Payments on account of costs – improving cashflow
Author: Nick McDonnell, Director & Costs Lawyer
The need for adequate cashflow in protracted litigation is now well understood. It matters not if the legal representatives are operating on deferred funding arrangements (such as CFAs) or they are billing and being paid regularly. Either of those arrangements simply shifts where those cashflow pressures are applied; to either the legal representative or the litigant themselves.
Despite this, practitioners seem hesitant to seek payments on account of costs particularly where the substantive claim is ongoing. This article examines the law and practice surrounding solicitors seeking orders for payments on account of costs and what can be done if a party fails to pay such an order.
Why should payments on account be sought?
Central to a party seeking justice is the ability for that party to access the mechanisms in order to achieve it. One of those crucial mechanisms is a party’s ability to fund its legal representation and it is from that principle the need for adequate cashflow arises.
The Court’s recognition that a party is entitled to adequate cashflow is not new. Morland J, in Giambrone v JMC Holidays Ltd (unreported, 20 December 2002), made this clear:
“Solicitors for claimants are fully entitled to an adequate cash flow from the defendants once the general issue of liability has been admitted or determined in the claimants’ favour, similarly on determination of generic issues in the claimants favour and on the assessment or settlement of awards of damages to individual or batches of claimants.”
HHJ Robinson, in X v Hull & East Yorkshire Hospitals NHS Trust [2019] 2 WLUK 723 (25 February 2019), took that principle and identified the consequences were there to be inadequate cashflow:
“Failure to ensure adequate cash flow during the period of inevitable delay may lead to the perverse and undesirable consequence that solicitors are unwilling to take on [a] case such as this at an early stage. It is [in] everyone’s interests to determine liability as early as possible. But if the consequence is that solicitors must then fund the quantum investigation for 10 years or more, they may not be anxious to take the case on early.”
Accordingly, as a starting point, it is helpful to know that the Courts already appreciate cashflow is key to enable a party’s access to justice. Below is an examination of when and how the Court can assist with facilitating that access.
When should payments on account be sought?
Broadly speaking, there tends to be four stages when a payment on account can be sought.
(i) During the course of the substantive claim itself;
(ii) At the conclusion of the substantive claim;
(iii) Upon commencement of detailed assessment proceedings
(iv) During the course of detailed assessment proceedings
The rules and practical considerations can vary depending on the point at which a payment on account is sought. So, let us look at these in turn.
During the course of the substantive claim itself;
CPR.r.44.2(1) provides:
“Court’s discretion as to costs – 44.2
(1) The court has discretion as to –
(a) whether costs are payable by one party to another;
(b) the amount of those costs; and
(c) when they are to be paid.”
As can be seen, the rule is drafted in such a way that allows for a broad application of the Court’s discretion, not just in respect of whether an order for costs can be made and the amount of such an order, but specifically as to ‘when’ an order can be made. In other words, there is no fetter on when the Court can exercise its discretion when making an order for a payment on account of costs, in principle, and this includes during the course of the substantive claim.
We have seen above that the Court already ready recognises the importance of cashflow. Flowing from that recognition, Master Cook, in RXK v Hampshire Hospitals NHS Foundation Trust [2019] EWHC 2751 (QB) (21 October 2019), said:
“ The need for solicitors engaged in heavy and protracted litigation to expect adequate cash flow is now well understood and enshrined in the rules…”
Master Cook went on to set out a non-exhaustive list of the types of factors that might be relevant to the Court when considering an application inviting it to make a ‘prospective’ or ‘anticipatory’ costs order. It was suggested, therefore, that an applicant might want to address the Court on all relevant factors which may include:
(i) The type of funding agreement in place between the applicant and its legal representative together with details of any payments made under that agreement;
(ii) Whether any Part 36 or other admissible offer has been made, and if so, details of the offer;
(iii) Details of any payments on account of damages already made;
(iv) A realistic valuation of the likely damages to be awarded at trial;
(v) A realistic estimate of the amount of costs incurred to the date of the application;
(vi) Any other factor relevant to the final incidence of costs, such as (but not limited to) the possibility of an issue-based costs order, arguments over hourly rates, any relevant conduct etc;
(vii) The likely date of any trial or trial window.
Pulling Giambrone, X v Hull and RXK together, it can be seen there is judicial recognition as to the importance of adequate cashflow, an understanding of what the impact on a party’s access to justice might be where there is inadequate cashflow, an understanding that the Court has both the jurisdiction and discretion to make an order for a payment on account of costs at any point, including during the course of the substantive claim and the types of information that might be relevant when a party asks a Court to exercise its discretion to make a prospective order for a payment on account of costs.
A party wishing to invite a Court to make such an order during the course of the substantive claim would be in a much stronger position were it to address the Court on all of the above.
At the conclusion of the substantive claim;
CPR.r.44.2(8) provides:
“Court’s discretion as to costs
44.2
(1) …
(8) Where the court orders a party to pay costs subject to detailed assessment, it will order that party to pay a reasonable sum on account of costs, unless there is good reason not to do so.” (emphasis added)
Prior to the rule changes that came with the introduction of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) on 1 April 2013, the equivalent rule provided that the Court “…may order…” rather than “…will order…” a payment on account. This shift was to make it the default position that such an order would be made (and in appropriate circumstances it can be disapplied) whereas, pre-1 April 2013, the rules were essentially neutral on whether or not such an order should be made.
As to what constitutes an “order” triggering a ‘claim end’ application for a payment on account of costs, Asplin LJ, in Global Assets Advisory Services Ltd & Anor v Grandlane Developments Ltd & Ors [2019] EWCA Civ 1764 (23 October 2019) said it was no matter whether the order was an express order of the Court or a deemed (such as a Part 36 offer/acceptance or a notice of discontinuance). Both were sufficient to meet the requirements of CPR.r.44.2(8).
Accordingly, the plain language of CPR.r.44.2(8) is that, at the conclusion of a piece of litigation and where the court orders (deemed or otherwise) a party to pay costs subject to detailed assessment, it will order that party to pay a reasonable sum on account of costs, unless there is good reason not to do so.
Upon commencement of detailed assessment proceedings;
There was, for a time, uncertainty as to whether CPR.r.44.2(8) required a receiving party to apply for a payment on account of costs at the same point in time when the paying party was ordered to pay costs subject to detailed assessment. HHJ Matthews, in Culliford & Anor v Thorpe [2018] EWHC 2532 (Ch) (02 October 2018), clarified this point. HHJ Matthews found that an application for a payment on account of costs does not necessarily have to occur at the point the Court makes the order as to the instance of costs. The application can be made at some later date and still rely on the CPR.r.44.2(8) mechanism.
During the course of detailed assessment proceedings.
As many will know, the broad detailed assessment process requires that:
(i) A receiving party serves its bill of costs;
(ii) A paying party serves its points of dispute;
(iii) A receiving party may serve (optional) replies to points of dispute;
(iv) A receiving party may then request a detailed assessment hearing;
Knowing that, CPR.r.47.16 provides:
“Power to issue an interim certificate
47.16
(1) The court may at any time after the receiving party has filed a request for a detailed assessment hearing –
(a) issue an interim costs certificate for such sum as it considers appropriate; “
Unlike CPR.r.44.2(8), 47.16(1) does not give rise to a presumption that a payment on account of costs (or interim costs certificate) be made (noting the difference in wording between “will” and “may” respectively). It simply provides a point in time (i.e. after a detailed assessment hearing has been requested) when a receiving party can apply for one.
Whilst not expressly stated, the point at which an interim costs certificate can be requested tells us more about how the Court might approach the amount it may order. Given an application for an interim costs certificate can only be made after a detailed assessment hearing has been requested, the parties and the Court will know (by virtue of both the points of dispute and any replies) what costs are disputed, and more importantly, what costs are not disputed. Therefore, an interim costs certificate can often reflect a sum that represents at least the amount of costs that are not disputed. In other words, there should be no reason why a receiving party should be kept from any sums not in dispute.
How much should a Court order be paid on account?
Jacob J, in Mars UK Ltd v Tekknowledge Ltd [1999] 2 Costs LR 44 Ch D, sought to consider the receiving party’s claim for costs and identify the sums the receiving party would “…almost certainly collect…”. In Allason & Anor v Random House (UK) Ltd (No.2) [2002] EWHC 1030 (Ch) (19 April 2002) Laddie J ordered the “…absolute bare minimum…” to be paid on account. Arnold J, in Starbucks (UK) Ltd v British Sky Broadcasting Group Plc & Ors [2012] EWHC 4085 (Ch) ordered the “irreducible minimum.” These approaches, however, were all under the pre-1 April 2013 rule (i.e. “may” not “will”).
The modern approach, post 1 April 2013, seems now to be as per Clarke LJ’s guidance in Excalibur Ventures LLC v Texas Keystone Inc & Ors [2015] EWHC 566 (Comm) (03 February 2015):
“It is clear that the question, at any rate now, is what is a “reasonable sum on account of costs”. It may be that in any given case the only amount that it is reasonable to award is the irreducible minimum. I do not, however, accept that that means that “irreducible minimum” is the test. That would be to introduce a criterion (a) for which the rules do not provide’ (b) which is not the same as the criterion for which they do provide; and (c) which has potential drawbacks of its own, not least because it begs the question whether it means those costs which could not realistically be challenged as to item or amount or some more generous test. On one approach it admits of every objection to costs, which cannot be treated as fanciful. [22]
What is a reasonable amount will depend on the circumstances, the chief of which is that there will, by definition, have been no detailed assessment and thus an element of uncertainty, the extent of which may differ widely from case to case as to what will be allowed on detailed assessment. Any sum will have to be an estimate. A reasonable sum would often be one that was an estimate of the likely level of recovery subject, as the costs claimants accept, to an appropriate margin to allow for error in the estimation. This can be done by taking the lowest figure in a likely range or making a deduction from a single estimated figure or perhaps from the lowest figure in the range if the range itself is not very broad.” [23]
A ‘reasonable sum’ might vary depending on whether a claim has been costs managed or not. In particular, a higher percentage of budgeted costs may be ordered to be paid on account given those costs will have already been subjected to some judicial scrutiny as to their reasonableness and proportionality. Whereas ‘incurred costs’ in a costs budget will not have been subjected to the same level of scrutiny and so a lower percentage of those may be ordered.
What can happen if an order for a payment on account of costs is note paid?
The logical next question is ‘What can a Court do where an order for a payment on account of costs is made but the paying party fails to make the payment in accordance with that order?’
Langley J in Days Healthcare UK Ltd v Pihsiang Machinery Manufacturing Co Ltd [2006] EWHC 1444 (QB) concluded the Court has the power to make an order debarring the defaulting party from participating further in any detailed assessment proceedings.
Taking the same issue one step further Senior Costs Judge Gordon-Saker, in Fitzroy Street Capital Inc & BMB Avenue Road Limited v Manning and others (SCCO, Senior Costs Judge Gordon-Saker, 14 December 2022) confirmed the Court has the jurisdiction to strike out a paying party’s points of dispute and order that the receiving party’s costs be assessed in full in the sum claimed.
Conclusion
Taking all of the above into account, legal practitioners will hopefully be in a much better and more informed position when considering when and how payments on account of costs can be sought, what a reasonable sum on account might look like and what a party’s options are in the event an order for a payment on account of costs is not paid.
