Kerry Underwood

NO INTEREST ON DISBURSEMENT FUNDING LOAN; INTEREST ON COSTS IS 8% FROM DATE OF ORIGINAL ORDER; CAPPED RECOVERABLE COSTS FIGURES FOR COSTS BUDGETING ARE EXCLUSIVE OF VAT

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The matters dealt with in this piece are examined in great detail in my three volume, 1,300 page book Personal Injury Small Claims, Portals and Fixed Costs – price £50 and available from Underwoods Solicitors here.

These principles, and the whole issue of Qualified One-Way Costs Shifting, is dealt with in my book – Qualified One-Way Costs Shifting, Section 57 and Set-Off – Available from me here for £15.

Kerry Underwood offers consultancy services in relation to this and other matters and details are here.

In

Marbrow v Sharpes Garden Services Ltd [2020] EWHC B26 (Costs) 

the Senior Courts Costs Office, in a clear and succinct judgment, ruled on three different and significant areas of costs.

 

No Interest On Disbursement Funding Loan

In relation to this issue the Senior Courts Costs Office Office held that the losing defendant in a personal injury case should not be liable for interest on a disbursement funding loan taken out by the claimant.

The agreed rate of interest was 5% and the total interest was £2,484.48.

Here, the claimant sought that sum as an item of costs and alternatively by way of allowing interest to run from an earlier period, that is to award pre-judgment interest.

The court disallowed both bases of the claim, but set out the different case law and considerations in relation to these two alternative methods of seeking to recover the cost of disbursement funding.

 

As A Costs Item

The court held that there was no discretion to allow disbursement funding interest as a costs item, as compared with pre-judgment interest.

In

Hunt v RM Douglas (Roofing) Ltd [1987] 11 WLUK 221

the Court of Appeal held that funding costs had never been included in the categories of expense recoverable as costs and to include them would constitute an unwarranted extension.

In

F & C Alternative Investments (Holdings) Ltd & Ors v Barthelemy & Anor [2012] EWCA Civ 843 

the Court of Appeal approved the submission that “costs of funding litigation by way of bridging loans are not ordinarily recoverable in themselves as costs of litigation”.

The decision in

Secretary of State for the Department of Energy And Climate Change & Anor v Jones & Ors [2014] EWCA Civ 363

concerned the rate of interest that could be allowed in costs from a date earlier than judgment rather than claiming it as a separate capital item of costs.

Thus the fact that there the court upheld the lower court’s decision to allow interest on pre-judgment disbursements at 4% above base rate, rather than at any lower rate, did not affect the principle that interest of itself cannot be claimed as an item of costs.

 

Pre-judgment Interest

Nevertheless CPR 44.2(6)(g) does allow the court to order the payment of interest on costs from a date before judgment.

Here, the court held that while it clearly had that power, justice in this case did not require a departure from the general rule that interest should only be paid from the date of the costs order, and the court also pointed out that the high rate of interest under the Judgment Act 1838 – 8 % –  “should go some way to compensating the claimant for the interest that he is liable to pay for funding the disbursement.”

The Senior Costs Judge gave his reasons for declining to exercise his jurisdiction to order pre-judgment interest:

 

“33. Jones was a rather different case to the present: a group action in which the disbursements came to a total in excess of £787,500. The present case is a straightforward personal injury claim. No evidence of the Claimant’s means has been produced but for present purposes I am happy to accept, on my reading of the papers, that it is unlikely that the Claimant would have had the means to fund disbursements other than by a loan. That is almost certainly the case for the vast majority of claimants in personal injury actions. Yet the incipitur rule remains the default position and parliament did not choose, when enacting the Legal Aid, Sentencing and Punishment of Offenders Act 2013, to make specific provision for the funding of disbursements whether by enabling the recovery of funding costs or by creating a default entitlement to pre-judgment interest.”

 

The decision not to award pre-judgment interest follows the recent case of

Nosworthy v Royal Bournemouth & Christchurch NHS Foundation Trust [2020] EWHC B19 (Costs)

It should be noted that Parliament has specifically given the courts power to award pre-judgment interest and a full High Court Judge in the case of

Involnert Management Inc v Aprilgrange Limited & Ors [2015] EWHC 2834 (Comm) 

said:

“” Since Hunt’s case was decided, the CPR have given the court power to order interest to be paid on costs from a date before judgment: see CPR 44.2(6)(g). This power is now routinely exercised when an order for costs is made following a trial to award interest at a commercial rate from the dates when the costs were incurred until the date when interest becomes payable under the Judgments Act . In the usual way, I have made such orders in this case.””

There is now a clear pattern of courts awarding pre-judgment interest in commercial cases, but not personal injury cases, but there is no justification whatsoever in law for adopting that different approach.

Indeed just four days after this decision the Chancery Division of the High Court awarded pre-judgment interest on costs in the commercial case of

Sharp and others v Blank and others [2020] EWHC 1870 (Ch)

where the court had this to say:

 

“22. CPR44.2(6)(g) provides that the Court may order interest on costs from a date before judgment. It is common ground that this jurisdiction will generally be exercised where a party has had to put up money to pay its solicitors and has thereby either lost the beneficial use of that money or has had to borrow it. It is also common ground that the rate awarded will be determined by weighing the factors identified by Sharp LJ in Jones v SoS for Energy and Climate Change [2014] EWCA Civ 363 at [17]-[18], generally with the aim of identifying a commercial rate in the circumstances. In the instant case there is no argument about the rate. The Claimants submit (and the Defendants accept) that, if ordered for any period, the appropriate rate is base rate simpliciter. The issue is whether interest should be awarded at all.

23. For the Claimants Mr Hill QC submits that it should not. His argument was that the Claimants obtained (in the face of opposition from the Defendants) a costs management order so that they could secure an accurate assessment of the costs risks that they faced and could compare it with the level of ATE insurance available to them. The Defendants did not signal an intention to claim pre-judgment interest on costs at any time when costs budgets were under consideration, and a possible claim for interest was not factored in to the level of ATE cover obtained. The figure at which Defendants invited the Claimants to secure insurance cover (with which request they broadly complied) did not include any element of interest at costs.

24. For the Defendants Ms Davies QC submitted (i) that interest on costs does not form an element of recoverable costs for the purpose of costs budgeting so that it is not surprising that it was not mentioned in the costs budget debates; (ii) there had been no representation that interest would not be claimed; (iii) no-one could during the costs budgeting process know for what period or at what rate interest would run and it was for the Claimants to assess their exposure on that account and (if desired) cover it; (iv) there was no justice in the current shareholders in Lloyds being deprived of compensation for the loss of the beneficial use of their money simply to benefit a group of past shareholders.

25. I accept that the Defendants had a commercial interest in the level of ATE cover obtained by the Claimants because of the great difficulties attending costs recovery under the GLO. But it was ultimately for the Claimants to decide against what risks to insure and what risks to bear themselves. A claim for pre-judgment interest on costs is commonplace, and it was for the Claimants to decide whether any protective measures were required, not for the Defendants to call for them. I shall exercise the discretion in the way in which it is customarily exercised and order the Claimants to pay interest on the Defendants’ costs at the applicable Bank of England base rate from the date of payment of each invoice until the earlier of (i) payment of such costs or (ii) the date from which interest at the rate prescribed by the Judgments Act 1838 become payable.”

So not only did the court come to a completely different conclusion but it referred to a claim for pre-judgment interests on costs as being commonplace and that it is normal for pre-judgment interest to be ordered.

So we now have two different parts of the High Court in the space of four days saying completely different things.

For my critique of that difference, and why the decisions are irrational, see my blog

COURT REFUSES PRE-JUDGMENT INTEREST IN PERSONAL INJURY – BUT OK IN COMMERCIAL CASES

 

Interest On Costs Is 8% From Date Of Original Order

On this issue the court held that interest should normally run from the date of the original order, but unfortunately, in the case already referred to of

Sharp and others v Blank and others [2020] EWHC 1870 (Ch)

the court followed the decision in

Involnert Management Inc v Aprilgrange Limited & Ors [2015] EWHC 2834 (Comm),

whereas we will see below here the court had disagreed with that decision.

The court in Sharp and others v Blank thus awarded judgment interest on costs from four months after the date of its judgment.

The Senior Courts Costs Office considered a number of matters arising out of a detailed assessment of costs in a personal injury case, and here I just deal with the issue of the date from when interest runs on costs.

Here the court held that interest should normally run from the date of the original order for costs and at the judgment rate of 8%.

This may seem obvious, but in fact it involved the court disagreeing with the decision of the High Court in

Involnert Management Inc v Aprilgrange Limited & Ors [2015] EWHC 2834 (Comm)

where the court said:

“it seems to me that a reasonable objective benchmark to take is the period prescribed by the rules of court for commencing detailed assessment proceedings. Pursuant to CPR 47.7, where an order is made for payment of costs which are to be the subject of a detailed assessment if not agreed, the time by which detailed assessment proceedings must be commenced (unless otherwise agreed or ordered) is three months after the date of the costs order. In order to commence such proceedings, the receiving party must serve on the paying party a bill of costs giving particulars of the costs claimed. It is then for the paying party to decide which items in the bill of costs it wishes to dispute. Postponing the date from which Judgments Act interest begins to run by three months will therefore generally serve to ensure that the party liable for costs has received the information needed to make a realistic assessment of the amount of its liability before it begins to incur interest at the rate applicable to judgment debts for failing to pay that amount.”

Strictly the court here distinguished that decision on the basis that it was a commercial case in which the court had ordered the payment of interest at 2% over base rate from when the costs were incurred, that is pre-judgment interest, until the date three months after the date of the costs order was made.

Nevertheless, it is clear that the judgment in Involnert was wrong, and so obviously wrong that it need no longer be followed, as it failed properly to take into account a Court of Appeal decision to the contrary, and failed properly to implement an Act of Parliament.

As the court here pointed out the entitlement to interest on costs is automatic under section 17 of the Judgments Act 1838 which provides:

(1) Every judgment debt shall carry interest at the rate of 8 pounds per centum per annum from such time as shall be prescribed by rules of court . . . until the same shall be satisfied, and such interest may be levied under a writ of execution on such judgment.

(2) Rules of court may provide for the court to disallow all or part of any interest otherwise payable under subsection (1).

Rule 40.8 of the Civil Procedure Rules 1998 provides:

(1) Where interest is payable on a judgment pursuant to section 17 of the Judgments Act 1838 or section 74 of the County Courts Act 1984, the interest shall begin to run from the date that judgment is given unless –

(a) a rule in another Part or a practice direction makes different provision; or

(b) the court orders otherwise.

(2) The court may order that interest shall begin to run from a date before the date that judgment is given.

Rule 44.2 provides (in part):

(6) The orders which the court may make under this rule include an order that a party must pay –

….

(g) interest on costs from or until a certain date, including a date before judgment.

Consequently interest is payable on costs at 8% from the date of judgment without the need for an order to that effect, unless the court makes a different order under either CPR 40.8 or CPR 44.2(6)(g) – see Hunt v R.M.Douglas (Roofing) Ltd [1990] 1 AC 398.

The court here quoted from the case of

Simcoe v Jacuzzi UK Group Plc [2012] EWCA Civ 137

which is a Court of Appeal case which pre-dated the Involnert case and the High Court there appears not properly to have considered the judgment in Simcoe.

In Simcoe the Court of Appeal said:

 

“47. We were referred to Fattal v Walbrook Trustees (Jersey) Ltd [2009] EWHC 1674 (Ch)[2009] 4 Costs LR 591, paras 25-30, in which Christopher Clarke J held, in summary terms, that the effect of CPR 40.8 was that (a) the general rule is that interest on costs runs from the incipitur date, (b) a departure from that general rule is justified if it is ‘what justice requires’; (c) the notion that a departure can only be justified in ‘exceptional’ cases is an unhelpful guide; (d) the primary purpose of an award of interest is ‘to compensate the recipient for [having] been precluded from obtaining a return on [his] money’; (e) ‘[s]ince the payment of solicitors’ costs involves the payment of money which could otherwise have been profitably employed, the overwhelming likelihood is that justice requires some recompense in the form of interest’.

48. I agree with all those observations, but would add two precautionary comments on his observations. First, I would discourage too detailed an approach into the facts of the particular case in hand for the purpose of determining the date from which interest should run. As Lord Ackner’s speech in Hunt [1990] 1 AC 398 implies, when making such a determination, the court should take a broad view of the position. Prolonged argument, let alone detailed evidence, on the issue must be avoided. There will often be no perfect date, and the decision inevitably will, indeed should, be broad brush. Further, if interest was to run from different dates on different components of the costs, it would, in many cases, lead to arguments which would do the legal system no credit. The second observation is that I would not necessarily agree with the suggestion, at [2009] 4 Costs LR 591, para 30, that it may be inappropriate to award interest on costs where the case is being funded by a third party entirely voluntarily or otherwise free of any cost. I would have thought that, following the logic of reason (v) in para 11 above (and see para 46 above), if interest on costs is payable from the incipitur date, the party to whom it is paid may have to account for it to the third party, and, if that is correct, there would seem to me to be a powerful argument for saying that the third party should get interest on costs in the normal way.”

 

This very helpful decision should put this issue to bed. Interest on costs runs at 8% from the date of the original order for costs and Involnert was wrongly decided.

 

Capped Recoverable Costs Figures For Costs Budgeting Are Exclusive Of Vat

On this issue the Senior Courts Costs Office considered whether the figures for the caps on recoverable costs in relation to costs budgeting and assessment include VAT, or whether VAT should be added to them.

With the VAT rate being 20%, and almost certain to rise, this makes a significant difference.

The court held that the limits set out in the rules are exclusive of VAT, and therefore VAT can be added to those figures.

Paragraph 7.2 of Practice Direction 3E provides:

Save in exceptional circumstances—

(a) the recoverable costs of initially completing Precedent H shall not exceed the higher of £1,000 or 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.

In

Response Clothing Limited v The Edinburgh Woollen Mill Limited [2020] EWHC 721 (IPEC)

the court was concerned with the cap on costs in the Intellectual Property Enterprise Court of £50,000 in relation to the liability aspect of the claim.

In that case the court held that the £50,000 cap included VAT.

Here the court distinguished that case on the basis that caps provided by Paragraph 7.2 set out above cannot include VAT as 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.

Thus 2% of £100,000 excluding value added tax, would be £2,000 excluding value added tax.

 

Comment

This is a difficult area, and, as ever, the Civil Procedure Rules are a mess, as evidenced by two different decisions of the High Court in relation to two different aspects of interest on costs in the space of two days.

Nevertheless, my view is that the decision re the costs cap and VAT is correct for the reason given by the Senior Costs Judge, that is that if costs are expressed as a percentage, rather than a cash sum, then if the fund on which the percentage is based is net of VAT, then so must the resultant costs be net of VAT.

In any event having a VAT inclusive figure can act unfairly, as the court itself recognised in the Response Clothing case.

As I said in my write-up of that case:

“This has a curious effect. A party which charges VAT, as it is over the VAT threshold of a turnover of £85,000 does not claim VAT from the other party as it can set off the VAT against VAT received from its customers or clients.

Thus for a VAT registered business where the costs are £50,000 plus VAT, the VAT will not be claimed from the other party and therefore the full £50,000 is recovered and is all costs, with no element being VAT.

For a non-VAT registered company, the calculation will be as follows:

                                                    £

Costs                                          41,667

VAT thereon at 20%                     8,333

Total                                           50,000

Thus, as the court here recognised, smaller enterprises are unfairly disadvantaged because their net recovery of costs will be lower than £50,000, whereas larger businesses can claim the full £50,000 in costs and recover the VAT on top of that.

The court described this as “an unfortunate anomaly.”

The court suggested that the Civil Procedure Rules be amended.

This issue does not arise in fixed costs as the fixed costs sum is always net of VAT, and therefore if, for example, the fixed costs were £50,000 then that is what the other side would pay in relation to a VAT registered company, whereas in relation to a non-VAT registered company they would pay £60,000, being £50,000 plus VAT.”

 

This is all dealt with in my blog –

CAPPED COSTS IN BUSINESS CASES: THREE NEW CASES

Written by kerryunderwood

July 21, 2020 at 8:16 am

Posted in Uncategorized

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