Turning the clocks back

The Court of Appeal has handed down judgment in the monster £105m costs litigation that is Motto v Trafigura [2011] EWCA Civ 1150. Much of the judgment was case specific, such as the level of success fee and after-the-event insurance (ATE) premium appropriate and whether the claimants' solicitors had complied adequately with the spirit of the pre-action protocol. However, there were three issues that have considerably wider impact for other claims.

The senior costs judge, Master Hurst, had held at first instance: 'There is no reason why a costs judge, having found at the outset on a global view that the costs have the appearance of being disproportionate, should be precluded from deciding that an item or number of items are in fact proportionate, and thus that the test of necessity should not apply to them.' The Court of Appeal allowed the defendants' appeal on this point and held that, once a preliminary finding had been made that costs were disproportionate, the test of necessity must be applied to each item.

The second issue related to what was termed the 'cost of funding'. The question that arose was whether the costs of establishing and setting up the conditional fee arrangements and/or the ATE insurance policy were recoverable and whether the costs of subsequent dealings with the ATE insurers were recoverable. Master Hurst had allowed such costs.

Despite successful claimants routinely including such work in claims for costs since at least the coming into force in April 2000 of the relevant parts of the Access to Justice Act 1999, there has to date been no binding authority on the point. Instead there have been a number of conflicting decisions, sometimes from the same costs judge, and huge uncertainty for those advising on costs disputes.

The Court of Appeal allowed the defendants' appeal on this point. The Master of the Rolls, giving the leading judgment, stated: 'I do not agree with the judge's decision on this issue, so far as any costs in establishing and setting up the conditional fee arrangements and/or the ATE insurance policy are concerned. The time, expertise and effort devoted by solicitors to identifying a potential claimant, and negotiating the terms on which they are to be engaged by the claimant, in connection with litigation, cannot, in my view, be properly described as an item incurred by the client for the purposes of the litigation.

'Until the CFA is signed, the potential claimant is not merely not a claimant: he is not a client. When advising a potential claimant on the terms and effect of the CFA, the solicitors are acting for themselves, not for the potential claimant: the solicitors are negotiating with him as a prospective client, not for him as an actual client.'

He held that insofar as the costs of such work were recoverable then, like advertising costs, such expenses should generally be treated as part of the solicitor's general overheads and taken into account when assessing appropriate hourly rates. Does this open the door for lawyers who undertake such work to seek enhanced hourly rates to reflect this cost? One suspects that the courts will not welcome such arguments.

Although in most cases the costs of this work are relatively small, the accumulative effect of this decision for both claimants and defendants is significant.

The third major issue that was decided in this case was whether the costs incurred investigating certain abandoned heads of claim were recoverable. Many of the claimants pleaded damages including allegations of death, loss of visual acuity, miscarriage, childbirth deformity, gynaecological symptoms, anaemia and memory problems. The claims all settled for a little under £1,000 each with the final settlement agreement recording that the damages attributable to exposure to the toxic waste could at worst have caused a range of short, low-level flu-like symptoms and anxiety.

Master Hurst had concluded that as these claims were never formally abandoned, and as the defendants had agreed to pay the claimants' costs, it was not open to the defendants to challenge any item in the bill simply on the ground that it was attributable to an alleged injury that was disclaimed in the joint statement. To that extent, the Court of Appeal held that this was incorrect and, following Shirley v Caswell [2001] Costs LR 1, on an assessment a costs judge could deprive a claimant of such costs even if there was a full costs order in his favour.

However, the court concluded that so long as a claimant held a bona fide and reasonable belief that a certain type of damage had been suffered as a result of the injury then that claimant could recover the necessary, reasonable and proportionate costs of making the claim to recover that damage. Only where a claimant continued to pursue a head of claim once it was apparent it was no longer reasonable (or necessary) would the costs from that date be disallowed.

Glossed over

On the face of it, this decision is uncontroversial. A wrongdoer should expect to pay the reasonable costs of establishing the extent of the damages caused by the wrongful act. However, this decision turns the clock back to the pre-CPR position where the issue of costs was approached on the basis of the 'winner takes it all'. Post-CPR a much more nuanced approach had been adopted by the courts, including the Court of Appeal. This judgment appears to gloss over or ignore much of the earlier case law on the subject and simply approaches the subject from first principles. This may not be the last we hear on the subject.

We now await the second appeal from Master Hurst's preliminary judgment, which will determine whether interest on costs runs from the date of the final costs order or the date of assessment of those costs. The appeal is due to be heard in January.