REUTERS | Maxim Shemetov

Diluting the qualification in qualified one-way costs shifting

Cast your mind back to the old days, when the world was young (to which Ritchie J drew the legal profession’s attention in Edwards v Slater and Gordon at paragraph 33) and legal aid was available to enable plaintiffs (as claimants then were) to fund personal injury (PI) claims. On a loss, it was generally the case that plaintiffs did not contribute to the successful defendants’ costs and the Legal Aid Fund met their own solicitors’ fees out of public funds. As the world grew older, in 1999, the government passed the Access to Justice Act 1999which removed legal aid as a means of funding PI claims except in clinical negligence. In its place, conditional fee agreements (CFAs) were permitted which allowed a success fee to be recovered on a win, with adverse costs in a losing case to be met by after the event (ATE) insurance.

A decade later, came another change. In his report into the cost of civil litigation (Review of Civil Litigation Costs), Sir Rupert Jackson recommended a new regime should be introduced in PI claims. Successful claimants would no longer be able to recover success fees or ATE premiums from their opponents, but if the action failed, Qualified one-way costs shifting (QOCS) under section II of CPR 44 would protect them from having to pay the costs of the action unless the claim had been struck out under CPR 44.15, or they had been fundamentally dishonest under CPR 44.16.

That dealt with the situation where the outcome was clear cut: victory for the claimant meant “with costs”; defeat for the claimant meant liability for the successful opponent costs but protected by QOCS, so there was nothing to pay. It did not, however, address the situation where the claim had succeeded, but on the way, the claimant incurred an adverse costs order, for example where the particulars of claim had been amended, causing the defendant to incur costs in revising its defence.

In circumstances such as these, CPR 44.14 would ride to the defendant’s rescue. Where there had been an order (emphasis added) concluding the case for the payment of damages and interest, defendants could enforce their costs orders up to the aggregate of the amount due to the claimant. In addition, where the court gave permission under CPR 44.12, defendants could set off their costs against the costs that they were liable to pay, albeit that in no circumstances could they exceed the net amount due to the claimants, so that those bringing claims, would never be out of pocket. Put another way, the worst that could happen to an honest losing claimant with QOCS protection, was to leave with nothing.

Practice, as QOCS has developed over the past decade, however, has not made perfect. In the first place, for enforcement to be permissible, there must be an order of the court or a judgment. A mere agreement to pay, such as to be found where the action has been settled on terms set out in a “Tomlin” Schedule will not do (see Cartwright v Venduct at paragraph 47). An acceptance of an offer under CPR 36 by a claimant is no use either, as it does not confer a right on the defendant to enforce any of its costs against damages or interest due to the claimant (see the judgment of Coulson LJ in Venduct at paragraph 45):

“[…] settlement in consequence of an acceptance of a Part 36 offer would also be outside the words of rule 44.14(1).”

If enforcement is not available in these circumstances, what of costs being set off against costs? CPR 44.12 permits the setting off of one set of costs against another, but no longer where QOCS applies. The decision of the Court of Appeal in Howe v Motor Insurers’ Bureau was overruled by the Supreme Court in Ho v Adelekun, meaning that costs orders cannot be set off against costs orders under CPR 44.12 even though the court might wish make an order doing so. The effect of that has been howls of protest by paying defendants who have costs orders made in their favour, since they have no monetary value whatsoever.

Take the following situation. Suppose that the defendant has offered to settle for £100,000 under CPR 36, a figure rejected by the claimant within the “relevant period”, only for there to be a change of mind a year later, due to a much improved prognosis about the personal injuries suffered. The default position is that the claimant will have costs to the last date on which the offer should have been accepted, with the defendant to receive costs thereafter (see Kunaka v Barclays Bank). Absent QOCS, costs would be set off against costs under CPR 44.12, but in a PI claim , not only will the defendant be required to pay the claimant’s damages and costs, but not a penny of the adverse costs can be enforced against those sums because a Part 36 acceptance is not an order for the payment of damages (Venduct) nor is set off possible under CPR 44.12 (Ho).

Unfair? Possibly and not only on the defendant but also on the claimant where he or she is a protected party under CPR 21 and the court’s approval of any settlement is required. That point was not lost on Master McCloud in MRA v the Education Fellowship Ltd in which the claimant, through his litigation friend, had settled upon the acceptance of a Part 36 offer out of time.

Before the master, it had been agreed that the default position was as Longmore LJ had described it in Kunaka, but it was the claimant’s case that there should be a variation to reflect the fact that it would be unjust for him to be required to pay all the costs from the date that the offer should have been accepted. In making this submission, the court considered whether the QOCS regime was disadvantaging those who need the court’s approval, namely, as was the case, protected parties, in contrast to those who did not.

At paragraph 40, the master said:

“It was argued that under the QOCS regime a Defendant can only set off its costs, in the circumstances here, where there had been a judgment or order for damages. In this case, if the Claimant had not been a minor or lacking in capacity, he would not face the need for a decision of the court approving the payment of damages (and hence an order for the above purposes) when a person not requiring the approval of the court would not necessarily have an ‘order’ for damages and hence not be exposed to that risk. That it was said cannot have been the intention of the rule makers.”

In the event, the master did not need to decide that point. She was satisfied that it would not be unjust for her to order that the defendant should have its costs from the date that the offer ought to have been accepted (“I must therefore follow, as counsel put it, “my head” and not “my heart”). Thus, armed with an order (emphasis added) for the payment of damages, CPR 44.14 was available to enable the defendant to enforce its £45,000 worth of costs against the £100,000 worth of damages.

Now, contrast the situation had the claimant not been a protected party: no court order approving the settlement would have been needed and the defendant would have been required to pay the claimant’s damages and costs without being able to set off or enforce any of its own costs against either.

That potential lacuna has not been lost on the Civil Procedure Rule Committee either, which has been asked by the government to consider whether there should be a rule change to CPR 44.14. The alteration suggested is to change subsections (2) and (3) as follows:

“(2) For the purposes of this Section, orders for costs include orders for costs deemed to have been made (either against the claimant or in favour of the claimant) as set out in rule 44.9.
(4) Where enforcement is permitted against any order for costs made in favour of the claimant, rule 44.12 applies.”

Such an amendment, if implemented, would not only have the effect of reversing the decisions in Ho and Venduct(in so far as Part 36 is concerned but not in respect of agreements to pay recorded in Tomlin orders), but also would go much further. No longer would the court’s permission be required to set off costs against costs: a “successful” defendant would have an entitlement to do so as of right under the amended rule. In these circumstances, claimants who thought that they would enjoy the umbrella of QOCS, will find themselves with less protection from adverse costs orders than they had when Howe was good law.

That is not a situation which sat comfortably with Nugee LJ (with whom Vos MR and Males LJ agreed) in Ho who said at paragraph 18:

“[…] were there no authority on the issue, I would be inclined to accept Mr Mallalieu’s submission that, where QOCS applies, the court has no jurisdiction to order costs liabilities to be set off against each other. I would find convincing Mr Mallalieu’s contention that Section II of CPR Part 44 represents a self-contained code and that, accordingly, a defendant can recover costs he has been awarded only by set-off against damages and interest under CPR 44.14…”

If adopted, however, the draft amended CPR 44.(4) will achieve the opposite. By allowing set-off against costs as an entitlement, the QOCS regime will be diluted in a manner not contemplated by Sir Rupert Jackson almost a decade ago when the rule was implemented. Unfair? Malcontents, speak up now or forever hold your peace.

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