspend is not a ‘good reason’ to depart

In Utting v City College Norwich [2020] EWHC B20 (Costs) 22 May 2020 the question at large was whether an underspend in respect of the budgeted sum is a ‘good reason’ to depart from the budget (so as to allow a line-by-line assessment).

The parties settled the substantive claim without the involvement of the Court but Master Brown was asked to provide judgment on this issue.

The Defendant relied upon Salmon v Bart Health [2019] while the Claimant relied on Chapman v Norfolk and Norwich University Hospital NHS Foundation Trust, March 2020.

Master Brown favoured the approach in Chapman and determined that if an underspend were to be good reason for departing from the budget it would be liable to undermine the effectiveness of costs budgeting, in that solicitors who come-in under budget would be subject to a detailed assessment whereas those who exceed the budget would receive the budgeted sum and avoid detailed assessment.