Spiralstem Ltd v Marks & Spencer Plc

The next issue for decision is the level of the success fee to be added to the claimant's base costs. The CFA (conditional fee agreement) is dated 13th August 2002. It provides for a success fee of 100%, of which 8% relates to the cost of the claimant's solicitors, Edwin Coe, postponing receipt of payment of their charges. This is usually called the postponement element or postponement charge and it is common ground that it is recoverable only from the client and not from his opponent, here, respectively, Spiralstem and Marks & Spencer. Accordingly, the sum for which Marks & Spencer is liable on Spiraltstem's case is 92% on top of the base costs that I allow for Edwin Coe's fees. Marks & Spencer disputes this figure. It contends the success fee for which it should be liable should be no more than 40%.

Mr. James appears for Spiralstem and Mr. Hollingworth for Marks & Spencer. Both have submitted skeleton arguments which helpfully set out the legal principles which apply.

CPR 44.4 (White Book vol.1 page 1166), Mr. James submits, sets out the basic principle; the ultimate issue as to whether the success fee is reasonable as between the parties. The subsidiary principles are set out in the Costs Practice Direction (“CPD”). CPD section 11.5 states:

“In deciding whether the costs claimed are reasonable and (on a standard basis) proportionate the court will consider the amount of any additional liability separately from the base costs.”

Section 11.7 states:

Section 11.8 states:

Section 11.9 states that:

“A percentage increase will not be reduced simply on the ground that, when added to the base costs which are reasonable and (where relevant) proportionate, the total appears disproportionate.”

How then is the success fee to be calculated? Mr. Hollingworth refers me to what has come to be known as the “ready reckoner” which is a formula devised by the contributors to the Law Society's publication “Conditional Fee Agreements Survival Guide”, Second Edition 2001. The formula works as follows. F is the chance of failure to win the claim; S the chance of success. You divide F by S and then multiply that figure by 100 which gives you the success fee.

In the present case the matter was adjudged by Edwin Coe to be a 50/50 case and applying that formula that would give a 100% success fee. For reasons to which I shall refer shortly, Mr. Hollingworth disputes, first, that this was ever a 50/50 case. He asserts that his client, Marks & Spencer, would suggest that a conservative estimate of the prospects of success at the time of the CFA would have been around 60%. Secondly, he submits that the ready reckoner should be adjusted or modified to reflect the fact that there was here a split trial in that liability was determined before there was a separate trial which took place on quantum.

It is appropriate for me to say something about the CFA. As I have said this provides for a success fee of 100% and the reasons for setting the figure at that level are set out in the schedule to the CFA. By virtue of clause 4.2.2 the success fee became payable when the claim was won, that is to say “when it [was] decided in the client's favour, whether by a Court decision or arbitral award for an agreement to pay the Client an award or recovery.”

Liability was admitted by Marks & Spencer on 2nd July 2003. The reasons for seeking 100% less the postponement charge are set out in the schedule. They are seven fold. Paraphrasing slightly, it was a complicated case, Spiralstem's financial position meant that it might become insolvent, title to the design rights were in issue, there was the fact that the claimant would be called upon to prove infringement, there was the fact that Marks & Spencer and the two other defendants had served defences to the claim, there was a lack of documentary evidence and a need for oral evidence and, finally, there was concern about the number of infringing modules.

All these matters are expanded upon between pages 56 and 57 of the points of dispute and again at paragraphs 38 to 48 of Mr. Hollingworth's skeleton argument and paragraphs 7 to 11 of Mr. James' skeleton argument. I do not propose to set them out in any further detail. What, in effect, they boil down to is this. Mr. Hollingworth contends that whilst some factors remained uncertain, this was not complicated and technical litigation and they were not such as to reduce the prospects to 50% and that a conservative estimate of success would have been around 60%. Mr. James, for his part, says this was a knife edge case with an equal chance that it could have been won or lost and, accordingly, the success fee should be fixed at 100%.

I have considered the parties' submissions with care and remind myself that I must have regard to the facts and circumstances as they reasonably appeared to Edwin Coe on 13th August 2002 when the CFA was signed. I must also take into account in deciding whether the success fee is reasonable, the risk that the circumstances in which the costs, fees or expenses would be payable, might or might not occur. Having done so I am not persuaded that this was a cliff-hanger case in which the prospects of Edwin Coe winning and recovering their costs was equal to their chance of losing it and being paid nothing.

In reaching this decision I bear in mind the stage that the litigation had reached by 13th August 2002. The proceedings had been issued on 17th April that year, particulars of claim served on 26th April and the defences of Marks & Spencer and the second defendant served on 14th June. The allocation questionnaires had been completed on 29th June and on 31st July, a Part 18 request for further information had been served by Edwin Coe on Marks & Spencer's solicitors.

From the pleadings it is clear that the battle lines by then had been drawn and that the defendants had disclosed their hands in the sense that Spiralstem now knew that Marks & Spencer would not “roll over” as Mr. Hollingworth expressed their position in paragraph 25 of his skeleton argument. Indeed, the nature of their defences was then known. That clearly would militate against a low success fee as would have been applicable had Marks & Spencer “rolled over” but, in my judgment they do not permit allowance of the maximum success fee which the law permits. In my opinion the facts then known would have enabled Edwin Coe to make an accurate assessment that the claim did indeed have prospects of success. In my view it is unrealistic to suppose that had it really been a 50/50 case the firm would have taken a “flier”, to use common parlance, and invested such a significant sum in terms of personnel and resources as has been the case, in such a highly speculative claim. In my opinion the chance of success was 60% and to that extent I agree with Mr. Hollingworth. Using the ready reckoner, that would ordinarily give a success fee of 67%.

However, that is not the end of the story because Mr. Hollingworth submits that the success fee should reflect the fact that the total costs will be spread over the determinations of liability and quantum and in these circumstances the uplift on the total should be decreased by the percentage of the overall costs which is likely to be spent on the quantum stage. He says that where, as here, liability has been decided first with quantum to be dealt with at a subsequent trial, the ready reckoner should be modified as follows. F should be divided by S and multiplied by 100% as before, but the resulting figure should then be multiplied by L where L is the percentage of costs expected to be spent on liability as opposed to quantum. That way the solicitors would not receive a 100% success fee for the quantum trial where there is no risk, but an overall success fee of 50%. That would mean that when the trial on liability costs are estimated at £100,000 and a similar figure for the quantum trial, the solicitor would receive those sums plus a £100,000 success fee, which is all they would need to recover to cover the notional losing of £100,000 if the liability trial had gone against them. If it were to be otherwise Edwin Coe would be overcompensated by £100,000.

Mr. Hollingworth submits that such a modification is appropriate here because the CFA provides only for a single-stage success fee. The position would have been different if Edwin Coe had had one CFA for the liability trial and a second CFA for the quantum trial. Alternatively, there could have been one CFA with a staged success fee but that did not happen here. Accordingly, Mr. Hollingworth submits that if you do not have separate CFAs or staged success fees it is appropriate for the success fee to be averaged out over the life of the litigation in order to reflect the varying levels of risk.

In support of this submission he has referred me to the decision of Eady J and Cox v. MGM [2006] EWHC 1235 (QB) and in particular paragraph 45 which states:

Relying on this passage Mr. Hollingworth submits that the success fee should be considered in the light of the risks that existed through the life of the litigation. He says it should be reduced to reflect the reduced risk following the admission of liability which meant that the quantum trial would be conducted relatively risk free or at much lower risk. He contends that the solicitors had cause to be cautiously optimistic at the outcome: a 60% chance of success would give a 33% success fee based upon the modified ready reckoner where L was 50%, reflecting the fact that 50% of the total costs of the action would be expended at the risk free quantum stage. His clients had increased this figure by way of offer in their points of dispute to 40%.

Mr. James' riposte is essentially threefold. Firstly, he submits that Mr. Hollingworth is wrong in principle. He contends that the split is simply arbitrary. The modified ready reckoner might work if exactly the same amount was spent on the liability trial as the quantum trial, but here the split was far different. More has been expended on quantum, so if the modified ready reckoner was used his clients would be under compensated rather than overcompensated.

Secondly, Mr. James submits that Mr. Hollingworth is wrong in law. He took me through a number of cases including Callery v Gray, ([2001] 1 WLR 2112), Ku, Atack v. Lee [2005] 2 Costs LR 308 and he submits that Mr. Hollingworth's submission that a distinction in the success fee should be drawn in split trial cases is inconsistent with the guidance given in those authorities. They essentially say that a higher success fee would be likely to be appropriate if a case does not settle within the protocol period, as happened here. If I was to apply the modified ready reckoner as Mr. Hollingworth urges me to do, this will be creating new law.

Mr. James further submits that the existing case law is against Marks & Spencer on this point. In Smiths Dock v. Edwards [2004] EWHC 1116 QB at paragraph 19, Crane J said this:

He continued at paragraph 23,

Mr. James submits that this is authority for the application of the ready reckoner in unmodified form although this is the starting point and the “end point” is that the success fee must be reasonable.

Thirdly, Mr. James submits that it would be wrong to apply the modified formula because the admission of liability on 3rd July 2003 did not bring with it an order for Spiraltstem's costs. On the contrary, there had been a number of payments into court or Part 36 offers and it was Marks & Spencer's case that if Spiralstem failed to beat them they would recover no costs and, indeed, would be liable to pay Marks & Spencer's costs of the action.

Drawing these threads together my decisions are these. It is clear that the ready reckoner has been recognized by the court and applied as a proper measure in calculating success fees, see Smiths Dock and, in particular, what Crane J said in the penultimate sentence of paragraph 23 that “use of the ready reckoner is usual and simple and demonstrates the success fees derived from the ready reckoner are not unfairly high.”

If there is to be a modification of that application or expressed differently, a distancing from the way that the ready reckoner has hitherto been applied to success fees by costs judges on detailed assessment, then, to my mind, it is for an appeal court to decide the parameters of any such modification. For my part I consider that I am bound by Crane J's decision in Smiths Dock and I am not permitted to stray outside the boundaries given in the ready reckoner calculations.

Further, to my mind the modified formula advanced by Mr. Hollingworth gives the appearance of being a method to apply different success fees to particular stages of the proceedings depending upon the level of risk at the material time, albeit that that success fee will be expressed as one single figure, here he says it should be 40%. Prior to the decision in Ku, the CPD at section 11.8(2) appeared to permit the court to allow variable success fees so that where, as here, liability was conceded, a different and lower success fee might thereafter be appropriate, as the level of risk had decreased after the claimant had "won", thereby triggering the definition of “successful action” in the conditional fee agreement here, at clause 4.2.2.

In Ku the Court of Appeal held that that was not permissible, see paragraph 36; once the success fee was decided by the costs judge, it would endure at that level to the end of the case including the detailed assessment. What it appears to me that Mr. Hollingworth is saying is that the risk after liability was conceded, lessened and so it must follow that the overall success fee should be lower. In my opinion, that does not give effect to section 11.7 of the CPD. The fact that the admission on liability meant that after 3rd July 2003 Spiralstem were not on risk as to losing, does not to my mind justify reducing the success fee by the level he contends.

I also agree with Mr. James in his submission that the liability/quantum split suggested by Mr. Hollingworth is simply arbitrary. Whilst on the figures Mr. Hollingworth has advanced the modification might work, problems will arise if one aspect becomes more expensive than the other. An added factor is that litigation does not end until the conclusion of the detailed assessment. That process can be lengthy and expensive as has been the case here where the detailed assessment will take longer than Master Bragge took to hold the enquiry as to damages. But, on Mr. Hollingworth's argument, it seems to me that the success fee will need to be reconsidered and possibly adjusted still further, if the modified ready reckoner formula is used, to reflect the fact that a party who has the benefit of an order for costs is operating in a risk-free environment so far as the detailed assessment is concerned in view of the operation of rule 47.18(1). This states that the receiving party, Spiralstem, is entitled to the costs of the detailed assessment proceedings.

In my judgment that is impractical and would not give effect to Crane J's finding in Smiths Dock, in particular that the ready reckoner is usual and simple. On the contrary it will introduce complications and uncertainties. For these reasons I am not persuaded that the modified ready reckoner should be used in this detailed assessment. I propose to use the ready reckoner in unmodified form as the starting point which will give a success fee of 67%, not 100%.

In my judgment that figure also satisfies the question of reasonableness so far as the “end point” mentioned by Mr. James is concerned. In conclusion I find that the prospect of success was 60% and that translates into a success fee of 67%.