INTEREST ON COSTS; PAYMENTS ON ACCOUNT OF COSTS & INDEMNITY COSTS AGAINST FUNDERS: EXCALIBUR IN THE REPORTS AGAIN

We have looked at the Excalibur case before in the context of an order for indemnity costs against funders. Further decisions in relation to costs were made by Christopher Clarke L.J. in Excalibur Ventures LLC -v- Texas Keystone INC [2015] EWHC 566(Comm).

THE CASE

The judge had ordered that the claimant, and the funders of the litigation, pay the defendant’s costs on an indemnity basis.

KEY POINTS

• The 8% interest rate on costs is punitive and the court did not order the funder’s pay interest on costs from a date prior to the date that it was decided that the funders had to pay such costs.
• The rules state that a court “will” make an interim order for costs.
• The amount of the interim order is not an “irreducible minimum” but a “reasonable sum on account of costs”.
• Permission to appeal was given on the issue of whether the funders should pay costs on the indemnity basis when they themselves had not been directly liable for the manner in which the action was conducted.

INTEREST ON COSTS

The judge had ordered that the funders pay costs in a judgment on the 23rd October 2014. An issue arose as to when interest on costs should run from.

1. The important question is whether the Judgment Act rate should start any earlier than 23 October 2014. Excalibur became liable for interest at that rate from 13 December 2013. It does not, however, follow that the funders should pay interest at that rate from then. I am told that there is no reported case which has considered the question of the appropriate interest rate date for interest under the Judgment Act in relation to funders.
2. The costs claimants submit that the funders should follow the fortunes of Excalibur in this respect as in others. Excalibur has not paid and will not be paying the 8 per cent rate due from then. It is only right, they say, that Excalibur should make up what they characterise as the shortfall in the costs claimants’ recovery from Excalibur – otherwise, they submit, the funders will receive an undeserved windfall.
3. I do not accept this characterisation. Eight per cent is very significantly above current commercial rates. Although the rate prescribed under the Act is not prescribed by way of penalty, in circumstances where the commercial rate taken is 1.5 per cent, its commercial character is penal. The “shortfall” in question lies in the inability of the Costs Claimants to recover the considerable excess over any commercial rate that 8 per cent represents. So far as the funders are concerned, a refusal to award interest at that rate from 13 December 2013 would only be a “windfall” in the sense that it would avoid what is in practical effect a penal charge.
4. The 8 per cent rate is something of an anomaly. It is prescribed by regulation but it has remained at that rate for a long time despite changes in current interest rates. In principle it is difficult to justify other than by treating it as an inducement to paying parties to agree costs or to proceed swiftly to an assessment. In that context a number of judges have regarded it as unjust that the 8 per cent rate should begin the moment that a judgment for costs has been given. In Colour Quest Limited v Total Downstream (UK) Limited [2009] EWHC 823, David Steel J regarded it as unjust for interest to accrue at that rate immediately after the costs order was made. Such an order if complied with could be said to represent a very sizeable windfall for the receiving party. He postponed the accrual of that rate for six months. In London Tara Hotel v Kensington Close Hotel[2011] EWHC 28, Roth J postponed the start of the judgment rate for four months in a case where the costs were large and there might be real issues of proportionality and reasonableness on taxation. He took account of the fact that application of a higher rate could serve as an incentive to proceed with the taxation or reach agreement on costs. In SCB v Ceylon Petroleum Corporation [2011] EWHC 2094, Hamblen J adopted a similar period. By contrast, in Schlumbereger Holdings Limited v Electromagnetic GO Services [2009] EWH 733, and Cranway Limited v Playtech Limited[2009] EWHC 823, Mann J and Lewison J, as he then was, declined to take this approach.
5. I was at one time attracted to the idea that I should order the 8 per cent rate to begin not at 13 December 2013 but some four to six months later in line with the authorities to which I have referred. However, all the cases to which I have referred were cases where the question was whether the accrual of the 8 per cent rate should be postponed until a date after the costs judgment, not as here whether it should be brought back to before then.
6. The default date for the application of the 8 per cent rate is the date of my judgment in October 2014. I have, however, a discretion to order interest to run from an earlier date if I think it just so to do. I do not think that it would be. I regard it as inappropriate to backdate the commencement date of the 8 per cent rate to a date before any order was made against the funders to pay costs or as to the scale on which they should do so.
7. The Costs Claimants say that the funders took a gamble on whether they would be ordered to pay costs and if so on what scale. Having lost the bet, they should make good the shortfall. If they had provided the security that I had ordered to be provided, the matter could have proceeded to assessment and by now the costs would either have been assessed or agreed. As to that, the funders were not bound to provide further funds. They were entitled to challenge their liability, or the scale of their liability, to pay costs and did so on grounds which, although I have rejected them, were not unreasonably put forward; and they have never come under any obligation to pay any costs until my order of October 2014. They could, of course, always have agreed a figure but until any assessment began they would have had difficulty in deciding what figure to offer. Further, any participation on their part in such assessment would have been, and may still be, problematic in that it is Clifford Chance that has access to most of the information and documentation from the Excalibur side relevant to costs. Given what has happened in the litigation, their willingness to assist the funders must be in doubt.
8. In the circumstances and despite the clarity of the additional submissions of Mr Eschwege this morning for which I am grateful, I propose to order that interest should be payable at the Judgments Act rate from the date of my judgment in October 2014.

AN INTERIM COSTS ORDER

1. CPR 44.2(a) provides that the court, “will order“ a paying party “to pay a reasonable sum on account of costs unless there is good reason not to do so”. This was and is the rule in place from April 2013 replacing the former rule that the court “may order an amount to be paid on account before costs are assessed“. Under the new rule there is thus a presumption that a payment will be made, subject to an exception, and a specific criterion as to amount.
2. There is some authority which refers to the criterion of “irreducible minimum“, e.g. Beach v Smirnov [2007] EWHC, 3499 or similar expressions. Several of the cases were decided before the rule changed. In Mars UK Limited v Teknowledge Limited [2000] SFR 138, Jacob J, as he then was, said that, “a payment of some lesser amount, which he will almost certainly collect” was a closer approximation to justice than saying that you need time to work out the total of the costs“.
3. In Blakemore v Cummins [2010] 1 WLR, 983 Elias LJ, giving the judgment of the Court of Appeal, accepted that in determining whether or not to make any order it was important to consider that a party should not be kept out of money which will almost certainly be demonstrated to be due longer than was necessary. That case was, however, connected with what was described as the “first issue” whether or not any order should be made and not, “the second issue“, i.e. quantum. It was also decided when the previous rule was in force. Lord Justice Elias referred in the context of the first issue to the discretion under the rule as a “wide one“. He did not lay down that the “irreducible minimum” test must be applied to the second issue.
4. In United Airline Inc v United Airways Limited, 2011 EWHC 2411, Vos J, as he then, was decided in a judgment ex tempore in this respect, that what he had to determine, “is not the irreducible minimum that is likely to be awarded but a reasonable estimate of what is likely to be awarded.” In the course of argument at the end of the application for summary judgment he had referred to a case which, as he thought, went further than Mars. Counsel, apparently misreading a paragraph of CPR 44.3.12 of the then current White Book, suggested that the case was Dyson Appliances Limited v Hoover Limited [2001] EWCA 1440 (which it was not). The White Book has cited Beach v Smirnov as authority (which it was – see paragraph 11) for the proposition that “justice requires that a sum of costs be paid provided there can be a reasonable assessment of the sum that is going to be likely to be awarded“.
5. In paragraph 13 of Beach v Smirnov the judge then said that it seemed to him that there was “at least an irreducible minimum of costs which I am going to be ordered (sic) to be paid – a sum which is very likely to be exceeded by the order following detailed assessment.” That sum satisfied the former criterion but was not put forward as the criterion itself. Dyson was, as the White Book rightly stated, distinguished in Beach v Smirnov in relation to the issue of whether costs on account should be ordered at all.
6. United Airline was followed by Warren J in Gollole v Pryke Chancery Division, unreported, 29 November 2011. Gollole has also been followed inKellie v Wheatley & Lloyd Architects Limited [2014] EWHC 2886, Football Association Premier League Limited v Berry [2014] EWHC, 726, andMehjoo v Harben & Barker [2013] EWHC 1669.
7. In VTB Bank v Skurikhin [2014] EWHC 3522, Simon J referred to Mars UK and to the change in the rules, (although his citation of the new rule was that it provided for a payment to be made on account of costs unless there was good reason not to do so, i.e. he did not refer to the words “a reasonable sum“) and awarded an amount which he thought reflected an irreducible amount of what would be recovered. United Airline does not appear to have been cited.
8. In Hospira UK Ltd v Genentech Inc [2014] EWHC 1688, Birss J held that it was clear:

“that the principles applicable to the assessment of a payment on account are and remain since they were first set out by Jacob J as he then was in the Mars v Teknowledge case. The task of the court is to ensure that it finds the irreducible minimum, which would be recovered“.

In Rovi Solutions Corporation v Virgin Media Limited [2014] EWHC 2449, Mann J took into account the test in Mars UK and regarded an irreducible minimum as the test. In Teva UK v Leo Pharma [2014] EWHC 3522, Birss J strove to find “a fair irreducible minimum” and said that it would be useful for the figure to be “not too much below” the likely level of a detailed assessment.

1. I do not, with respect, agree with the formulation by Birss J of the task of the court in Hospira. It is clear that the question, at any rate now, is what is a “reasonable sum on account of costs“. It may be that in any given case the only amount that it is reasonable to award is the irreducible minimum. I do not, however, accept that that means that “irreducible minimum” is the test. That would be to introduce a criterion (a) for which the rules do not provide’ (b) which is not the same as the criterion for which they do provide; and (c) which has potential drawbacks of its own, not least because it begs the question whether it means those costs which could not realistically be challenged as to item or amount or some more generous test. On one approach it admits of every objection to costs, which cannot be treated as fanciful.
2. What is a reasonable amount will depend on the circumstances, the chief of which is that there will, by definition, have been no detailed assessment and thus an element of uncertainty, the extent of which may differ widely from case to case as to what will be allowed on detailed assessment. Any sum will have to be an estimate. A reasonable sum would often be one that was an estimate of the likely level of recovery subject, as the costs claimants accept, to an appropriate margin to allow for error in the estimation. This can be done by taking the lowest figure in a likely range or making a deduction from a single estimated figure or perhaps from the lowest figure in the range if the range itself is not very broad.
3. In determining whether to order any payment and its amount, account needs to be taken of all relevant factors including the likelihood (if it can be assessed) of the claimants being awarded the costs that they seek or a lesser and if so what proportion of them; the difficulty, if any, that may be faced in recovering those costs; the likelihood of a successful appeal; the means of the parties; the imminence of any assessment; any relevant delay and whether the paying party will have any difficulty in recovery in the case of any overpayment.
4. I regard 80 per cent of the sum claimed as a reasonable figure to take in this case. This was litigation on a gargantuan scale which justifiably required a lot of work and where I have awarded costs on an indemnity scale. As I have said before, I do not, for the reasons given in my judgment of 19 February 2013, regard the Texas and Gulf counsel teams – about which Excalibur made particular complaint – as excessive for litigation of this size. I am also conscious of the very large amount of labour which must have been generated by the manner in which Excalibur and its solicitors chose to conduct the litigation both before and after the trial began. Nothing causes me to depart from the figure of 85 per cent of the amount claimed, which on the security for costs application in December 2013 I regarded as a reasonable assumption as to what the costs claimants could expect to recover by way of indemnity costs. As I say in paragraph 90 of my judgment, the 15 per cent deduction itself was intended to deal with the reduction that the costs judge might have made from the 100 per cent figure.
5. I reached my conclusion not by the mere assumption of a figure but on the basis of evidence of independent costs draftsmen as to the level of costs to be expected on an assessment on an indemnity basis. I am certainly not going to change my view on account of the evidence of Mr Andrew Neale put before Popplewell J at the security for costs hearing in March 2012 and described by him as “inappropriate in its scope … intemperate in its terms and … in a number of respects unrealistic in its content“, such that he ordered Excalibur to pay the Costs Claimants’ indemnity costs in respect of it.
6. Nor am I encouraged to do so in circumstances where the full extent of Excalibur’s own costs is not apparent to me. Given that the funders have provided at least £ 14.25 million and that Clifford Chance were applying a 40 per cent discount, Excalibur’s costs would appear to be over £ 20 million compared with Gulf and Texas’s costs of both £ 16.5 and £ 10.5 million respectively. I accept that it is possible that the costs on both sides are unreasonable such that Excalibur’s costs are no guide to what is an objective question. But a comparison between the costs of both sides is often informative.
7. I take a figure of 80 per cent to allow for the possibility that the 85 per cent estimate is erroneous. I agree with Birss J on the appropriateness of taking a figure which is not too much below the estimate. I also bear in mind that there is unlikely to be any difficulty in recovering from the costs claimants in the event that 80 per cent represents an overpayment. Per contra, the attitude taken by the Platinum funders, who have never confirmed that they will pay any amount that the court may order, and one of whom has taken no part in the proceedings, does not inspire complete confidence that they will do so. The same goes in relation to Blackrobe in relation to whom an additional consideration, to which I refer hereafter, applies.

PERMISSION TO APPEAL ON INDEMNITY COSTS ORDER

1. I now turn to the question of permission to appeal. Both sets of funders seek permission to appeal. There are, as it seems to me, two basic points which merit permission to appeal. The first is whether I was wrong to order the funders to pay indemnity costs in circumstances where they did not themselves conduct the litigation, were not personally guilty of discreditable conduct and received confident advice from Mr Panayides of Clifford Chance and, to a lesser extent, others. These are essentially the first and second grounds drafted by Mr Croxford. The second is whether the Arkan cap should include sums provided by way of security for costs, which is ground four of Mr Croxford’s grounds.
2. Whilst there are considerable difficulties that I foresee for the appellants, I am, with some hesitation, persuaded that there is a chance of success that can properly be described as “realistic”. Perhaps more importantly these issues are of wider importance than the confines of this case. They relate to the litigation funding industry as a whole and involve questions of considerable public interest as to the applicable principles. On that basis there seems to me what can properly be regarded as a compelling case for an appeal.