Costs professionals regularly received questions about certain aspects of inter partes assessments, such as the amount of recoverable interest and myriad issues surrounding costs budgeting. Most will have ready answers; however, there remain areas where even the most experienced of those in our field require clarification.
Master Gordon-Saker’s Judgment in Marbrow v Sharpes Garden Services Ltd  EWHC B26 (Costs), is one such case that shows how budgeting and interest still invite confusion.
The matter arose out of a personal injury case that settled shortly before trial, where it was agreed that the defendant pay the claimant’s costs on the standard basis. The case was also subject to costs management. Three key issues arose during the detailed assessment: (i) whether the cap on the recoverable costs of the costs management process was inclusive or exclusive of VAT; (ii) recoverability of interest on a disbursement funding loan; and (ii) the date from which the claimant’s entitlement to interest should run.
Cap on recoverable costs
Most would think that this was a simple answer – paragraph 7.2 of Practice Direction 3E provides:
“Save in exceptional circumstances –
- The recoverable costs of initially completing Precedent H shall not exceed the higher of £1,000 or 1% of the total of the incurred costs (as agreed or allowed on assessment) and the budgeted costs (agreed or approved); and
- All other recoverable costs of the budgeting and costs management process shall not exceed 2% of the total of the incurred costs (as agreed or allowed on assessment) and the budgeted (agreed or approved) costs.”
Considering this more carefully, however, raises the question of whether the cap is inclusive or exclusive of VAT.
The defendant argued that, as the practice direction did not expressly state that VAT was payable in addition to the cap, it therefore must be construed as being inclusive of the 1% and 2% figures. The claimant’s position was that VAT does not fall within the definition of ‘costs’ in CPR 44.1 and therefore the cap had to be exclusive of VAT.
Master Gordon-Saker held that “the caps provided by paragraph 7.2 cannot include value added tax because they are expressed as percentages of figures which do not include value added tax. All of the figures set out in a budget exclude value added tax”.
Certainly, the argument raised in Friston on Costs (3rd edition), and referred to by the master, supports this position. This says that, as a Precedent H is prepared specifically to discourage VAT being recorded therein, “it would seem odd if the costs were payable on a VAT-inclusive basis”.
Interest paid on a disbursement funding loan
In his bill of costs, the claimant claimed interest he was liable to pay under a loan agreement with his solicitors regarding the funding of disbursements as an item of costs in the assessment (totalling £2,484.48; interest of 5%). Reference was made to the decision of the Court of Appeal in Secretary of State for Energy v Jones  EWCA Civ 363. But could this reasonably be said to be a ‘cost’ of the litigation?
The master referred to Hunt v RM Douglas (Roofing) Ltd  11 WLUK 221, where the claimant was seeking recovery of interest incurred under an overdraft which was used to fund the disbursements in the 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”.
As such, this item was disallowed on assessment.
Date from which interest should run
The usual answer is that interest runs from the date of the order giving rise to costs, pursuant to section 17 of the 1838 Judgment Act. However, the defendant in Marbrow referred to the decision in Involnert Management Inc v Aprilgrange Limited & Ors  EWHC 2834 (Comm), and contended that interest should instead run from three months after the order for costs.
By this time, the bill of costs should have been served pursuant to CPR 47.7, and the paying party will have received “the information required to make a realistic assessment of its liability before it begins to incur interest at the rate applicable to judgment debts for failing to pay that amount”. CPR 40.8 or CPR 44.2(6)(g) were cited as to the court’s discretion to make a different order.
Clearly, there are conflicting positions in this regard. Master Gordon-Saker maintained that Involnert (amongst other cases) had specific features to justify a departure from the general rule. He went on to say that most, if not all, cases which departed from the general rule were commercial matters where orders for pre-judgment interest on costs at commercial rates are often made. The instant case, however, arose from a straightforward personal injury claim, and therefore there was no reason to depart from the general rule. Interest was therefore awarded from the date of the order giving rise to costs.
The master also considered that “the higher rate of interest under the Judgment Act should go some way to compensating the claimant for the interest that he is liable to pay for funding the disbursements”, in reference to his decision regarding the point discussed above.
Whilst the decisions reached could appear to be obvious and correct, Marbrow should be used by costs professionals as an example of when to consider the specific circumstances of a case when making arguments as to interest, and that, perhaps, the introduction of Precedent T in the realm of costs budgeting is not the only clarification required in this arena.
This article first appeared on the THOMSON REUTERS DISPUTE RESOLUTION BLOG on 18 August 2020. Written by Natalie Swales, Council Member of the Association of Costs Lawyers and a Partner at Masters Legal Costs Services LLP