Interim awards of expenses – a significant decision
Andrew Smith QC of Compass Chambers comprehensively analyses changes to interim awards of expenses in the wake of the Higherdelta case.
It is competent for the court to make an interim order for payment of a fixed sum in respect of expenses against the party who is ordered to pay those expenses, pending preparation of and taxation of judicial accounts.
A simple procedure can be adopted which is inexpensive and quick. This can materially improve cash flow for solicitors, allowing them to be paid a reasonable proportion of their likely fees at an early point in time; and to recover funds to meet outlays incurred during the conduct of the process.
Equally, it allows clients who have been funding litigation to be reimbursed at an early opportunity without reducing the amount of damages (if any) which they have obtained.
The ability to obtain such awards should apply in all kinds of litigation, whether commercial, personal injury or otherwise.
Interim Awards of Expenses
The attention of solicitors is drawn to a recent decision of Lord Bannatyne on 30th June 2017 (regrettably as yet unpublished and doubt as to whether it will be) regarding interim awards of expenses. Although the decision was made in a commercial action, as were the other cases in which such awards have been made, there is no reason in principle as to why the decision should not apply in all cases – including personal injury and medical negligence claims. The decision in Higherdelta v Covea Insurance, but only on the merits, is to be found at https://www.scotcourts.gov.uk/search-judgments/judgment?id=c20836a7-8980-69d2-b500-ff0000d74aa7.
All those who litigate are aware that – in reality – each party has to fund a claim as it progresses. That funding continues even after an award of expenses is obtained, whilst the account of expenses is made up and taxed if necessary. If the parties do not do so, or are unable to do so, often the solicitors meet the outlays during the litigation. Some experts will be prepared to wait until conclusion of the case; counsel are often prepared to defer payment of fees. But, when the case is concluded, it can take several months for the account of expenses to be made up; months to obtain a date for taxation; and months for the result of the taxation to be made known by the Auditor. During this time, it is habitual that the paying party (usually of course the defender) pays nothing towards the expenses even though something is plainly due. It is convenient (and logical) to adopt English terminology of “the paying party” and “the receiving party” for the purposes of this note. The terminology is so obvious that no definition is required.
The solicitor and counsel can of course be firm with the client, and demand that he makes payment of the outlays and fees - perhaps from the damages he has obtained if it is a damages action. This is of course good for the solicitor and counsel, but less than fair to the client who is in essence funding a debt due by the paying party who is almost by definition a “wrongdoer” (otherwise he would not have lost). The receiving party is not entitled to interest on the sum due to him until the Auditor has reported (see Phee v Gordon, Extra Division CSIH 50). On the other hand, counsel and solicitors are obliged to pay tax and VAT upon the fee as rendered, thus carrying the outlay of that sum without having been paid.
Counsel and solicitors would in theory be entitled to defray the cost of that outlay by charging it to the client in terms of the Late Payment of Commercial Debts (Interest) Act 1998 – which applies interest at 8% over base per annum. But once again, to do so to a client who has been either wronged by fault or perhaps breach of contract at the instance of the paying party simply adds insult to injury. Equally, someone who has been been “wrongly” sued by the pursuer faces an unfair delay in being put back to the financial position that he has entitlement to. Accordingly it is unlikely that the solicitors and counsel will do otherwise (unless the client is wealthy) than wait for the many months until the Auditor reports. Of course, in commercial actions it may well be that the clients are less troubled by being kept out of the money than in personal injury actions. That is not always so: in Higherdelta, although the pursuer company was a limited company, the entire shareholding was owned by one individual. The main asset of the company (a commercial property) was lost in a fire. The defenders refused to pay out under the policy arguing that there was material non disclosure in many respects. The owner of the company had to fund the litigation personally as without the main income generating asset, the company was struggling to survive. Fortunately the defence was rejected and the matter is now proceeding to have quantum assessed as necessary.
In the normal way, an order for expenses will make the finding of liability by one party to pay the other the expenses (and of course the decerniture for payment). Occasionally a party will obtain a substantial interim order for expenses, such as an order for the expenses to date, or even for the discharge of a proof. The practical problem and indeed the solution were described in the English case of Mars UK Ltd v Teknowledge Limited, reported in 2 Costs LR 44.
The Mars UK v Teknowledge Case
This decision, in the Chancery Division and by the then Jacob, J ., followed the introduction of the Civil Procedure Rules in England (commonly referred to as the CPR), which had been introduced consequent to the Woolf reforms of the Rules of the Supreme Court of England and Wales and associated County Court Rules. Although apology might be necessary for quoting the decision at such length, as this case has been referred to in most of the recent cases in Scotland which determined that interim payments should be made, it is justified to look at the case in some detail.
His Lordship said this:
“I now turn to the second issue, whether or not there should be an order for interim payment . The first thing to do is to consider what the general rule should be, interim payment or not. There is no guidance given in the Rules other than that the court may order a payment on account. There is no guidance in the Practice Direction. So I approach the matter as a question of principle. Where a party has won and has got an order for costs the only reason that he does not get the money straightaway is because of the need for a detailed assessment. Nobody knows how much it should be. If the detailed assessment were carried out instantly he would get the order instantly. So the successful party is entitled to the money. In principle he ought to get it as soon as possible. It does not seem to me to be a good reason for keeping him out of some of his costs that you need time to work out the total amount. A payment of some lesser amount which he will almost certainly collect is a closer approximation to justice. So I hold that where a party is successful the court should on a rough and ready basis also normally order an amount to be paid on account, the amount being a lesser sum than the likely full amount.
“This is likely to have practical advantages in another way. The motive for trying to prolong a detailed assessment, namely putting off the evil day when payment has to be made, will be considerably reduced when he who has to pay can only put off the evil day in respect of a considerably reduced sum. Moreover the whole point of the detailed assessment as a commercial matter may become less important with the result that there will be less detailed assessments than there used to be of taxations of costs. Thus I start from the proposition that there should be an interim payment in general. However, the court has a discretion. In exercising that discretion the court must take into account all the circumstances of the particular case. One of those is that the Defendant may wish to appeal. Another is dealing with the case in a way which is proportionate to the financial position of each party, one of the matters which one must consider in allowing the overriding objective of enabling the court to deal with the cases justly.”
The important points to be taken from this case are as follows:
• Although the CPR makes provision for an interim payment to be made, that rule merely determines competency. As will be seen below, in Scotland the competency of such orders is beyond question.
• The driving force behind this decision is the interests of justice. It is this principle that was specifically founded upon by Lord Bannatyne in Higherdelta. Although this principle is enshrined in CPR 1, a provision that is not specifically mirrored in the Rules of the Court of Session or Sheriff Court. It hardly requires a rule in Scotland to state that the courts should act “justly”.
• Care should be taken when considering the observations about appeals. Costs orders from the lower court are not automatically suspended in England when a party seeks to appeal. It requires an application to the superior court to stay the order pending the appeal (if permission to appeal is allowed).
• That said, it is clear from this case (as it is in Scotland) that the making of an interim order is a matter of discretion. One powerful factor in exercising that discretion is the injustice of making a party wait for sums to which he is entitled.
The Scottish Cases
As far as is known, on just four occasions in recent times have orders for interim payments been made in the way discussed in this note. It may well be that the shortage of decisions is based upon a lack of knowledge that such applications can be made.
For what it is worth, the making of interim orders of this kind is not only routine, but where a detailed assessment (i.e. a taxation) is required, it is virtually unheard of for an application for a substantial sum not to be made. The practice has gathered momentum since the decision in Mars referred to above.
Martin & Co Petitioners
The first such case, Martin & Co (UK) Limited, was a case in which the Petitioners in an action of interdict in respect of a franchise agreement were fearful that the Respondents would be unable to or unwilling to meet the award of expenses which had been pronounced against them. Diligence could not be effected without a money amount specified in the interlocutor. The very real fear (which proved justified) was that the paying party would declare himself bankrupt.
The Respondent did not appear at the hearing (no doubt on account of his pending impecuniosity).
Lord Drummond Young granted the motion and issued the opinion referred to. However, he added a “rider” which was that “special circumstances” were required to justify such an order (and held that there were indeed such special circumstances). This additional requirement was not raised by him in the course of argument, and as will be seen below, it appears that this requirement is at least controversial; and it is suggested that it is simply wrong. It was certainly not discussed in court, but in Higherdelta a full argument was presented to Lord Bannatyne who considered on full argument that no special circumstances were in fact required.
As was anticipated, the paying party did declare himself bankrupt almost immediately upon the order being made. What the Petitioners avoided was a lengthy period of time passing before the Auditor reported; and then the Respondent declaring himself bankrupt. Significant further expense would have been incurred (such as the audit fee at 5% of the account and the costs of a law accountant making up the account). And, for what it was worth, an inhibition could be registered against the Respondent’s heritable property to try to obtain an advance on other ordinary creditors.
Martin & Co: Inner House
In an associated part of the process, which was heard by the Inner House (not reported on this point) against another of the Respondents, the Division ordered an interim payment against one of the other respondents. No submission was made on behalf of that respondent that it was incompetent to make such orders; and that particular Respondent was represented by senior counsel. In the light of Lord Drummond Young’s decision, it was advanced for the Petitioners that there continued to be “special circumstances” which were easily demonstrated. That requirement was therefore not a matter of discussion before the Inner House and the motion was granted for an interim payment.
Subsequent to the Martin & Co. cases, Lord Woolman made an order for interim payment (see Tods Murray WS v Arakin Ltd) finding that there were “special reasons”. No argument had to be or was presented that special circumstances were or were not required. Lord Woolman essentially followed the decision of Lord Drummond Young.
Higherdelta v Covea
In Higherdelta, the argument was presented on behalf of the Pursuers that Lord Drummond Young was incorrect to hold that “special circumstances” were required, largely because of the manifest injustice of the result should no order be made.
A secondary argument was presented for the pursuers to the effect that even if special circumstances were required, they were present in the case for a number of reasons.
Lord Bannatyne ruled (after considering the position overnight) that no special circumstances were required (that so especially after considering the English jurisprudence which is referred to above). He also found that if special circumstances were required, then they existed. He ordered that the sum of £100,000 plus VAT be paid within fourteen days as payment to account of expenses.
The importance of the decision in Higherdelta
It is understood that at least two other motions are awaiting hearing in the commercial court for interim payments in the light of the Higherdelta decision. As observed above, there is no reason why such motions should be restricted to commercial actions and there is an argument that in commercial actions they should be less common than in - for example - personal injury claims where the outlays are being carried by either a non-commercial individual, or counsel and solicitors.
As is explained above, it is absolutely routine for interim orders on costs to be made in England following judgment. This is the practice, now specifically in the CPR, as a consequence of the observations in the Mars case referred to in the text of the submissions to Lord Bannatyne.
It is difficult to understand why this approach should not be the norm in Scotland too: in cases in which (for example) a pursuer is successful, at the by order hearing to discuss expenses why is a motion not being made for a specific sum to be paid immediately in the name of expenses? It is clear that such motions should indeed be made and generally in the interests of justice they should be granted.
At least in the Martin & Co cases, and in Higherdelta, the judges were provided with a short letter from a law accountant giving a “ball park” estimate of what in their experience the Auditor may allow at taxation. Such letters should be short, and a broad estimate. A reasonable proportion of that sum can then be sought and it is suggested 75% to 90% be sought, plus VAT, and that a specific period of time is specified for payment in the interlocutor. Such applications are of course similar to interim damages motions and some use may, if necessary, be made of the authorities referred to regarding interim damages.
The motion in Higherdelta was “for payment by the defenders of the sum of £100,000 plus VAT by way of payment to account of the expenses awarded against them, within a period of fourteen days failing which interest shall accrue at the judicial rate.”
It is also helpful to have in that letter an estimate of the time scale that would be involved were the matter to be sent to taxation. Plainly if a taxation can be obtained in a few weeks, the urgency may not be acute: but arguably even then there is no reason why the receiving party should be kept “out of the money”.
Lord Bannatyne has stated in a subsequent application to him yet to be heard at the time of writing this note that he does NOT wish to see a long and detailed letter, or a draft account of expenses. The whole point of this procedure is to avoid detailed accounts being obtained prematurely.
It may also be prudent to offer the undertaking recorded by Lord Drummond Young in Martin & Co: that should the interim amount be higher than ultimately assessed by the auditor, the excess will be refunded to the paying party with judicial interest. Lord Drummond Young in Martin & Co. considered that such an obligation would arise at common law in any event. However, it is thought right that this undertaking should assist with having confidence in persuading the court as to the quantum of the order.
It is suggested that this important decision ought to have profound beneficial effects upon those who carry out large quantities of litigation, and even those who are not major players, in easing cash flow in all kinds of cases. There is no reason why the Scottish courts should not be on an even keel with England on this matter; and be seen as a sensible and commercial place to litigate.
Andrew Smith QC MCIArb
Compass Chambers, Edinburgh
Crown Office Chambers, London
Leading counsel in Scotland, England and Wales
SOLICITOR’S NOTE OF DECISION BY LORD BANNATYNE
COURT ATTENDANCE NOTE
Date: 30 June 2017
Re: HIGHERDELTA LIMITED v COVEA INSURANCE PLC
Lord Bannatyne read his judgment which was noted as follows:-
The only controversial matter before me is in relation to a motion for interim order of expenses.
It is not in dispute that such an order is competent. The question is in the circumstances, should such an order be made.
Generally speaking, expenses are a matter for judicial discretion. (Holt v Alexander & Sons). To put it another way, the overriding objective in terms of expenses is to deal with the matter fairly and this was the approach described by Jacob, J. in the Mars case.
Applying that logic, substantive justice would be done in this case should such an order be made. I accept the submissions made by Mr Smith QC on page 6 of his note of argument. Those points are in three parts:-
i. The client is obliged to pay his own side’s costs, which amount to approximately £140,000 plus VAT. This sum is a substantial part of the income of the pursuer company, which has been deprived of income during the period from the fire to date. Accordingly, on account of the wrongful withholding of payment to permit the premises to be renovated and operated, thus generating an income, the company has to fund payment of legal fees and expenses to establish that right. This, it is submitted, is manifestly unfair.
ii. It is likely that it will take until January or February of next year to obtain a taxed account from the Auditor. Accordingly, there will be six months wait until the pursuer obtains an enforceable order regarding expenses.
iii. The pursuer is obliged to make payment of interest at the commercial rate (under the Late Payment of Commercial Debts (Interest) Act 1998) to his own account. His legal advisors are entitled to that payment to defray the outlay being withheld, and upon which income tax must be paid on render of the fee. However, the pursuers are not entitled to interest on that sum until the auditor has produced the taxed account (see Phee v Gordon, Extra Division CSIH 50). The net result of this position is that although the pursuer is liable for interest if the debt is not paid, that cannot be recouped by him. The defenders thus retain the benefit of keeping the pursuer “out of the money” for a period of six months or so. That, it is submitted, is not in the interests of justice. It should be noted that a number of fees have already been paid by the pursuers, but the vast majority are outstanding.
Each of these factors alone likely suggests that such an order should be made in the interest of justice. When they are taken together, it is clear that such an order should be made. There were no material factors brought to my attention or that I could see that would mean that making such an order would be unfair. There are no countervailing facts which outlay against the position adopted by the pursuer.
The decision of the Outer House in Martin & Co (UK) Limited, Unreported CSOH 25 and in Tods Murray WS v Arakin Ltd CSOH 134 recognised that there the respondent was at least reluctant to make payment of expenses, and perhaps lacked the liquidity to do so.
I recognise that those factors do not exist in the present case. This has not caused me concern or to reject the motion. For this reason, the motion should be granted in the interests of fairness and substantive justice and I would go beyond the test as laid down by Lord Drummond Young in Martin & Co and Tods. No special reasons require to be shown.
All of the circumstances should be looked at.
I do not accept that I am innovating on the law here, merely applying it as it has always been.
I consider that the sum sought of £100,000 is conservative in terms of the letter I was shown from the law accountants and reasonable in the circumstances. I therefore grant the order for interim expenses made on the basis of the points I have put forward. It should be noted that if I am wrong in departing from the test as laid down by Lord Drummond Young that special reasons are required, the matter would still regardless have been awarded as I do consider that special circumstances as applied by the test in Martin & Co were present in this case.