Legal Cost Specialists

Recovery of interest paid on disbursement funding loan

By on Jul 13, 2020 | 4 comments

Last week in Marbrow v Sharpes Garden Services Ltd [2020] EWHC B26 (Costs) (10 July 2020) the Senior Costs Judge Master Gordon-Saker handed down a reserved judgment in relation to three discreet issues where I acted for the Defendant paying party.

None of the issues were novel, but they are ones that have continued to trouble the lower courts, which was no doubt part of the reason for the reserved judgment.

The issue I will deal with today is the decision relating to whether the interest paid on a disbursement funding loan was recoverable as an item of cost or, alternatively, by way of allowing interest to run from an earlier period.

The Claimant claimed, as an item of costs, the interest payable under a loan agreement with his solicitors in relation to the funding of disbursements. The agreed interest rate was 5%.

The Claimant relied on the decision of the Court of Appeal in Secretary of State for Energy v Jones [2014] EWCA Civ 363 as authority that such an item was recoverable as an item of costs.  The Master rejected that on the basis the Court in that case was concerned with the rate of interest that could be allowed on costs from a date earlier than judgment where, as here, the claimants had incurred a liability to pay interest to their solicitors in respect of the funding of disbursements.

In Hunt v RM Douglas (Roofing) Ltd [1987] 11 WLUK 221 the claimant sought to recover on the taxation of his costs the interest that he had incurred under an overdraft to fund the disbursements required for his claim.  The Court of Appeal held that funding costs had never been included in the categories of expense recoverable as costs and to include them would constitute an unwarranted extension.

The Master held that it was clear following Hunt that interest incurred under a disbursement funding loan cannot be recoverable as costs and so disallowed the item within the bill.

However, the Master then considered CPR 44.2(6)(g), which does allow the court to order the payment of interest on costs from a date before judgment.  He distinguished Jones on the basis it was a different case to the present: a group action in which the disbursements came to a total in excess of £787,500.  The present case was a straightforward personal injury claim.  Although there was no evidence of the Claimant’s means, for present purposes he accepted that it was unlikely that the Claimant would have had the means to fund disbursements other than by a loan, as is almost certainly the case for the vast majority of claimants in personal injury actions.  Nevertheless the incipitur rule remains the default position and parliament did not choose, when enacting the Legal Aid, Sentencing and Punishment of Offenders Act 2013, to make specific provision for the funding of disbursements whether by enabling the recovery of funding costs or by creating a default entitlement to pre-judgment interest.

He concluded that justice did not require a departure from the general rule in this case such as to aware interest from an earlier date.

This was the same conclusion that was recently reached by Master Brown in Nosworthy v Royal Bournemouth & Christchurch Hospitals NHS Foundation Trust [2020] EWHC B19 (Costs) (30 April 2020).

    4 Comments

  1. I do not agree with this ruling on interest. On the law as it has been interpreted by the Commercial Court, notanly in Innvolnert, and also by the CA in Jones v Secretary State, Parliament *has* introduced a flexible power to award pre-judgment interest at a compensatory rate under CPR 44.2(6)(g), which is (by definition) not referrable to the date of judgment. As Leggatt J says in Innvolnert, this power is now exercised on a daily basis in the business and property courts, compensating commercial litigants who are out of pocket because they have paid their lawyers pre-judgment.

    This being so, what possible basis can there be for not making similar awards to personal injury claimants, who are out of pocket because they have had to borrow money to litigate? The only distinction between the two scenarios is that PI claimants probably need the money more.

    There is an argument that practice in the B&P courts is wrong, because the assumed power to award interest on costs other than under the Judgments Act does not exist (this is hinted at in Simcoe but not developed and if ths argument succeeded it would not only mean that 20 years of Com Ct practice have been ultra vires, but also that the enhanced interest provisions in Part 36 are ultra vires as well). But I cannot see any tenable argument that the approach in cases like Innvolnert does’t apply equally in PI cases to claimants who have incurred funding charges – whether under loans or as a result of deferment related success fees. Those claimants should be awarded pre-judgment interest to compensate them for those costs, and claimant PI lawyers should continue to pursue this.

    Jaques Hughes

    13th July 2020

    • Personal injury Claimants are never truly “out of pocket” though; how can it be deemed good practice to advise a client to take out a loan, for which interest he will be responsible, under a CFA? In the event of a loss, he would still be responsible to pay the interest?

      S Smith

      13th July 2020

      • Disbursement funding loans are perfectly common – for years the Law Soc’s own product, Accident Line Protect, had a loan element, on which interest was payable. Success fees which include a charge for funding are also common. If such finance charges have been reasonably inccurred by a claimant (and the master did not find here that the charges were unreasonably incurred) why should the claimant not recover pre-judgment interest by way of compensation for them? All the more so when some large commercial organisation would unquestionably recover such pre-judgment interest under what is now standard practice in the B&P court.

        Jaques Hughes

        13th July 2020

        • They have never been recoverable as costs:

          Hunt v RM Douglas:
          ‘[B]y established practice and custom funding costs have never been included in the category of expenses, costs or disbursements envisaged by the statute and RSC O. 62. To include them would constitute an extension of the existing category of “legal costs” which is not under the prevailing circumstances warranted.’

          Motto and others v Trafigura Ltd and another:
          ‘Interest on sums borrowed to pay litigation costs is not money payable to solicitors for work done for the ultimate benefit of the client.’

          They are the costs of being a litigation, not a cost of litigation (London Scottish Benefit Society v Chorley).

          There are other, additional considerations, for example, if the claim concludes by way of Part 36 acceptance and the issue is certainly quite involved but I don’t consider that Jones changed the law in any way. I agree with the recent decisions that this cost is not recoverable inter partes.

          For further info, consider chapter 56 of Friston on Costs (Oxford University Press, 2018)

          Liz

          16th July 2020

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