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Articles | Mon 18th Jul, 2022
This week’s edition of the Roundup concerns two cases involving costs agreements which parties may subsequently have come to regret: the decisions in Doyle v M&D Foundations and Building Services Limited [2022] EWCA Civ 927 and Candey v Tonstate Group Ltd & Others [2022] EWCA Civ 936. And the Court of Justice of the European Union has added to the body of caselaw on ‘extraordinary circumstances’ within the meaning of Regulation (EC) No.261/2004 (better known as the Denied Boarding Regulation) with the revelation (in KU v SATA International, Case C-308/21) that the failure of an airport’s refuelling system can be regarded as an extraordinary circumstance for the purposes of the Regulation, which seems rather inconsistent with previous decisions on the issue. We sometimes wonder whether the ability to predict the approach the CJEU will take has completely deserted us, especially in relation to the Denied Boarding Regulations.
When are Fixed Costs not Fixed Costs? When there’s a Consent Order
In Doyle v M&D Foundations and Building Services Ltd [2022] EWCA Civ 927 [2022] 7 WLUK 76 the Court of Appeal grappled with the question of whether or not a consent order which recorded that the costs of the claim would be subject to detailed assessment in the context of a claim to which the fixed-costs regime would ordinarily apply nonetheless had the effect of disapplying that regime by agreement.
The background to the case was that the respondent had, in November 2016, issued a claim for damages against the appellant having suffered injury in the course of his employment. Originally handled under the Pre-Action Protocol for Low Value Personal injury Claims, by July 2018 the Claim had fallen out of the Protocol and become the subject of without prejudice negotiations. The appellant made a Part 36 offer of £5000; the respondent indicated its willingness to accept the same but not as straight Part 36 offer since it had been made within 21 day of the trial and therefore fell within the ambit of CPRr.36.13(4). A consent order was duly drawn up and sealed recording the settlement sum and providing that the appellant pay the respondent’s costs, “such costs to be the subject to detailed assessment if not agreed”. The respondent thereafter lodged a bill of costs for detailed assessment on the standard basis. The appellant objected, contending that the case fell within the fixed recoverable costs regime set down in CPR 45 IIIA. That argument was rejected at first instance, where it was held that the fixed-costs regime did not apply since the parties had contracted out of it.
The Court of Appeal also upheld the decision. In the first place, following the case of Pan Petroleum AJE Ltd v Yinka Folawiyo Petroleum Co Ltd [2017] EWCA Civ 1525, [2017] 10 WLUK 238, it reiterated that the proper approach to interpreting a court order was for it to be given its ordinary and natural meaning, bearing in mind its object and proper context:
“27. In the present case, where the Order was by consent and so made administratively by the court, there was no judgment to assist in construing it. The immediate context of the Order was that it embodied an agreement between the parties, the terms of which had been finalised via a travelling draft between the respective solicitors. For that reason, and because the central question in construing costs provisions in the Order is whether the parties had contracted out of the fixed costs regime, the real question is the true interpretation of the parties’ agreement.”
Secondly, it considered the fixed-costs regime, of which it observed, following Moore-Bick LJ at paragraph 22 of Solomon v Cromwell Group Plc [2011] EWCA Civ 1584, [2012] 1 W.L.R. 1048, [2011] 12 WLUK 618, there is “nothing in the rules that prevented parties settling a dispute on any terms they please, including as to costs” and that there was nothing in the regime that prevented parties from contracting out of it.
Thirdly, it turned to the meaning of the phrase “subject to detailed assessment”:
“44. In my judgment, and contrary to the appellant’s contention, there is no ambiguity whatsoever as to the natural and ordinary meaning of “subject to detailed assessment” in an agreement or order as to costs. The phrase is a technical term, the meaning and effect of which is expressly and extensively set out in the rules. It plainly denotes that the costs are to be assessed by the procedure in Part 47 on the standard basis (unless the agreement or order goes on to provide for the assessment to be on the indemnity basis). The phrase cannot be read as providing for an “assessment” of fixed costs pursuant to the provisions of Part 45 unless the context leads to the conclusion that the wrong terminology has been used (by the parties or by the Court) so that the phrase should be interpreted otherwise than according to its ordinary meaning.”
Fourthly, it considered the context of its employment in the present case,
“50. In this case the terms of the Order were agreed by firms of solicitors acting for the parties, both specialists in this type of litigation. They reached agreement in the course of inter-solicitor correspondence in which a Part 36 offer by the appellant was expressly rejected by the respondent, but a counter-offer (not pursuant to Part 36) in the form of a draft of the order was accepted by the appellant (being returned with minor amendments which were in turn accepted by the respondent).
51. In so doing, the solicitors must, applying an objective test, be taken to have been aware of the relevant rules and principles, in particular, (i) that the fixed costs regime can be disapplied by agreement and (ii) that an order providing for detailed assessment (without more) entails an assessment on the standard basis (rule 44.3(4)(a)). In those circumstances it is difficult to see any basis on which the use of the term “detailed assessment” could bear anything other than its natural and ordinary meaning as discussed above. No matter how strictly enforced the fixed costs regime may be in cases to which it properly applies, and no matter how unlikely it was that the respondent would have been able to escape that regime had the matter proceeded, the parties reached a compromise of the dispute on the basis of a provision as to costs which, on its face, would take the case out of the fixed costs regime and entail assessment on the standard basis. There is no objective reason to believe that the solicitors did not intend the term to bear its natural, ordinary (and in my judgment, obvious) meaning, not least because it would be impermissible (and to no avail) to speculate as to the parties’ respective legal or commercial motivations for reaching a settlement on the terms they did. Indeed, the appellant has not suggested that the use of the term “detailed assessment” was a mistake or otherwise did not reflect the parties’ agreement.”
The effect of the order, therefore, was indeed to disapply the fixed-costs regime in the manner which had been originally held.
About the Author
Dr Russell Wilcox was called to the Bar in 2000, and before joining chambers enjoyed an illustrious career in academia. He was an associate member of McNair Chambers in Qatar, where he worked on a number of large-scale cross-jurisdictional commercial disputes and on international arbitral proceedings, and acted as disclosure counsel in Athenasios Sophocleus & Others v Secretaries of State for Foreign and Commonwealth Affairs and Defence, relating to the actions of the Colonial Administration in Cyprus during the Cyprus Emergency of 1956 to 1959. He now accepts the full range of work undertaken by the travel team at 1 Chancery Lane.
When are Damages Based Agreements not Enforceable? When they’re Concluded by Defendants
Candey Ltd v Tonstate Group Ltd & Ors [2022] EWCA Civ 936 explored a different, but equally novel, attempt to circumvent normal costs rules by agreement.
The Claimant was a firm of solicitors engaged in an argument over ownership of shares in the Defendant. They represented their client, the owner of the shares, in resisting a claim that the shares in fact belonged to a third party. The client agreed that he would transfer half of the disputed shared to the firm if he was successful in resisting the claim. The client succeeded, but was made bankrupt before he could make good on his promise and could no longer do so. The Claimant sued the Defendant to be recognised as a shareholder.
Can a Defendant enter into a Damages Based Agreement (“DBA”) with his own solicitors? Or, in other words, is it lawful for a party against whom a claim is made (i.e. the defendant to a claim or counterclaim) to enter into an agreement that, if he succeeds in defending that claim in whole or in part, he will pay his legal representatives a percentage of the money or the value of the assets that he has resisted having to pay or transfer to his opponent?
No such common law right existed, so did any power under s.58AA Courts and Legal Services Act 1990, or the DBA regulations 2013, permit the parties to do so?
In a word, no. Such an agreement was unenforceable.
While neither the 2013 Regulations nor the 1990 Act expressly excluded a Defendant from entering into an arrangement of this kind, neither did they make any express or implied reference to a Defendant entering into such an arrangement, and both Hansard records, and the Jackson Report, indicated a presumption (though not an express assertion) that only a Claimant would do so.
The correct interpretation of the Regulations was that, in general, any sort of DBA was unlawful unless specifically made lawful by the Act or the Regulations:
Borrowing a phrase used by Lord Justice Lewison in Zuberi v Lexlaw [2021] EWCA Civ 16 at [26], the legislation created “islands of legality in a sea of illegality”, carefully balancing difficult and sensitive competing policy considerations.
Therefore, if Mr Williams could not point to anything which demonstrated that Parliament had turned its mind specifically to the introduction of enforceable agreements between defendants and their lawyers that, if successful, the defendants would pay the lawyers’ fees from their own funds or other assets even if they recovered nothing from the opposing party which could be used for that purpose, this was fatal to his argument, even before one turned to consider the language of the statute or the 2013 Regulations. It was impossible to expand the exceptions to the common law prohibition beyond the clear legislative intent.
There seems to me to be considerable force in those submissions, since it cannot be inferred that Parliament created an exception to a long-established common law prohibition by accident or oversight.
In any case, s.58AA(3) of the 1990 Act provides that:
In order to qualify as a DBA, the agreement must provide for payment by the recipient of the services if he or she “obtains a specified financial benefit” from the litigation.
And, as a Defendant did not stand to gain any financial benefit from the proceedings (as opposed to avoiding a loss), no DBA could have arisen. As an aside, the author does, however, find it somewhat difficult to accept that avoiding a loss of money is incapable of being a “specified financial benefit” to any greater extent than a gain of money, notwithstanding that it is clear that DBAs were not really intended to be used in this way.
But there are clear reasons why policy might not permit this. As Males LJ put it pithily:
To my mind the submissions made on behalf of the Solicitors in this case are a variant of “heads I win, tails you lose”. They mean that a client who loses his case must pay the sum claimed to the claimant, but if he wins, he must still pay up to half the sum claimed to his solicitors. There is, therefore, no good outcome for a client who enters into such an agreement. Win or lose, he faces financial disaster. It is not surprising that legislation aimed at promoting access to justice should not permit such agreements.
In short, the agreement was unenforceable and the Claimant was unable to establish ownership of the shares (or, presumably, obtain payment for its services); perhaps something of a salutary warning of the price of an over-greedy approach to costs. A Defendant solicitor, therefore, must look to some alternative form of funding arrangement in the future and should revise any such existing agreements carefully.
About the Author
Robert Parkin was called in 2009. He has a mixed civil practice, including in the area of travel and cross-border claims. He was junior drafting counsel in Barclay-Watts & Others v Alpha Paraneti & Others [2019] HQ11X02379, a substantial cross border dispute involving mis-selling of holiday lets in Cyprus.
…And Finally…
In exciting news for those who, like us, enjoy developments in tech, a German law firm, Gleiss Lutz, has opened up an office in the metaverse. This news comes shortly after the High Court gave permission (in D’Aloia v Binance Holdings [2022] EWHC 1273 (Ch D)) for a claim to be served by way of a non-fungible token on blockchain, and confirms us in our pre-existing view that what starts with remote court hearings can only end in virtual reality. Quite what the implications of entering the metaverse are for applicable law, jurisdiction and enforcement purposes is anyone’s guess at this point; but we’d suggest that The Powers That Be start thinking about them and developing solutions to the problems which are so clearly coming, and, it would seem, coming sooner rather than later. As always, the team stands ready to support any such efforts with its knowledge and experience in such matters, having watched Dr Strange and the Multiverse of Madness only the other day.
