Can the Winning Party in Litigation Change its Funding Arrangements and Increase the Losing Party’s Liability for Costs?

The recent decision of the Senior Courts Costs Office in Dial Partners LLP v Eastern Airways International Ltd offers an interesting review of the principles regulating the right of a receiving party in litigation to change its funding arrangements before settlement or judgment.

The facts in Dial can be summarised as follows:

  1. In March 2015, the Claimants entered into a Damages-Based Agreement (“DBA”) with their solicitors, which provided that the solicitors would receive 50% of the damages recovered.
  2. In June 2015, the Defendants were informed that there was a DBA.
  3. On 21 October 2016, the Defendants made a Part 36 offer of £300,000 plus costs, which expired on 11 November 2016.
  4. On 2 November 2016, the Claimants entered into a Conditional Fee Agreement (“CFA”) with their solicitors, which replaced the DBA. The Defendants were not informed.
  5. The trial was listed for 14 November 2016, and on the weekend of the 12/13 November 2016, the parties settled in the Claimant’s favour at £625,000 but excluding costs.

The Claimant’s case before Master James was effectively that: a) it did not matter that the Defendants were not told, because the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”) had removed the obligation of a party to tell an opponent about funding arrangements; b) the High Court decision in Surrey (a child) v Barnet and Chase Farm Hospitals NHS Trust [2016] EWHC 1598 (QB) had established that there was a need for a paying party to raise a genuine issue before any investigation into the reason for the receiving party’s change in funding arrangement would be carried out and the threshold had not been met in this case; and c) the Claimants were actually worse off under the CFA, then under the DBA.

The Defendant’s case was that: a) they still believed the DBA to be in existence when the matter was settled and the existence of the DBA had influenced their decision to settle; b) the Privy Council decision in Kellar v Williams [2004] UKPC 30 had established that where a costs agreement was amended after judgment, a paying party could elect to pay costs under the agreement of their choice; and c) the lack of evidence of what led the Claimants to change funding arrangements meant that the court was precluded from establishing whether the action taken was reasonable.

In giving judgment in the Claimant’s favour, Master James held that:

  1. What the Claimants and their solicitors had done was to move from an agreement where at best the solicitors would be paid a fraction of what the case had actually cost to run, to a CFA under which the solicitors could at least try to recover the true cost of the action (bearing in mind that on the Standard Basis a recovery of something between two-thirds and three-quarters of the Bill would not be unusual).
  2. The decision of Master Gordon-Saker in JN Dairies v Johal Dairies (23 August 2011) needed to be placed in the pre-LASPO context of “double or quits” costs liabilities.
  3. Whilst the case was very near to trial, it was not at trial, much less post-settlement as in Kellar and the principle had not been breached. As at 2 November 2016, the case was not certain to settle despite costs offers having been made.
  4. Changing from a DBA to a CFA is not objectionable in of itself.
  5. The Defendant had failed to raise a “genuine issue” as far as reasonableness was concerned and it was not the court to determine the attraction to the Claimants of the different awards of damages.

Practitioners will no doubt be keeping an eye on whether the decision is challenged and reviewing the true costs of any current DBA agreements and considering whether a change in funding arrangement is necessary, but more importantly, reasonable.

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