The Court of Appeal has recently given consideration to the question of when a successful defendant can avoid the application of QOCS (qualified one-way costs shifting) by virtue of the ‘fundamental dishonesty’ exception.
QOCS was introduced in 2013 and prevents a successful defendant from recovering costs from a claimant, thereby reversing the normal convention. It applies to all personal injury claims. However, there are exceptions to the rule, one of which is that QOCS will not apply if it is found that the claim was “fundamentally dishonest”. This is set out in Civil Procedure Rule 44.16(1). The rule contains no definition of “fundamentally dishonest” but the Court of Appeal decision in Howlett v Davies  EWCA Civ 1696 has shown that a court may allow an insurer to take advantage of the fundamental dishonesty exception even if that insurer has not expressly pleaded fraud in its defence.
In this case a mother and son had claimed damages allegedly suffered as a result of a low velocity impact road traffic accident. The insurer argued that the accident had not happened as alleged, or at all. The judge at first instance agreed with the insurers, deciding that the claim should be dismissed with costs on the basis that the Howletts had been dishonest and their dishonesty was fundamental.
The Howletts appealed the costs order, arguing that it was not open to the District Judge to make a finding of ‘fundamental dishonesty’ because such dishonesty had neither been pleaded nor had such an accusation been put to the relevant witnesses. Both appeal courts disagreed, on the basis that the credibility of the claim was expressly disputed and the witnesses were well aware that they were being accused of not telling the truth. This approves the approach to allegations of dishonesty suggested in Kearsley v Klarfield  EWCA Civ 1510 in which Brooke LJ said that a defendant would have done enough if it “set out fully the facts from which they would be inviting the judge to draw the inference that the plaintiff had not in fact suffered the injuries he asserted”. The Howlett ruling makes clear that if this approach is adopted claimants cannot later protest that they have been ‘ambushed’ by an allegation of fundamental dishonesty.
Regarding the meaning of “fundamentally dishonest”, the Court of Appeal approved the “common sense” interpretation set out in the County Court decision in Gosling v Halio (April 2014) in which it was held that a claim would be fundamentally dishonest if the dishonesty went to the root of either the whole of the claim or a substantial part of it.
Insurers, often rightly wary of making allegations of fraud, should be encouraged by the ruling in Howlett. The decision demonstrates that respondents to dubious claims will not automatically be excluded from use of the QOCS exemption for fundamental dishonesty by choosing not to plead fraud. What ultimately matters is that the witnesses receive fair notice of a challenge to their honesty and have the opportunity to deal with it. Hewey LJ indicated that this might be clearer if the words “dishonest” or “lying” are used but these are not pre-requisites. Even if the decision does not deter people from making illegitimate claims insurers should at least be confident that if claimants are challenged appropriately the would-be fraudsters will have to foot the bill for doing so.
John McGowan and Clare Birchenhough