Covering the Cost: Interest on Disbursements
The case of (1) The Secretary of State for the Department for Energy and Climate Change (2) Coal Products Limited v Jeffrey Jones and Others [2014] EWCA civ 363 arose from the Phurnacite Workers Group Litigation where a number of claimants were successful in their claims for damages. The judge subsequently ordered the defendant to pay damages plus a proportion of costs and interest.
Each claimant had an agreement with their solicitor which gave them credit to spend on disbursements on the understanding that the sum outstanding would be repaid by the defendant if the case was won or recovered from the ATE providers if it was lost. The interest rate was set at 4% above base rate.
The court’s power to award interest on costs is derived from CPR 44.2. The purpose is to compensate a party who has been deprived of the use of his money or had to borrow money to fund his legal costs. In assessing the rate, the court conducts an appraisal of what is reasonable with due regard to the class of litigant to which the receiving party belongs. A rate is chosen to reflect the real cost of borrowing to that class of litigant. A first class institutional borrower can expect to be awarded a lower rate than that of a private individual.
The defendant argued that in reality the claim for interest was not one made by the claimants, who were never at risk of having to pay interest, but was a claim by their solicitors. The agreements, they argued, were therefore no more than a device to enable the solicitors to claim interest on the disbursements they were funding, at a rate of their choosing. In the absence of evidence as to the solicitors’ financial position or rate at which they could borrow, it was argued there was nothing to displace the usual presumption that the rate afforded to a first class borrower ought to apply.
It was found that had the claimants funded the disbursements by bank loan, there would have been a valid claim for the interest charged. The solicitors simply fulfilled the role of the bank and had offered better terms. The court awarded the rate as per the agreements.
By the time of the appeal hearing it was agreed between the parties that the agreements were genuine and valid and that the claimants were entitled to pre-judgment interest on disbursements. The applicable rates were also agreed.
The defendant contended that the claimants’ claim for interest was effectively a subrogated claim by the solicitors who funded the litigation and that the claimant’s liability to pay interest was notional rather than real. This should have led the judge to assess the rate of interest by reference to the solicitors’ circumstances rather than those of the claimants.
The Court of Appeal disagreed pointing out that the money had been outlaid and the claim for interest was actual rather than notional. Further, it was said that the agreements were valid and the rate of interest reasonable. The claim was therefore allowed.
Agreements to recover interest on disbursements are rare in the context of personal injury litigation however the courts appear happy to endorse their use provided there is an actual claim for interest and the rate adopted is reasonable. Claimant solicitors might welcome this decision as it potentially allows them to agree a better rate of interest than they might otherwise receive. The cost of unbilled disbursements is routinely a problem for many in conditional fee cases. We may see these agreements becoming more popular as a way to cover such overheads.