Will the courts allow costs to be deducted from damages in infant cases?

By Keith Hayward

Victory Legal Costs Solicitors

Tel: 01329 227 985

Fax: 01329 227 988

Web: www.victorylegal.co.uk

E-Mail: keith.hayward@victorylegal.co.uk

The court has a duty to protect the interests of minors, and most judges have had an

understandable reluctance to allow deductions from damages for costs under the

old regime. Will this position change in the post Jackson world?

The early signs are that many judges across the country still do not want to allow any

deductions in principle and many are refusing to do so. This paper explores whether

they are right to do so, examines the applicable court rules, and looks at how

practitioners should deal with this issue in practice and the challenges they face in

doing so.

Following the Jackson reforms it is no longer possible to recover success fees and

ATE premiums inter partes where the CFA or ATE policy are dated on or after 1 April

2013. Consequently the Claimant will remain contractually liable to pay these from

their damages where the CFA so provides. There is a deliberate policy here

recommended by Lord Jackson, and accepted by the government, to give litigants an

interest in the costs of the litigation to assist in controlling costs.

Consumer protection legislation was introduced at the same time in the form of the

Conditional Fee Agreements Order 2013 that puts a cap on the maximum sum the

solicitor can charge a client in a personal injury claim by way of a success fee to 25%

of the damages. In order to comply with this legislation the 25% must be applied to

the damages excluding future pecuniary loss, net of CRU and be inclusive of VAT.

There is no statutory restriction whatsoever on recovering any shortfall in base costs

from a client. Consequently clients can be charged the full shortfall in addition to a

success fee, and only the latter has to be capped under the legislation which in

practical terms renders the protection under the regulation meaningless. However,

where a solicitor seeks to charge the shortfall on base costs in addition to the

success fee, it would be prudent to consider an overall cap on the charges so that

the client has certainty, for example by limiting the total fees to a maximum of 25%

of ALL the compensation awarded. It is a matter for the solicitor whether they wish

to include any ATE premium within this overall optional cap or charge it in addition.

There is absolutely nothing in either the legislation or the court rules to suggest that

children should be treated any differently to adults, and therefore as a matter of

policy it seems clear that they should be treated the same. A Litigation Friend will

normally sign the CFA as agent for the child, and as a result the child is contractually

bound to pay exactly the same sums as an adult claimant would be where the CFA

and terms of business so provide.

The only difference between an adult and a child is that any settlement will not be

valid unless it is approved by the court and therefore such claims should go to an

infant settlement hearing. This means that the judge has to give express permission

at the hearing (or upon any subsequent application) to allow any deductions to be

made from the child’s damages under the rules, and as a result the judge has to be

persuaded that it is appropriate to do so.

The relevant rules of court are as follows:

21.10

(1) Where a claim is made –

(a) by or on behalf of a child or protected party; or

(b) against a child or protected party,

no settlement, compromise or payment (including any voluntary interim

payment) and no acceptance of money paid into court shall be valid, so far as

it relates to the claim by, on behalf of or against the child or protected party,

without the approval of the court.

Part 21.10 is the reason why approval needs to be sought from court rather than

relying on a parental indemnity.

21.11

(1) Where in any proceedings –

(a) money is recovered by or on behalf of or for the benefit of a child or

protected party; or

(b) money paid into court is accepted by or on behalf of a child or protected

party,

the money will be dealt with in accordance with directions given by the court

under this rule and not otherwise.

(2) Directions given under this rule may provide that the money shall be

wholly or partly paid into court and invested or otherwise dealt with.

(3) Where money is recovered by or on behalf of a protected party or money

paid into court is accepted by or on behalf of a protected party, before giving

directions in accordance with this rule, the court will first consider whether

the protected party is a protected beneficiary.

The above rule makes it clear that it is up to the judge what should happen to the

money and whether any deductions should be allowed in principle. This is where the

first battle ground is as many judges do not want to allow any deductions (see the

arguments below on persuading them otherwise).

21.12

(1) In proceedings to which rule 21.11 applies, a litigation friend who incurs

expenses on behalf of a child or protected party in any proceedings is

entitled on application to recover the amount paid or payable out of any

money recovered or paid into court to the extent that it –

(a) has been reasonably incurred; and

(b) is reasonable in amount.

(2) Expenses may include all or part of –

(a) a premium in respect of a costs insurance policy (as defined by section

58C(5) of the Courts and Legal Services Act 1990); or

(b) interest on a loan taken out to pay a premium in respect of a costs

insurance policy or other recoverable disbursement.

(3) No application may be made under the rule for expenses that –

(a) are of a type that may be recoverable on an assessment of costs payable

by or out of money belonging to a child or protected party; but

(b) are disallowed in whole or in part on such an assessment.

(Expenses which are also ‘costs’ as defined in rule 44.1(1) are dealt with under

rule 46.4(2).)

(4) In deciding whether the expenses were reasonably incurred and

reasonable in amount, the court will have regard to all the circumstances of

the case including the factors set out in rule 44.4(3).

(5) When the court is considering the factors to be taken into account in

assessing the reasonableness of the expenses, it will have regard to the facts

and circumstances as they reasonably appeared to the litigation friend or to

the child’s or protected party’s legal representative when the expense was

incurred.

(6) Where the claim is settled or compromised, or judgment is given, on terms

that an amount not exceeding £5,000 is paid to the child or protected party,

the total amount the litigation friend may recover under paragraph (1)

must not exceed 25% of the sum so agreed or awarded, unless the court

directs otherwise. Such total amount must not exceed 50% of the sum so

agreed or awarded.

Rather confusingly the above rule expressly refers to an ATE premium as being an

expense. However, costs and any other disbursements are expressly excluded. So

unless there is an ATE premium to consider the above section is not relevant to the

issue as to whether costs and disbursements should be deducted from damages.

That is dealt with in Part 46.4:

46.4

(1) This rule applies to any proceedings where a party is a child or protected

party and –

(a) money is ordered or agreed to be paid to, or for the benefit of, that party;

or

(b) money is ordered to be paid by that party or on that party’s behalf.

(2) The general rule is that –

(a) the court must order a detailed assessment of the costs payable by, or

out of money belonging to, any party who is a child or protected party; and

(b) on an assessment under paragraph (a), the court must also assess any

costs payable to that party in the proceedings, unless –

(i) the court has issued a default costs certificate in relation to those costs

under rule 47.11; or

(ii) the costs are payable in proceedings to which Section II or Section III of

Part 45 applies.

(3) The court need not order detailed assessment of costs in the

circumstances set out in Practice Direction 46. (see below)

(4) Where –

(a) a claimant is a child or protected party; and

(b) a detailed assessment has taken place under paragraph (2)(a),

the only amount payable by the child or protected party is the amount

which the court certifies as payable.

So where the court is persuaded in principle that costs can be paid out of the

damages, the court MUST order a detailed assessment UNLESS any of the

circumstances apply as set out in the practice direction to Part 46. The only potential

relevant circumstance is set out in paragraph 2.1(a):

a) where there is no need to do so to protect the interests of the child or

protected party or their estate.

Where the court requires a detailed assessment to be carried out, rule 46.9 will

apply:

46.9

(1) This rule applies to every assessment of a solicitor’s bill to a client except a

bill which is to be paid out of the Community Legal Service Fund under the

Legal Aid Act 19884 or the Access to Justice Act 1999.

(2) Section 74(3) of the Solicitors Act 1974 applies unless the solicitor and

client have entered into a written agreement which expressly permits

payment to the solicitor of an amount of costs greater than that which the

client could have recovered from another party to the proceedings.

(3) Subject to paragraph (2), costs are to be assessed on the indemnity basis

but are to be presumed –

(a) to have been reasonably incurred if they were incurred with the express or

implied approval of the client;

(b) to be reasonable in amount if their amount was expressly or impliedly

approved by the client;

(c) to have been unreasonably incurred if –

(i) they are of an unusual nature or amount; and

(ii) the solicitor did not tell the client that as a result the costs might not be

recovered from the other party.

(4) Where the court is considering a percentage increase on the application of

the client, the court will have regard to all the relevant factors as they

reasonably appeared to the solicitor or counsel when the conditional fee

agreement was entered into or varied.

In summary a solicitor who is seeking to obtain an order permitting costs to be deducted from damages will need to deal with the following:

1. Obtain instructions from the Litigation Friend who must authorise the

application to be made.

2. Persuade the court that a deduction is appropriate in principle.

3. Where the court refuses a reduction in principle take instructions from the

Litigation Friend whether to appeal, and if so instructed seek permission to

do so.

4. Where the Court agrees to a deduction in principle, seek to persuade the

Court that a detailed assessment is not necessary to protect the interests of

the child and allow the amount sought to be deducted.

5. Where the Court orders detailed assessment the solicitor will need to

proceed to a solicitor and own client detailed assessment hearing where

costs will normally be assessed on the indemnity basis pursuant to Part

46.9(3).

The remainder of this article will look at the above five points and the issues they raise and how to deal with them.

1. Obtain instructions from the Litigation Friend to apply for a deduction

The litigation friend must have made an informed decision at the outset that this method of funding was appropriate and fully understood what they were agreeing to. In accordance with their professional conduct obligations solicitors must keep clients fully informed throughout the case of their liability for costs. At the end of the case the solicitor should fully account to the client by delivering a final bill which gives credit for any costs recovered from the paying party, so the client can see exactly what the remaining liability is for the shortfall in base costs (where charged), the success fee and any ATE premium, and be shown how the cap on the success fee (and any overall cap) has been applied. Assuming the litigation friend is happy with the final bill, instructions should then be sought as to whether the litigation friend wishes to apply at the hearing for these sums to be deducted from damages or paid from other resources. It must always be remembered that costs belong to the client and not to the solicitor. Consequently it is the litigation friend’s decision whether to apply for payment from the damages, and the litigation friend’s consent should be obtained to make this application. It is suggested that a signed authority expressly consenting to the deduction be obtained and handed to the judge.

2. Will the Court allow a deduction to be made in principle?

Pre Jackson most solicitors were prepared to waive any right to solicitor and own client costs. But this was in an era where success fees and ATE premiums were recoverable inter partes and standard costs could be recovered outside of the portal. But with the introduction of the Jackson reforms, government policy is now that

litigants should have an interest in funding and should pay success fees and ATE premiums from damages. Also the introduction of fixed fees in fast track personal injury cases has resulted in many firms now seeking to charge their clients not only the additional liabilities but also the shortfall in base costs which is a matter of contract in the absence of any restrictions in the legislation. With nothing in the rules providing for children to be dealt with differently from adults it is difficult to see how there can be any justification in principle for the courts to refuse to allow a deduction in principle against the background of the new philosophy in the rules just because the Claimant is under 18. Where a court is reluctant to allow a deduction in principal the solicitor should consider drawing the court’s attention to the following arguments in addition to the fundamental point of principle identified above:

A contract exists between the solicitor and child where the child is liable to

pay the fees in principle, and the client through their Litigation Friend is

happy with the fees charged. Consequently the child will remain liable

whether or not permission is granted to clear this liability out of the

damages. If the court does not allow the deduction the child and litigation

friend will be placed in a position where the litigation friend may have to pay

this debt personally on behalf of the child to clear this liability which would

not be appropriate.

If a litigation friend is put in a position where they have to pay costs they will

not want to run cases in the future and children will be denied access to

justice.

The only alternative is for the solicitor to waive their fees. As inter partes

costs are fixed and limited in fast track cases, many firms will refuse to act for

children if they cannot charge fees to the client, and again as a result children

will be denied access to justice.

The court’s role is to protect the interests of the child. The court need to take

into account when doing so that the child has a contractual liability to pay

which is not disputed either in principle or amount. As long as the court is

satisfied that the litigation friend fully understood the contract and made an

informed decision to sign up to the contract knowing that there would be this

liability upon a successful conclusion, it would be wrong for the court to

interfere and to refuse to allow a deduction in principle.

Under the Jackson reforms general damages were increased by 10% to

“compensate” claimants for the loss of recoverability of success fees, and the

Claimant has had the benefit of the 10% increase.

3. Where the court refuses a deduction in principle consider an appeal

It has recently been suggested by His Honour Judge Halbert, the designated civil

judge in Chester, that any appeal is in reality a dispute between the solicitor and the

child, and the solicitor has no locus standi and an appeal cannot proceed. It is

suggested that this is an incorrect interpretation of the position.

Whether to appeal must be the decision of the child through their litigation friend. If

the litigation friend provides that authority then it is not the solicitor appealing it is

the child. The dispute is not between the child and the solicitor at all, as the child

wants the solicitor to be paid the costs (which are not disputed) from the damages

rather than have to pay from other resources, or potentially be left with a liability

that they have no means of paying. If instructed to do so the solicitor would be

bringing the appeal on the child’s behalf, and clearly the child would have locus

standi to do so in these circumstances.

If the solicitor does not have the authority to proceed to appeal and does so in their

own right then of course it is correct to say the solicitor would not have the locus

standi to do so. But as long as the solicitor is acting with the authority of the client

this should not be an issue.

But there remains the issue of how the appeal will be funded. Clearly the paying

party has no interest in the appeal, and no costs will be recoverable inter partes

regardless of the outcome of the appeal. It is unlikely that the existing CFA will cover

an appeal brought by the client, and therefore a new funding arrangement would

have to be put in place. If the solicitor is using the Law Society model CFA this only

covers appeals brought by the Defendant. The reality is that if the solicitor charges

under a new funding arrangement for the appeal, as those costs will not be

recoverable inter partes the litigation friend may well spend more on the appeal

than the sums they are seeking to deduct making any appeal pointless. So in

practical terms unless the solicitor is prepared to fund the appeal it is unlikely to

proceed.

It may well be that the solicitor will want to agree to fund the claim to obtain a ruling

on this point for the benefit of future cases. If not then the solicitor will be faced

with the choice of either asking the Litigation Friend to pay or writing off the debt.

Finally, if the solicitor wants to run the appeal and the court cannot be persuaded

that they have locus standi, it is still open to the solicitor to apply to be joined in as a

party to enable the appeal to proceed.

4. Where a deduction is allowed in principle will the court insist on a detailed

assessment?

In order to avoid a detailed assessment the court will need to be satisfied that it is

not necessary to protect the interests of the child.

Where the solicitor is looking to charge the shortfall in base costs and the success

fee, then it will be important that inter partes costs have been agreed prior to the

application being made so that both the litigation friend and the the court can

understand how much the shortfall is and what is being charged to the client.

It will be prudent to produce a bundle for the court in advance of the hearing

including the following documents:

a. The CFA, terms of business and client care letter so the court can see the

hourly rates charged, the grade of fee earner(s), the percentage success fee

charged and any applicable cap;

b. A risk assessment or statement of reasons explaining how the success fee has

been arrived at so the court can satisfy itself that the percentage charged is

reasonable;

c. The final bill to the client showing a breakdown of the amount of time

charged at the contractual hourly rates giving credit for the sums recovered

inter partes;

d. A signed consent from the Litigation friend agreeing the figures in the bill and

consenting to the deduction from damages.

In many fast track cases the cap will apply and as a result the solicitor may not be

charging the full amount of either the shortfall in base costs or the success fee. If

the solicitor can demonstrate that even if the matter went to a detailed assessment

it is likely that the cap would still apply and therefore makes no difference to the

client’s liability, then it is hoped that judges will be happy to conclude that a detailed

assessment is not necessary and simply order the deduction of the sums sought.

Some commentators have suggested that it is now appropriate to charge very high

hourly rates (such as £400 per hour regardless of the level of fee earner) and apply a

100% success fee on that hourly rate in all cases, with the objective of making sure

the fees reach the 25% cap as often as possible. This is not advisable, and it is

difficult to see how this complies with the solicitor’s professional conduct obligations

and is in danger of putting the solicitor’s interests ahead of those of the client. It may

also have an impact on whether the court is prepared to allow a deduction in

principle, and where the court is prepared to do so whether the matter should

proceed to a detailed assessment hearing.

Where the court has concerns and feels that there needs to be an assessment, it

may well be possible to persuade the court that a summary assessment should be

carried out there and then rather than order a detailed assessment. A detailed

assessment is only required if it is “necessary to protect the interests of the child”.

So if the court feels the interests of the child can be protected by a summary

assessment, the court has the power to dispense with a detailed assessment.

One reason why the court might not order summary assessment is a lack of time. For

this reason it is suggested that when giving a time estimate for the hearing

practitioners should allow sufficient time to enable a summary assessment to be

completed if the court can be persuaded, and to explain to the court in the covering

letter the reason for the extended time estimate to enable the court to grapple with

these difficult issues.

Every attempt should be made to avoid an order for a detailed assessment, because

once made there can be no compromise and the case must then proceed to a

detailed assessment hearing before any costs can be paid of the damages. This will

result in substantial costs being incurred in the detailed assessment process. The

question then is who will fund this process?

The starting point is the contract with the client. The Law Society model CFA makes it

clear that any assessment of costs arising out of the claim is covered by the CFA.

Consequently the solicitor can contractually charge the client for all such work at

contractual rates and charge a success fee on top. But this will be of no assistance to

the solicitor where the cap applies. The reality is that where the cap applies the

solicitor will in effect have to fund the detailed assessment process, which will

include paying a substantial detailed assessment court fee.

Where the cap does not apply then the child will potentially be spending more of

their compensation should the court force the parties to go to a detailed

assessment. So the very child that the court is seeking to protect may end up with

additional costs being incurred on their behalf as a result of the court making an

order that the child did not want.

It may be that the costs of the assessment process will be affected by S70(9)

Solicitors Act 1974 which provides that where the solicitors fees are reduced by

more than one fifth the solicitor will pays the costs of the assessment, and if reduced

less than one fifth the client will pay. However, Section 70 is dealing with Solicitors

Act assessments and is headed “assessment on application of party chargeable or

solicitor.” Whereas here neither the solicitor nor the client has made any application,

and the assessment has been imposed by the court against the wishes of both the

client and the solicitor. Consequently it is not clear whether this rule would apply to

such an assessment.

5. Dealing with a detailed assessment hearing where ordered

Where the court orders detailed assessment it will be a solicitor and own client

assessment, and under Part 46.9(3) the costs will usually be assessed on an

indemnity basis.

When carrying out that assessment there are three rebuttable presumptions under

46.9(3):

a) Costs have been reasonably incurred if they were incurred with the express

or implied approval of the client;

b) The costs are reasonable in amount if their amount was expressly or

impliedly approved by the client;

c) costs will have been unreasonably incurred if –

I. they are of an unusual nature or amount; and

II. the solicitor did not tell the client that as a result the costs might not

be recovered from the other party.

Paragraph 6.1 of PD46 makes it clear that the information in c) ii) above must be

given to the client before the costs were incurred.

The hourly rates should of course have been expressly stated in the CFA or client

care letter. It is prudent to obtain a signature from the client expressly agreeing to

the terms. The hourly rate will then be presumed reasonable on assessment

pursuant to rule 46.9(3)(a) due to the client’s express agreement. The court should

only then assess the amount of time involved on an assessment. This is a point that

should be drawn to the court’s attention when considering whether a detailed

assessment is necessary in the first place to protect the interests of the child,

particularly where the cap applies.

Nevertheless practitioners should note that the presumptions in Part 46.9(3) are

rebuttable. Clients must make informed decisions before they sign the agreement.

This means that the court may want to know that the litigation friend understood

what they were signing. The fear here is that CFAs are complicated and it is often

difficult for a client to fully understand how they operate. Where the emphasis in the

discussions with the client has centered on there being a 25% cap for protection, the

danger is that clients have misunderstood believing it to be a contingency fee of 25%

rather than a cap and do not appreciate the significance of the hourly rate.

Consequently the lack of understanding of the litigation friend or the lack of clear

paperwork spelling out the position may lead to the court to conclude that the

presumption is rebutted. During a solicitor Act assessment the court would only

consider this if it was specifically raised by the client as an issue. Will the court raise

this of its own motion? Whilst that remains to be seen the risk is that the court will

as the court’s role is to protect the interests of the child.

Where the court take the view that the hourly rate is too high and cannot be

justified, there remains a risk that the court will seek to rely on the presumption in

Part 46.9(3)(c) and treat that part of the rate charged above what the court consider

is a reasonable solicitor and own client rate as being “unusual in nature and

amount”. Should the court take this view then unless the solicitor can demonstrate

that it was made clear to the client before the work was carried out that fees at this

level cannot be recovered inter partes, the presumption of unreasonableness will

apply. Where this assumption applies it is difficult to see any circumstances where

the court would allow that presumption to be rebutted. When assessing costs on

the indemnity basis the court will not allow costs unreasonably incurred to be

charged to the client. Consequently all such charges would be disallowed.

Where the only issue relates to the amount of time spent and the hourly rate is

presumed reasonable, the court will want to see what cost estimates were given to

the client. If proper cost estimates were given throughout and the litigation friend

kept fully informed of the level of costs being incurred, then it might be possible to

persuade the court that the litigation friend has impliedly approved the costs being

incurred where the solicitor remains within the estimate. The costs will then be

presumed reasonable under rule 46.9(3)(b).

With regard to the success fee, some commentators have suggested that as the

consumer protection legislation does not require a risk assessment to be produced

to set the success fee that it is no longer necessary to prepare one and solicitors are

free to charge 100% on all cases. The reality is that the absence of a requirement in

the legislation simply means that the retainer will be valid and enforceable

regardless as to whether a risk assessment was carried out. When assessing the

percentage of the success fee the court has the power to interfere with the

percentage set, and therefore any percentage charged will need to be justified to the

court on any assessment.

Part 46.9(4) confirms that when the court is assessing the success fee it will take into

account all the factors known to the solicitor when the agreement was entered into.

Consequently the court will need to understand what those factors were so the

success fee can be assessed. So either a risk assessment should be produced or

perhaps a statement setting out the reasons why the success fee was set at the level

it was.

Conclusion There is no logical reason why children should be treated differently to adults and if

the correct arguments are put to the court it is hoped that in principle the courts will

now allow deductions to be made.

The current rules should be reviewed so that they expressly deal with this situation

so it is clear to all what the intention is and what the parameters are. The fear

remains that if deductions cannot be made then access to justice will be denied to

children as no one will want to be a litigation friend unless a solicitor agrees to waive

fees over and above those costs that can be recovered inter partes. Solicitors may

well cease acting for children due to the low level of fees if they have to waive their

fees.

As currently drafted the rules lean towards a detailed assessment. In the vast

majority of cases that will not only be disproportionate to the amounts in issue, but

due to the difficulties discussed in this paper will make it virtually impossible to

proceed. Again this issue needs to be addressed, and can easily be addressed by

expressly providing for the costs to be summarily assessed at an infant settlement

hearing.

There remains a danger that due to the uncertain position that the use of parental

indemnity will increase to avoid infant approval hearings. This is not a practice that

should be encouraged and these issues need to be addressed sooner rather than

later by the rules committee.

1 July 2014