The Court of Appeal, in Mishcon de Reya v Caliendo, dismissed an appeal against an order granting the respondents relief from sanctions (pursuant to CPR 3.9) imposed under the pre-April 2013 costs provisions relating to failures to serve notices of funding arrangements. The Court of Appeal found no reason to interfere with the judge’s exercise of his discretion to grant relief. In particular, it endorsed the judge’s decision to focus, in his consideration of stages 1 and 3 of the Denton test, on the effect of the breach rather than the effect of granting relief from sanctions.
Outline of the facts
In relation to the substantive claim, the respondents had signed CFAs and obtained ATE insurance. Pursuant to the old CPR 44.15(2) and paragraph 9.3 of the Practice Direction on Pre-Action Conduct, details of the funding arrangements should have been given to the appellants as soon as possible and in any event within seven days of entering into the funding arrangement concerned. However, in relation to the solicitors’ CFA and ATE, notice was provided 3.5 months late. Regarding counsel’s CFA, notice was provided 2.5 months late. The respondents issued and served proceedings accompanied by an application for relief from sanctions made pursuant to CPR 3.9.
Hildyard J’s decision
Hildyard J granted the respondents relief from sanctions, applying the three-stage test prescribed in Denton v TH White Ltd. The appellants appealed to the Court of Appeal on the basis that the judge had wrongly applied the Denton principles to the facts of the case.
Court of Appeal’s decision
The Court of Appeal dismissed the appeal, holding that Hildyard J had correctly applied the Denton test and exercised his discretion in relation to relief.
In relation to the first stage (the seriousness or significance of the breach), the judge had given due weight to the presumption that failure to give notice of funding would lead to the other party proceeding on a false footing as to its possible costs exposure. There was no good reason to believe the appellants would have acted differently if notice of funding had been given in time, and there was no evidence that they were prejudiced.
With regards the second stage (reasons why the failure occurred), the judge had attributed appropriate weight to the requirements to give notice and had been entitled to conclude that the reason for the default was not to weigh too heavily against the respondents.
In terms of the third stage (all the circumstances of the case), the judge adequately took into account the increase in the appellants’ financial exposure if relief was granted. He was correct to hold that the effect of granting relief should be given less weight than the impact of the breach.
What does this mean?
This case is of wider interest than solely in relation to applications for relief from sanctions imposed under the old costs rules. Such applications are likely to be diminishing in number since the Jackson reforms came into effect.
The Court of Appeal was firm in upholding the judge’s exercise of his judicial discretion. A possible outcome is that judges dealing with applications for relief from sanction, or appeal courts being asked to vary such decisions, will grant permission to appeal such decisions more sparingly. This will focus even more on the importance of the application for relief itself.
The need for evidence of prejudice
This case also reiterates the need for parties opposing applications for relief to provide the court with evidence of the prejudice that they have allegedly suffered. This needs to be done at the application for relief stage, not at any appeal of that application. The Court of Appeal dismissed the appellants’ arguments that legal professional privilege or confidentiality as to their litigation tactics prevented them from adducing evidence as to what offers of settlement might have been made, had proper notice of funding arrangements been given. At paragraph 17(ii), Gloster LJ held that the appellants were not required to disclose their views on the merits of the case. Rather, they needed to adduce evidence stating that, had they been aware of the funding arrangements:
“serious consideration would have been given to an offer of settlement and that that opportunity had been denied to them, with consequent substantial prejudice.”
The guidance makes it clear that evidence is required, but it needn’t be particularly specific. Ideally, parties who are informed of another party’s breach will correspond with the defaulting party at the time that they are notified, setting out the prejudice that they have suffered or may suffer as a result. There was no such contemporaneous correspondence in this case.
The risk of satellite litigation
The respondents had a potential (and apparently good) claim against their present solicitors for the failings in relation to late service. Had relief not been granted, this could have resulted in the respondents being unable to claim certain additional liabilities from the appellants, even on obtaining a costs order in their favour. However, the decision of Hildyard J and the Court of Appeal was that, although the respondents might well be able to recover against their current solicitors, such satellite litigation was to be discouraged. Furthermore, this was not a factor that should be conclusive of the application.
On the other hand, in cases where relief is not granted, it is likely that there will be satellite claims against solicitors whose failings cause their clients to be sanctioned. It may well be straightforward to establish breach of duty in these cases. It is, therefore, likely that a settlement will be reached in most cases at an early stage, rather than causing a wave of satellite professional negligence litigation in the courts.
Interpretation of the Denton test
The respondents’ solicitors had admittedly no good reason for failing to serve notice of the funding arrangements earlier. However, this did not deter Hildyard J (or the Court of Appeal) from granting relief. This follows paragraph 31 of Denton, which makes clear that even if an application for relief cannot satisfy stages 1 and 2 of the test, the court should still proceed to consider all of the circumstances of the case.
This case is also of interest in terms of the endorsement that this differently constituted Court of Appeal gave to the view of the majority in Denton (Lord Dyson MR and LJ Vos). At paragraph 32-36 of Denton, the majority of the Court of Appeal considered that the two listed factors in CPR 3.9(1)(a) and (b) should be given particular weight and should have the “top seats at the table”. The contrary view expressed by the architect of the reforms, Lord Justice Jackson, in paragraph 85 of Denton, that those listed factors should only have a “seat at the table, not… the top seats at the table”, was rejected.
