Recoverability of costs of funding

A regular reader of the Legal Costs Blog recently got in touch to ask whether the decision in National Westminster Bank v Kotonou [2009] EWHC 3309 (Ch) was a useful one when challenging the costs associated with the funding of a claim.

Before turning to the case itself, it is useful to remind ourselves of the case law surrounding this area.

Dr Mark Friston’s definitive new work, Civil Costs: Law and Practice summarises the position in this way: “There is no binding authority on the recoverability of the costs of funding advice; there is a significant divergence of judicial opinion on the topic”.

The starting point is perhaps the decision of Master Hurst in Claims Direct Test Cases [2002] EWHC 9002 (Costs):

“It has long been held that the cost of funding litigation is not a recoverable cost as between the parties:

‘… by established practice and custom funding costs have never been included in the category of expenses, costs or disbursements envisaged by the statute or RSC Order 62. To include them would constitute an extension of the existing category of “legal costs” which is not under the prevailing circumstances warranted.’

(per Lord Justice Purchas, Hunt v R M Douglas (Roofing) Ltd, 18 November 1987, CA, unreported. This point was not taken in the subsequent House of Lords Appeal.)

It follows from this that the only costs of funding litigation which are recoverable are those permitted by statute, in this case Section 29 of the Access to Justice Act 1999. Section 29 is specific and has been interpreted by the Court of Appeal in Callery v Gray. Anything falling outside the scope of the Section is not recoverable.”

Master Seager-Berry in Ghannouchi v Houni Ltd (SCCO, 12 January 2004) allowed the costs associated with funding and this case is routinely relied on by receiving parties:

“the work of providing detailed advice and drafting the CFA and the risk assessment and making enquiries about insurance are recoverable.”

I’m sure I have seen a copy of this judgment at some stage but it is not available through any of the normal sources.

His Honour Judge Cockcroft, in the case of Masters v Hewden Stuart Heavy Lifting Ltd (Leeds Civil Hearing Centre, 18 March 2005), having analysed the case law, held:

“Without being qualified by any subsequent authority drawn to my attention, they seem fairly and squarely to preclude recovery from the other party, the defendant, of the claimant solicitors funding costs. … I am driven here to conclude that [the judge below] was wrong to allow one hour’s costs, or indeed any costs against the defendants in respect of work done concerning the funding of the claim.”

We then have the case of Woolley v Haden Building Services (No 2) [2008] EWHC 90111 (Costs) where Master Rogers held:

“In my judgment, the costs of funding have never been recoverable and nothing has changed as a result of the introduction of CPR or, indeed, as a result of the introduction of the CFA Regulations, and therefore that element of this bill in which the Claimant seeks to recover its funding costs, fails.”

However, we then have a further decision from Master Rogers on the same point. Here he managed to muddy the waters compared with his earlier decision. This is the case of Bollito v Arriva London [2009] EWHC 90136 (Costs):

“There has been considerable disagreement at costs judge and district judge level as to whether or not costs of funding are recoverable as between the parties in a detailed assessment.

On the basis of what I said in [the case of Woolley] Mr Cooper submitted that the costs of funding should not be recoverable by the Claimant from the Defendant in this case. Mr Cooper however accepted that, as always, I have a discretion in these matters and there was no hard and fast rule laid down by a court which is binding on me.

Mr Walton submitted that this was not a usual case where a couple of letters were written to set up a CFA where the costs of funding were de minimis. On the contrary, there were three separate retainers and much work needed to be done in relation to matters not least because the Claimant was not able to deal with matters directly and of course was not English speaking anyway.

Equally important was the fact that when the £50,000 limit of cover was reached under the BTE insurance offered by DAS substantial efforts had to be made by the Claimant’s solicitors to find an alternative source of insurance or cover.

I was told that at a rough estimate the costs of funding in this case came to about £5,000.

It seemed to me that even in a bill of this size this was not a negligible sum and that in my discretion it would be right to award those costs to the Claimant which is what I did.

I refused Mr Cooper’s application for permission to appeal. I said in the quotation from Woolley mentioned above that it would be nice to have authority from a higher level as to whether the Senior Costs Judge is right as set out in Claims Direct Test Cases or whether the decision of Master Seager-Berry in Ghannouchi v Houni Ltd and others is to be preferred.

However, I do not think this is an appropriate case for such a decision because in my discretion I decided that the costs of funding in this case were sufficiently large to justify ordering them to be paid by the Defendant to the Claimant.

As this was a decision taken by a specialist judge in his own field I do not think that there is any reasonable prospect of that decision being reversed on appeal and that is why I refused permission.”

I find this decision somewhat odd, even ignoring the difficulty it throws up for practitioners advising their clients when the same costs judge can reach different decisions on exactly the same issue. If, having held in the case of Woolley, that well established law did not allow this category of work to fall within that which is recoverable, how can there then be a general discretion on a judge to allow it in a particular case? This is not an issue such a photocopying where a general discretion is allowed in the rules for such costs to be “exceptionally” allowed. If a category of work is not recoverable, the fact that is unusually large in amount should make no difference (although the photocopying example does work the other way).

So, then we come to the decision in National Westminster Bank v Kotonou. This was a decision by Mr Justice Briggs. The facts of the case were unusual and need not trouble us for current purposes. However, the relevant section of the judgment was as follows:

“Turning to ground two, it was common ground both before Master Campbell and on this appeal that there is a general principle that the costs of a claim do not include costs incurred by a party in seeking funding either for the prosecution or for the defence of that claim. Nothing in this judgment is intended to cast doubt on that general principle.”

Therefore, although the point was not argued, it was accepted by all concerned that funding costs are not recoverable. These comments might be easier to dismiss in other circumstances but for a number of issues:

1. This is a High Court decision (although the point itself was not argued) where there has previously been none.
2. Both sides were represented by experienced specialist costs counsel (Mr Andrew Post and Mr Simon P Browne). It does not appear to have been taken as even in doubt as to whether the law was otherwise.
3. The Senior Costs Judge, Master Hurst, sat as one of the two assessors; the other being Mr Martin Cockx (partner in Amelans and therefore no suggestion that the claimant side of the argument could not be put before the judge). The fact that there is no suggestion in the judgment of Mr Justice Briggs that he thought there was any doubt over the law implies that the Senior Costs Judge did not advise him to the contrary.

So, on balance, this case is certainly helpful to paying parties even if not definitively the last word on the matter.

This case was also interesting for those who undertake appeals. Mr Justice Briggs held:

“In my judgment the fact that, unless the court orders otherwise, an appeal is by way of review does not necessarily preclude the consideration of fresh legal argument. In the present case, all the factual material upon the basis of which the first ground of appeal is sought to be advanced was available to the Costs Judge, and no unfair prejudice would be occasioned to the Kotonous by permitting the Bank to raise this additional argument.”

One thought on “Recoverability of costs of funding

  1. No, the Nat West case isn’t authority on the point at all. The “funding” being discussed is funding in the sense of the cost of borrowing money to pay for litigation. It certainly is well established that this is not recoverable, and this sort of funding charge is not included in the CPR defintion of costs. (Although its worth saying that this rule may itself be an artefact of a principle which, in damages cases, has been abandoned – the principle that you do not recover additional losses caused by your impecuniosity. This was establised in the Liesbosch Dredger [1933] AC 449 but dispelled in Lagden v O’Connor [2003] 1 AC 1067. If you can now recover the cost of funding as damages, it may yet be revisted in costs as the anomalies that follow from the divergence of approach at different stages of the proceedings are obvious.)

    “Funding” in the sense of borrowing costs is also the funding discussed in Hunt v Douglas Roofing. It is unclear why Judge Cockcroft and Master Hurst cited that case when discussing the quite different funding they were being asked to consider (it doesn’t appear that Judge Cockcroft had the Douglas case before him, he was simply re-quoting from Master Hurst in Claims Direct).

    The “funding” you are discussing above is entirely different: you are referring to solicitors’ time in putting in place ATE and similar. This is a point which needs to be approached from first principles. Is this “costs” within the meaning of the CPR? Obviously yes: it is solicitors’ time. Next, is it a cost “of or incidental” to the claim? Again, obviously less. Arranging an ATE policy is a cost directly resulting from the claim. Therefore it follows it is reccoverable inter partes under s 51 of the Senior Courts Act 1981, so long as it is reasonable (and if standard basis, proportionate). Will it be reasonable to arrange ATE insurance? Well, if the premium is allowed, yes. So the answer appears to be clear. When one adds that it would be bizarre for Parliament to allow the i/p recovery of an ATE premium without allowing the incidental costs, the case for recovery seems to me to be very strong.

    Where CFAs are concerned, however, I think there is a very real objection to recovering the set-up costs, but it is a different one from those given in the various SCCO decisions you cite. It is our old friend the indemnity principle. How can a solicitor charge his client for drafting his own terms of business and deciding what terms to use, and in particular whether to allow CFA terms given the risks of the case? He can’t: surely, this is overhead cost. No client would agree to pay for this. So the indemnity principle ought usually to preclude i/p recovery of this type of “funding”.

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