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LORD CHANCELLOR'S DEPARTMENT

8. Case No. C.141/99

Administrative error by the Court Service (CS) in the operation of the small claims arbitration procedure; also delay by the Legal Aid Board (LAB) in determining an application for legal aid

8.1. Mrs A complained that error and delay by the Court Service (CS) in telling her that her negligence claim for £3,000 would be dealt with by trial in court rather than by small claims arbitration, and by the Legal Aid Board (LAB) in telling her that she was not financially eligible for legal aid, had caused her to incur costs in pursuit of the claim, which she would have dropped at the outset had she been made aware then of the true position.

8.2. My investigation began in October 1998 once I had obtained comments from the Chief Executives of CS and LAB. I have not put into this report every detail investigated but I am satisfied that no matter of significance has been overlooked. An appendix gives a chronology of the main events relating to the complaint, which are also summarised at paragraphs 8.6 to 8.8 below.

Background

8.3. Under section 64 of the County Courts Act 1984 county court rules may prescribe cases in which proceedings are (without any order of the court) to be referred to arbitration, and the manner in which and terms on which cases are to be so referred. Rules may also prescribe cases in which proceedings may be referred to arbitration by order of the court. Under Order 19 of the County Court Rules 1981 any proceedings in which the sum claimed or amount involved does not exceed £3,000 are automatically to be referred to the district judge for arbitration upon receipt by the court of a defence to the claim. (In practice, if a claim is unliquidated - that is, if the specific sum of money involved is not either already ascertained or capable of being ascertained as a matter of mere arithmetic - it will not be referred automatically for arbitration unless limited to £3,000.) The district judge may rescind a reference for arbitration and order trial in court if he is satisfied that a difficult question of law or a question of fact of complexity is involved. Where the district judge is minded to order trial in court, the court must notify the parties in writing, specifying the grounds on which the judge is so minded; a party may within 14 days of such notification object to the order for trial and request a hearing at which the district judge must decide whether to order trial in court and may give directions regarding the steps to be taken before or at any subsequent hearing. Where the district judge is not minded to order trial in court, he must give an estimate of the time to be allowed for the arbitration hearing; the court must give the parties notice of the date of the hearing and issue directions regarding the steps to be taken by the parties concerning exchange of documents in preparation for it. In certain circumstances the judge may decide to hold a preliminary hearing and give such additional directions as appear to him necessary or desirable. With a few exceptions, no costs are allowed in respect of proceedings that are automatically referred to arbitration. A party to proceedings may apply for a voluntary, as opposed to automatic, reference to arbitration. In that event an order referring the proceedings to arbitration may be made by the district judge. However, the restrictions on costs which apply to automatic references to arbitration do not apply to voluntary references.

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8.4. Legal aid is a system of government funding for those who cannot otherwise pay for legal advice, assistance and representation. The civil legal aid scheme is administered by LAB through area offices which are responsible for granting legal aid certificates. In order to qualify for legal aid, a person must have reasonable grounds for taking the proceedings in question, and legal aid may be refused if in the circumstances it appears unreasonable to LAB that it should be granted. The person must also be financially eligible. At the time of the events giving rise to Mrs A's complaint, the Legal Aid Assessment Office (LAAO), part of the Benefits Agency, were responsible for determining, under the Civil Legal Aid (Assessment of Resources) Regulations 1989, whether a person was financially eligible for legal aid by reference to their disposable income and capital. (That function has since been taken over by LAB themselves.) Where a person was assessed as having disposable capital of more than £6,750 he or she might be refused legal aid if it appeared to LAB that the person could afford to proceed without it. (In practice LAB took the view that a person could afford to proceed without legal aid unless the probable costs exceeded the amount of their disposable capital less £3,000.) Certain amounts of capital were disregarded if the person was of pensionable age and was assessed as having disposable income of less than £2,498 a year. Where it appeared that a person had deprived himself of resources in order to reduce disposable income or capital those resources were treated as if still possessed. Where a person was suspected of having deprived himself of resources, LAAO's instructions required them to consider whether the person had been aware of the need for litigation at the time the money had been disposed of, whether there had been firm plans to dispose of the money before the applicant had become aware of the need for litigation, and whether there was a reasonable explanation for the timing of the disposal.

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Jurisdiction

8.5. The Ombudsman can investigate the administrative actions of court staff, unless taken at the direction or on the authority (whether express or implied) of any person acting in a judicial capacity. I refer in this report to the decisions of a district judge only to place in context the administrative actions of CS. Private solicitors are not within the Ombudsman's jurisdiction and I refer to their actions only to place in context the actions of CS, LAB and LAAO.

Investigation

8.6. On 18 October 1996 a summons was issued by a county court in Mrs A's claim for negligence against a letting agency (the opponent) relating to alleged mismanagement of the letting of a property for Mrs A and her two co-owners. Mrs A told the court that although it would cost £4,498.98 to repair damage to the property and replace stolen items, she was limiting her claim to £3,000 so that it could be dealt with by arbitration. On 11 November the opponent's solicitors sent the court their defence in which they disputed Mrs A's claim and asked for the matter to be dealt with by arbitration. On 12 November the court sent Mrs A a form N450 (notes for guidance on automatic directions) which gave a timetable and directions for exchanging documents and fixing a date for the case to be heard by trial. On 14 January 1997 a court official referred Mrs A's case to the district judge asking whether, as the claim was for only £3,000, they should refer the case for arbitration. The judge replied that the claim was unliquidated and for well over £3,000, although an attempt had been made to limit it to £3,000; even if it had been a liquidated claim for £3,000, in view of all the issues raised she would rescind the reference for arbitration. On 17 January the judge directed that the case should be listed for a pre-trial review hearing on 2 April; on 23 January the court notified Mrs A of that hearing. On 21 March Mrs A applied to have the case referred for arbitration, saying that court officials had told her on two occasions that her claim would be dealt with by arbitration; she had assumed that the court's pre-trial notice referred to arbitration, and had only recently been told that that was not the case.

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8.7. On 26 March Mrs A made an urgent application through her solicitor to LAB for legal aid. She gave details of her financial situation, in particular that she had savings of approximately £3,000, owned a third share in a property inherited from her mother which had a market value of £45,000, and had given £10,000 to her son on 13 March. On 2 April, following a hearing attended by Mrs A's solicitor, the district judge refused Mrs A's application for arbitration on the grounds that the claim was unliquidated and complex issues of fact and law were involved. On 2 April and again on 8 April LAAO wrote to Mrs A asking for more information about the money she had given her son, and her ability to realise the value of her share in the property; they also asked about receipts from a trust fund or will, and requested documentary evidence relating to her savings. LAAO had received Mrs A's replies to those enquiries by 14 April but on 15 April they treated her application as abandoned, apparently because her replies had not all been linked to the file. Following a telephone call from Mrs A on 22 April, LAAO re-opened the case. On 30 April they wrote to Mrs A saying that it appeared that, by giving her son £10,000 at a time when she had been aware that she would be involved in litigation, she had deprived herself of that sum and that they would send LAB an assessment including it if they did not receive any further explanation from her within ten days. On 7 May Mrs A telephoned LAAO saying that she had received their letter that day and would reply immediately, which she did, but on 8 May LAAO again treated her application as abandoned. On 2 June Mrs A telephoned LAAO asking the present position on her case. On 23 June the opponent's solicitors notified the court that Mrs A was discontinuing her action. On 7 July Mrs A telephoned LAAO asking why nobody had contacted her and was told that her application had been treated as abandoned due to lack of co-operation. On 9 July Mrs A wrote to LAB's head office complaining about the handling of her application. On 5 August LAAO wrote to Mrs A asking for further information about her income and savings; Mrs A replied on 8 August. On 5 September LAAO carried out an assessment. They calculated Mrs A's disposable income as £2,623 a year and her disposable capital as £13,515; the latter figure comprised £10,000 in respect of Mrs A's share of the property and £3,515 in her bank account. On 12 September LAB's area office wrote to Mrs A saying that she had given £10,000 to her son just before she applied for legal aid and that LAAO had therefore taken that sum into account in assessing her disposable capital; unless she could show that the costs of the case would exceed £10,515 she would not qualify for legal aid.

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8.8. From October 1997 to April 1998 Mrs A corresponded with CS and LAB, complaining that they had mishandled her case and that if CS had told her at the outset that her claim would not be dealt with by arbitration, and if LAB had told her promptly following her application for legal aid that she was financially ineligible, she would have dropped the claim and saved herself costs. CS attributed the situation to the decisions of the judge. LAB accepted that LAAO should have carried out their assessment more quickly, and that Mrs A had subsequently been given incorrect information about the basis of the assessment; they apologised for those shortcomings, but took the view that it had been Mrs A's decision to incur costs while awaiting determination of her application - there had been no guarantee that the application would be successful. On 27 April 1998 the Member referred Mrs A's complaint to the Ombudsman.

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CS's reply to the complaint

8.9. In his comments on the complaint the Chief Executive of CS said that there was no record that the court had told Mrs A that her case would be dealt with by arbitration. Mrs A had said that she had been advised by a solicitor to take the case to the small claims court and claim the maximum of £3,000. She had therefore issued the summons in the belief that the case would proceed to arbitration. However, her claim had clearly stated that the amount involved was £4,498.98. If the case had been due to follow the arbitration procedure the court would have sent specific forms for that purpose; they had not done so. Instead they had issued form N450, which set out automatic directions (that is, as distinct from directions by a judge) telling the parties what to do to prepare for trial. Another factor which had prevented the case going to arbitration was the complex nature of the claim. In one of a series of leaflets which CS produced describing the arbitration procedure it was explained that when a defence was received, if the dispute was of a complex nature it might be referred for trial in open court. The judge's decision to that effect had proved that the court staff had been right to send form N450. In accordance with usual practice no covering letter or explanation had been sent with that form. Clearly Mrs A had not appreciated the significance of the form N450. She had not queried the form or sought legal advice when she received it. The refusal of legal aid to carry on the case must also have contributed to her decision to discontinue it. The Chief Executive concluded that he did not consider a compensation payment towards Mrs A's costs to be appropriate.

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LAB's reply to the complaint

8.10. In his comments on the complaint the Chief Executive of LAB said that at no time had LAB indicated that Mrs A would be financially eligible for legal aid. Mrs A's solicitor had been under a duty to make sure that Mrs A was aware that there was no guarantee that legal aid would be granted. The Chief Executive apologised for the delay by LAAO between May and July 1997 in processing Mrs A's application. There had been genuine concerns about Mrs A's financial eligibility which had led to a number of enquiries being made; all those enquiries had been relevant to the assessment and a determination could not have been made before they had been concluded, but they could have been concluded earlier. However, Mrs A had continued to fund her case on a private basis in the full knowledge that her costs were not covered by a legal aid certificate, and that they would not be recoverable retrospectively even if a certificate had been issued. The Chief Executive concluded that he did not consider a compensation payment towards Mrs A's costs to be appropriate.

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Findings and remedy

8.11. I deal first with CS's handling of Mrs A's case. Under the relevant provisions of the County Court Rules (paragraph 8.3), Mrs A's claim should have been automatically referred to the district judge for arbitration on 12 November 1996. Instead, CS failed to refer the claim to the judge and wrongly took it upon themselves to issue directions for a trial. That error merits my criticism. It is clear from subsequent events that, if Mrs A's claim had been referred for arbitration, the judge would have rescinded the reference. In that event, CS would have been required to notify Mrs A that the judge was minded to order trial in court, and Mrs A would have been able to request a hearing for the judge to consider her objection to that. It seems probable, in view of the terms in which on 2 April 1997 the judge refused Mrs A's application for arbitration of 21 March, that any earlier objection to trial in court would likewise have been unsuccessful. Mrs A has maintained that on being told that the case would go to trial she would immediately have dropped her claim. That is not what she did in response to the judge's decision of 2 April. However, the position then was significantly different from that which it would have been had the proceedings taken the course that they should have done; Mrs A had already obtained legal representation for the pre-trial hearing on 2 April and had applied for legal aid. I regard those steps as having been a reasonable response to the situation in which Mrs A found herself at the end of March, particularly as until 2 April the possibility of at least partly retrieving the situation by means of an application for a voluntary reference to arbitration remained open. Having taken those steps it is understandable that Mrs A should have decided to await the outcome of her application for legal aid, which she reasonably expected to receive swiftly, before deciding whether to drop her claim (which in the event she did in June 1997, apparently following an ultimatum from the opponent). In contrast, if in November 1996 Mrs A had been sent by CS the notification which the Rules would have required her to be given to the effect that automatic reference of her claim to arbitration had been rescinded, she would have had the opportunity to avoid the costs which she incurred between then and April 1997 in obtaining and exchanging evidence, applying for legal aid and being represented at the pre-trial hearing. I conclude that CS's maladministration in failing to refer Mrs A's claim to the judge in November 1996 deprived her of the opportunity to make a properly informed decision about the conduct of her case at a suitably early stage, thereby causing her to incur costs which, as she had made clear from the outset, it was her intention to avoid. I also criticise CS for failing properly to address the problem in their correspondence with Mrs A from 9 December 1997 onwards (see appendix). They initially admitted that a timely reference to the judge had not been made, but when pressed by Mrs A concerning the effect of that failing in terms of the absence of an appropriate notification and her consequent costs, they changed tack and began erroneously to suggest that the case had followed the correct course from the outset; they increasingly sought inappropriate refuge in the independent nature of the judge's decisions and eventually quite wrongly stated that the judge had ordered the directions for a trial that they had issued in November 1996. That was an inadequate response to Mrs A's complaint.

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8.12. I next consider the question of whether Mrs A should have mitigated the effect of CS's maladministration by querying the form N450 that CS sent her on 12 November 1996 or the notice of the pre-trial hearing which they sent her on 23 January 1997. I note the Chief Executive's point that there is no record of CS having told Mrs A that her claim would be dealt with by arbitration, and his view that in the absence of such advice Mrs A, or her solicitor, was at fault for having acted on an assumption and having failed to take account of the possibility that the claim would be deemed unsuitable for arbitration in view of the amount involved and the complexity of the legal and factual issues raised (paragraph 8.9). I accept that Mrs A or her solicitor should have been aware of the possibility that the automatic reference of the claim to arbitration could be rescinded by the judge, and that Mrs A by her own admission was not aware of that. However, to some extent at least that was not a possibility with which Mrs A should have needed to concern herself at the outset, because there was no provision in the Rules for court officials to anticipate a judge's decision to rescind an automatic reference to arbitration. Having limited her claim to £3,000, Mrs A and her solicitor were entitled to expect that it would be dealt with by arbitration unless and until the court notified her in writing that the judge was minded to order trial in court; although in view of the evident complexity of the case it might nevertheless have been recognised as potentially unsuited to arbitration from the outset. I recognise that the issue of form N450 and the notice of the pre-trial hearing might well have alerted Mrs A to the fact that something was amiss. However, the arbitration procedure contains provision for exchange of documents and preliminary hearings (paragraph 8.3). Given that Mrs A reasonably assumed, in the absence of a specific notification from the court to the contrary, that her claim was being dealt with by arbitration, the fact that she did not query the procedures described or the terminology used in the notifications she received strikes me as unremarkable; it is more remarkable that court staff apparently saw no need when issuing such forms in the circumstances of Mrs A's case to make sure that she understood that the situation was no longer as she evidently expected it to be. Nor do I see why Mrs A should have been expected to seek legal advice on the matter; it was in order to minimise such costs that she had limited her claim in the first place. However, I cannot absolve Mrs A from all responsibility for clarifying the position when first notified by the court of the course which the proceedings were to take, in view of the doubt which should have existed from the outset as to the case's suitability for arbitration. I therefore asked the Chief Executive if CS would contribute on an ex gratia basis to those costs which I have described in paragraph 8.11 above, and any others that Mrs A had reasonably incurred in pursuit of her claim in the period from 12 November 1996 to 2 April 1997 inclusive. The Chief Executive agreed that CS would reimburse 50 per cent of Mrs A's reasonable costs. I welcome that.

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8.13. I deal finally with LAB's and LAAO's handling of Mrs A's case. In view of the information given by Mrs A in her application for legal aid of 26 March 1997, in order properly to assess the extent of her disposable capital LAAO needed to obtain from her details of her savings, her ability to realise the value of her share in a property (that being an asset which, if realisable, would fall to be taken into account whether or not Mrs A actually realised it), and the reasons for the gift of money she had made to her son on 13 March. They also needed to clarify information concerning her income, in order to establish whether she qualified to have some of her capital disregarded (paragraph 8.4). They began their enquiries promptly in April, but did not complete them until August, and did not carry out an assessment of Mrs A's financial eligibility for legal aid until a month after that. The major part of that delay was caused by LAAO in May mistakenly treating the application as having been abandoned, and failing to resume action on it until August, after Mrs A had complained several times. That was a very poor performance. Had LAAO taken the correct action efficiently at all stages, they should have been able to complete their enquiries and carry out their assessment by no later than the end of April. To make matters worse, when notifying Mrs A on 12 September of the outcome of the assessment, LAB's area office mistook the basis on which LAAO had assessed her capital and accordingly gave the wrong reason as to why she had been found financially ineligible for legal aid; that letter also made no admission of fault by LAAO in their handling of the matter, despite the fact that LAAO had themselves made such an admission in a report to LAB's head office on 14 August (see appendix). LAB have since apologised to Mrs A and accepted that LAAO's assessment should have been completed earlier; I note that the assessment of financial eligibility for legal aid is no longer carried out by LAAO. I have considered whether LAB should be asked to reimburse any costs incurred by Mrs A after the end of April, when she should have been notified that her application had been refused. I note the Chief Executive's point that there was no guarantee that Mrs A would be found financially eligible for legal aid (paragraph 8.10). I consider that, whatever expectations Mrs A may have had in the early stages of her application, LAAO's letter to her of 30 April 1997 made clear the strong possibility that she would be found financially ineligible (albeit on different grounds from those which eventually applied). In view of that I do not consider that LAAO could reasonably be held responsible for any costs incurred by Mrs A while awaiting the belated outcome of her application for legal aid. I now pass on to Mrs A through this report the Chief Executive's apology for LAAO's delay, which I regard as a suitable response to that part of Mrs A's complaint.

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Conclusion

8.14. Maladministration by CS in failing to refer Mrs A's claim to a judge at the proper time contributed to a situation in which she incurred costs which she might otherwise have avoided. There was also a delay by LAAO in dealing with her application for legal aid. CS have agreed to contribute towards Mrs A's costs and LAB have apologised for LAAO's delay. I regard that as a satisfactory outcome to a largely justified complaint.

APPENDIX

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