The Court of Appeal has, in the last fortnight, considered two aspects of the litigation funding reforms brought about by the LASPO Act 2012; namely, the approach to be taken on the timing of clinical negligence ATE policies and the recoverability of success fee uplifts relating to CFAs transferred after the cut-off date for recovery (1 April 2013).
In both recent cases, broad policy concerns around the personal injury market and access to justice were given considerable weight and it was determined that:
The recoverability of success fee uplifts under CFAs transferred after 1 April 2013 should be allowed (the outcome in Budana); and
ATE insurance for clinical negligence cases could be taken out at an early stage and the premium remains recoverable (the outcome in McMenemy & Reynolds)
Both outcomes could significantly increase the amount of costs that defendants will have to pay in certain cases.
Budana v Leeds Teaching Hospital NHS Trust  EWCA Civ 1980
The claimant brought a claim for personal injury following a slip-trip and entered into a CFA in December 2011. Her original solicitors sold their personal injury book to Neil Hudgell Solicitors (NH) and notified her that her case would be transferred. There was a ‘master’ transfer agreement between the two firms in March 2013 and a subsequent specific transfer agreement signed by the claimant with NH in April 2013. There was also a back-up CFA signed by the claimant in May 2013 with NH, put in place to ensure recovery of at least some costs in the event that the transfer arrangements failed.
The principal claim succeeded and in her claim for costs, the original CFA entered into before April 2013 was relied upon and a success fee sought for the work done by both firms. This was on the basis that the original CFA was assigned to NH and covered the entire case. It was in NH’s commercial interests to keep the original CFA going as it contained the lucrative 100% success fee uplift. The defendant challenged the right to any costs except for those stemming from the back-up CFA with NH signed in May 2013. It asserted that, based on the facts, the original CFA was terminated or alternatively it was novated – meaning that an entirely new contract was created on the later date - and as a matter of law, the CFA could not be assigned.
Can a giraffe be a horse?
The thrust of the defendant’s argument was that the attempted transfer must fail. A new contract was created after April 2013 and therefore, it would be ineffective (i.e. no costs would be recoverable) as it did not comply with the new provisions. The purported assignment was at best, a novation and even if it was described or intended to be an assignment it was not. The judge paraphrased this argument as submitting that a giraffe cannot be turned into a horse simply by agreement. Much emphasis was placed on the fact that the claimant had expressly consented, since his or her consent is a prominent feature of a novation whereas an assignment may be effected between law firms, without the need for the claimant’s consent to appear in the assignment agreement.
The novation was not fatal
The court agreed with the defendant that the CFA had not been assigned in this case and determined that the original CFA was novated. However, the novation did not prevent the payable success fee from being transferred. Looking at this conclusion on novation, it might be said that the Court of Appeal has deployed public policy considerations to drive the proverbial coach and horses through the assumption that a novation in these circumstances would have been fatal to recovery of any costs.
In fact, there was judicial concern that any other result – i.e. other than allowing the recovery of base costs and the success fee - would have deprived the claimant of costs he or she would otherwise have expected to recover. The court appeared to have widely accepted the evidence and submissions from the Law Society, as intervener, which covered the economic environment in which personal injury claims are conducted.
Three things we have learned from Budana
The benefits of a CFA can be assigned from one solicitor firm to another (although it was not assigned here)
Where there is a novation after April 2013, a pre LASPO success fee can still be recoverable subject to a suitable transfer agreement
The Court of Appeal appears prepared to take a broad and purposive approach to the LASPO funding legislation and is prepared to move away from a ‘black letter law’ approach
The implications of Budana
The decision will be welcomed by firms that have been keen to keep old-style CFAs going, given the recoverable success fees associated with them. However, in cases where the defendant is seeking to assert its right to recover costs in the usual way it could be beneficial to argue that a pre-LASPO CFA exists, since that will exclude the application of ‘Qualified One Way Costs Shifting’ (‘QOCS’) even where it has been novated. After all, if the logic of - and the public policy motivation for - the decision is to ensure the ongoing recoverability of success fees in claims first pursued under pre-LASPO CFAs which were transferred after April 2013, then it would be unjust for a claimant obtaining the benefits of the old regime to also obtain the benefit of the new.
Peterborough & Stamford Hospitals NHS Trust v McMenemy: Reynolds v Nottingham University Hospitals NHS FT  EWCA Civ 1941
The government rejected Sir Rupert Jackson’s recommendation for a blanket ban on recovery of ATE ‘After the Event’ insurance premiums. In clinical negligence cases, it instead permitted (via s46(2) of LASPO Act) limited recovery of premium to the extent that it related to the cost of expert evidence on liability or causation. These appeals were in relation to two policies that were taken out before proceedings were issued and before expert evidence was obtained.
The application of Callery v Gray  EWCA Civ 1117
In its landmark decision, the Court of Appeal made a policy decision in Callery that ATE premiums at modest cost in volume motor litigation for a moderate level of damages could be insured at the outset of the case and would be recoverable. The key issue in McMenemy and Reynolds was whether Callery was still good law in the present context, i.e. in clinical negligence cases a decade and a half later, with the premiums in these cases some 12 times more than the premiums considered in Callery. It was argued that this was a different world to the one considered in Callery because (i) the recoverable element of the premium was restricted to the risk of the cost of expert reports only, (ii) there was otherwise a general bar on premium recovery and (iii) the new test on proportionality surely applied.
No reason to depart from the policy
Remarkably, although lamenting the lack of any guidance from the Rule Committee on what the appropriate approach should be in the present circumstances, Callery was held still to apply. Considerable weight was placed on the wide format of the enabling legislation and especially on a change to the secondary legislation which removed the absolute bar against recovery of ATE insurance premiums in the event that expert reports were not in fact obtained.
Although the new test on proportionality did apply here, it did not mean that a case-by-case approach should be adopted as to whether the incurring of the ATE premium in principle was reasonable. The approach was to be a general one and it would be reasonable in clinical negligence claims to take out an ATE policy at an early stage.
Proportionality Vs access to justice?
It is surprising to learn that the application of the new test of proportionality has done nothing to alter the Callery approach on the timing of taking out such ATE policies. The Court of Appeal qualified the application of the Callery principle in Sarwar v Alam  EWCA Civ 1401, although Sarwar is not cited in this judgment. If the new test on proportionality lacks the force to be applied on a case by case approach in this context then perhaps it’s not the case that proportionality trumps everything after all.
Three things we have learned from McMenemy and Reynolds
An ATE policy in clinical negligence can be taken out at an early stage and the premium will be recoverable
The new proportionality test applies to post April 2013 ATEs, but this does bite on whether it was reasonable to take out in principle
It may be that the CPRC could create rules or PDs dealing with the post April 2013 recovery of ATE policies
What was not covered here?
There was no general guidance on the approach to be taken with the new test on proportionality and the quantum of clinical negligence ATE premiums is due to be examined in test cases expected to be heard next summer.
The future impact of these cases
These decisions will be seen as an aid to access to justice and will be welcomed by the claimant personal injury sector.
It is apparent from them that the Court of Appeal is increasingly being asked to deal with issues left unresolved because of gaps and a lack of clarity in the transitional arrangements associated with the LASPO Act. Furthermore, the court is prepared to take a broad purposive approach in this area. As Lewison LJ observed: “At the moment, however the pieces of the jigsaw puzzle are manoeuvred they do not all fit properly”.