20 December 2018

One of the key provisions within the Civil Litigation (Expenses in Group Proceedings) (Scotland) Act 2018 (the Act) is its introduction of Qualified One way Costs Shifting (QOCS). The provisions on QOCS seek to address the purported imbalance between the individuals and insurers by restricting the costs payable by a pursuer if their claim is unsuccessful. In practical terms, QOCS operates in a pursuer’s favour protecting them from an adverse costs finding, provided they have conducted the litigation reasonably and appropriately.

However, there is an important exception to QOCS in s.4 (a) of the Act as QOCS can be dis-applied in cases where the pursuer “makes a fraudulent representation in connection with proceedings”.

It seems reasonable that if an insurer is faced with a claim in which a fraudulent representation is made, the pursuer should lose the protection that QOCS provides. However, it is unclear what conduct / behaviours will amount to a fraudulent representation in the eyes of the Court or when the Court will entertain such arguments. Will a defender have to take a claim to proof / trial in order to establish that a fraudulent representation has been made? Alternatively, will the court entertain motions (applications) to dis-apply QOCS before proof / trial when presented with compelling evidence?

Moreover, will the Scottish Courts interpret fraudulent representations as requiring the same standard of conduct required to establish fundamental dishonesty? This is an important point as, in the case of Grubb -v- Findlay, 2018, the Inner House of the Court of Session (Scottish Appeal Court) rejected the argument that a claim can be deemed fraudulent if, at its centre, it has a genuine component which is surrounded by an otherwise grossly exaggerated claim.

On one view, the disapplication of QOCS should theoretically serve to protect an insurer in the event of a fraudulent claim as it opens the pursuer up to the potential for a finding of costs against them. However, in reality will insurers be able to recoup the costs they incur defending such claims? Consider the scenario that the pursuer has the benefit of after the event (ATE) legal expenses insurance funding the claim. In circumstances where the defender successfully argues there to have been a fraudulent representation, would the ATE insurers be entitled to withdraw funding? Depending on the terms of the ATE policy, the answer could be in the affirmative. If the ATE insurer has agreed to fund the claim on the basis of a set of facts presented by the pursuer - which are then discovered to be false - this may allow the ATE insurer to refuse indemnity.

It would not be surprising if ATE insurers now seek to frame policies to deal with s.4 (a) of the Act and include a catch all provision allowing them to refuse indemnity in the event of fraudulent representations / fundamental dishonesty / gross or material exaggeration.

Over and above this, if we assume that the average pursuer making a personal injury claim does not have the means to fund the litigation personally, the risk is that defenders / insurers are not able to recoup their costs from a pursuer, even if QOCS is dis-applied by the Courts. This strikes us as inherently unfair and inequitable outcome of QOCS. The only party losing out here is not the pursuer or the ATE insurer, but the defender / insurer who may be unable to recover any costs incurred in defending the claim, even if successful in its defence.

The Act received Royal Assent earlier this year on 5 June 2018. However, it has not been brought into force as the Rules of Court required to give practical effect to the terms of the Act are currently being drafted. It will be interesting to assess the content of the Rules given the practical implications of QOCS and its dis-application is an area which appears to require further thought. It is an area which seems likely to be the subject of further legal argument upon implementation of the Act.

Contact: Mark Hastings, Associate mfh@bto.co.uk T: 0141 221 8012