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Qualified One Way Costs Shifting -v- Fundamental Dishonesty

Qualified One Way Cost Shifting ("QOCS") now applies to all injury claims, except where a CFA was signed prior to 1 April 2013.  As the new rules bed in, the full extent of the effect of QOCS is beginning to be seen.   It is generally accepted that this principle will spread to other areas of litigation once its success (or otherwise) has been measured.  All litigators should take note, but for the moment only Injury litigators have the happy experience of working within this new costs regime.

What is QOCS protection? If a Claimant never puts a foot wrong in an injury case and then loses completely then the Claimant will not have to pay the Defendant's costs   Does a Claimant  have little to fear from litigation?  Was that was the intention of QOCS. 

The position is not quite that simple; failure to beat a Part 36 offer can defeat QOCS protection.   In such cases the normal costs order will apply, i.e. that that the Claimant does pay the Defendant's costs incurred since the expiry of the relevant period for acceptance of the Part 36 offer.  The effect of QOCS will be to restrict the enforcement of that costs order.

A common misconception about QOCS is that the order to pay costs is limited to the amount of damages.  This is not the case, it is the enforcement of the order that is limited to the level of the Claimant's damages.  Worryingly for the Claimant's lawyer is the doctrine of set off (see CPR 44.12).  This means that if the Defendant is awarded costs of £5,000, but the Claimant's damages are only £3,000, the shortfall of £2,000 can be set off against the Claimant's costs, incurred before the -Part 36 was made.

The effect of this should see Claimants and their lawyers being far less bullish about the margin of error they are prepared to risk when Part 36 offers are made by Defendants.

It should also be remembered that QOCS only applies if the case goes to a contested hearing.  The issue does not arise in settled matters.

S.57 - There is now an additional feature in the Defendant's arsenal.  For cases issued on or after 13 April 2015, Section 57 of the Criminal Justice and Courts Act 2015 will apply.   Some believe that this undermines the whole concept of QOCS.  Section 57 contains the 'Fundamental Dishonesty' test, widely reported and much feared by Claimant litigators.

In this brave new world a Defendant could admit primary liability and yet still pay no damages and receive their costs in full if the court can be persuaded on the balance of probabilities that any element of the primary or related claim was Fundamental Dishonesty.  If Fundamental Dishonesty is found then the court must still assess the level of damages the Claimant would have been awarded.  The Defendant's costs are then assessed and set off against the assessed damages, and the balance is to be paid by the Claimant to the Defendant.

Whilst widespread satellite litigation is anticipated, the Court of Appeal has provided an indication of where the 'bar' lies in the recent case of Hayward v Zurich Insurance Company plc [2015], in which it was held that exaggeration for financial gain is fraud.  If Fundamental Dishonesty is less than fraud, any claim exaggerated for financial gain arguable must  be fundamentally dishonest.

Section 57 states that the whole claim MUST be dismissed if there is fundamental dishonesty in relation to any part of it.  Lawyers should be advising their Claimant clients that even if they 'win' they may be deprived of all of their damages and be ordered to pay the other side's costs, probably on an indemnity basis.  This is not the protection that QOCS promised Claimants.

The extent of the risk posed by Fundamental Dishonesty applications by Defendants is a risk that perhaps has not been factored into the premiums currently set by Legal Expenses Insurers.  The introduction of QOCS saw premiums fall; will Claimants now find their premiums increase as the effect begins to filter into the market place?

The judicial feeling is that ANY exaggerated claim, no matter how small, will be considered Fundamentally Dishonest, but it remains to be seen how the courts will apply this new principle in practice or whether Claimants will be willing to take a case to court if the adverse risks are so draconian.

A Claimant cannot, however, escape the issue by filing a Notice of Discontinuance.  The court can still direct in such cases that issues arising out of an allegation of fundamental dishonesty be determined even though the notice has not been set aside.

Does this mark the end of 'miscellaneous expenses' seen so often on schedules of loss in the past?  Or the aspirational schedules that are regarded as a starting point for negotiation as opposed to a realistic statement of the true level of the claim?

This truly is a 'brave new world' for injury litigators.  The initial fear is that QOCS would prompt more trials, with Claimants having little to lose by pressing on with poor cases.  Our own experience here at Ashfords is that risk-based Part 36 offers are being accepted promptly and at a lower level than ever before.  If that pattern persists and Claimants are proving to be cautious to test the new rules, it may be  some time before the anticipated 'satellite litigation' is available to provide some judicial guidance on the application of these new rules.

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