DEFENDANTS HAVE TO PAY COSTS OF ATE PREMIUM: DEEMED ORDER FOR COSTS FOLLOWING ACCEPTANCE OF PART 36 OFFER INCLUDES THE COSTS THE ATE PREMIUM
In Dance v East Kent University Hospitals NHS Foundation Trust & Ors [2022] EWHC B9 (Costs) Costs Judge Leonard considered two ingenious arguments where the defendants attempted to avoid paying the claimant’s ATE premium. This involved consideration of the deemed order for costs following acceptance of a Part 36 offer and whether the term “costs” can be given two different meanings. The arguments were not accepted and the premium is payable.
“the wording of the No 2 Regulations does not support the conclusion that they add to the CPR by introducing an additional requirement to the effect that a recoverable ATE premium must be expressly provided for in a costs order.”
THE CASE
Clinical negligence remains one of the very limited areas of litigation where the costs of after the event insurance policies are recoverable from the defendant. Defendants have not been happy about this and, over the years, we have seen many ingenious arguments as to why policies should not be paid.
In this case the claimant had accepted a Part 36 offer made by the defendants. There were more ingenious arguments as to why the defendants were not liable to pay the costs of the ATE policy that the claimant had taken out.
ARGUMENT NUMBER ONE: ACCEPTANCE OF A PART 36 OFFER DID NOT AMOUNT TO AN ORDER FOR COSTS
This argument was, perhaps unsurprisingly, not pressed that hard by the defendants.
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That contention is based on two grounds. The first, as the Points of Dispute put it, is that in Cartwright v Venduct Engineering Limited [2018] EWCA Civ 1654 “the Court of Appeal confirmed that a Part 36 offer or a Tomlin Order did not amount to an ‘order for costs‘”.
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The second is that even where there is an order for costs, the ATE premium will only be recoverable if the costs order makes specific provision to that effect. The first Defendant relies in that respect upon an editorial note at paragraph 48.0.4 of Sweet & Maxwell’s “Civil Procedure” (“the White Book”):
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“Regulation 3 of the 2013 Regulations provides that ‘a costs order made in favour of a party to clinical negligence proceedings who has taken out a costs insurance policy may include provision requiring the payment of an amount in respect of all or part of the premium of that policy’. It is therefore incumbent upon the party seeking costs to request the judge to include the necessary provision when making the order. If no such provision is included in the order, the cost of the premium will not be recoverable. The Civil Procedure Rule Committee decided that there was no need for any further rules in respect of ATE premiums in clinical negligence cases.”
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I can address the first of those grounds now. Self-evidently a Part 36 offer is not an order, but the Claimant’s right to recover costs in this case arises from his acceptance of the first Defendant’s Part 36 offer. It would seem that the first Defendant’s contention is that the Court of Appeal found that such acceptance leaves the Claimant without the benefit of an order for costs for the purposes of recovering the cost of an ATE premium.
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That, as Mr Latham for the Claimant points out, is incorrect. It is not in issue that the Claimant accepted the first Defendant’s Part 36 offer within the period set by the first Defendant for acceptance. His right to recover costs arises, accordingly, under 36.13(1) of the Civil Procedure Rules (“CPR”). CPR 44.9(1)(b) provides that in those circumstances, a costs order in the Claimant’s favour will be deemed to have been made on the standard basis.
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Given the provisions of CPR r.44.9(1)(b) it would not have been open to the Court of Appeal in Cartwright v Venduct Engineering Limited to find that acceptance of a Part 36 offer cannot give rise to an order for costs, nor did the court purport to do so. The point of Cartwright v Venduct Engineering Limited is that a Tomlin Order is a record of a settlement reached between the parties designed to have binding effect, not an order for damages and interest made in favour of the claimant for the purposes of CPR 44.14(1), with the result that the making of a Tomlin order (and, of necessity, the acceptance of a Part 36 offer) would not result in damages being available for set-off under the regime that governs qualified one-way costs shifting.
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Mr Friston for the first Defendant, unsurprisingly, did not press this particular point. His submissions focused upon the second ground, to which I now turn.
THE SECOND ARGUMENT
The judge then considered the defendants’ arguments that, in essence, a specific order mandating payment of the ATE premiums was necessary and this was not engaged in the current case, where the order for costs was made after acceptance of a Part 36 offer.
THE DEFENDANTS’ SUBMISSIONS ON THIS ISSUE
The judge considered, but did not accept, the Defendants’ submissions on this point.
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Mr Friston submits that regulation 3(1) of the No 2 Regulations is permissive rather than restrictive. Rather than assuming a default position of an entitlement to recoverable ATE premiums, subject to prescribed fetters, it affords the court a restricted power to make an order that includes provision for the payment of recoverable ATE premiums.
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This is made clear not only by the language that is used but also by fact that the No 2 Regulations were made under section 58C(2) of the CLSA. The default position (of non-recovery) is established by the primary legislation, subject to secondary legislation. That secondary legislation affords the court the power to make an order in respect of recoverable ATE premiums.
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It would be wrong to read regulation 3(1) of the No 2 Regulations as saying that a costs order will, by default, include an entitlement to recoverable ATE premiums. Both the wording of the No 2 Regulations and the legislative context in which they were made make it clear that any such entitlement will arise only if an order is made to that effect.
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Hence the note at paragraph 48.0.4 of the White Book, which correctly describes the law. The burden is on the receiving party (in this case, the Claimant) to seek what the editors describe as “the necessary provision”. The burden is not on the paying party to seek an order disallowing the recoverable ATE premium.
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Lewison LJ in McMenemy identified the three significant changes made when the No 2 Regulations replaced the First Regulations. They did not include a provision to the effect that an order for costs will necessarily incorporate an entitlement to a recoverable ATE premium. They merely created a facility by which the court could make provision, in an order for costs, for the payment of a recoverable ATE premium.
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As the editors of the White Book correctly say, an order making provision for payment of a recoverable ATE premium has to be made. It does not exist merely because an order for costs has been made. If that had been the intention of Parliament, the Regulations would have been worded entirely differently.
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The fact that an entitlement to recoverable ATE premiums has to be affirmatively made is entirely logical. There are few other constraints on a defendant’s potential liability for an ATE premium, because such premiums are subject to assessment on ‘macroeconomic’ grounds rather on the grounds of individual reasonableness. They are also almost entirely exempt from the test of proportionality. As such, it is entirely understandable that the legislature intended to create a mechanism for judicial oversight that was additional to assessment. Those protections may not be as strong as those that existed in the First Regulations, but they continue to exist nonetheless.
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It is not for this court to improve upon the deemed order made, in this case, upon the Claimant’s acceptance of the first Defendant’s Part 36 offer. A Costs Judge has no power to re-write the very order that governs the assessment. Any such power would be expressly conferred by the CPR, and it is not.
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“(1) Subject to paragraphs (2) and (4) and to rule 36.20, where a Part 36 offer is accepted within the relevant period the claimant will be entitled to the costs of the proceedings (including their recoverable pre-action costs) up to the date on which notice of acceptance was served on the offeror…
(7) The claimant’s costs include any costs incurred in dealing with the defendant’s counterclaim if the Part 36 offer states that it takes it into account.’
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Thus, a deemed order arising out of acceptance of a Part 36 offer will, expressly, be for “the costs of the proceedings”. It says nothing specific about recoverable ATE premiums. The Rules make it clear that this will include the pre-action costs and the costs of a counterclaim, but there is nothing to say that this would include recoverable ATE premiums. The Civil Procedure Rule Committee (“CPRC”) could easily have included a paragraph that provided for the recovery of such costs (as they have done with counterclaims) but has not done so.
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“In Parts 44 to 47, unless the context otherwise requires… ‘costs’ includes fees, charges, disbursements, expenses, remuneration, reimbursement allowed to a litigant in person under rule 46.5 and any fee or reward charged by a lay representative for acting on behalf of a party in proceedings allocated to the small claims track…”
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There is a noticeable omission from this list, namely any form of “additional liability” (as referred to in the pre-1 April 2013 CPR) such as a success fee under a Conditional Fee Agreement or an ATE premium. This is not an inadvertent omission. Prior to 1 April 2013, costs were defined in the following way (in CPR 43.2(1)(a)):
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“… ‘Costs’ includes fees, charges, disbursements, expenses, remuneration, reimbursement allowed to a litigant in person under rule 48.6, any additional liability incurred under a funding arrangement and any fee or reward charged by a lay representative for acting on behalf of a party in proceedings allocated to the small claims track…”
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From 1 April 2013, reference to additional liabilities was removed. The fact that this was intentional (in the context of whether the post-2013 test of proportionality applies) was made clear by Sir Terence Etherton MR in BNM v MGN Ltd [2017] EWCA Civ 1767, at paragraph 81:
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“Standing back from the minutiae, it seems perfectly clear that the reference to ‘any additional liability incurred under a funding arrangement’ was deliberately omitted from the definition of “costs” in the new CPR 44.1(1) …If it had been intended that the new proportionality test was to apply to funding arrangements to which the statutory saving and transitional provisions applied, that would have been made clear in the statutory provisions or the new costs rules or both and it was not.”
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The revisions to the definition of “costs” in CPR 44 were made at about the same time as the First Regulations were due to come into force. It was, therefore, an entirely logical and coherent revision. Recoverable ATE premiums were not “costs” by default but were something ancillary to costs which were in the discretion of the court. They only became embraced by the CPR once a specific order to this effect was made. The definition incorporates the word “includes” because recoverable ATE premiums are not “costs” by default. They become “costs” if the court makes an order that they be recoverable.
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If the definition had remained as it was, then any order for costs would, by default, have included a provision for recoverable ATE premiums. This would have run counter to the changes made by both the No 2 Regulations and the First Regulations, which clearly envisaged that recoverable ATE premiums would be payable only if and to the extent that the court made an order to that effect.
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When read as a whole, the entire scheme is coherent and well-integrated. Importantly, the definition of “costs” affords no basis for saying that an order for costs made by way of acceptance of a Part 36 offer will, by default, include the provision for the payment of a recoverable ATE premium. Quite the opposite is so.
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Given that the Claimant urges upon the court a purposive interpretation, it is not clear what legislative purpose would be served by such an approach. One intended purpose of the Regulations is to enhance access to justice in clinical negligence claims by affording claimants the opportunity to recover premiums for the purposes of funding certain expert reports. It is quite clear, however, that Parliament did not intend that this would always be so. One could go so far as to say that the purpose of those Regulations was to strike a balance between the needs of claimants (namely, access to justice) and the needs of defendants (namely, protection from excessive liability), and that an interpretation that focused on the former without regard to the latter would be impermissible. It would be wrong to read the word ‘may’ in regulation 3(1) as if it read ‘will’.
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In fact the Claimant does not find himself in difficulty by reason of the No 2 Regulations. The real reason he finds himself in difficulty is by reason of the operation of the CPR. The Claimant finds himself having to rely on a purposive interpretation not because the Regulations say what they say, but because CPR 36.13 makes no provision requiring the payment of a recoverable ATE premium. As such, if a purposive interpretation were to be appropriate, it would have to apply to the CPR rather than the Regulations.
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The intended purpose of CPR Part 36 is to encourage settlement and to promote certainty. It has nothing to do with promoting access to justice (indeed, in many respects, its purpose is to do precisely the opposite by imposing substantial costs penalties on parties who fail to accept offers). It would be an impermissible exercise of interpretation to interpret Part 36 as if access to justice were its intended purpose.
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“In order to allow for…” (the intuitive outcome) “… Mr Williams QC had to rewrite the rule … That is not what the rule says. Indeed, no matter how he put his case, Mr Williams QC needed to add further words… In my view, the absence of the necessary words is fatal to his case on interpretation.”
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Exactly the same applies here. In order to allow recovery of the Claimant’s ATE premium, the court would have to read CPR 36.13 as if it contained something along the lines of “… and an order for costs will, without further order of the court, include provision requiring the payment of an amount in respect of all the premium where such a premium is recoverable pursuant to the Recovery of Costs Insurance Premiums in Clinical Negligence Proceedings (No. 2) Regulations 2013”. Reading such words into Part 36 would not only be an impermissible exercise of judicial legislation. It would also cut across the well- established principle that Part 36 is a self-contained code and it would overlook the fact that CPR 44.1 was specifically revised so as to remove any reference to additional liabilities.
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Even if a purposive interpretation of CPR 36 were permissible, the court would be faced with the insurmountable difficulty of not being able to see into the mind of the CPRC. The CPRC could have included a provision which dealt with recoverable ATE premiums in the event of a Part 36 offer being accepted by introducing provisions to the effect that recoverable ATE premiums under the No 2 Regulations would (subject to assessment) always be recoverable; or that recoverable ATE premiums would be recoverable only upon application; or that such premiums would be recoverable by default but may be disallowed upon application by a defendant as matter of general discretion; or that recoverable ATE premiums would be recoverable by default but could be disallowed if it would be unjust to allow such a premium.
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This court has no way of knowing which of these is the ‘right’ approach. Each has its own merits and difficulties (and each may require its own consequential amendments to other parts of the CPR). In particular, whilst the first of these options would deny defendants the protections afforded by the No 2 Regulations, the second to the fourth preserve those protections to varying degrees. It is not for this court to decide which is the ‘right’ one. This court is simply not in a position to determine what CPR 36.13 “ought” to have said, which would be a matter for the CPRC itself.
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It is possible that CPR 36.13 contains an error. The court has the power to correct drafting mistakes, but the threshold for doing so is very high. In Inco Europe Ltd and Others v. First Choice Distribution (A Firm) and Others [2000] UKHL 15, [2000] 1 WLR 586 at 592D-H, Lord Nicholls had this to say:
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“This power is confined to plain cases of drafting mistakes. The courts are ever mindful that their constitutional role in this field is interpretative. They must abstain from any course which might have the appearance of judicial legislation. A statute is expressed in language approved and enacted by the legislature. So the courts exercise considerable caution before adding or omitting or substituting words. Before interpreting a statute in this way the court must be abundantly sure of three matters: (1) the intended purpose of the statute or provision in question; (2) that by inadvertence the draftsman and Parliament failed to give effect to that purpose in the provision in question; and (3) the substance of the provision Parliament would have made, although not necessarily the precise words Parliament would have used, had the error in the Bill been noticed. The third of these conditions is of crucial importance. Otherwise any attempt to determine the meaning of the enactment would cross the boundary between construction and legislation: see Lord Diplock in Jones v. Wrotham Park Settled Estates [1980] A.C. 74, 105. In the present case these three conditions are fulfilled.”
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Not one of these conditions is satisfied. There is no material before this court which would justify a finding that the intended purpose of either CPR 44.9(1)(b) or CPR 36.13 was to allow for recoverable ATE premiums on the making of a deemed costs order, much less material that would allow this court to be “abundantly sure” that this was so. There is nothing to suggest that there has been an error.
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In this regard, Mr Friston refers to the observations of Briggs LJ at paragraph 53 of his judgment in Qader & Ors v Esure Services Ltd & Ors [2016] EWCA Civ 1109:
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“It may be said that the interpretative jurisdiction to put right obvious drafting errors in a statute is fortified by the difficulties which typically face Parliament in doing so, in relation to primary legislation, in the light of its heavy workload. The same difficulties do not affect the Rule Committee to any similar effect. It can, and regularly does, re-consider rules when invited to do so by the court, either to correct drafting errors or other infelicities which have been proved to cause procedural difficulty.”
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In view of the fact that the White Book has highlighted for many years the need to make specific provision in an order for costs for the payment of a recoverable ATE premium, it must follow that the CPRC has had the opportunity to look into the matter. As such, this court cannot be ‘abundantly sure’ that there has been error. In fact, as already highlighted in the context of purposive interpretation, the court does not know what the CPRC would have done if it had made rules dealing specifically with recoverable ATE premiums.
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In any case, as previously observed, it may well be that it is open to a claimant to make an application for an order for recovery of recoverable ATE premiums upon acceptance of a Part 36 offer. If so, there can be no error to correct.
THE JUDGE’S DECISION ON THIS ISSUE
As already mentioned the judge did not accept the defendants’ submissions on this issue.
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Whilst I admire the ingenuity of Mr Friston’s submissions, I do not find them persuasive. My reasons are, in summary, first that I do not accept that the No 2 Regulations create an exception to the normal rule that “costs” as defined at CPR 44.1(1) are (subject to assessment) recoverable under any order for costs without specific provision for any particular element of those costs: and second, that recoverable ATE premiums do fall within the definition of “costs” at CPR 44.1(1). I will explain those conclusions.
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I must start with section 58C(1) of the CLSA, which is not, in my view, to be given an entirely literal interpretation. That is because read literally, the words “A costs order… may not include provision requiring the payment of an amount in respect of all or part of the premium of the policy” would mean only that a costs order may not incorporate an express provision to the effect that such an amount must be paid.
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The words “A costs order… may not include provision requiring the payment of an amount in respect of all or part of the premium of the policy” in section 58C(1) of the CLSA must, accordingly, be understood not to refer to any express provision in the order, but to mean only that a costs order (however worded) will not enable the recovery of an ATE premium except to the extent permitted by regulations made under section 58C(2).
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The question then is whether those words, when repeated in both the First Regulations and the No 2 Regulations, are to be read differently, so that they do refer to an express provision. There is no obvious reason why they should be, and my reading of the First Regulations (which Mr Friston accepts can serve as an aid to interpretation of the No 2 Regulations) offers a clear indication that they should not.
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I say that because the First Regulations, having said at regulation 2(1) that “a costs order… may include provision requiring the payment of an amount in respect of all or part of the premium of the policy”, go on to provide at regulation 2(2)(c) that the order “may not” do so if the cost of the report “is not allowed” under the costs order.
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If it were necessary, for an ATE premium to be recoverable under regulation 2(1) of the First Regulations, for a costs order to make express provision to that effect, regulation 2(2)(c) would be otiose. The necessary inference is regulation 2(1) of the First Regulations is not to be read in that way.
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On the contrary, regulation 2 of the First Regulations, read as a whole, is in my view consistent only with the conclusion that, provided that the statutory criteria are met, a costs order in a qualifying case will permit a claimant to recover a recoverable ATE premium against an opponent unless that order makes express provision to the contrary. That is consistent with normal practice and procedure under the CPR.
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I can see no good reason to read the words “A costs order… may include provision requiring the payment of an amount in respect of all or part of the premium of the policy” in regulation 3(1) of the No 2 Regulations any differently from the same words in section 58C(2) of the CLSA and regulation 2(1) of the First Regulations.
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Mr Friston describes that wording as “permissive”, but I can attach no significance to that. It must of necessity be permissive. Statutory provisions made to preserve the right to recover ATE premiums under orders for costs in certain cases will provide either that such costs orders may allow the recovery of an ATE premium, or that they shall allow the recovery of an ATE premium. The first option is the obvious one, because the second would purport to prevent the court from exercising its discretion on assessment, for example by disallowing in its entirety a recoverable ATE premium that has been unreasonably incurred.
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That is first because I can see no real basis for the conclusion that the No 2 Regulations are intended to do more than to establish the criteria which an ATE premium has to meet if it is to be recoverable. That is their purpose under section 58C(2) of the CLSA. There is nothing to support the conclusion that they are intended to improve upon the established procedures and criteria for the assessment of costs.
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Second, it is already well within the discretion conferred upon the court by CPR 44, when making an order for costs, to disallow all or part of a recoverable ATE premium if there is a case for doing so. It would neither be necessary nor appropriate for the No 2 Regulations to purport to impose some sort of additional jurisdiction.
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Third, although as I have said the discretion must exist, in the great majority of cases there would be no exercise of any sort of judicial oversight as to the recovery of an ATE premium at the point when a costs order is made. Even where a costs order is made at the end of the trial of a clinical negligence claim, it is unlikely that any trial judge would, on making the order, address the component elements of the costs awarded. That would be a matter for assessment.
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There would be no opportunity for judicial oversight at all in the majority of clinical negligence cases that (as Lewison LJ observed) settle without a trial. That will include cases, as in McMenemy and this case, where a Part 36 offer is accepted and an order for costs is deemed to be made under CPR 44.9(1)(b). It will also include cases where a clinical negligence claim has been settled without the issue of proceedings and the costs cannot be agreed, so that a costs-only order under CPR 46.14 is required. The CPR 46.14 procedure makes no provision for the judge making the order to have any idea whether any ATE premium has been paid, much less about the merits of recovering it.
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I have myself, in making costs-only orders in clinical negligence cases since April 2013, routinely been including express provision for recoverable ATE premiums. I have done so not in the exercise of any sort of judicial oversight (because, as I have said, the procedure does not allow for the exercise of such oversight). I have done so only to forestall the dispute that is addressed by this judgment. I have of course made provision for such recovery subject to the court’s discretion on assessment, which is the appropriate forum for determining whether an ATE premium should, on the merits, be recovered.
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I would add that no paying party has ever taken issue with the form of order I have used (no doubt because any principled objection to the ATE premium can be addressed on assessment) and that to the best of my knowledge, most judges consider this precautionary wording unnecessary. In the course of preparing this judgment I have concluded that they must be right.
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That is first because of the conclusions I have reached upon the construction of the No 2 Regulations and second because, as Mr Latham says, Lewison LJ in McMenemy has already determined that the definition of “costs” under the CPR must in clinical negligence cases extend to recoverable ATE premiums.
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Mr Friston argues that Lewison LJ in McMenemy (consistently with the findings of Etherton MR in BNM v MGN Ltd) envisaged that recoverable ATE premiums would fall within the definition of costs under CPR 44.1(1) only where an order for costs makes express provision for their recovery. In other words, an order providing in express terms for the recovery of a recoverable ATE premium will bring it within the CPR 44.1(1) definition of “costs”, but without such express provision it will fall outside it.
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I can find nothing in the judgment of Lewison LJ to support such a convoluted interpretation. His finding to the effect that the definition of costs in the CPR must include a recoverable ATE premium was not qualified in any way, much less by reference to the precise wording of a costs order. On the contrary, he expressly stated that following acceptance of a Part 36 offer (in which case there would be no express provision in an order for its recovery) a recoverable ATE premium would fall to be assessed under the CPR.
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There is nothing in the No 2 Regulations or the CPR that could support the novel proposition that the CPR’s definition of “costs” will change depending upon the terms of an order for costs. An order for costs may award part of a party’s costs, or disallow some specific part, but it does not, and could not, define what “costs” are. They are defined by CPR 44.1(1).
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It also seems to me that the proposition that, absent specific provision in a costs order, a recoverable ATE premium will fall outside the CPR’s definition of “costs” is inconsistent with Mr Friston’s submission to the effect that a clinical negligence claimant, having accepted a Defendant’s Part 36 offer, could make a separate application for the recovery of a recoverable ATE premium either under CPR Part 8 or CPR Part 23. As Lewison LJ pointed out in McMenemy, if the recoverable ATE premium does not fall within the definition of “costs” then a CPR Part 8 application will inevitably fail. It seems to me that a CPR Part 23 application would also fail, because acceptance of a Part 36 offer creates only an entitlement to recover “costs” as defined under the CPR.
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Mr Friston argues that Lewison LJ did not find, expressly, that the note at 48.0.4 to the White Book was incorrect. That of course is right, presumably because the paying parties in McMenemy were not advancing the case put to me by the first Defendant. For that reason, Lewison LJ’s judgment may not, as Mr Latham submits, represent a full and binding determination of the issue. The point is however that Lewison LJ’s findings cannot be reconciled with the first Defendant’s case, and they are at least determinative of whether a recoverable ATE premium falls within the definition of “costs” at CPR 44.1(1).
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