22 February 2017Print This Post

Getting to grips with proportionality and additional liabilities

Coulthard: King and Murrells rulings based on sound policy grounds

Posted by Lee Coulthard, assistant regional manager in the Leeds office of Litigation Futures Associate John M Hayes

Before the Jackson reforms, the relationship between proportionality and additional liabilities was clearly defined. Section 11 of the Costs Practice Direction in force before 1 April 2013 provided:

“11.5 In deciding whether the costs claimed are reasonable and (on a standard basis assessment) proportionate, the court will consider the amount of any additional liability separately from the base costs…

“11.9 A percentage increase will not be reduced simply on the ground that, when added to base costs, which are reasonable and (where relevant) proportionate, the total appears disproportionate.”

As a consequence, additional liabilities were very rarely reduced on grounds of proportionality.

One of the key reforms was the introduction of a new proportionality test. Under CPR 44.3 (2), on a standard basis assessment, “costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred”.

Unfortunately, the new rules are silent as to the application of this test to additional liabilities. This is probably unsurprising, because additional liabilities ceased in the main to be recoverable between the parties. Unfortunately, there are significant classes of cases where additional liabilities are recoverable between the parties and yet the new proportionality test applies, namely:

  • The run-off of cases where the funding arrangement was entered into before 1 April 2013, proceedings were not entered into before 1 April 2013 and work was undertaken after 1 April 2013;
  • The run-off of insolvency cases where the funding arrangement was entered into before 6 April 2016;
  • Mesothelioma cases;
  • Publication and privacy cases; and
  • Clinical negligence cases, in respect of the recoverable element of the after-the-event (ATE) insurance premium relating to insuring the cost of obtaining own liability and causation evidence.

Even more unfortunately, the judges at the Senior Courts Costs Office are in disagreement as to the interplay between the new proportionality test and additional liabilities in these cases.

BNM v MGM was a publication and privacy case. A conditional fee agreement (CFA) was entered into with solicitors on 18 April 2013, with counsel on 7 May 2013 and 30 July 2013; and an ATE policy was taken out on 25 July 2013. All of the funding arrangements therefore post-dated the new proportionality test.

Master Gordon-Saker considered CPR 48, which is the overarching transitional provision in respect of additional liabilities. CPR 48 provides that the rules relating to funding arrangements would continue to apply as they were immediately before 1 April 2013 in respect of any pre-commencement funding arrangement.

The practice direction identifies some of the relevant rules. Despite this not appearing to be an exhaustive list (relevant provisions are said to ‘include’ those listed), Master Gordon-Saker considered it to be particularly relevant that the old proportionality test was excluded. He determined that the proportionality test was not a rule “relating to funding arrangements” and therefore did not survive in respect of additional liabilities.

In King v Basildon & Thurrock University Hospitals NHS Foundation Trust, the claimant made a clinical negligence claim. The additional liabilities predated 1 April 2013. Whether additional liabilities were to be considered separately for proportionality purposes was significant. Base costs had been assessed at £88,337, which was considered to be proportionate; the total costs including additional liabilities were assessed at £234,251, which would have been disproportionate if (and only if) the new proportionality also applied to the additional liabilities.

Master Rowley expressly declined to follow BNM. There were two strands to the reasoning, one technical, and one based on policy.

The technical reasoning was that under the old rules, the definition of costs included additional liabilities. Under the new rules, additional liabilities are not included in the definition of costs. Where the new proportionality rule states that “costs are proportionate if they bear a reasonable relationship” to various factors, then additional liabilities are excluded from that definition.

The policy reasoning was that Parliament has expressly and deliberately preserved the recoverability of additional liabilities in those cases where they continue to be recoverable. Aggregating additional liabilities with base costs in order to determine proportionality would risk rendering those additional liabilities “irrecoverable in practice”.

Murrells v Cambridge University Hospitals NHS Foundation Trust was also a clinical negligence case where the CFA was entered into on 4 September 2012 and ATE premium on 11 September 2012.

Master Brown also expressly declined to follow BNM. The decision in King was referred to, and Master Rowley’s reasoning adopted.

Master Brown further reasoned that in many run-off cases, the success fee might be fixed. It would be odd, to say the least, that despite being fixed, the sums could then in effect be reduced by the aggregation of additional liabilities and base costs when considering proportionality.

A further reason was that parties would have entered into the funding arrangements before the proportionality test was introduced, possibly in some cases before the wording of that proportionality test was known.

In such cases, claimants would still be liable to their solicitors and ATE insurers for the additional liabilities even if they could not recover them from the opponent on the grounds of proportionality. In lower-value cases, this might lead to good claims having to be abandoned, which could not be Parliament’s intention.

It would have been possible to distinguish the situations in BNM as opposed to King and Murrells, on the basis that in the first case the funding arrangements post-dated the change in the proportionality test, and that they pre-dated that change in the latter cases.

The hook on which to hang such a distinction is potentially provided by CPR 44.3(7)(b), which applies that the new proportionality test does not apply in relation to “costs incurred in respect of work done before 1st April 2013”. It would stretch the language to describe entering into the CFA or taking out the ATE insurance as ‘work done’, but probably not to breaking point.

However, despite recognising this as a potential escape route, both Master Rowley and Master Brown declined to do so. All three decisions made no distinction in their reasoning between pre- and post-1 April 2013 funding arrangements.

Further guidance on this issue is expected – BNM is due to be heard in the Court of Appeal but not until October. In the meantime, it is to be hoped that the reasoning in King and Murrells, which is based on sound policy grounds as well as being a perfectly justifiable reading of the rules, prevails.

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