Revenue and Customs v Blue Sphere Global Ltd

The Respondent traded as an exporter of mobile telephones. In 2006 its claim for repayment of input tax of £1,100,750 was refused by HMRC who contended that the claim was connected to the fraudulent evasion of value added tax and that the Respondent knew, or should have known, of that.

The Respondent pursued an appeal to the VAT and Duties Tribunal (now the First Tier Tribunal (Tax)) which was heard in July 2008. The appeal was dismissed by the Tribunal and the Respondent pursued a further appeal to the High Court. Following a 2 day hearing in May 2009 the Chancellor of the High Court allowed the appeal and ordered that HMRC should pay the Respondent’s costs in the High Court and in the Tribunal.

HMRC pursued an appeal to the Court of Appeal, which was consolidated with two others and heard in February 2010. The appeal was dismissed and HMRC was ordered to pay the Respondent’s costs in the Court of Appeal (on the standard basis up to 23^rd July 2009 and on the indemnity basis thereafter).

The Respondent’s solicitors, Thomas Cooper, and counsel were retained under conditional fee agreements.

The Respondent’s bill claims total costs of £1.96m in respect of the work done in the Tribunal, High Court and Court of Appeal. As part of the detailed assessment of that bill the parties have agreed that a number of preliminary issues raised by the Appellants, which relate to the conditional fee agreements and the hourly rates claimed, should be decided before the other objections. This judgment is concerned with those preliminary issues.

Various points raised in relation to the conditional fee agreements entered into by Mr Colin Challenger, of counsel, are not now pursued.

The conditional fee agreement entered into by Thomas Cooper and the Respondent on 16^th May 2007 (the 2007 agreement) provided for a success fee of 100 per cent (of which 5 per cent related to postponement of payment) in the event of a win and defined the work that was covered by it:

What is covered by this agreement

Your claim for refund of VAT from HM Revenue & Customs and for damages

What is not covered by this agreement

Any counterclaim against you

Any appeal you make against the judgment/order other than on our advice

The 2007 agreement incorporated standard conditions which provided a definition of “win” at clause 4(m):

Your claim is finally decided in your favour whether by a court decision or by agreement.

“Finally” means that your opponent:

•

Is not allowed to appeal against the court decision; or

•

Has not appealed in time; or

•

Has lost any appeal.

By clause 7(b)(ii) it was provided that Thomas Cooper could terminate the agreement if they believed that the Respondent was unlikely to win. In that event the Respondent would be liable to pay only Thomas Cooper’s disbursements, including counsel’s fees if counsel had not entered into a conditional fee agreement.

The arrangements between Thomas Cooper and the Respondent were varied by a countersigned letter dated 22^nd July 2009 (the 2009 agreement). The letter was written after the appeal to the High Court but before the appeal to the Court of Appeal was heard. It recorded that the work done on the appeal to the High Court had been covered by the 2007 agreement and that “we have been successful and it is agreed that we are entitled to our fees pursuant to the CFA”. It explained that although the solicitors “are entitled to invoice for all of our fees we accept that this is academic until the company is successful in the Court of Appeal and is put in funds”, adding:

For the avoidance of doubt, it is agreed on behalf of Blue Sphere Global Limited that we are entitled to our fees (including the interim fees rendered) because we have met the definition of success as agreed with you.

The letter then recorded “the terms … on which we agreed on 14 July 2009 to continue to act for you” namely “that, with effect from 22 May 2009, we would proceed on the basis of a Discounted Conditional Fee Agreement which applies two hourly rates for this firm’s work”. The primary rates would be payable if the Respondent were successful on the appeal to the Court of Appeal and the discounted rates would be payable otherwise. In the event of success the solicitors would also be entitled to a success fee of 80 per cent.

As an example of the rates set out in the letter, the primary rate for Mr Green (payable in the event of success with a success fee of 80 per cent) was £500 and the discounted rate (payable in the event of failure) was £300.

The letter went on to state that:

Save as varied herein the terms remain as per the CFA.

The arrangements were further varied by a countersigned email dated 18^th August 2010 which provided for a success fee of 90 per cent in respect of work done on a costs application in the Court of Appeal (following the dismissal of the appeal).

The Appellants accept that the 2007 agreement was a valid conditional fee agreement which covered the proceedings in the Tribunal and was capable of covering the proceedings through and including the appeal to the Court of Appeal. However they point to evidence that the 2007 agreement must have been terminated by Thomas Cooper under clause 7(b)(ii) in the summer of 2009. The consequence would be that Thomas Cooper would be entitled to be paid disbursements only. Alternatively, they contend that the definition of win must have been varied before the 2009 agreement and that such variation was not reduced to writing. This would be a material breach of s.58(3)(a) of the Courts and Legal Services Act 1990. They rely on what the Respondent told the Court of Appeal.

After the successful appeal to the High Court the Respondent was entitled to payment of the input tax. However the Appellants obtained an order for a stay pending the appeal to the Court of Appeal. On 24^th June 2009 the Respondent issued an application for an order that the stay be discharged or varied so that funds could be released to enable it to meet the costs of resisting the appeal to the Court of Appeal. The application was supported by a witness statement of Mr Green, a partner at Thomas Cooper, in which he explained (at paragraph 4):

We are not required to act for [the Respondent] on a Conditional Fee basis on any further appeal, unless we agree to do so and our agreement would be based on the prospects of success … before the Court of Appeal. … In the circumstances my firm, and Counsel, will have to give very serious consideration to the question of whether it is commercially sensible for us to continue to act in these proceedings pursuant to a conditional fee agreement.

And (at paragraph 7):

At the moment [the Respondent] has no agreement for representation at the hearing of the appeal.

The application first came before the court (Rimer LJ) on 6^th July 2009 when the Respondent was represented by Thomas Cooper and junior counsel. The court was told by counsel that Thomas Cooper “will not proceed if no variation is granted”. No order was made on the application but the Respondent was given permission to renew it. The intention was that the Respondent should make enquiries as to whether it could obtain representation by others.

On 8^th July 2009 Mr Michael Peters, the sole director of the Respondent, wrote to Rimer LJ:

As it stands [the Respondent] is no longer represented by any solicitors or counsel for the upcoming appeal. I am therefore forced into the uncomfortable position of defending myself against the government with all their unlimited resources.

[The Respondent’s] CFA agreement with Thomas Cooper was based on a no win no fee, due to the fact that The Chancellor ordered HMRC to repay all BSG monies with interest and costs, this is a winning case and Thomas Cooper have complied with our agreement and are entitled to be paid.

The letter set out details of the solicitors who had been approached but had refused to act on a conditional fee agreement and concluded with a request for 5-10 per cent of the input tax to be paid to the Respondent together with a sum representing the estimated costs of Thomas Cooper in pursuing the appeal. The costs estimate, filed before the first hearing, was in the total sum of £195,348.

It is apparent from my reading of Thomas Cooper’s correspondence file that Mr Whelan, a solicitor at Thomas Cooper, was closely involved in the drafting of the letter. Indeed in the Respondent’s bill there are claims for 3 hours and 48 minutes of Mr Whelan’s time and 24 minutes of Mr Green’s time on 7^th July 2009 for “Drafting letter for Michael Peters to the Court (5 x A4) and internal discussions on representation”.

Mr Peters attended the renewed hearing of the application on 14^th July 2009 without lawyers. On the basis that the Respondent would be unable to obtain representation on the appeal otherwise, and on condition that Thomas Cooper confirmed that they would act for the Respondent on the appeal, Rimer LJ made an order that £100,000 be released to them.

The same day Thomas Cooper wrote to the Appellants’ solicitors:

In view of the fact that the sum of £100,000, which has been ordered to be released on account of costs and disbursements, is insufficient for the matter to be fully funded to trial, we have agreed with our client and give you notice that we will act pursuant to a Discounted Conditional Fee Agreement, which is subject to a success fee. It is our intention, if possible, to instruct Counsel to act on a similar basis and we will notify you, in due course of the name of our client’s Counsel.

I have read through Thomas Cooper’s correspondence files for the relevant period. There is nothing to suggest that the 2007 agreement was terminated by them, whether under clause 7 or otherwise.

It seems to me that the 2007 agreement would have covered the proceedings in the tribunal, the appeal to the High Court (because that was pursued on Thomas Cooper’s advice) and the appeal to the Court of Appeal. Given the definition of “win”, no success fee would have been payable until the Court of Appeal dismissed the appeal. The skeleton arguments record that this is not now controversial.

However taking the evidence at face value it is clear that in the summer of 2009 Thomas Cooper believed that they were entitled to their fees and a success fee despite the appeal to the Court of Appeal. It is also clear that there were concerns about the funding of that appeal.

Doubtless the Chancellor’s decision would have been a cause of great joy in the Respondent’s camp. Thomas Cooper would have been looking forward to the payment of their fees and a success fee. The further appeal would therefore have been a bitter blow. Whatever their view as to their entitlement to be paid at that stage, they would not receive payment unless and until the appeal to the Court of Appeal was resolved in their client’s favour. The Respondent had no money to pay them otherwise.

The sweet jar had been snatched away and would only return if the appeal to the Court of Appeal (for which permission had been granted by the Court of Appeal) failed. It is not surprising that there would be considerable concern about past and future costs.

Paragraph 4 of Mr Green’s witness statement dated 24^th June 2009 can I think only be read as an expression of his view that the 2007 agreement had run its course and Thomas Cooper had to decide whether to continue to act on some other basis – rather than that they were contemplating termination of the 2007 agreement. That is not inconsistent with what Rimer LJ was told on 6^th July 2009 (that they would “not proceed if no variation is granted”).

Mr Peters’ letter of 8^th July 2009, while contrived, is again not inconsistent with the view that the 2007 agreement had run its course, rather than that it had been terminated.

In fact it had not run its course and Thomas Cooper remained under an obligation to act for the Respondent unless and until they terminated the 2007 agreement under clause 7(b)(ii). There is no evidence that they did terminate the agreement. If they thought that the agreement had run its course, why would they?

There is no evidence that Thomas Cooper determined their retainer or repudiated their agreement with the Respondent. They remained on the record. Clearly they were still acting for the Respondent when Mr Peters wrote his letter to Rimer LJ, despite what the letter states, because they had a significant hand in drafting it. That they did not represent the Respondent at the hearing on 14^th July was a tactic. In fact a trainee solicitor attended the hearing, presumably with a view to reporting back.

In short while they contrived to give the appearance that they would not continue to act, there is nothing to suggest that Thomas Cooper actually ceased to act for the Respondent at any time. Although Mr Green indicated that he was not required to act for the Respondent on the appeal to the Court of Appeal, there is nothing to suggest that the contractual relationship was in fact ever broken.

In my judgment the letter of 22^nd July 2009 was therefore a variation of the 2007 agreement. Although the letter records an agreement “that success for the purposes of the [2007 agreement] would be a win in the High Court or an order for costs in your favour” there is nothing to suggest that this was recording an earlier variation of the 2007 agreement. Rather it is a reflection of what Thomas Cooper believed the 2007 agreement provided.

That the letter is a variation of a subsisting agreement is perhaps supported by the sentence in the letter:

Save as varied herein the terms remain as per the CFA.

Accordingly I conclude that the 2007 agreement was not terminated and was not varied by any agreement which was not reduced to writing.

The Appellants contend that the misrepresentation of the funding position to Rimer LJ (that Thomas Cooper were not obliged to continue to act and would not continue to act) amounted to an abuse of process and/or misconduct for the purposes of CPR 44.14.

CPR 44.14 provides:

(1)

The court may make an order under this rule where –

…..

(b)

it appears to the court that the conduct of a party or his legal representative, before or during the proceedings which gave rise to the assessment proceedings, was unreasonable or improper.

(2)

Where paragraph (1) applies, the court may –

(a)

disallow all or part of the costs which are being assessed; or

(b)

order the party at fault or his legal representative to pay costs which he has caused any other party to incur.

There is no evidence before me which would enable me to find that there was a deliberate misrepresentation. The documents to which I have already referred would suggest that it was genuinely believed by Mr Peters and Mr Green that Thomas Cooper had earned the success fee and was not obliged to carry on representing the Respondent in the Court of Appeal.

While, in the case of Mr Green, he should have known the true position his failure is not such as to justify the conclusions either that this amounts to an abuse of process or that the sanctions allowed by CPR 44.14(2) would be appropriate. First, Thomas Cooper was open about the new arrangements, informing the Appellants’ solicitors that they would be acting under a discounted conditional fee agreement in their letters of 14^th and 17^th July 2009. While the Appellants expressed “grave reservations as to the conduct of” Thomas Cooper (see Howes Percival’s letter dated 20^th July 2009) they nevertheless paid the £100,000 ordered rather than reverting to the Court, firing this shot:

The Commissioners will refer to the correspondence, and the instructions that you gave your Counsel at the hearing on 6^th July if you return to the Court to seek further funding. (emphasis added)

Secondly, the Appellants have in fact suffered no loss or prejudice by reason of any misrepresentation. The money paid as a result of the Respondent’s application was by way of a release of funds which, in the event, belonged to the Respondent.

No challenge is now made to the recoverability of Mr Challenger’s success fee.

Mr Patchett-Joyce and Mr Rickards acted for the Respondent in the High Court under conditional fee agreements dated 24^th April 2009. Each provided for a success fee of 100 per cent.

The agreements were varied in November 2009, by reducing the success fees to 85 per cent but providing that counsel should receive some fees in any event - £25,000 in the case of Mr Patchett-Joyce and £2,500 in the case of Mr Rickards. The agreements setting out the variations state that they are intended to have effect from 19^th June 2009.

The Appellants contend that as counsels’ conditional fee agreements are silent as to any percentage for postponement of payment, but are dependent on the solicitors’ conditional fee agreement which provided that 5 per cent of the success fee related to postponement, 5 per cent of counsels’ success fees should be deemed to relate to postponement.

I am afraid that I really cannot follow this argument. If the agreement does not state that any part of the success fee relates to postponement then it seems to me that no part of the success fee relates to postponement.

The Appellants submit that it was unreasonable for the Respondent to enter into the new arrangements with Thomas Cooper and counsel once the Court had allowed the release of £100,000 on account of their costs.

It seems to me that the difficulty with this argument is that the sum released was only a little over half of the estimated costs of the appeal. There would be no other source of funds to make up the shortfall. The discounted fee arrangements were designed to meet that shortfall and I cannot say that the Respondent’s decision to enter into those arrangements was unreasonable. My view may well have been different had the Court ordered, or had the Appellants agreed to, the release of the estimated costs in full. For then a sum would have been released, on account of costs, which would or should have paid the Respondent’s legal costs, win or lose, on a conventional basis. There would have been no reason to enter into or continue conditional funding arrangements. But that is not what happened.

It is not in issue that retrospective success fees are permissible in principle. However in Forde v Birmingham City Council [2009] EWHC 12 QB Clarke J said:

122.

It is material to note that the occasions when a retrospective CFA will be entered into after a CFA without a success fee has already been signed are likely to be limited. If such a CFA already exists the solicitor will be bound by it and is unlikely to need, or be able, to enter into a new retrospective CFA.

….

133.

Mr Mallalieu submits that the parties are free to change the terms upon which the solicitor is to be remunerated in any manner they wish. That being so they can, absent undue influence or misrepresentation, validly introduce or increase a success fee which is to apply retrospectively.

134.

In this context, however, the interests of the parties are not the only ones to be considered. The interests of the paying party, who is potentially affected by an agreement on a success fee which he has no ability to influence, have to be considered. That may be of particular significance in a case such as the present where the claimant enjoys a good prospect of winning and where there is no realistic likelihood of her having to pay any part of a success fee which she cannot recover from her opponent.

135.

One of the reasons put forward in support of the contention that a retrospective success fee is contrary to public policy is that a litigant is entitled to know whether he is facing an opponent who has agreed a success fee and that a retrospective success fee would be inconsistent with that right. Had the paying party known from the beginning that there was a success fee he might have acted differently. It is, therefore, material to consider the extent to which the CPR provides for an opponent to be informed that he faces someone who has agreed a success fee.

…..

150.

In respectful disagreement with Master Campbell and Master Hurst, I do not regard it as necessary to hold that a retrospective success fee is per se contrary to public policy. There is, in my view, insufficient warrant for effectively precluding solicitor and client from making such an agreement. In some, perhaps many, circumstances a retrospective success fee, or its amount, may be unreasonable, either as between the parties or as between solicitor and client. But this will not always be so. The Court has, in my opinion, enough weapons in its armoury, in the form of the criteria applicable on a detailed assessment and the provisions of the Costs Practice Direction and the Practice Direction on Protocols, to disallow or reduce retrospective fees that are unreasonable, as in this case.

In the present case the success fee percentages agreed in the variations to the conditional fee agreements (for both solicitors and counsel) are lower than the percentages agreed originally. However, they are applied, in the case of the solicitors, to higher hourly rates. In the case of counsel they are applied in respect of a period when counsel became entitled to the payment of fees even in the event of failure.

It seems to me that the only real issue on the retrospective success fees claimed is the reasonableness of recovery and so I consider that as part of my decision on the success fees generally.

The Appellants do not now challenge the level of success fees claimed by Thomas Cooper for work done in the Tribunal or in the High Court (95 per cent). Nor do they challenge the level of the success fee claimed by Mr Challenger throughout (100 per cent). They contend that the success fees claimed by Mr Patchett-Joyce and Mr Rickards for work done in the High Court (100 per cent) should be reduced by 5 per cent to reflect the postponement of payment, but I have already rejected that. They do not challenge the success fee claimed by Mr Post for work done on the costs application in the Court of Appeal.

The Appellants do challenge the levels of success fees claimed under the discounted conditional fee agreements by Thomas Cooper (80 per cent), Mr Patchett-Joyce and Mr Rickards (85 per cent), and by Thomas Cooper on the costs application (90 per cent).

In relation to Thomas Cooper’s success fees Miss Ayling, on behalf of the Appellants, relies on the decision of the Court of Appeal in Gloucestershire County Council v Evans [2008] EWCA Civ 21 in which Dyson LJ (as he then was) said at paragraph 28:

First, I do not accept that, in determining whether the success fee claimed is reasonable, the court is bound only to consider the risk of failure. Para 11.8(1) of PD 44 provides: “In deciding whether a percentage increase is reasonable relevant factors to be taken into account may include- (a) the risk that the circumstances in which the costs, fees or expenses would be payable might or might not occur...”. The court must take into account all relevant factors. It is difficult to conceive of a case where the risk of failure would not be a relevant factor. But it is clear that it is not the only relevant factor. In the case of a discounted fee CFA, the court could, and usually would, also have regard to the fact that a reduced level of fees would have been recoverable even if the case had been lost. Thus, if the basic charge was £200 per hour and the discounted charge £199 per hour, in assessing the reasonableness of the fee, the court would be bound to take into account the fact that the solicitor was not at risk, whatever the risk to the client of the claim failing. In the real world, however, a solicitor would surely not offer such terms to his or her client. Quite apart from the question whether such conduct would be regarded as unprofessional by the Law Society, it is most unlikely that the client would agree to retain a solicitor on such a basis. But in the unlikely event that such terms were agreed between solicitor and client, they would have to pass the reasonableness test on a detailed assessment of costs.

Miss Ayling suggests that the assessment of the risk of being entitled to the discounted rate rather than the primary rate should be calculated in a similar way to the approach adopted by Mr Post. The difference between Mr Green’s rates is £200. Assuming a 50 per cent risk of failure the success fee would be 20 per cent (0.5 x 200 divided by 500).

Were the court to allow a lower hourly rate and that rate used in the calculation the result would of course be different. Using the rate offered for Mr Green in the points of dispute (£373.46), Miss Ayling calculates a success fee of 9.8% (reflecting a 50 per cent chance of losing £73.46).

Miss Ayling goes on to submit that the risk that the Respondent would not be able to pay even the discounted rates in the event of failure is not something which should be taken into account. In C v W [2008] EWCA Civ 1459 Moore-Bick LJ said at paragraph 21:

In the light of the concession to which I referred earlier the judge did not make any allowance for the risk that Mrs. C might not pursue the claim to a conclusion. In my view there are two reasons why it would have been wrong for him to do so. The first is concerned with the nature of the agreement itself. The foundation of Mr. Post's argument was that if a claimant for whom a solicitor is acting under a CFA decides not to pursue the claim, there are unlikely to be any funds available from which the solicitor can hope to obtain payment of his profit costs and disbursements. In effect, the solicitor is at risk of recovering nothing. However, that is to treat the solvency of the client as an element in the risk which the solicitor undertakes under a CFA, which is not usually the case. It is usual for a CFA to provide, as it does in this case, that the client may terminate the agreement at any time, but that if he does so before the case has been disposed of by judgment or compromise, the client is liable to pay the solicitor's profit costs and disbursements. As Mr. Morgan pointed out, the legislation providing for CFAs is concerned with arrangements under which the whole or a part of a solicitor's fees become payable only in specified circumstances and are to that extent at risk and the success fee is intended to reflect that risk. The circumstances (and therefore the risk) are invariably related in one way or another to the outcome of the proceedings, not to the client's solvency.

On the other hand if solvency is relevant, it would also be relevant that £100,000 had been obtained on account of the costs of the appeal.

On behalf of the Respondent Mr Kirby submitted that while account should be taken of the fact that the discounted rates would be due in any event it was not appropriate to embark on an over-elaborate mathematical approach. This was hard-fought, very risky litigation and a success fee in the range of 50-60 per cent would be appropriate.

I accept that this was a risky case for the Respondent’s solicitors. The Respondent had won in the High Court but permission to appeal had been granted by the Court of Appeal. It would be fair to put the prospects of success, or failure, at 50 per cent. But the risk to the solicitors was greatly reduced by the agreement of a discounted fee payable in the event of failure. Success fees have to be calculated according to the risk and I cannot fault the approach suggested by Miss Ayling of applying the risk of failure to the shortfall between the rates. That the hourly rate allowed by the court may be less than the primary rate is not, in my view, relevant. The primary rate was agreed between the solicitors and their client as a reasonable rate for the client to pay. Similarly the risk of not recovering the lower rate from the client is not relevant (C v W) although if I were wrong on that the release of £100,000 on account of costs would also be relevant.

Accordingly it seems to me that the agreed success fee of 80 per cent is unreasonable. It does not take proper account of the reduction in risk consequent on the agreement that the Respondent would be liable for a discounted rate in any event. In my judgment the reasonable success fee as between the parties would be 20 per cent. (Any percentage uplift for postponement of payment would be in addition to that.)

Is it then reasonable that this rate should apply retrospectively to all work done from 22^nd May 2009? But for the discounted conditional fee agreement Mr Green’s rate over this period would have been £410 per hour. With a success fee of 95 per cent the claim against the Appellants would be £799.50 per hour. The discounted conditional fee agreement provides for a primary rate for Mr Green of £500. With a success fee of 20 per cent, the claim against the Appellants would be £600 per hour. The arithmetic in relation to Mr Whelan’s rates is broadly similar.

If the total rate (base rate plus success fee) under the 2009 agreement were greater than the total rate under the 2007 agreement, it would be difficult to see how any retrospective effect would be reasonable as between the parties. However, in the circumstances of this case I cannot say that the retrospective effect of the arrangements set out in the 2009 agreement is unreasonable as between the parties.

In relation to the fees of counsel it seems to me that a similar approach must apply for the same reasons. In respect of Mr Patchett-Joyce, Miss Ayling calculated a success fee of 33 per cent by applying a 50 per cent risk of failure to the difference between the brief fee (£75,000) and the fee payable in any event (£25,000). Allowing for the fact that other fees would be incurred in addition to the brief fee, she contended for a success fee of 40 per cent.

If one takes a strictly mathematical approach, the total of the base fees claimed for work done after 19^th June 2009 (the date from which the variation was to take effect) by Mr Patchett-Joyce is £112,000. The sum to which he is entitled in any event is £25,000. The difference is £87,000. 50 per cent of 87 divided by 112 gives 39 per cent.

In respect of Mr Rickards the figure would be 50 per cent of 39,200 (£41,700 minus £2,500) divided by 41,700, giving 47 per cent.

Allowing for the uncertainties as to what work would have been required I would allow a 40 per cent success fee for Mr Patchett-Joyce and a 50 per cent success fee for Mr Rickards. Again, given that these are lower than the rates agreed by counsel in the original conditional fee agreements (100 per cent) it is not unreasonable that they should apply retrospectively.

In respect of Thomas Cooper’s fees for the costs application in the Court of Appeal, their email dated 18^th August 2010 recorded that counsel had put the prospects of success at slightly better than 50 per cent. On that basis I think that it would be reasonable to allow the success fee of 90 per cent that is claimed. As that was expressed to be in substitution for the 100 per cent allowed for in the original agreement, it must follow that 5 per cent relates to the postponement of payment and that the success fee allowed as between the parties should be 85 per cent.

What remains in issue are some of the increases in hourly rates from those set out in the 2007 agreement: £350 for solicitors with over 4 years’ post qualification experience, £260 for “other solicitors” and £145 for trainees. The agreement provided:

We will review the hourly rate on the review date and on each anniversary of the review date. We will not increase the rate by more than the rise in the Retail Prices Index and will notify you of the increased rate in writing.

The review date was “1st May 2008 and thereafter if not altered”.

The only evidence of an agreement to increase the rates is that set out in the countersigned letter of 22^nd July 2009:

On 16 June 2008 our base rates were increased by agreement to Nick Green £410 per hour and Mark Whelan £285 per hour

and the primary rates set out in that letter for work done after 22^nd May 2009: £500 for Mr Green, £350 for Mr Whelan and £150 for trainees.

The Appellants contend that only agreed increases in rates of no more than the rises in the retail prices index can be allowed. They rely on my decision in Puksis v Brumby [2008] EWHC 90095 (Costs) in which I said (at paragraph 53):

A unilateral increase greater than that permitted by the agreement cannot amount to a mutual variation of the agreement. The absence of complaint by the client cannot be taken to be consent.

It seems to me that the present case is distinguishable as there is evidence (the countersigned letter of 22^nd July 2009) that the Respondent agreed to the rate changes in June 2008. The same letter would of course also evidence the Respondent’s agreement to the rate changes from 22^nd May 2009. Although the client could have insisted on limiting any increases to the retail price index, the client can of course agree to a higher rate.

I have not however seen any evidence that the Respondent agreed to an increase in Mr Whelan’s rate for the costs application to £475. Indeed the email from Thomas Cooper to Mr Peters of 18^th August 2010 confirms that “our rates will continue to be those which were agreed with you for the appeal before the Court of Appeal”. Accordingly no more than £350 per hour could be allowed for work done by Mr Whelan. Apart from that it seems to me that the rates claimed are those that were agreed with the Respondent. The trainees’ rate has I think been agreed at £145 throughout.

In my judgment Mr Green’s rate of £410 per hour for work done after 16^th June 2008 is reasonable. This was complex, high value work and the rate is only slightly over that suggested in the guideline hourly rates for 2008 (£396).

The step up in Mr Green’s rate to £500 per hour for work done after 22^nd May 2009 is, in my view, unjustifiable and the rate claimed is unreasonable. The guideline hourly rate for 2010 was £409. A modest increase would be justifiable and reasonable and I would allow £425 for work done after 22^nd May 2009. That is also the rate set out in the Respondent’s estimate of costs for the Court of Appeal dated 24^th June 2009.

Mr Whelan was admitted as a solicitor on 1^st November 2007. That he had particular experience of MTIC cases does not entitle the Respondent to recover more than it is liable to pay its solicitors. As the rate for solicitors of less than 4 years post qualification experience provided in the 2007 agreement is £260, no more than that should be allowed for work done by Mr Whelan up to 16^th June 2008. Although £260 is more than the Band C guideline rates for 2007-8, I am satisfied that it is reasonable.

I am also satisfied that £285 would be a reasonable rate for Mr Whelan for work done after 16^th June 2008. However I am not satisfied that the increased rates of £350 from 22^nd May 2009 or £475 for the costs application are reasonable. As at November 2010 Mr Whelan had 3 years’ post qualification experience, putting him in Band C throughout the whole of his involvement. While I accept that his experience and the degree of responsibility assumed by him justifies a higher rate than the guideline rate, it does not justify more than double the guideline rate.

The costs estimate prepared for the Court of Appeal in June 2009 gave a rate of £295 for Mr Whelan. Having regard to all of the circumstances I think that would be a reasonable rate for all work done by him after 22^nd May 2009.

In view of my decision on Thomas Cooper’s success fee I cannot say that the agreement that the rate increases should be retrospective is unreasonable.

The Tribunal’s decision was handed down on 17^th December 2008. Notice of Appeal was lodged on 6^th February 2009 and on 18^th February 2009 a notice of funding in form N251 was lodged at court and served on the Appellants. The notice given was that the claim was funded by a conditional fee agreement dated 16^th May 2007 which provides for a success fee.

The Appellants contend that notice of funding should have been given in respect of the proceedings in the Tribunal.

Rule 44.15 of the Civil Procedure Rules 1998 provides that:

(1)

A party who seeks to recover an additional liability must provide information about the funding arrangement to the court and to other parties as required by a rule, practice direction or court order.

Paragraph 19.2 of the Costs Practice Direction (Practice Direction to CPR Parts 43-48) provides:

(1)

In this paragraph, ‘claim form’ includes petition and application notice, and the notice of funding to be filed or served is a notice containing the information set out in Form N251.

(2)

(a) A claimant who has entered into a funding arrangement before starting the proceedings to which it relates must provide information to the court by filing the notice when he issues the claim form.

(b)

He must provide information to every other party by serving the notice. If he serves the claim form himself he must serve the notice with the claim form. If the court is to serve the claim form, the court will also serve the notice if the claimant provides it with sufficient copies for service.

…..

(4)

In all other circumstances a party must file and serve notice within 7 days of entering into the funding arrangement concerned.

(Practice Direction (Pre-Action Conduct) provides that a party must inform any other party as soon as possible about a funding arrangement entered into prior to the start of proceedings.)

The first question is whether these provisions apply to proceedings in the VAT Tribunal.

CPR 2.1 provides:

(1)

Subject to paragraph (2), these Rules apply to all proceedings in –

(a)

county courts;

(b)

the High Court; and

(c)

the Civil Division of the Court of Appeal.

CPR 43.2(2) provides:

(2)

The costs to which Parts 44 to 48 apply include –

(a)

the following costs where those costs may be assessed by the court –

(i)

costs of proceedings before an arbitrator or umpire;

(ii)

costs of proceedings before a tribunal or other statutory body; and

(iii)

costs payable by a client to his solicitor; and

(b)

costs which are payable by one party to another party under the terms of a contract, where the court makes an order for an assessment of those costs.

Miss Ayling submits that the effect of this last provision is to apply “all of CPR 44-8 to the costs of proceedings before a Tribunal”. But to my mind that ignores the word “costs” in “The costs to which Parts 44 to 48 apply include…”. It seems to that this provision is intended to provide a definition of the word “costs” where it is used in CPR Parts 44 to 48 to the effect that where such costs are to be assessed by the court they are to be assessed in accordance with those rules. The scope of the rule is thus limited to the assessment process.

That must be right because other provisions in CPR Part 44, for example the court’s powers in relation to misconduct, are not applied to, for example, arbitral proceedings. Costs regimes in, for example, employment tribunals, are different to the regime employed by the courts.

In my judgment there is nothing in the Civil Procedure Rules which required the Respondent to give notice of funding arrangements (whether in form N251 or otherwise) in relation to the proceedings in the VAT Tribunal.

At the relevant time the rules governing the procedure of the Tribunal were the Value Added Tax Tribunals Rules 1986 and rule 29 provided:

(1)

A tribunal may direct that a party or applicant shall pay to the other party to the appeal or application –

(a)

within such period as it may specify such sum as it may determine on account of the costs of such other party of and incidental to and consequent upon the appeal or application; or

(b)

the costs of such other party of and incidental to and consequent upon the appeal or application to be assessed by a Taxing Master of the Supreme Court or a district judge of the High Court … by way of detailed assessment … on such basis as it shall specify.

(c)

Where a tribunal gives a direction under paragraph 1(b) of this rule in proceedings in England and Wales the provisions of Part 47 of the Civil Procedure Rules 1998 and any practice directions supplementing that Part shall apply, with the necessary modifications, to the taxation of the costs as if the proceedings in the tribunal were a cause or matter in the Supreme Court of Judicature in England.

CPR Part 47 provides the procedure for detailed assessment. There is nothing in the VAT Tribunal rules which requires service of a notice of funding.

Miss Ayling referred me to the decision of the Court of Appeal on the costs application in the present case: [2010] EWCA Civ 1448. But it seems to me that the issue that the court was deciding (in paragraphs 5 to 9) was whether CPR Part 36 applied to appeals from the Tribunal (in the High Court or Court of Appeal), rather than proceedings in the Tribunal.

Miss Ayling submitted that the CPR are applied by analogy in proceedings in the VAT Tribunal and accordingly, by analogy, there is a positive requirement to give notice of additional liabilities: Broomco (1984) Ltd v HMCE (C00123) LTL 20^th December 2001; and The Funding Corporation Ltd v Commissioners for HM Revenue and Customs [2006] UK VAT V 19525. She also relied on the comments of the tribunal chairman in the present case: “the CPR do not apply to the Tribunal, however the approach of the courts is clearly relevant”.

In Broomco the decision for the tribunal was who should pay the costs. The reference to CPR Part 47 in what is now rule 29(1)(c) was then a reference to Order 62 of the Rules of the Supreme Court. The Tribunal noted that the rules had not been amended to reflect the replacement of the RSC by the CPR and went on to apply CPR Part 44 in making their decision.

In fact when the Tribunal rules were amended (after Broomco) the reference to RSC Order 62 was replaced by a reference to CPR Part 47 only, not CPR Parts 43-48.

In the Funding Corporation case the Tribunal reiterated (at paragraph 15) that it “will apply by analogy the general rules about costs contained in Part 44 CPR and in particular rule 44.4 which deals with the basis of assessment”.

I cannot extract from these decisions any greater proposition than that the Tribunal will follow the general principles in relation to costs that the courts employ – principles now embodied in the CPR. But it seems to me that is very different from importing the detailed requirements of the CPR.

The Tribunal’s rules expressly apply CPR 47 where the costs of proceedings in the Tribunal are to be assessed by the court – that then governs the procedure in the court. Had it been desired to import from CPR the requirement to give notice of funding in Tribunal proceedings, that could easily have been done.

Given the automatic and draconian consequences of a failure to give notice of funding, I cannot conclude that the requirement to give notice, the sanction for not giving notice or the power to grant relief from such sanction (in CPR 3.9) have been imported into the procedure of the Tribunal simply because the Tribunal generally follows the principles applied by the courts in relation to the incidence of costs. Accordingly in my judgment there was no requirement to give notice of funding in relation to the proceedings in the Tribunal.

For similar reasons, in my judgment CPR 44.3B has not been imported into the procedure of the Tribunal and if there has been a failure to provide information, the sanction imposed by that rule has not been applied.

It follows that there is no necessity for the Respondent to apply for relief from sanctions. However, in case I am wrong as to whether a sanction has been imposed, I will give reasons for my view that this would have been an appropriate case in which to grant relief under CPR 3.9 (if indeed that also applies to proceedings in the Tribunal).

For these purposes I proceed on the footing that the Appellants were not notified that Thomas Cooper were acting under a conditional fee agreement until 8^th April 2008, nearly a year after the appeal to the Tribunal was lodged and about 2 months before the appeal was heard by the Tribunal (statement of Alison Kirby 7 September 2011 paragraph 21).

In CIBC Mellon Trust Co v Stolzenberg [2004] EWCA Civ 827 Arden LJ said:

The dictum of Mance LJ [in Hansom and others v Makin and Wright [2003] EWCA Civ 1801]makes it clear that although the Court must go through each of the matters in the list in CPR 3.9 as a separate and distinct exercise the result is not ascertained by adding up the “score” of either side on each point. If that were the right method, there would be a danger of double-counting. The object of CPR 3.9 is to ensure that all the right questions are asked. That produces “structured decision-making”. In addition to going through the subparagraph of CPR 3.9, the Court must ask itself if there are any other circumstances that need to be taken into account. However, having done all this, the Court is then also required to stand back and form a judgment to the aggregate of the relevant circumstances that have been identified in going through the list to see whether it is in accordance with the overriding objective in the CPR to lift the sanction. This overall “look see” is simply the overriding objective in action.

Taking each of the factors in CPR 3.9: (a) the interests of the administration of justice are never served by a failure to comply with the rules; (b) the application for relief has not been made promptly, but it is common that applications for relief from the sanction for failing to provide funding information are made as part of the detailed assessment process rather than in the substantive proceedings; (c) there is nothing to suggest that the failure to comply was intentional; (d) there is no good explanation for the failure (on the assumption that, contrary to my view, there was a failure); (e) no other relevant failure was relied on beyond a short delay in serving an N251 in the High Court proceedings (not, in itself, relied on as giving rise to a sanction); (f) the failure was caused by the Respondent’s legal representatives; (g) no hearing date has been imperilled; (h) the failure to comply had no apparent effect on either party; (i) if relief is granted the Respondent’s solicitors would recover a success fee for the proceedings in the Tribunal which, otherwise, the Appellants would not have to pay.

It is clear that prejudice to the non-defaulting party, or the lack of it, is an important factor: Supperstone v Hurst [2008] EWHC 735 (Ch); Manning & Begs v King’s College Hospital [2011] EWHC 2954 (QB).

There was no apparent prejudice caused to the Appellants by the failure to give notice of funding. There is nothing to suggest that the Appellants would have acted any differently had they received earlier notice. Knowing of the conditional fee arrangements they opposed the High Court appeal and pursued the further appeal to the Court of Appeal. Any uncertainty as to the outcome of the detailed assessment that the failure, or the consequent need to apply for relief, has caused can be compensated in the costs order made on the detailed assessment rather than by refusal of relief: Manning.

Standing back and looking at all of the circumstances, but having particular regard to the lack of prejudice, it seems to me that it would not be just to refuse relief were it required.