CIVIL PROCEDURE BACK TO BASICS 53: PART 36 AND COSTS AFTER THE COURT HAS LIMITED THE BUDGET TO COURT FEES

This may be an ambitious subject for the back to basics series. However here I want to look at the situation where a party has failed to file their costs budget timeously and the budget has been confined to court fees.  Making an appropriate Part 36 offer means that that party can still recover 50% of the fees allowing the party in default to row back a little from the stark position in the rules.  Also there is one case that addresses the difficult practical and ethical issue for a solicitor and client dealing with the problem of being confined to court fees.  Permission to appeal was refused in that case, however the judgment refusing permission to appeal provides some interesting observations.

 

 

THE ISSUE

When a party has failed to file a costs budget in time and its costs are limited to court fees only there is little incentive on the opposing part to settle in the face of a Part 36 offer.

THE CLEVER WAY THAT PART 36 DEALS WITH THIS

Changes introduced in April 2015 introduced an amendment to Part 36. This  means, in essence, that a party subject to a nil costs budget can still recover 50% of their fees for the period after a Part 36 offer if the offer is not beaten.

“Cases in which the offeror’s costs have been limited to court fees
36.23.—(1) This rule applies in any case where the offeror is treated as having filed a
costs budget limited to applicable court fees, or is otherwise limited in their recovery of
costs to such fees.
(Rule 3.14 provides that a litigant may be treated as having filed a budget limited to court
fees for failure to file a budget.)
(2) “Costs” in rules 36.13(5)(b), 36.17(3)(a) and 36.17(4)(b) shall mean—
(a) in respect of those costs subject to any such limitation, 50% of the costs assessed
without reference to the limitation; together with
(b) any other recoverable costs.”

CROSS-REFERENCING THAT RULE IN PART 36 AND WHAT IT MEANS

This requires a lot of cross referencing.

(1) 36.13(5)(b) is a reference to where the parties cannot agree the liability for costs and where the court, unless it is unjust to do so, order “the offeree do pay the offeror’s costs for the period from the date of expiry of therelevant period to the date of acceptance”

(2) 36.17(3)(a) is a reference to the costs being ordered to be paid by a claimant to a defendant where a claimant fails to beat a defendant’s offer.

(3) 36.17(4)(b) is a reference to costs ordered to be paid by the defendant to a claimant when the defendant fails to beat the claimant’s offer.

It means, in essence, that a party subject to a nil costs budget can still recover 50% of their fees for the period after a Part 36 offer if the offer is not beaten.

A GOOD PART 36 OFFER MEANS YOU COULD STILL GET HALF YOUR COSTS

This is a clever rule.  A party, on a nil budget, could still get half their costs if they make a realistic Part 36 offer and their opponent fails to beat it.This does not undermine the purpose of the sanction (only half the costs can be recovered). It still gives both parties an incentive to settle.

CASE LAW ON THE TOPIC

The one decision (I am aware of) on this point is Master Rowley in Batti -v- Asghar [2019] EWHC B5. The claimants had filed their costs budget late and the budget was confined to court fees. However the defendants made a Part 36 offer which the claimants accepted out of time. The defendants tried every which way not to be liable for the claimants’ costs but were ordered to pay them (at 50%).   The defendants  sought permission to appeal, however that application was refused by Mr Justice Bryan.

THE JUDGMENT OF MASTER ROWLEY

The defendants’ argument was that there was no valid retainer between the defendants and their solicitor after the costs had been budgeted at nil, alternatively there was a major conflict of interest and the solicitor should have refused to act.
  1.  I have already concluded in the first part of this judgment that it was perfectly reasonable for the claimants to take the view that they could continue to instruct the solicitors on the basis that if they suffered any losses as a result of the solicitors’ breach of duty, they would be able to bring such a claim at the end of the case when the losses had been quantified.
  2.  It is clear from the evidence that the claimants were advised that they could take independent legal advice on their position. Whilst Mr Foy suggested that this was insufficient and that they ought to have been required in some way to take independent legal advice and indeed move to another firm of solicitors, I think this puts the duty on the claimants’ legal team at far too high a level. There may be any number of perfectly legitimate reasons why a client wishes to continue with solicitors that he has instructed. Once the solicitor has advised the client that there is a potential claim against him on which he may wish to take separate advice, then his duty in my view is discharged.
  3.  I accept Mr Power’s submission that it is perfectly possible for a solicitor to consider that his client’s best interests may be served by the solicitors continuing to act for him notwithstanding a discrete mistake.
  4.  The fact that it would appear to be Mr Challenger who gave that advice to the claimants, rather than Landmark themselves, does not seem to me to make any difference. The contents of Mr Challenger’s written advice was available to all and his oral advice to Rashid following the hearing was, as I understand it, made in the presence of a representative of Landmark. If the solicitors thought that some other advice should have been given, then they had the opportunity to make that view known. It seems to me to be clear that the solicitors accepted they had breached their duty to their client and so were potentially liable for a claim for losses depending upon how the case panned out.
  5.  Having advised the client that they might wish to obtain independent legal advice, what were the solicitors then expected to do? As Mr Power rather wryly observed, one way to minimise a potential legal claim, in the manner suggested by the defendants, was to leave the claimants without legal representation since that was more likely than anything else to prompt the claim to fail.
  6.  Instead, the solicitors pursued the claim under the strategy that had been worked out previously. The solicitors, perhaps optimistically, held the belief that an indemnity basis order might be achievable and which would prove beneficial to the recovery of costs. But it is clear that the general pursuit of the claim did not change as a result of Master Leslie’s Order. The only conduct to which the defendants refer in terms of the solicitors either seeking to maintain the case or to run it into the ground appears to relate to the offers made and rejected.
  7.  The offer of £1.2 million was undoubtedly an optimistic proposal from the claimants. But that is hardly an unusual state of affairs. The email record of Mr Challenger’s conversation about the offer indicated that he produced a justification of the figures which he took some trouble to explain to Mr Asghar’s son.  It is clear from Mr Challenger’s evidence that he no longer recalls that justification and there is no evidence from the defendants as to what was said.
  8.  Nevertheless, I accept that there was some justification of the figures put forward and as such I do not consider that a great deal of store can be put by a simple analysis of the offer being made through deducting the damages put forward in other offers and assuming the remainder relates to costs as Mr Foy submits.
  9.  More problematically for the defendants, if, as Mr Foy suggested, there was no prospect of the defendants accepting that offer, then it is hard to see that it could possibly be of any benefit to the solicitors in the aims imputed to them by the defendants. In the absence of any settlement, the seemingly generous amount of costs contained within the offer would not be recovered and the litigation would continue. If the putative offer had been acceptable to the defendants, Mr Challenger indicated that it was one he would recommend and there is nothing to suggest that the claimants would have been short changed in their damages if that had occurred.  Therefore, it does not seem to me that the defendants are able to make out any conflict between the claimants and their solicitors as a result of making that offer, even if neither of the claimants now recollected it to any degree.
  10.  The rejection by Rashid of the defendants’ offer of £127,888 notwithstanding his own offer to accept £108,923 is rather more complicated than it first appears.
  11.  Rashid’s Part 36 offer of £108,923 was made by letter dated 20 November 2015.  The defendants made an offer in response in December 2015 which, although described as without prejudice to costs, was not made in accordance with Part 36 since it sought to limit the costs recoverable in addition to the damages. This offer played no part in the hearing before me.
  12.  Almost exactly a year after Rashid’s offer, the defendants made two offers to settle his claim.  The first, dated 22 November 2016, was described as being without prejudice to costs and offered £101,000 together with standard basis costs, subject to reservations regarding the costs of an appeal; any reduction to costs regarding conduct; and any costs reserved to that point.  The offer was open for acceptance for 7 days, i.e. until 4pm on 29 November 2016.
  13.  On 25 November 2016, the defendants set out a further offer which again had to be accepted by 4pm on 29 November 2016 or it would be automatically withdrawn.  This offer was for £127,888 rather than £101,000 but otherwise repeated the terms of the earlier offer.
  14.  It is this last offer that Mr Foy put to both Rashid and Colin Challenger when querying why such an offer was rejected given that it was for a higher sum than Rashid’s own offer from November 2015.
  15.  Rashid described the offer as being for £127,888 and no costs.  He also described it as being incapable of acceptance because it did not set out the truth. The first of these comments does not appear to be an accurate description since some costs were offered and the defendants simply reserved their position on the others.  The second comment has more force than would normally be the case because the offer was set out in several numbered paragraphs.  As such it was not simply a monetary offer which had nothing to do with setting out any other issues.  Nevertheless, Rashid’s comment is difficult to follow and it seemed to come from his view that every action could be explained by the fact that the case was about reputation at least as much as about money.
  16.  Mr Challenger’s recollection was much more accurate. He referred to the length of time between Rashid and the defendants’ offers as well as the fact that the defendants’ offers left certain matters open.  This evidence is borne out by the offer documents. His conclusion that it was difficult to be sure as to what the offers amounted to and whether they were better that Rashid’s offer is also borne out, in my view, by other documents lodged for the hearing which were not referred to by counsel on either side. They were exhibited to the first defendant’s witness statement and consist of email exchanges between leading counsel for both sides in between the defendants’ offers and the beginning of the trial in December 2016. The emails attach various draft Tomlin orders where the parties seek to impose their own wording as to various costs provisions in particular. They demonstrate in my view the wrangling left to be done as a result of the open ended nature of the defendants’ offers.  They are important because there is no suggestion that the claimants’ leading counsel was affected in any way by the alleged conflicts of interest and would undoubtedly have been advising the claimants upon the various proposals put forward. It was clearly not the damages that were in issue but, to my reading, the efforts of the defendants to limit the extent of the costs that would be payable.  It is interesting to note that the first draft of the Tomlin order produced by Landmark on 29 November 2016 proposes a simple order for standard basis costs.  That does not fit with the defendants’ argument that Landmark were holding out for indemnity basis costs to the detriment of the claimants.
  17.  Given Master Leslie’s order and the workings of Part 36, it seems to me to be no mean feat to establish which of the offers made by the parties may be more beneficial than the other.  That is so, even if the extra complication of the possibility of the trial judge making an indemnity basis order is ignored. When compared to the order ultimately made by May J following the acceptance of Rashid’s offer by the defendants, it is not clear to me whether the defendants’ own offer was ultimately beaten or not.
  18.  In the circumstances in this case, I do not see that the rejection of the defendants’ offers made very shortly before trial was unreasonable, let alone was it demonstrative of the existence of any conflict of interest.  Nor do I see any difficulty in the concept of one claimant deciding not to accept an offer because it would cause difficulty for the other claimant if he were to do so.  It shows no conflict of interest in my view.
  19.  This leads me to what I think is the nub of this preliminary challenge. The defendants have taken the view that if the claimants can avoid paying any of their solicitors’ costs then they should do so. It is not simply a suggestion that the defendants should benefit from the claimants’ solicitors supposedly falling foul of the SRA Code of Conduct. But it is the expectation that the claimants will positively act in a manner detrimental to their solicitors simply in order to avoid having to meet their ostensible contractual liabilities.
  20.  In the case of Birmingham City Council v Forde [2009] EWHC 12 (QB) the appellant defendant argued that the claimant had been placed under undue influence by her solicitors to enter into a second CFA in case their first CFA was found to be unenforceable. If there had not been that undue influence, the defendant argued, the claimant could have relied upon the first CFA being unenforceable and have no liability to meet her solicitors’ costs. At paragraph 98 Christopher Clarke J (as he then was) set out the defendant’s argument as follows:
“CFA 2 was, Miss Bretherton submits, manifestly to Miss Forde’s disadvantage because of the success fee and because it imposed a retrospective liability when, if CFA 1 was invalid, she was not responsible for [her solicitors’] fees under it. The making of the agreement calls for an explanation and the presumption of undue influence applies. In the absence of evidence that Miss Forde received independent advice on CFA 2 it must be treated as invalid. The fact that [the solicitors] told Miss Forde that she had the right to seek independent advice cannot save it. The fact that it did so only served to increase the trust that she reposed in them without providing the advice necessary to rebut the presumption.”
  1.  The judge then cites the dictum of Lord Nicholls in Royal Bank of Scotland Plc v Ettridge (No.2) [2002] 2 AC 773 where he said that the evidence required to discharge the burden of proof:
“…depends on the nature of the alleged undue influence, the personality of the parties, their relationship, the extent to which the transaction cannot readily be accounted for by the ordinary motives of ordinary persons in that relationship and all the circumstances of the case.”
  1.  At paragraph 106 of the judgment Christopher Clarke J deals with the defendant’s argument in the following way:
“It is apparent that Miss Forde was prepared to assist her solicitors recover their fees despite the challenge made by the Council to the validity of CFA 1. A willingness to do so appears to me to be readily accounted for “by the ordinary motives of ordinary persons” if they were in the relationship that Miss Forde had with [her solicitors] and in the circumstances which she was asked to sign CFA 2. [Her solicitors] had acted for Miss Forde, obtained a s 82 order, and secured an offer of £4,500. In those circumstances it would be entirely understandable for her not to seek to rely on the unattractive contention that [her solicitors] should get nothing at all for what they had done – a contention that she would not have the resources to mount and the advancement of which would probably have to await at least the resolution of [another case involving the defendant]. It was also understandable that she would not wish to be placed in a position where, if her solicitors had no valid retainer, they had no subsisting obligation to act for her. It made sense for her to enter into an arrangement which would ensure that there was a valid retainer under which [her solicitors] would be bound to continue acting and pursuant to which it would be entitled to be paid. Many people would regard it as unacceptable that [the solicitors] should get nothing for their work. The ordinary motives of ordinary persons do not exclude doing the decent thing, even if some persons would not be minded to do so.”
  1.  Mr Foy referred to the so-called costs wars where the validity of CFAs – in particular their compliance with primary and secondary legislation – was challenged on many occasions. Where those agreements fell short, the solicitors were unable to recover their costs from the clients and consequently those clients had no claim for costs against their opponents. The case of Forde comes from that time.
  2.  The circumstances of this case are not entirely on all fours with Forde , but the desire of the clients to use their solicitors, notwithstanding retainer issues, runs through both cases. The fact that in this case the solicitors made an error did not detract from the confidence placed in them by the claimants based on the evidence before me. Simply because the claimants might be able to bring a claim against their solicitors professional insurers does not mean they have to do so, as indicated above.
  3.  When CFAs were first used, solicitors and then barristers all decried the use of such contingent arrangements because of the clear conflicts of interest that would arise in many and varied situations. Nevertheless, such agreements came into being and legal professionals had to deal with the professional difficulties as and when they arose. That solicitors have been able to do so satisfactorily may be demonstrated by the fact that there is only one reference to conditional fee agreements in the SRA Code of Conduct that was in force at the time of this case. Under O(1.6), solicitors were required only to enter into fee agreements that were legal and which the solicitor considered to be suitable for the client’s needs taking into account the client’s best interests. Indicative behaviour 1.17 said that where a solicitor was acting for a client under a fee arrangement governed by statute, “such as a conditional fee agreement”, behaviour achieving the required outcome involved providing the client with all relevant information relating to that arrangement.  This very limited reference in the Code of Conduct suggests that the ethical problems in running CFAs had effectively been resolved by the time of this case.
  4.  In my judgment, the solicitors here have been placed in a situation which is no more ethically difficult than the running of a CFA with a client. The extent of the recoverability of costs from the opponent was not certain. An indemnity basis order would achieve a good recovery and a standard basis order would achieve a partial recovery. It was in both the solicitors’ and the claimants’ interests to seek the best recovery of damages possible.
  5.  On the other hand, a loss for the client would not necessarily have enabled the solicitors to recover all of their costs. Given the sums involved there must always have been a possibility that the claimants would not have been good for the money if they had not achieved the success at trial. Whilst Rashid said that the costs involved would not bankrupt him, it is noticeable that neither of the claimants have met all of their outstanding solicitors’ fees. It is in my view too simplistic to say that the solicitors would be paid if their clients lost but would only be paid to an extent if the clients won.
  6.  Once the clients had decided to remain with the solicitors, there is nothing in my view to indicate that the solicitors did not pursue this case as it would have been pursued in any event. The defendants point only to the offers that have been made in terms of conduct. As I have set out above, it does not seem to me that either the optimistic £1.2 million offer or the rejection by Rashid of the defendants’ £127,888 offers demonstrate a conflict, whether actual or potential,  between the solicitors and their clients.
  7.  Consequently, in my judgment the theoretical concerns regarding conflicts of interest, whether actual or potential, raised by the defendants have not been demonstrated in reality and as such there is nothing to taint the validity of the claimants’ retainers with their solicitors.
Unenforceability and illegality
  1.  Both counsel referred me to a number of authorities on the question of whether any breach of the SRA Code of Conduct would cause the retainer to be unenforceable or illegal. Given the decision that I have made, I have not found it necessary to come to any conclusions on the matters raised by counsel.  I have decided to leave the field clear for a High Court Judge if this matter is taken on an appeal.  Consideration of this issue would only occur if my conclusions were overturned and at which point any views expressed on this issue by me would be valueless. It would be a much better course of action in any event for an authoritative decision to be produced regarding whether the Supreme Court decision in Patel v Mirza does indeed change the position from that set out in many costs cases in the Court of Appeal and below, as contended for by the claimants.

THE JUDGMENT OF MR JUSTICE BRYAN (REFUSING THE DEFENDANT PERMISSION TO APPEAL)

In the event the defendants were refused permission to appeal. The judgment was given on the 2nd May 2019.  There is no neutral citation  – this was a judgment refusing permission to appeal (the judgment is available on Lawtel)

NO EVIDENCE THAT THE CLAIMANT HAD AGREED TO WORK FOR FREE

Firstly the argument that the claimants and their solicitors must have come to an agreement that no costs would be recovered was rejected.

“In relation to strand one, the first of those two arguments, Master Rowley heard evidence,
both from witnesses and, indeed, from counsel. He reached a conclusion in a judgment
which was described by William Davis J on the written application as a “comprehensive
reserved judgment”. I concur in that identification and description of that judgment. It was
a detailed judgment which ran to some 54 pages and 104 paragraphs and had been reserved
for some time after the hearing in September with that judgment being delivered in early
February of this year. It is clear that the master had given very careful consideration, both to
the evidence before him and the arguments that were raised, as set out in that comprehensive
reserved judgment. So far as this first point is concerned, it will be appreciate that that
master was very well placed to assess that evidence from the respondents and from counsel
and to consider the documentary material and contemporaneous correspondence. He
reached a clear finding of fact, namely that no agreement of the kind suggested was reached.
Rather, the respondents continued with their solicitors, knowing that they had a claim
against the solicitors if they needed to rely on it in due course”

THE SECOND ARGUMENT

The defendants’ second argument was that if there was no such agreement there ought to have been one because to do otherwise was to run into a conflict of interest rendering any fees to be charged unenforceable as against the clients. Again permission to appeal was refused on that ground.

 

15 The real question, therefore, that was before Master Rowley was whether, in fact, there was
a conflict or a significant risk of a conflict of interest. The master concluded that there was
no conflict of interest, in fact, nor a significant risk of a conflict of interest

 

“It is clear that his reasoning was that there was not, in fact, in his view, any
actual conflict or, indeed, a significant risk of conflict in situations where it was in the
interest, he found, of both the claimants and their solicitors to pursue the case to trial with a
view to beating the claimants own Part 36 offers so as to improve the costs recovery so that
there was no conflict of interest between themselves and the claimants. Their interests were
aligned, as he put it at para.68 of his judgment. He concluded that to beat a Part 36 offer
was perfectly proper goal to achieve.”
“It is clear that his reasoning was that there was not, in fact, in his view, any
actual conflict or, indeed, a significant risk of conflict in situations where it was in the
interest, he found, of both the claimants and their solicitors to pursue the case to trial with a
view to beating the claimants own Part 36 offers so as to improve the costs recovery so that
there was no conflict of interest between themselves and the claimants. Their interests were
aligned, as he put it at para.68 of his judgment. He concluded that to beat a Part 36 offer
was perfectly proper goal to achieve. “

NO COMPELLING REASON FOR AN APPEAL TO BE HEARD

The judge also rejected the argument that there was a “compelling reason” why the appeal should be heard.

“That leaves the question of whether or not there is any other compelling reason for
permission to appeal to be granted. It is said by Mr Foy in his written submissions, although
not particularly elaborated upon in his oral submissions, that there is a point of general
interest in relation to the proper construction of the Code of Conduct. It seems to me the
difficulty with that scenario is that whether or not there is a conflict or a significant risk of
conflict is highly fact-specific, a point that was exactly before me orally during the course of
this hearing. I do not consider that there is any uncertainty or ambiguity arising out of the
Code of Conduct or the language of the Code of Conduct. The application of that Code of
Conduct is heavily factually dependent. This would not be a good case for an appellate
court to be considering that provision in circumstances where, as they say, the first ground
of appeal is not reasonably arguable with the result that there was a valid retainer in place
and in circumstances where, on the facts of this case and for the reasons that I have
identified, I do not consider that it is reasonably arguable that there was a conflict or a
significant risk of conflict”