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Charging interest on disbursements (Part 2)

Charging interest on disbursements recovered from a defendant at the successful conclusion of a case (assuming disbursements paid by solicitors for the claimant)

There is an overlap between this heading and the heading of this blog (and that in Part 1), in that the indemnity principle potentially applies, and the ability to recover costs from a defendant may depend upon the terms of the retainer.

The leading modern case is Jones and others v Secretary of State for Energy and Climate Change,  where the Queen’s Bench Division of the High Court allowed pre-judgment interest on disbursements, where the disbursements had been paid by the claimants’ solicitors as the matter progressed, and where there was a credit agreement between the solicitors and the client. The interest rate was 4% above base, payable only in the event of success, with the after the event insurer paying the credit charge if unsuccessful. The paying party conceded that, in principle, the claimants were entitled to pre-judgment interest on disbursements. Here, it was the rate of interest that was in dispute.

CPR 44.3(6)(g) allows a court to award interest on costs from or until a certain date, including a date before judgment, and the rate is in the discretion of the court. This power was introduced by the Civil Procedure Rules and first exercised in Bim Kemi AB v Blackburn Chemicals Limited [2003] EWCA Civ 889, where the Court of Appeal said:

“… in principle there seems no reason why the court should not [award interest on costs] where a party has to put up money paying its solicitors and has been out of the use of that money in the meanwhile.”

The judgment then considers various cases where the rate of interest had been considered, including Jaura v Ahmed, which deals with the issue in detail.

In Tate and Lyle Food and Distribution Limited v Greater London Council, the High Court said that it would always be right to look at the rate “at which plaintiffs [claimants] with the general attributes of the actual plaintiff in the case… could borrow money as a guide to the appropriate interest rate.”

Examples of rates allowed include:

Here, given that the claimants were individuals of modest means, the Court of Appeal found that in the open market, the interest rate on an unsecured loan “would have been significantly in excess of the 4% above base rate” agreed with the solicitors, and thus allowed that sum.

The case is also of interest in that it takes as a given that the solicitors could have charged a higher hourly rate, or a higher success fee to reflect the fact that they were funding disbursements. The Court of Appeal regarded this as a separate and additional risk, beyond that of postponement of receipt of costs, warranting a higher hourly rate or success fee.

Given the fact that it is much harder for a client to challenge the hourly rate as compared with the success fee, claimants’ solicitors are advised to reflect the cost of funding in the hourly rate.

Also, a success fee is now not recoverable from a losing party, with the single exception of mesothelioma claims, whereas the solicitor and client full rate potentially is, where an indemnity costs order is made (for example because a claimant has matched or beaten its own Part 36 offer at trial) or on judgment being entered.

A key part of the judgment is paragraph 5 which reads:

“Disbursements can be funded in a number of ways. A claimant with adequate means may pay the disbursements as the case progresses. If he or she does not have sufficient funds at his/her disposal, he/she may obtain a loan, e.g. from a bank. Alternatively there are commercial organisations which will fund disbursements for which they charge claimants a commercial rate of interest. In some cases, the claimant’s solicitors might fund the disbursements, either by absorbing the cost as part of their overheads or by providing the funding in return for the payment of increased hourly rates of remuneration or an additional uplift in their success fee under a CFA.”

The High Court there refers to “increased hourly rates of remuneration or an additional uplift in their success fee under a CFA.” (My emphasis.) Thus, they see it as either/or. Logically, I agree, but it does not work like that as the success fee is always calculated by reference to a percentage uplift on the hourly rate, whatever that hourly rate is, and whatever the reason for that hourly rate.

Strictly, I think the agreement by the solicitors to fund disbursements should be reflected in the hourly rate, as it is an increased and premium service to the client, and the risk of recovery, or rather the risk of failing to recover costs, remains unchanged, although the potential amount of the unrecovered costs increases if the solicitors are funding the disbursements. Consequently the hourly rate should be increased and the level of the success fee should not be increased. However, if the hourly rate is increased, then the solicitor gets both the higher hourly rate and a higher success fee in cash terms, not percentage terms, because the success fee is based on the hourly rate.

Thus, there is effectively double billing. It could be argued that there is always double billing where there is a success fee, as the hourly rate is the fee for doing the work and the success fee is a bonus for risking not getting paid in the event of defeat.

This does happen in other parts of a claim. Let us say the success fee is correctly fixed at 100% at the outset, and no one disputes that. The matter settles. There are then negotiations about quantum, or indeed absolutely routine emails dealing with the mechanics of payment of agreed damages. At this stage there is no risk whatsoever, but nevertheless that work still attracts a success fee of 100%.

The success fee cannot be recovered from the defendant, except in mesothelioma claims. Even if an order is made on an indemnity basis, that does not allow recoverability of the success fee. There is no advantage in charging a higher success fee in terms of recovery from the defendant, as the client would end up paying that from their damages. Thus, the key issue is whether a higher hourly rate would indeed be recoverable from the defendant. As far as I am aware, there is no authority on this particular point, that is whether or not a higher hourly rate reflecting the fact that a solicitor is funding disbursements, is recoverable.

There is a powerful argument that this is a classic example of solicitor and own client costs, which are not recoverable; that is that the higher hourly rate reflects a premium service to the client and is a matter between the solicitor and client, and not recoverable. Having said that, if an order on the indemnity basis is made, then my view is that such hourly rate would be recoverable, as proportionality does not come into play and there is no suggestion that it is unreasonable or unnecessary for the solicitor to fund the disbursements. Indeed, the whole tone of the judgment goes the other way; that it is necessary for someone to fund the disbursements to allow a party of modest means to be able to litigate.

How much could the hourly rate could be increased without red flags being raised? This is a difficult point, as the hourly rate is never, in my experience, split up with a higher rate reflecting a higher level of service. That would be very easy to do. That is to say that the rate is, for example, £250 per hour with the client funding the disbursements, say £275 an hour with the solicitor funding the disbursements.

The only way that hourly rates are generally differentiated is by the level of lawyer dealing with the matter. I think that it would be a mistake to isolate that out, as it gives a specific element of the hourly rate for the defendant to challenge on the basis that it is truly solicitor and own client cost. However, in commercial work generally, it may well be that getting the solicitor to charge 10% more than they do already will not be picked up or raise any red flags, although that of course depends upon how much they are charging already.

In practice, the answer is probably to do both; that is to increase the hourly rate on the basis of the additional service to the client, but not isolate out that element in the hourly rate, and rather to seek to recover the whole rate from the defendant and seek to recover the cost of interest as per the Jones case. That would need little change to a typical retainer, because the attraction to a client is walking away with a minimum of, say, 60% of their damages, or whatever. As we know, that is all that the client is concerned with, and the client is right. Thus, it matters not whether the rate is £300 an hour or £3,000 an hour as far as the client is concerned; their protection is in the limiting of the costs to be deducted from damages.

Arguably, the court should allow recoverability of a higher hourly rate to reflect the solicitor funding disbursements. For all intents and purposes, it is a form of interest and the client is getting the benefit of being able to litigate. However, in practice, the courts have a long history of awarding interest on damages and costs, albeit that the power to award interest in relation to a period pre-judgment is relatively new.

In the Jones judgment, the High Court returned to the matter in paragraph 23:

“They could have entered into an agreement with Hugh James that Hugh James would fund the disbursements in return for additional uplifts in their success fees. However, such uplifts would not have been recoverable from the defendant and, in the event that their claims succeeded, the claimants would have had to meet the additional uplifts out of their damages.”

Thus, there, the High Court mentions only increasing the success fee, and not the hourly rate, but at the same time states that the claimant should not have to pay the cost of funding disbursements out of their damages. Obviously, one way of dealing with that is to allow recoverability of that element from the defendant, as part of a higher hourly rate.

As to the risk of a Solicitors Act own client challenge to the amount charged, there is no doubt that it is much harder for a client to challenge the hourly rate, as compared with a client challenging the success fee.

Where the claimant is funded by a third party (assuming disbursements paid by funder)

In Angela Jade Powell v Shrewsbury and Telford Hospital NHS Trust (Case Number O5Y02236) (1 April 2016), the claimant, a person of limited means, used disbursement funding and sought to recover the interest payments from the losing party. The paying party conceded that, in principle, the claimant could recover interest, but disputed the right to claim pre-judgment interest on three grounds:

  • The credit agreement was unenforceable as the claimant had not been properly advised.
  • The court did not have jurisdiction to re-open the consent order and thus changed what had been agreed.
  • 3% was an excessive rate of interest.

In the end, the defendant conceded on all points and paid £1,600 in interest. The case that established this principle is Jones.

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