What happens when a party changes the arrangements of its funding prior to settlement, part-way through a case? Which funding arrangement prevails? This was the issue discussed in the High Court case of Dial Partners LLP & Anor v Eastern Airways International Ltd & Ors  EWHC B1 (Costs).
On 19 March 2015, the claimants entered into a damages based agreement (DBA) with their solicitors, under which 50% of the damages could be recovered to cover its fees. On 2 November 2016, less than a fortnight before the trial, the claimants replaced their DBA with a post-LASPO conditional fee agreement (CFA). The claimants had made a Part 36 offer for £1,250,000, while the defendants had made an offer of £300,000. One to two days before trial, the case was settled for £625,000 (excluding costs).
The defendants argued that they should not be held liable for costs greater than the amount stipulated in the claimants’ original DBA (maximum of £250,000 plus disbursements other than Counsel’s fees), as they still believed the DBA was in existence when settlement was agreed upon. £250,000 equates to 50% of the settlement, exclusive of VAT at 20%.
The claimants’ costs were calculated at £523,032.76. For the defendants to comply with the DBA, they would therefore have to reduce the costs on an item-by-item assessment until they were below the cap. If so, the claimants would suffer a ‘six figure hole’ in respect of their costs.
WHEN CAN FUNDING AGREEMENTS BE CHANGED?
Master James, at paragraph 18 of his judgment, clarified that:
‘Post-LASPO there is no obligation to tell an opponent in a case such as this about their funding arrangements, since the reason for doing so – warning their opponent that additional liabilities such as Success Fees and ATE Premiums may be mounting up – no longer exists. Therefore, if the Defendants settled upon the basis that the DBA "must" still be in place or else they would have heard about it, that is the Defendants' hard luck. I am putting this rather more bluntly than Mr Stacey did, but that is what it amounts to; the Claimants object to having their costs halved because the Defendants received bad advice on costs. That is, if in fact they received such advice at all, given the absence of any evidence as to what advice they did or did not receive and what reliance they did or did not place upon it’.
The defendant cited the case of Kellar v Williams  UKPC 30, in which it was held that the paying party could choose which funding agreement to adhere to:
‘... on the ground, as the Chief Justice correctly held, that that amendment had come into existence subsequent to the making of the costs basis and so could be disregarded by the paying party if he wished’.
Despite the defendant’s argument that the switch to CFA funding was opportunistic, Master James deduced, at paragraph 24, that:
‘... what Candey and the Claimants did was to move from a DBA whereby Candey would at best be paid a fraction of what the case had actually cost to run, to a CFA under which Candey could at least try to recover the true cost of the action (bearing in mind that on the Standard Basis a recovery at something between two-thirds and three-quarters of the Bill would not be unusual)’.
The claimants argued that the ‘change from DBA to CFA was not a mere tactical step to take advantage of a near-certain settlement; as far as they were concerned, the matter might well have fought on to Trial and the outcome thereof could not be predicted merely because a Defendants' Part 36 offer had been made...’
The judge confirmed this by stating, at paragraphs 32 and 33, that:
‘The Claimants did not receive an offer of £300,000.00, craftily change their retainer and then accept that offer a day later; they received an offer of £300,000.00, changed their retainer but fought or at least negotiated on for almost two more weeks, until the eve of Trial when they settled over the weekend for more than double what the Defendants had on the table at the time that the retainer was changed.
As such I do not find that the Claimants fall foul of the Kellar principle on the facts of this case and nor do I find that, once a Part 36 offer has been made, settlement is a near certainty ... The syllogism that a Part 36 offer equates to a near certainty of settlement of the case, simply does not work’.
WAS SWITCHING TO A CFA A REASONABLE CHOICE?
Secondly, the defendant argued, given a lack of evidence, that there was no proper basis to abandon the DBA and incur further liabilities under the CFA. The claimant stated that ‘… the effect of the change in the Claimants' retainer in costs was unknown at the time it was discussed … any outcome was entirely speculative…’
In Surrey v Barnet and Chase Farm Hospital and others  EWHC 1598, it was held that genuine issues must be raised by paying parties before any investigation into changes in funding is undertaken. The claimant, therefore, sought to rely on this case, asserting, at paragraph 37, that:
‘... the Defendants do not even reach the threshold of establishing a genuine issue on the reasonableness of the change in funding from DBA to CFA, and ... in fact they are simply trying to obtain a windfall from the late change in funding, which would leave the Claimants with a six-figure shortfall in their costs recovery’.
Master James concluded, at paragraph 44, on this 2nd submission, in favour of the claimants:
‘... that the Defendants have not raised a "genuine issue" as far as reasonableness is concerned and therefore for present purposes, it was not for me to decide upon the attraction to the Claimants of an award of full damages plus full costs, or at least of costs on the standard basis to be Assessed if not agreed under a CFA, rather than of full damages out of which costs to a maximum of half of the damages award must be paid and with the Defendants' liability to repay those costs likewise "capped" at half the damages award under the DBA, but it seems straightforward enough’.
He continued, by continuing, at paragraph 44, to state that:
‘It is not that the Claimants would wish to "punish" the Defendants by incurring an extra costs burden just in order to pass it on to them, but why should the Claimants not take the opportunity to ensure that their Solicitors were paid (and that the Defendants were liable to pay) something much closer to what the case actually cost to run? There is not the "double or quits" attempt, as in JN Dairies to add a large, retrospective Success Fee to the costs; rather the attempt was to remove a "cap" which may have left Candey with an unrealistic recovery’.
Held, at paragraph 48:
‘However, upon the specific question of whether it is against the Kellar principle to switch from a DBA to a CFA in the way that the Claimant has done here, I find that it was not, and on the question of whether it was reasonable to do so I find that the Defendants have not reached the threshold of a genuine issue (per Surrey v Barnet and Chase Farm Hospital and others) and as such my comments above to the effect that it does not at first blush seem unreasonable, are perhaps obiter’.
The effect of this was to award the claimants costs of £523, 032.76, pursuant to the replacement CFA, as opposed to the £250,000 cap specified under the DBA. As a result, the defendants increased their liability by six figures.
Full text judgment can be accessed here.