Complex litigation and solicitors’ cash flow

Law firms need to maintain a healthy profit margin otherwise the practice could be in jeopardy. This is an obvious point, though it’s taken a recent ruling to actively demonstrate that the courts understand the need for law firms to maintain good cash flow.

Complex, long-running litigation can pose particular financial challenges for claimant personal injury firms. It necessarily involves the expenditure of significant sums in disbursements over a sustained period of time, typically many years. These costs include court fees, counsel’s fees, expert witness reports, and so on.

In HI v Hull & East Yorkshire Hospitals NHS Trust (Court of Appeal 21 June 2019), the defendant hospital trust failed in its appeal against an earlier decision allowing the appeal of law firm Switalskis (who represents the claimant) against a costs order made by the district judge. The claim was initially legally aided, but when the legal aid limit was reached in March 2017 the action continued under a Conditional Fee Agreement.

The decision meant the firm was allowed an interim payment of £150,000 to cover the costs of the ongoing clinical negligence action. It had already been running for 12 years and the claimant had received significant interim damages amounting to £1.34m.

What’s the background?

Switalskis has acted for the claimant from the beginning of his legal action. He suffered catastrophic brain damage at birth but even so, his life expectancy was still 70 years. A liability settlement was approved at the end of 2012 when he was five years old, but both the neuropsychology expert and an educational psychology expert said they could not give condition and prognosis evidence until he was at least 12 years old.

The court stayed proceedings until 2020 and the trial is expected to take place in 2022.

Just two days before the hearing, the defendant agreed to pay another £200,000 in interim damages but refused to pay anything further by way of interim costs. Switalskis therefore applied for the payment of further interim costs but lost. It won on appeal – and the Court of Appeal then refused the defendant’s application to appeal.

There were five critical factors leading to the defendant’s unsuccessful appeal:

  1. There is an acknowledged 90 per cent liability on the defendant’s part;
  2. The claim is very large and will far exceed the interim payments awarded;
  3. There will be an exceptionally long period before quantum can be finalised;
  4. There has been no Part 36 offer, and
  5. The judge assessed that there is effectively no risk that the costs sought by the claimant would prevent future set-off of costs to be paid to the defendant, “whether against costs due, or damages due, to the Plaintiff”.

In his written reasons, Irwin LJ stated: “It seems entirely proper to me to order interim costs payments with a view to the cashflow of solicitors in very long-lasting litigation, where very significant liability has been conceded. That must particularly be so in the case of specialist solicitors who may be facing such problems in a range of cases.”

In the earlier judgment allowing Switalskis’ appeal, the appeal court acknowledged the cash flow pressures on firms conducting such complex litigation. HHJ Robinson said in his ruling that “failure to ensure adequate cash flow during the period of inevitable delay” between determination of liability and quantum “may lead to the perverse and undesirable consequence that solicitors are unwilling to take on cases such as this at an early stage”.

He also commented that earlier authorities show the court “recognised that solicitors engaged in heavy and protracted litigation are entitled to expect an adequate cash flow”. Furthermore, he said that in the absence of any Part 36 offer from the defendant, “it is a virtual certainty that the claimant will be entitled to his costs to date. It seems to me that the orders for interim payments in respect of damages represent an example of the sort of triggering events anticipated by Moreland J [in a previous case] to give rise to a right to receive a tranche of costs”.

The district judge had also given insufficient (or any) weight to the fact that Switalskis would obtain no benefit at all from the December 2012 order for costs and he was wrong not to allow the firm’s application for costs.

What does this mean?

Complex personal injury litigation carries potentially significant financial risks and costs challenges, particularly for claimant PI firms who do not have the level of economic resources readily available to defendant insurers. There is also the reality that exceptionally few cases can now be taken on a legally aid basis.

To have refused Switalskis’ appeal (or allow the defendant’s subsequent appeal) would have amounted to a further blow to access to justice for the most vulnerable, and a win for defendant insurers. The result would undoubtedly have led to firms needing to consider carefully how financially viable it would be to take on a complex or high value case.

 

 

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