The Price of Refusing to Discuss Costs: Court of Appeal backs issuance of professional negligence claim to recover pre-action costs

The Court of Appeal in Ayton v RSM Bentley Jennison [2018] EWHC 2851 (QB), has provided authoritative dicta on whether a claim can be issued, solely to recover costs, in a claim in which the defendant had agreed to settle during the pre-action stage.

The claimant claimed that in reliance of advice from a firm of accountants, he entered into a transaction and lost around £100,000. The defendants were prepared to pay the full sum of £100,000 but crucially would not countenance any contribution whatsoever to the claimant’s legal costs to that date. The claimant issued proceedings for £100,000 plus costs and on appeal the claimant was awarded £430,000 in respect of the costs element of the claim (60% of the claimant’s bill).

The Court of Appeal have now found that a claimant is entitled to issue a claim to solely recover the costs of complying with the Professional Negligence PAP, especially in circumstances where the defendants have conceded the substantive claim but have failed to make any contribution towards costs.

What is the Pre-Action Protocol for Professional Negligence?

Both parties are encouraged to attempt to settle the professional negligence claim without issuing formal proceedings in court. The Civil Procedure Rules (CPR) contains the Professional Negligence Pre-Action Protocol.

The protocol sets out the framework to be followed and encourages an exchange of information and a set timetable, which both parties must comply with to encourage early settlement without the need for a costly court process.

The updated PAP for professional negligence came into effect in May 2018, on which date claims to be issued from that point onwards must comply with.

What happened during the pre-action stage and why did the defendants not offer any costs contribution?

The claimant followed the Pre-action Protocol for Professional Negligence, and sent a letter of claim to the accountant’s legal representatives (Clyde & Co). The reason why costs were not agreed is because the pre-action protocol fails to make any provision for the costs arising from preparing the pre-action letter and investigating the merits of the claim.

No detailed response to the letter of claim was provided except for a cheque attempting to settle the matter for the sum claimed in the letter of claim (save for costs). The defendant made it clear that it had no intention of paying the claimant’s legal costs (in circumstances where a Conditional Fee Agreement is agreed this is not an ideal situation for a claimant or their legal representatives).

What did the defendant’s solicitors advise their client?

The defendant’s legal representatives tried to argue a technical point and utilise the lacuna in the PAP Professional Negligence to the advantage of their client. Clyde & Co claimed that the defendant had no obligation to pay the claimant’s legal costs under the pre-action protocol and there was apparently no mechanism by which a claimant could seek payment of costs in circumstances where the defendant had paid the full amount.

What did the claimant’s solicitors advise their client?

As no agreement as to costs was forthcoming, the claimant issued proceedings claiming £100,000 for damages, plus some £1,500 for consequential loss and expenses and of course costs. The defendants responded by filing a defence which pleaded tender before claim and paid circa £100,000 into court. The defendant continued to defend the remainder of the claim and pleaded that it had no obligation to pay any of the defendant’s pre-action costs.

What did the Court of Appeal decide?

May J awarded costs to the claimant in the sum of around £400,000, and in the leading judgment stated:

“The PAP makes it clear that the onus is not just on a claimant to avoid proceedings. Once the process has started, by the issuing of a letter of claim, it is for both parties to seek to resolve their disagreements. What the defendants did at the pre-action phase in this case was to offer an ex gratia payment, with no admission of liability, of the full amount of the damages claimed plus interest at 1 per cent. There was no offer to pay costs, and when the claimant enquired about costs, it was clear that the defendants were adopting a position (of refusing to pay) which they intended to maintain and to fight, as they did, all the way to the Court of Appeal.

The only option left to a claimant in circumstances where a pre-action offer is made to pay damages but there is a persistent refusal to cover legal costs is to issue proceedings…

May J in Ayton v RSM Bentley Jennison [2018] EWHC 2851 (QB)

Did Clyde & Co provide negligent advice?

A successful claim in the tort of negligence must satisfy three basic requirements proved on the balance of probabilities: a duty of care was owed by the professional; the professional breached this duty and the breach caused a loss. One step is for the court to assess whether a reasonable solicitor with the skill and expertise expected of a senior specialist in litigation would consider the approach taken by Clyde & Co to be reasonable. Arguably, their course of action was indeed reasonable. Clyde’s put forward a highly technical and tactical argument which on this occasion failed (but it was by no means an unreasonable strategic course to pursue).

It was of course open to Clyde’s to choose to run the tactical course that they did, seeking to rely upon the wording of the CPR in relation to a tender before claim (on some occasions tactical game playing in litigation works- see one of our cases here (which was far more clear cut in that the Defendant’s solicitors were entitled to pursue their tactical course of action): Woodward and Another v Phoenix Healthcare Distribution Limited [2019] EWCA Civ 985).

However, Clyde’s course of action was risky – the key question therefore is whether the client was warned of these risks. Indeed, Clyde & Co would certainly have realised that costs must have been incurred by the claimant in complying with the pre-action protocol. Moreover, the firm also must have ascertained that the clear risk in adopting this tactical course (which had no clear guarantee of success) was that interest and costs would rise whilst they continued to deny the claimant’s claim for costs.

If no clear warnings were given then the defendant accountants may be able to issue a claim for professional negligence between the settlement amount offered at the outset (plus costs) in response to the letter of claim and the consequent amount they were ordered to pay the claimant by the Court of Appeal.

Furthermore, did the law firm advise the defendant that they could have settled the substantive sum and agreed to pay the claimant’s costs to be the subject of assessment (which is an inherent mechanism provided for by Part 36)? If the defendant had misgivings about the claimant’s costs, the extent of the uplift, the amount of hours claimed, the rates charged- these could all have been challenged on assessment (when costs were far lower).

City of London Specialist Professional Negligence Lawyers

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We ensure that we provide the best possible outcome for our clients by conducting in depth investigation and research into the realistic prospects of a case before advising on the appropriate course of action in order to reduce time and expense. Where appropriate we encourage the use of alternative dispute resolution (such as mediation and without prejudice negotiation) and our negotiation skills are first-class. If required, we are extremely experienced and capable at navigating our clients through the litigation process.

Clients hire us because of our extensive experience in litigation disputes – when necessary, we know when to go to court and we know how to litigate.

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If you have a claim against a professional and want expert legal advice, get in touch so we can assess the legal merit of your case. We can often take on such claims on a no win no fee basis (such as a CFA or DBA) once we have discussed the claim with you and then assessed and advised you on the merits of the proposed professional negligence action.

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