Update: costs

Multiple defendants

It is common in personal injury matters for a claim to be initially pursued against a number of potential defendants but to succeed against only some of them. This is particularly common in disease claims. Given how often this situation must arise, it is surprising how little case law there is on the question of how the successful claimant's costs should be dealt with (the recoverability of the successful defendants' costs is another matter entirely).

There should be no problem in relation to the issue of the recoverable costs incurred purely in relation to the claims against unsuccessful defendants, such as communications with those defendants or investigating liability so far as the claims against those defendants alone are concerned. Those costs will normally be recoverable.

It would also be generally accepted that the costs incurred purely in relation to the claims against the successful defendants would not be recoverable from the other defendants (assuming liability issues are quite distinct between the defendants).

However, what about 'common' costs? In this context, the expression is used to describe the costs that would have been incurred regardless of the number of defendants pursued, such as medical reports or possibly the issue fee.

Again, it is generally accepted that where a claim is pursued against two defendants and each defendant pays damages, then each defendant will be liable in equal proportions for the claimant's common costs. This will be regardless of the amount of damages paid by each defendant.

It is not uncommon, particularly in disease claims, for defendant insurers to agree among themselves to pay the claimant's costs in proportion to the damages paid by each '“ to reflect the time exposure period of the cause of the disease '“ but this appears to have no legal foundation. This causes no problems where the claimant is successful against each defendant. The defendants will pay all the claimant's common costs with each defendant liable for an equal share.

Common costs

Where the problem arises is where the claim succeeds against some, but not all, defendants. What happens to the common costs?

The first approach is to say that the unsuccessful defendants are liable for 100 per cent of the common costs. Those costs are identical to those that would have been incurred in any event and disregarding the unsuccessful claim against the other defendants. The unsuccessful defendants are not being asked to pay any more than they would have done in any event.

The other approach is that the common costs must be apportioned according to their purpose and equal apportionment will be the norm (see Fourie v Le Roux & Others [2006] EWHC 1840 (Ch)).

For example, if a claim is pursued against five defendants, the common costs must be equally apportioned between those five defendants and each is potentially liable for only 20 per cent. The fact that the claim may fail against some of these defendants is irrelevant. The potential liability of each defendant does not alter dependant on the success or failure as against the other defendants. The consequence of this is, if the claim succeeds against four defendants and fails against the fifth, the unsuccessful defendants are each only liable for their 20 per cent share. The claimant therefore 'loses' 20 per cent of the common costs.

In two recent first instance decisions, proceedings were issued against a number of defendants arising from asbestos exposure. The claims against some of the defendants were discontinued in both cases. Should the claimants recover 100 per cent of their common costs against the unsuccessful defendants or only a proportion? In Ryder v Harland & Wolff Ltd & Others (29 October 2010, Norwich County Court) and in Grufferty v Foster Wheeler & Others (15 November 2010, SCCO), regional costs judge Sparrow and Master Gordon-Saker, respectively, both accepted that the second approach was the correct one. The claimants 'lost' part of their common costs.If this is the correct approach, unsuccessful defendants should consider carefully whether they are paying the correct proportion of common costs to take into account all defendants pursued, and claimants should be cautious about which defendants they actively pursue if they are uncertain as to whether the claim against each defendant can be seen all the way through to a successful conclusion.

Given the complex issues that arise in relation to apportionment and division of costs (see for example Medway Oil and Storage Co Ltd v Continental Contractors Ltd [1929] AC 88) this is unlikely to be the last you hear on this issue.

Brain in a VAT

Now on to the exciting stuff. Since the rate VAT reverted to 17.5 per cent from 1 January 2010, the question of the correct rate to apply to costs being claimed from third parties has caused surprising difficulties. There are three relevant periods where different rates were in force:

• 17.5 per cent '“ for the period from 1992 to 30 November 2008.
• 15 per cent '“ from 1 December 2008 to 31 December 2009.
• 17.5 per cent '“ from 1 January 2010 to 3 January 2011.

Since VAT reverted to 17.5 per cent a very large number of receiving parties have been claiming this figure on all work, regardless of whether some of the work was undertaken between 1 December 2008 and 31 December 2009.

The starting point for understanding the correct rate to apply can be found in HM Revenue & Customs' VAT '“ Reversion of the Standard Rate to 17.5 per cent: A Detailed Guide for VAT-Registered Businesses. It states: 'Under the normal rules, standard rated supplies with tax points created by payments received or VAT invoices issued on or after 1 January 2010 will be liable to the 17.5 per cent rate.'

It is routinely argued that where the costs are not settled until after 31 December 2009, then, because an invoice will not be raised or payment received until after 31 December 2009, that is when the tax point will arise and therefore all work attracts VAT at 17.5 per cent.

In fact, the 'normal' rules are no more than the starting point. Where there are changes in the rate of VAT, special rules apply. This is explained in section 3 of the guide:

'However, there are optional change of rate rules that you may be interested in applying. You can apply the rules selectively to different customers. Also, you can adopt them without notifying HMRC.'

For present purposes we are concerned with services which were ongoing when the rate change occurred. These rules apply where there is a continuous supply of legal services either because the substantive claim was still ongoing on 1 January 2010 or because the detailed assessment proceedings had not yet concluded by 1 January 2010.

The guide explains this at section 3.4: 'It will happen that a service commences before 1 January 2010 and is still in progress after that date. The normal rule is that where an invoice is issued or a payment received after 1 January 2010 VAT is due at 17.5 per cent even if part of the supply was undertaken before that date. However, the special rules also apply here both in relation to continuous supplies of services and to single supplies of services carried out over a period of time.'

The option to choose which rate to apply is dealt with at section 3.4.1: 'If you make a continuous supply of goods (gas, electricity or water liable at the standard rate) or services (e.g. leasing equipment) and are currently applying the tax point rules at paragraphs 14.3 and 30.10 of the VAT Guide (Notice 700) you may account for VAT at the 15 per cent rate on that part of the supply made before 1 January 2010.

'This is the case, even if the normal tax point occurs later (for example, where a payment is received in arrears of the supply).

'If you decide to do this, you should account for VAT at 15 per cent on the value of the goods actually supplied or services actually performed before 1 January 2010, and at 17.5 per cent on the value of the goods actually supplied or services actually performed after.'

The position concerning work done by solicitors is expressly dealt with at section 9.5: 'If you are a solicitor most of your supplies are covered by the normal tax point rules including a tax point on completion of the work. Where you issue a VAT invoice or receive a payment on or after 1 January 2010 for work that was completed before 1 January 2010 you may use the special rules and account for VAT at 15 per cent (see section 3.3). Where work commenced before 1 January 2010 but will not be completed until on or after 1 January you can apportion the supply between that liable to 15 per cent and that liable to 17.5 per cent (see section 3.4).'

Number crunching

The Law Society's VAT change practice note VAT change: Reversion of the standard rate to 17.5 per cent '“ 15 December 2009 mirrors this. Section 3.3 states: 'The normal rule is that where an invoice is issued or a payment received after 1 January 2010 VAT is due at 17.5 per cent even if part of the supply was undertaken before that date.

'Where work commenced before 1 January 2010 but will not be completed until on or after 1 January you can apportion the supply between that liable to 15 per cent and that liable to 17.5 per cent.'

Unless, which would be unusual for claimant lawyers in personal injury claims, interim invoices have been delivered to the client, the rates that should be claimed by claimants from defendants are those in force at the time the work was undertaken.

Indeed, for cases being pursed under conditional fee agreements using the Law Society Model Agreement wording, claiming a higher rate than that in force at the time almost certainly amounts to a breach of the indemnity principle. The wording used in these agreements is: 'We add VAT, at the rate (now [n] per cent) that applies when the work is done, to the total of the basic charges and success fee.'

Therefore, the solicitor is contractually obliged to charge the client the rate applicable when the work was done rather than that applicable at any other tax point.

The added importance of this is that VAT is about to increase to 20 per cent from 4 January 2011. Again, VAT should be claimed as at the appropriate rate for when the work was done. VAT should not be claimed at 20 per cent throughout.