Capped costs in business cases

Here I look at three recent business cases involving capped costs, including the first two cases to be tried in the capped costs list pilot scheme and one in the Intellectual Property and Enterprise Court. Both are part of the Business and Property Courts of England and Wales (B&PCs).

Capped costs are different from fixed costs in that the receiving party still has to show what work was done, and justify the rates and levels of fee earners utilised. Thus, in two capped costs cases involving the same issues and the same amount of damages, and concluding at the same stage, the actual costs within the cap may be quite different. That cannot happen in fixed costs cases.

Jackson LJ’s (as he then was) last report recommended the introduction of fixed recoverable costs in all claims valued at £100,000 or less, but the consecutive issues of Brexit and COVID-19 have meant that nothing has happened. In April 2020, the government announced that the Civil Procedure Rule changes and small claims limit changes in personal injury work, and other personal injury reforms, were being put back until April 2021 at the earliest. It is unlikely that the extension of fixed recoverable costs will come in before October 2021, or even April 2022. This delay is likely to lead to greater use by the courts of their powers to cap costs.

It may be that one of the lasting effects of COVID-19 will be more remote hearings, cutting costs and justifying capped costs, especially as many parties in the B&PCs are likely to be short of money for some time. Consequently, understanding capped costs and considering the early decisions is important. As with conditional fee agreements, it is much more difficult to get a grip of the relevant law if you come to the party late.

Both of the cases in the capped costs scheme were accommodated within the two day trial period, even though, in both cases, more witnesses than anticipated by the pilot were allowed. This may well encourage cases to be listed in this scheme, even though, on the face of it, they are not suitable due to the number of witnesses.

IPEC recoverable costs cap

In Response Clothing Ltd v The Edinburgh Woollen Mill Ltd, the B&PCs held that the £50,000 cap on recoverable costs in IPEC cases (CPR 45.31(1)(a)) is inclusive of VAT, subject only to CPR 45.32 or the “exceptional circumstances” contemplated in Henderson v All Around the World Recordings Ltd. As far as the court was aware, the point had not arisen before in the IPEC.

Practical Law’s legal update on the decision helpfully sets out the background and decision. Where a receiving party is registered for VAT, VAT is not included in the claim, as it can be recovered as input tax (Practice Direction 44.2.3). In this case, the successful claimant, who was not registered for VAT and whose costs exceeded £50,000, submitted that it should recover costs of £50,000 plus VAT. The defendant argued that claimant’s costs, including VAT, could not exceed £50,000.

The judge noted that the only exception to the £50,000 cap, in the rules, is in CPR 45.32 where a party has behaved unreasonably. This was not applicable here. He noted that, in Henderson, HHJ Birss QC (as he then was) had held that the court also had a discretion to depart from the £50,000 cap “in an exceptional case”. However, he did not do so and, as far as Hacon J was aware, the cap has always been adhered to.

In Henderson, HHJ Birss QC also unequivocally concluded that VAT, if appropriate, was dealt with “on top of the PCC costs cap”. This was apparently on the basis that “scale costs” in CPR 45.42(5) (then in force in identical terms to the current CPR 45.31(5)) referred to total and stage costs. The judge noted that the headings of section IV of CPR 45 and CPR 45.31 suggest that the term “scale costs” applies to both total and stage costs. However, he considered that CPR 45.30(4) creates a definition of scale costs that is “too strong” to allow for any alternative interpretation. Combined with the “unambiguous” wording of CPR 45.31(a), that led him to conclude that a party claiming VAT on its costs can only recover £50,000 including VAT, subject only to CPR 45.32 or Henderson “exceptional circumstances”. As a result, the claimant was only entitled to £50,000 in costs.

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” and 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; 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. In relation to a non-VAT registered company, they would pay £60,000, being £50,000 plus VAT.

Capped Costs List Pilot Scheme Decisions

In Silvercloud Finance Solutions Ltd (t/a Broadscope Finance) v High Street Solicitors Ltd, only the second case to be tried as part of the capped costs list pilot scheme under Practice Direction 51W, the court noted that the trial had been “comfortably accommodated” within the two day period allowed by the capped costs list and heard within the capped costs list time limits.

As Practical Law’s legal update usefully explains, as in the first case under the capped costs list, Faiz v Burnley Borough Council, the court relaxed the general rule that each party may call no more than two witnesses. Here, it allowed five witnesses to give oral evidence, as well as receiving the evidence of another witness under a Civil Evidence Act notice. It no particular reason for allowing this. The High Court observed:

  • One of the consequences of the capped costs list time limits is that there is less opportunity to explore the reliability of witnesses. However, where there are factual disputes, the court must still decide which evidence is to be preferred. It should not “shy away from” finding that people have been dishonest with the court.
  • The capped costs list costs caps mean that disclosure may be more limited. Furthermore, a party dissatisfied with the other’s disclosure may be more hesitant to apply for specific disclosure.
  • Although Practice Direction 51W.3.10 provides that the costs of an application will be reserved until the end of a trial, at which point they will be summarily assessed, there was insufficient time here to deal with summary assessment before handing down judgment. It would be dealt with on paper as soon as practicable.

The court also noted that two of the witnesses gave oral evidence by telephone because they were self-isolating during the COVID-19 pandemic. It did not prove practicable to give evidence by Skype, as had been hoped. They were still able to give their evidence clearly, and the judge did not consider that the method used impaired their evidence. On the facts, the underlying claim for £100,000 plus interest said to be contractually due as a loan introduction fee, failed.

The case also shows the danger of ever using initials. There was a dispute over the meaning of the initials “BQ”. The defendant stated that the B stood for beer, whereas the judge found it was more likely that it referred to borrowing, as in “borrowing questionnaire”. Beer quotient or borrowing questionnaire: much the same I suppose. NGLIMHO, initials are not a good idea.

In Faiz, the first case in which proceedings subject to the capped costs list pilot reached trial, the court made a number of helpful observations about procedural matters in such cases.

The judge noted that the capped costs pilot list is a separate list, not a sub-list. Subject to the matters listed in PD 51W.1.6(3), it is available for all cases with a monetary value not exceeding £250,000 where the trial is expected to require no more than two days. Here, the claimants applied promptly for interim injunctive relief following the action taken by the council to obtain peaceable re-entry. At that stage, it was unlikely that the claimants contemplated issuing proceedings in the capped costs list; in any event, they did not have any realistic opportunity to raise this with the council before issuing their application.

At the hearing of the claimants’ initial application, the judge had granted them interim relief and fixed a return date, on which the parties agreed to treat the hearing as the case management conference. In view of the urgency of the case, it was listed for trial soon after on the basis that the interim injunctive relief would continue until trial or earlier order. The canvassed with counsel regarding the capped costs list pilot scheme and, ultimately, the parties together agreed to transfer the case to the list. Consistently with PD 51W.2.28, the parties agreed to rely only on the documents contained in their bundles of core documents, with no other directions for disclosure. Consistent with PD 51W.2.33, a deadline was provided for the exchange of witness statements. There were no directions for expert evidence. Having been allocated to the capped costs list, there was no provision for cost budgeting.

The judge acknowledged that, although PD 51W.2.31 provides for the parties to be limited to no more than two witnesses, agreement was reached that the council should be permitted to call three. The judge was satisfied that this was appropriate and made an order providing for the council to have permission to call three witnesses.

The judge also noted the trial bundle which was filed at court, that skeleton arguments were properly delivered, and that the parties jointly prepared a trial timetable. As the judge stated at paragraphs 32 and 33, “At all stages, there was a significant degree of collaboration to ensure that the case was ready by the agreed trial date. For this, the parties are to be commended. The trial occupied the Court for no more than two full days.”

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