An introduction to qualified one way costs shifting: New CPR 44.13-17

In “part-payment” for the loss of recoverability of the CFA success fee, Lord Justice Jackson gave Claimants a 10% uplift on general damages, which was enacted in rather peculiar fashion by the Court of Appeal in Simmons v Castle by means that can only be described as "judicial legislating".

In part-payment for the loss of the right to recover the after-the-event insurance premium from a losing Defendant, Lord Justice Jackson gave Claimants the protection of "qualified one way costs shifting", known as QOCS or QOWCS (pronounced “kw-ocs”).

The basic principle recommended by Jackson was that a successful Claimant will recover their costs from a Defendant in the usual way, but if unsuccessful the Claimant will not be liable for Defendant’s costs. This is “one-way costs shifting”. It would follow, so you might have thought, that there would therefore be no need for ATE insurance, but that is not how it panned out, primarily because of the continued existence of Part 36.

As implemented, “one way costs shifting” it is qualified, as we shall see, because a Claimant can be liable for Defendant’s costs, subject to a cap.

QOCS applies only to PI, and the statutory fatal accident claims: (new) CPR part 44.13.

QOCS does not apply to a PAD application.

I mention as an aside that at a professional conference I attended in early March, District Judge Hill, the White Book senior editor revealed that the Ministry of Justice is working on a full roll out of QOCS to all areas of practice. He said, in fact, "they are working hard on it". In the context of QOCS being a part-payment for loss of recoverability of the ATE premium it is baffling that it would be applied to other areas of practice, but logic is not always the touchstone in such matters. You may think that this gives the lie to the theory that QOCS is to compensate Claimants for loss of ATE. I am not going to get into that, but I suppose the thinking might be that a full roll out of QOCS will deter or eliminate abusive use of litigation, i.e. aggressive Defendants spending to wear down Claimants. The less cynical interpretation may be that a cap on recoverable costs to any damages awarded will limit inflationary effects on costs, but I think that is probably reading too much into it. All we do know about QOCS is that yet again we Injury lawyers will be at the vanguard of the new costs landscape. Our commercial colleagues will doubtless be coming to us in a few years’ time wondering what it is all about.

Getting back on track. Taking into account Jackson’s recommendation and the continued application of Part 36, you may have thought that the QOCS rule in the new CPR would look something like this:

Where a claim is successfully defended, a claimant shall not be ordered to pay the defendant’s costs, save where the claimant has failed to obtain a judgment more advantageous than a defendant’s part 36 offer.

Please forgive the rather rough drafting but I hope you get the point, which I make to illustrate by way of contrast with the approach to implementing QOCS in the new CPR 44.14, as follows (my emphasis):

CPR 44.14 – (1) Subject to rules 44.15 and 44.16, orders for costs made against a claimant may be enforced without the permission of the court but only to the extent that the aggregate amount in terms of such orders does not exceed the aggregate amount in money terms for damages and interest made in favour of the Claimant.

The Civil Procedure (Amendment) Rules 2013 [SI 2013/262] (Costs Schedule)

Save for the exceptions in 44.15 and 44.16 – which I shall come on to – and some further guidance in the practice direction, that is it.

This approach favours enforceability over modification of the usual order for costs/ principle.

Neither will you find anything about QOCS in the new Part 36: when enforceability with a cap is the key to QOCS, there is no need.  Putting to one side the enforceability point, it is a devilishly neat piece of drafting.

Let’s think for a moment how CPR 44.14(1) works.

1. The starting point – putting to one side the exceptions – is that the court will still make costs orders. i.e. Claimants cannot argue that QOCS prevents a court from making the usual – or other appropriate – order. The enforceability approach gives the court huge flexibility: for instance, using its broad costs discretion, in an appropriate case the court could award some or all costs even against a Claimant who does better than a Defendant’s part 36 offer, say where there has been an unreasonable refusal to mediate. What QOCS does is to cap that liability, subject to exceptions for which the court’s permission is required.
2. Suppose a Claimant loses on liability. Judgment for D, C to pay D’s costs. QOCS effectively allows C to walk away from the failed claim, because there is no award for ‘damages and interest’ against which the costs order can bite.
3. Likewise the Claimant who discontinues! There is no modification to CPR 38 (at least where the dishonesty exception does not kick in, because "fundamental dishonesty" trumps QOCS). Is this an oversight? Who knows, but if you are a Claimant not currently ATE funded (QOCS applies to all PI claims, not just the ATE losers) and are considering having to walk away, then you may want to consider waiting a couple of weeks.
4. Where QOCS is going to be a bit more of a minefield is in the more familiar scenario, i.e. where liability is admitted or not otherwise being disputed, and C is therefore damages only. The usual / general / simple risk is P36. This is where the drafting is clever. If C beats a D’s P36 offer, or if there is no offer, it’s simple enough, because the usual order is D pay all of C’s costs. We are concerned with the scenario where D has an award and interest less than D’s P36 and therefore has the usual liability for D’s costs from after the 21 days during which C could but do not accept D’s offer. In these circumstances, D can enforce its order for costs up to the limits of C’s damages and interest.
5. Incidentally, looked at in this way you can see that, absent the exceptions, C would not need ATE because Jackson’s theory is that C’s liability for D’s costs will be covered by the money in hand, or more realistically, C’s liability to D for costs should not exceed D’s liability to C for damages and interest. No need to dip into savings, or sell the family home. In theory, "risk eliminated". Of course, it’s not, because it’s only "risk minimised". What about where the outcome was determined at trial, in a fairly low value claim where D made a good, early Part 36, such that the post-part 36 costs match or exceed the award? Moreover there may be interim payments which been spent already by a Claimant, perhaps on treatment with no other assets or liquid assets? Whilst the Defendant insurer will hold back the damages, what if there’s a shortfall to account for interims? C will have to find the money.

An even trickier question to which I see no obvious answer is how does this mesh with CRU? Unlike, say, the cap on success fees, there is no mention of CRU in CPR 44.14. In the absence of any credit for CRU, then it looks as if CPR 44.14(1) could be unfavourable to Claimants: it is not as if the rule provides that costs can be enforced without permission to the extent of damages and interest net of CRU.  One can therefore envisage circumstances where the Defendant will have to discharge the CRU certificate, so that the net pot for set off against costs is going to be even smaller, and assuming the benefits have been spent by the Claimant on living expenses, they will not be available for the Claimant to meet any costs liability. Bear in mind that certain benefits under the CRU provisions are not means-tested so, for instance, there may be a family property against which a costs shortfall could be enforced.

Those advising Claimants may find themselves in difficulty when it comes to advising. If nothing else, scenario such as this will continue to drive the market for ATE. Even where there are no CRU or interims to consider, clients may wish to lay off the risk of having to give up all of their sub-P36 damages pot save for an ATE premium. That would make sense. The post-Jackson difference will be that clients will take a closer interest in the cost of the premium, and it is therefore reasonable to suppose that ATE policies and premiums in PI litigation may take on more of a consumer feel.

I recognise that the scenario I have envisaged above may not arise in many cases because in practice Defendant post P36 costs may not be so immense in the scheme of things but if, as I suspect, we will see many more cases going to trial now insurers will not be facing the spectre of “double-bubble and then some”, i.e. the 100% success fee and final stage ATE premium are not in the mix, I do predict there will be horror stories in straightforward cases where QOCS protection has been lost and the cap on enforcement does not stop the Claimant having to top up the Defendant’s costs. Of course, I also recognise that Jackson LJ, Ramsay J and others might say that, on the contrary, the beefed up P36 may see cases settle early. They might add – privately of course – that the other pressures in the new rules, including budgeting, may lead to more robust advice being given to Claimants to accept early P36s. I can see that point, like it or not.

It remains to be seen to how the post 1st April ATE products will pan out. Assuming that, broadly as now, ATE will not cover loss of QOCS protection under the dishonesty exception, then the only risk being insured is Part 36 risk. There is a case for that to be relatively inexpensive cover or at least more competitively priced, not only because of the more limited risks and liabilities, but also because Claimants are expected to begin to take a closer interest in how much they will end up paying for their ATE, and therefore it becomes more of a genuine B2C insurance product, rather than hitherto where it’s really been B2B without any regard to the consumers ability to pay. Early indications are that ATE providers are putting to together much lower priced products.

Defendants and Insurers should bear in mind that a Claimant who has not purchased ATE may find it harder to do so – or surely more expensive to do so – where there has already been a meaningful P36 offer. Looked at in this way, it can be seen how QOCS combined with the limited ATE risk encourages Insurers to make good, early P36 offers.

I have been trying to visualise the change QOCS will bring to the scenario of advising a Claimant in conference on P36. Hitherto it was really my call whether I recommend myself and my Solicitor to accept the ongoing CFA risk, broadly safe in the knowledge that the ATE insurers my clients use will be guided by me. In theory the Claimant client merely had to make a bid for their case if they wanted to fight on. If we supported them there was no downside risk. Now, we have – to use that dreadful phrase – the "skin in the game". In post-transitional cases we will have a better idea of the likely budgeted expense to balance against the risk of the lower, sub-P36 outcome. Without going into the detail, I expect Claimants may be more minded to settle for lower sums, especially where they have no BTE cover or have opted against ATE (or can’t get it) because many simply cannot contemplate getting nothing in their hands… they will always want to get something, even where personal finances are not on the line beyond the damages award. As discussed, the impact of CRU could be significant. Claimant solicitors may have to take a much closer interest in how their clients fund themselves, not only as to interim payments, but also with respect to applications for benefits, a matter upon which hitherto advisers have taken a neutral stance, certainly in sub-catastrophic claims, where there is a risk their client may find themselves with a costs liability and a shortfall in funds to meet it.

Overall, Claimants are going to face new, possibly more significant risks, in taking their claims to court, whereas Defendants may be less restrained in forcing Claimants to trial.

QOCS Exceptions

You were wondering about the “without permission” reference in 44.14(1). Well here’s where permission is needed:

44.16.— (1) Orders for costs made against the claimant may be enforced to the full extent of such orders with the permission of the court where the claim is found on the balance of probabilities to be fundamentally dishonest.

What is fundamentally dishonest? Jackson recommended a "fraud" exception and that seems fair enough. But what is this? What does it mean? It is not a term of legal art, so far as I can ascertain, and most commentators expect this to be the rocket launchpad of much satellite litigation. As a starting point, it clearly scoops up straightforward fraud. And, by interpretation, I think it must contemplate a lower level of dishonesty than fraud.

The wording also goes broader than the Claimant’s behaviour alone, “the claim” could include behaviour of others, presumably the legal professionals, although I recognise it is hard to contemplate a situation where the lawyers have acted with fundamental dishonesty but their client has not.

Do we have a new pleading "term of art" that avoids the minefield of pleading fraud? Who’s brave enough to find out?

I think this is a gift of discretion for the Judges. I can see it fitting in neatly with those cases where there has been a genuine accident justifying an award of damages but where the Claimant has presented fabricated or exaggerated losses, and what the “fundamental” element does is to introduce weighing scales, so the odd bit of padding may not generate loss of QOCS, but it’s where the edifice of exaggeration is so great the majority of the Claimant’s case collapses.

Anyone who has fought trials will, I think, be familiar with the case where a genuine accident victim just hugely overeggs it, and the Judge makes a finding that where there is a dispute on any given fact, the Claimant’s version will not be favoured. That, I think, is at least one paradigm of fundamental dishonesty, but after a peak of litigation, probably after 2015, we will know more.

The new PD44 sets out a procedure to follow in a case to which CPR 44.16(1) applies:

12.4 In a case to which rule 44.16(1) applies (fundamentally dishonest claims):

a. The court will normally direct that issues arising out of an allegation that the claim is fundamentally dishonest be determined at the trial.

b. Where the proceedings have been settled, the court will not, save in exceptional circumstances, order that issues arising out of an allegation that the claim was fundamentally dishonest be determined in those proceedings.

c. Where the claimant has served a notice of discontinuance, the court may direct that issues arising out of an allegation that the claim was fundamentally dishonest be determined notwithstanding that the notice has not been set aside pursuant to rule 38.4.

d. The court may, as it thinks fair and just, determine the costs attributable to the claim having been found to be fundamentally dishonest.

There are additional exceptions in CPR 44.16(2).

44.16(2) Orders for costs made against the claimant may be enforced up to the full extent of such orders with the permission of the court, and to the extent that it considers just, where:

a. The proceedings include a claim which is made for the financial benefit of a person other than the claimant or a dependant within the meaning of section 1(3) of the Fatal Accidents Act 1976 (other than a claim in respect of the gratuitous provision of care, earnings paid by an employer or medical expenses), or;

b. A claim is made for the benefit of the claimant other than a claim to which this Section applies.

These are more benign than CPR 44.16(1). Their purpose is to exclude from QOCS protection elements of claims that are not really “personal injury”, or where it might be said the PI element is incidental, as well as claims brought on behalf of others, i.e. not for the benefit of the Claimant. Again this is an area of risk that may cause difficulties for those advising Claimants and also generates further justification for ATE cover. That said, given that the Court can breach the enforceability cap “to the extent it considers just” and bearing in mind the clarity that budgeting will bring (at least in cases to which it applies, remembering that there will be “transitional” cases that are not budgeted), I can foresee as a general rule that the Claimant’s own regular PI claims will be QOCS protected, and that costs referable to the non-PI / non-Claimant part of a claim are not QOCS protected. This is catered for by the new PD44 paragraph 12.5 (my emphasis), and indeed it can be seen that third party beneficiaries are liable for their part of the proceedings, which in fact goes beyond QOCS:

Where claim is for benefit of another

Court will usually order beneficiary to pay costs of the proceedings or attributable to the issues to which CPR 44.16(2)(a) applies;

Or may exceptionally permit enforcement against the Claimant.

There is guidance in the new PD 44 to supplement CPR 44.16(2):

12.2 Examples of claims made for the financial benefit of a person other than the claimant or a dependant within the meaning of section 1(3) of the Fatal Accidents Act 1976 within the meaning of rule 44.16(2) are subrogated claims and claims for credit hire.

But beware, this is not comprehensive.

The new PD 44 also provides a definition of gratuitous care in 44.16(2):

12.3 “Gratuitous provision of care” within the meaning of rule 44.16(2)(a) includes the provision of personal services rendered gratuitously by persons such as relatives and friends for things such as personal care, domestic assistance, childminding, home maintenance and decorating, gardening and chauffeuring.

There is no guidance for 44.16(b). What does it mean anyway? My reading of it is that it concerns non-PI elements of a claim, where they are heads of loss that could stand alone even if there had not been an injury. Typical examples may include property damage (e.g. motor policy excess, loss of use claims) or housing disrepair. There will be other examples. Costs referable to those types of claim will not have QOCS protection.

Interestingly, there is no QOCS exception for simply discontinuing a claim. It would seem that the combined effect of QOCS and part 38, especially where have been no interim payments, allows a PI Claimant to walk away from a claim. A costs order can be made in the usual way, but in theory there will be nothing against which to enforce it.

So, to summarise:

a. Where it is appropriate to do so, a costs orders will still be made against a Claimant at the end of a trial in the usual way.

b. QOCS protection is in fact protection against enforcement. CPR 44.14(3) provides that a QOCS-limited costs order is not to be treated as an unsatisfied judgment for the purposes of any court record.

c. What problems this may all throw up remain to be seen. There is a lot of headline concern about the definition of fundamental dishonesty and, for sure, that will be hot topic that likely to dominate in 2-3 years’ time once the cases filter through, but I see more fundamental challenges for practitioners in the scenario I have described where a Claimant fails to do better than a Defendant’s part 36 offer but has had – and spent – interim payments and CRU benefits.

There is one final anomaly generated by the transitional provisions relating to QOCS:

44.17.  This Section does not apply to proceedings where the claimant has entered into a pre-commencement funding arrangement (as defined in rule 48.2).

That is to say:

QOCS will not apply where a CFA with a success fee is up and running prior to 1/4/2013
QOCS is retrospective in all other cases

Therefore a BTE funded or privately funded claim, regardless of when commenced, gets QOCS protection. Not only can this cause anomalies, for example, acceptance of historical part 36 offers out of time, PI Claimants funded by BTE or privately get the 10% Simmons v Castle uplift on general damages and QOCS, even though they have not lost anything requiring part-payment or justifying the enhancement, e.g. recoverability! The BTE insurers have been curiously quiet in the run up to Jackson. In terms of adverse costs, they have collected premium for a risk or liability that will, overnight, have reduced or even disappeared. Of course they will retain the cases I have identified where, in practice, damages do not offset the costs liabilities, although that may not be that many cases, and in any event the risk profile is very different from that taken on at inception.

Should Claimant advisers be settling BTE funded cases before 1st April where a short wait now means 10% more for on the Claimant’s general damages?

Should insurers be letting BTE claimants have their 10% early to keep them out of QOCS?

Curiously, given that the QOCS liability on Defendants is seen as an across-the-board price the insurance industry must pay for being relieved of ATE liability, there is no exemption for Defendants without insurance and limited claims exposure by volume for the purposes of a PI claim. Defendants in this category do exist, although they are relatively rare, mainly private "PL", avoided or non-insured EL claims, or historical disease. This group will be limited by QOCS where they successfully defend a post-1/4 CFA even they are of course unable to participate in the wider benefits of reduced recoverability. It seems unfair, for instance, that an uninsured Defendant could not take full advantage of the cover provided by a pre- 1/4/13 BTE policy and yet for in pre 1/4/13 CFA funded claims uninsured Defendants  remain exposed to the most expensive liability of recoverable success fees and ATE. Perhaps the law makers felt that these were too small a group to justify the complexity of separate provision, although a derogation would surely have been simple enough. Perhaps it was felt that this is deserving punishment for failure to have insurance, if nothing else to deter others from not being insured adequately or at all for PI liability. Perhaps most realistically the rule makers / draftsman just did not give any thought to the position of uninsured Defendants, who by definition don’t have a lobbying voice. There is really no point speculating or dwelling on this. There are plenty of examples of anomalies and exceptions generated by the J-day rules probably because they have been drafted without sufficient regard to how it will work on the ground.

There are more anomalies. What about the claim funded by a pre 14 /13 CFA with success fee, but without ATE? Should Claimants funded in this way not get QOCS protection in recognition that there is no recoverable premium to worry about it? Should QOCS transition not have been limited to cases with ATE funding only?

What may be worth dwelling on, and it’s worth seeing how it pans out because it is more likely to arise in practise is those cases where as at 31/3/13 a claim that was BTE for a time, then when the policy limit was exhausted, a CFA was entered into with ATE.

There’s yet another layer, which is where there is the above scenario, plus a post 14 scenario, say a child’s case where the child reaches majority after 1/4/2013 and a new agreement is necessary or where a non-fatal PI claimant dies after 1/4/2013 and his or her estate takes over the claim and has to sign a post 1/4/2013 CFA.

The simple rule is that the transitional rule would seem sufficient to capture all of these “hybrid” funding scenario to deny QOCS, but equally I foresee there will be an appetite to endeavour to chase QOCS protection where the circumstances justify it, especially in cases where there are both a pre-1/4/13 and post-1/4/13 CFA.