Kerry Underwood

Archive for December 2015

2016: SOME PREDICTIONS

with 11 comments


Fred, who once stepped in at short notice to take the minutes at the Rutland West Junior Lawyers’ Division Social Events subcommittee, will be the Law Society Gazette’s Legal Personality of the year.
Approximately 638 lawyer wannabees who could not be bothered passing the exams will announce new systems of delivering law.
Each will be a game changer.
Each will be reported in banner headlines by the Law Society’s Gazette.
Each will be run by people who have failed and failed again running legal services providers.
Each will fail.
10 000 firms of solicitors will carry on serving their communities and that service will hardly get a column inch in the legal press.
Claimant personal injury lawyers will huff and puff about the small claims limit rise and everything else but in fact will quietly readjust, refocus their businesses and carry on successfully.
Personal injury defence firms will be in very serious trouble; it is hard to see many surviving.
After-The-Event insurance will largely disappear.
The scrapping of general damages in soft tissue cases will run into difficulties in Parliament.
Qualified One-Way Costs Shifting will become the big costs issue.
Three people who have never practised law, most of them from the same family, will tell the 200 000 of us who do how we should do it and will tell us that it will all be done by Artificial Insemination, or something like that.
62 million Britons will still want to see lawyers and doctors, rather than computers.
Motor insurance premiums will not fall.
It will be made illegal to claim against any motor insurance policy for anything.
Motor insurance premiums still do not fall.
Being injured becomes a criminal offence.
Motor insurance premiums still do not fall.
George Osborne and Jack Straw form a new political party: The Insurance Company Party.
Motor insurance premiums still do not fall.
The world ceases to exist
Still motor insurance premiums do not fall
Queens Park Rangers will not be promoted.
 

Written by kerryunderwood

December 30, 2015 at 3:05 pm

Posted in Uncategorized

ASSIGNMENT OF CONDITIONAL FEE AGREEMENTS: UNIFIED

with 15 comments


This piece brings together all other pieces and is correct and complete up to 20 June 2016.

 

This is one of the elephants in the Jackson room, entirely unaddressed in the Jackson Report, the implementation speeches, the Legal Aid, Sentencing and Punishment of Offenders Act 2012 or the Conditional Fee Agreements Order 2013.

 

OVERVIEW

 

Novation

 

Novation involves a three party agreement where both the original parties to the contract and the new party agree that the original agreement comes to an end and a new agreement comes into being between one of the original parties and the new party and in relation to the same subject matter and on the same terms.

 

Thus one party is substituted by the new party and the first contract ends except for determining any rights or liabilities under it, that is there is no continuing obligation between the parties to the original contract.

 

Thus there are two contracts.

 

In an old-fashioned hourly rate retainer it would not normally make any difference as to whether the change in status was in fact an assignment or a novation as the original parties would need to deal with the obligations to one another prior to transfer. For example a client would owe the original solicitor fees up to the date of the transfer/novation. It is the line in the sand caused by the abolition of recoverability and also the fact that no fees are due from a client in a No Win No Fee Agreement until and unless the case is won.

 

Assignment

 

In contrast an assignment is an agreement between one of the original parties, the assignor and a new party, the assignee and does not require the agreement of the other original contracting party.

 

An assignment creates no new right but merely transfers existing rights under a contract from one party, the assignor, to another, the assignee, typically from the old firm of solicitors to the new firm of solicitors and the assignee can then enforce those rights without the consent of the other original party.

 

Benefits and Burdens

 

Generally an assignment can only transfer the benefit of the contract and not the burden.

 

In a solicitor-client retainer the benefit of the contract from the solicitor’s point of view is the right to payment from the client. That can in theory be transferred.

 

However the burden on the solicitor, that is the obligation to work for the client, cannot be transferred.
The reason for this restriction is that a party is entitled to contract with a particular individual or firm and to expect that work to be done by that body. Thus a client may be unconcerned as to who is to receive the cheque for the work but is likely to be very concerned about who is actually doing the work. Consequently the law generally does not allow one contracting party to pass the burden to another.

 

Obviously if the other party, that is the client, consents then there is no problem but that potentially then turns what looks like an assignment into a novation.

 

Formalities

 

Section 136 of the Law of Property Act 1925 requires that the assignment of a chose in action:-

 

  1. Must be in writing under the hand of the assignor; and that

 

  1. Express notice of the assignment must be given to the third party, that is the client; and that

 

  1. The assignment must be absolute. Thus is cannot obtain a provision that it is conditional only on a certain event taking place.

 

Personal Contracts

 

The general principle is that any contract involving personal service can never be assigned – see Griffith v Tower Publishing [1897] 1 Ch 21.

 

The general view of the courts is that a contract between solicitor and client is very much one of personal service, most recently confirmed by the Court of Appeal in

 

Blankley v Central Manchester and Manchester Children’s University Hospitals NHS Trust [2015] EWCA Civ 18

 

It was to preserve that personal service element that the court allowed assignment in

 

Jenkins v Young Brothers Transport Ltd [2006] EWHC 151 (QB)

 

The High Court relied on the concept of “conditional burden” which apparently applies where the burden is a condition of and related to the benefits. See

 

Halsall v Brizell [1957] Ch 169

 

Thamesmead v Allotey, Court of Appeal, 13 January 1998, and

 

Rhone v Stephens [1994] 2 AC 310

 

Those cases involve the transfer of land with the benefits and burdens passing, for example restrictive covenants and it may be thought that that concept is not easily transferable to Conditional Fee Agreements.

 

The potential worst case scenario is that the court finds that at the date of transfer a new Conditional Fee Agreement was created on the same terms as the old agreement. Thus recoverability of the success fee is lost and unless the pre-April 2013 agreement had a 25% damages limitation on the success fee then that new one is unenforceable as it does not comply with the new regulation requiring a 25% success fee damages cap.

 

This can be avoided by having a new post-April 2013 compliant Conditional Fee Agreement that only comes into effect if the original pre-April 2013 agreement is for any reason found not to have been assigned. In a different context this principle was approved in

 

Forde v Birmingham City Council [2009] EWHC 12 (QB)

 

To rub salt into the wound it is possible that the client who no longer has recoverability of an additional liability does not get the protection of Qualified One-Way Costs Shifting. I deal with this in Qualified One-Way Costs Shifting and there are at present conflicting first instance cases on this point.

 

The same point applies in relation to the 10% uplift on general damages – see Simmons v Castle [2012] EWCA Civ 1039

 

There is a further, largely theoretical, issue and that is that if there is a new contract caused by novation the on any solicitor and own client assessment the court must take into account the facts and circumstances as they reasonably appear to the solicitor “at the time the [CFA] was entered into and at the time of any variation thereof.”

 

However as will be seen by that wording, there is in fact no requirement to assess risk. Nevertheless if, for example, liability had been admitted between the original Conditional Fee Agreement being entered into and the novation that would theoretically allow the court to lower the success fee payable by the client to the new solicitor.

 

The issue is thrown into sharp relief by the abolition of recovery of success fees.  If a pre 1 April 2013 Conditional Fee Agreement is assignable then the success fee remains recoverable; if not then in a post 31 March 2013 “assignment” the success fee is not recoverable and the defendant tortfeasor receives a windfall.  There is also an issue as to whether any costs, that is base costs as well as the success fee, are recoverable for work done before the non-assignment. On the face of it there is no valid retainer and therefore no recovery of any fee.

 

Jones v Spire Healthcare: A Decision not to be relied upon

 

In Jones v Spire Healthcare Ltd, Liverpool County Court, 11 May 2016 – case no. A13YJ811

 

a Circuit Judge, allowing an appeal from a District Judge, held that an insolvent firm of solicitors can validly assign its entitlement and responsibility under a Conditional Fee Agreement with a client to another firm of solicitors.

 

If it could not do so then the agreement would be a novation, that is a new agreement, and the costs of the insolvent firm would be unrecoverable.

 

If no new compliant agreement was entered into following a statutory change in relation to technical requirements, as happened in April 2013 in relation to conditional fee agreements, then the agreement would not be enforceable by the new firm and so no costs at all could be recovered from the losing party.

 

This would be to the disadvantage of any creditor in the administration and would represent a windfall to a losing defendant.

 

The Circuit Judge analyses the law in relation to Conditional Fee Agreements and in relation to assignment in considerable detail.

 

The benefit of a contract, other than one which involves personal skill and confidence dependent upon a particular individual discharging obligations under it, can be assigned, whereas the burden cannot, subject to certain exceptions.

 

One of those exceptions is where the benefits and burdens are inextricably linked, for example where entitlement to the right or benefit is dependent upon, or conditional upon, the discharge of certain responsibilities.

 

Here the court analysed at some length the decision of the High Court in

 

Jenkins v Young Brothers Transport Ltd [2006] EWHC 151

 

and followed it.

 

Here the court held that, as in Jenkins, the benefits and burdens were inextricably linked, thus allowing the burden to be assigned.

 

The court said:-

 

“Rules restricting burden assignment were clearly devised to protect the non-participating counterparty. This is clear from the Tolhurst case [Tolhurst v Associated Portland Cement Manufactures [1902] 2 KB 660]. In circumstances where there is tripartite involvement to the extent that not only do the assignee and the assignor agree to the shifting of the burden, but so too does the recipient of the benefit (here the Claimant) and a separate deed of assignment is entered into in relation to her own conditional fee agreement, it would be an unduly restrictive and overly legalistic approach to deny the parties the effect of what they intended.”

 

Comment

 

I must admit to an almost complete failure to understand the law on assignment and the logic of the law. Surely every contract involves a benefit and a burden, as otherwise there is no consideration and therefore no contract. Surely also one party’s burden is another party’s benefit. The benefit to the client is getting the work done and the burden is paying the fee. The benefit to the solicitor is earning the fee and the burden is doing the work. Surely also the benefit and burden must always be inextricably linked.

 

Leaving that aside in my view practitioners should be very wary of relying on this judgment in the sense of assuming that Conditional Fee Agreements can be validly assigned.

 

First of all a contract for the provision of legal services is one which involves personal skill and confidence dependent upon a particular individual discharging obligations under it and therefore the starting point is that such a contract can never be assigned.
The judge here worked on the basis that that was no longer the case in personal injury work –

 

“It is axiomatic that case handling these days is conducted at a distance, and that it would be very difficult to identify those cases where a particular client had been insistent on the continuity of a specific fee earner.”

 

Axiomatic means: “self-evident, indisputably true”. (Shorter Oxford Dictionary.

 

That statement by the judge is just plain wrong and is itself sufficient grounds to overturn the decision as it is central to his reasoning. It is putting the cart before the horse – just because firms like Barnetts conduct themselves in this way- and go bust- does not mean that all firms do.

 

The fact that work which is clearly personal in nature is being done in an impersonal, and generally poor quality way, by some solicitors does not alter the law of assignment.

 

What the judge is in effect saying is that there is a law against assignment of work which should be undertaken personally but if you don’t undertake it personally then you can avoid the law against assignment of such contracts.

 

That does not make sense.

 

The Judge may also have cared to look at why Barnetts went bust – they were the paradigm of a pile it high sell it cheap firm who did indeed do work at a distance. Does the Judge wish to encourage that?

 

Many commentators, including me, think that the decision in Jenkins is wrong. If there is a law preventing assignment of contracts involving personal skill and confidence then the fact that assignment may achieve that objective, as in the Jenkins case, does not mean that the contract is in fact capable of assignment.

 

It can be argued that the law against assignment is a common law principle and that the whole point of common law is that it evolves and that therefore the public policy reasons for not allowing assignment in contracts of a personal nature were precisely the public policy reasons which allowed the Jenkins exception.

 

Even if all of that is true that does not justify the decision in this case.

 

In any event another court could distinguish this case on the ground that the original firm of solicitors was insolvent and therefore could not continue to do the work. The contract was frustrated.

 

A different court may take a very different view in relation to a firm which is solvent but simply chooses to abandon its responsibilities to its personal injury clients by selling them on.

 

Neither did the court here consider the issue of referral fees. Such fees are illegal in personal injury work and invalidate the retainer.

 

I do not know the arrangements in this case but if a firm of solicitors buys out the personal injury work from another firm, that is the new firm obtains personal injury cases by paying a fee to the old firm, then on the face of it that is an illegal referral fee, which whilst attracting no criminal sanction, invalidates the retainer.

 

A High Court or Court of Appeal decision on the assignment of Conditional Fee Agreements would be welcome.

 

In the meantime I probably need to read a book on the subject, or perhaps write one.

 

Change of status of client

 

First I look at CFAs in relation to a change in the status of client’s post-Jackson, that is children attaining majority, those losing capacity, clients dying and clients becoming bankrupt, and a corporate client changing its legal status.

 

 

Children attaining majority

 

As long as the minor stays a minor, then there is no problem, and the success fee and base costs are recoverable from the losing party under a pre 1 April Conditional Fee Agreement.

 

The potential problem is in relation to a case where the Conditional Fee Agreement was signed prior to 1 April 2013 and the minor achieved majority on or after that date.  There is the issue of whether costs incurred under the original CFA are recoverable, irrespective of the issue of the success fee, as if the original agreement cannot be assigned, then there is no lawful retainer in place in relation to pre-majority work.  The indemnity principle means no retainer equals no fee.

 

Once the minor achieves his or her majority the role of the Litigation Friend falls away and, on the face of it, so does the Conditional Fee Agreement signed by the Litigation Friend.

 

Two potential consequences flow from this:

 

 

  • that the retainer runs only from the date of the new Conditional Fee Agreement leaving the solicitor with an indemnity principle issue in relation to costs incurred before that date.

 

This penalizes a child for being a child on 31 March 2013. A claimant who was an adult on 31 March 2013, or a child who had achieved his or her majority by that date, would have no such problem.

 

This gives an unwarranted windfall to the tortfeasor.

 

It is strongly arguable that the Legal Aid, Sentencing and Punishment of Offenders Act 2012 is thus not compliant with the Human Rights Act 1998.

 

Section 44 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 was implemented by the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Commencement No. 5 and Saving Provision) Order 2013. Article 4 contains the saving provisions and it would have been simple to add

 

“(g)        proceedings where a minor whose Litigation Friend entered into a Conditional Fee Agreement before 1 April 2013 achieves his or her majority during those proceedings.”

 

To rub salt in to the wound such a claimant does not get Qualified One Way Costs Shifting as at some stage there had been a Conditional Fee Agreement with a success fee (Landau v The Big Bus Company, 31 October 2014, Master Haworth, SCCO). See my piece – Qualified One Way Costs Shifting.

 

For the same reason it appears that the 10% Simmons v Castle (No 2) [2012] EWCA Civ 1288 general damages uplift does not apply.

 

In cases involving minors achieving their majority the courts are likely to hold that costs, including the recoverable success fee, are recoverable under the original Conditional Fee Agreement and thus no problem is caused by a child being represented under a pre 1 April 2013 CFA attaining majority.

 

In Dunn v Mici [2008] EWHC 90115 (Costs) the Supreme Court Costs Office worked hard to preserve the validity of a CFA on a different point, but with the same potential effect. The court was not dealing with success fee recoverability but that does not affect the rationale of the decision; if the original Conditional Fee Agreement entered in to by the minor is valid, then costs under that original agreement, including the success fee, are recoverable.

 

Dunn v Mici concerned a CFA under the since repealed 2000 Regulations, which imposed heavy regulatory burdens upon solicitors in Conditional Fee cases. The defendant argued that the claimant’s solicitor had failed to comply with those Regulations and so no costs were payable by the claimant and that by operation of the indemnity principle the losing defendant’s liability was nil.

 

As the claimant had been a minor when the Conditional Fee Agreement was entered into, it had been signed by his mother. At paragraph 20 the court said:-

 

“…a principal can act through an agent; here, the principal was Mr Dunn and his mother was his agent. Second, there was no requirement for a litigation friend to be appointed. This would only have been obligatory on the issue of proceedings had Mr Dunn then been a minor, but by that date, he had already attained his majority.”

 

In any case where proceedings had not been issued when the Litigation Friend was appointed then the principles set out in Dunn v Mici apply.

 

If, unusually, proceedings had been issued before the CFA was signed, then there would be a Litigation Friend, who would doubtless have signed the CFA.

 

However, that does not prevent the Litigation Friend from also being the agent of the principal, the principal being the minor.

 


 

Contracts for Necessaries

 

There is a strong argument that a CFA to pursue a lawsuit is a contract for necessaries; such contracts have always been treated differently, and even if made by a person under a legal disability, including a minor, are valid and enforceable.

 

Consequently a minor is free to enter in to a binding and enforceable Conditional Fee Agreement on the basis that it is a contract for necessaries.

 

This is important in relation to the Principal-Agent argument as there must be a valid Principal for there to be a valid Agent.

 

 

In Practice

 

Solicitors should rely on the original CFA and seek recovery of costs, including the success fee, as usual.

 

Additionally the client should sign a statement as follows:-

 

“I confirm that the attached document is a true copy of a Conditional Fee Agreement dated [                     ] entered into between [ solicitor ] and [ name of signatory ] and I confirm that [ name of signatory ]was at all times acting as my lawfully appointed Agent in relation to the Conditional Fee Agreement and had full authority to sign that agreement on my behalf.

 

I have now achieved my legal majority and instruct [solicitor] to continue to act for me under this Conditional Fee Agreement.

 

Insofar as it is necessary for me to ratify this agreement, I hereby do so.”

 

This document does not need to be disclosed to the paying party until and unless the paying party takes the point on assessment of costs.

 

Additionally the client should enter in to a fresh CFA on a “belt and braces” basis but this CFA should not be disclosed to the paying party until and unless the validity of the original agreement is challenged. This does at least give a right to costs from the date of the new agreement if the original one is held to be invalid. In such circumstances the success fee will not be recoverable.

 

In Forde v Birmingham City Council [2009] EWHC 12 (QB) the Queen’s Bench Division of the High Court held that retrospective CFAs are permissible and that no consideration is required. Any changes to the basis of the retainer must be made prior to the entitlement to costs becoming crystallized. The terms of the backdating must be such that a reasonable client would not object, the point being that the actual client is unlikely to object because she will not be paying anything.

 

If the second CFA failed then resort could be had to the first one. The court also held that s 58(1) of the Courts and Legal Services Act 1990 (CLSA 1990) and the changes made thereto meant that even a seriously flawed CFA is not illegal, but merely unenforceable. (See paragraph 206 of the judgment).

 

Thus the client should also sign a retrospective, not backdated, CFA on the same basis as the original one. This CFA should not be disclosed to the paying party until and unless the validity of the original agreement is challenged.

 

There is another, now very significant, problem in relation to children cases where, for any reason, there is no valid pre 1 April 2013 Conditional Fee Agreement; of course the reason may be that the cause of action did not arise until after 31 March 2013.

 

The problem is that most judges are refusing to allow any deduction from a child’s damages in order to fund the claimant solicitor’s success fee. Thus in the event of a post 31 March 2013 Conditional Fee Agreement, or a pre 1 April 2013 Conditional Fee Agreement that is not assigned, the solicitor is likely to get no success fee. As recoverable costs in portal cases are not, on their own, economically viable, it is not now feasible for lawyers to act for children in such cases.

 

This problem will be greatly enhanced if the small claims limit in personal injury cases is raised.

 

With effect from 6 April 2015 the Civil Procedure Rules allow summary, rather than detailed, assessment of costs payable by a child to his or her own solicitors (CPR 46.4(5)). However the procedure is wholly unworkable – see my blog Children’s Cases – April is the Cruellest Month.

 

 

Death and Assignment of Conditional Fee Agreement

 

The same issues apply, that is in relation to the recoverability of the success fee where the original Conditional Fee Agreement was entered into before 1 April 2013, and the client died on or after that date and also in relation to pre-transfer base costs, whenever the original Conditional Fee Agreement was entered into.

 

The issue of base costs has always existed but the whole subject has been brought into the sharper focus by the abolition of the recoverability of the success fee, that is the consequences are potentially more severe.

 

There is no case law on this specific point, that is whether a personal representative can rely on a Conditional Fee Agreement entered in to by the deceased.  In the absence of a Conditional Fee Agreement, there is not normally a problem as work done to the date of death is a debt due from the estate on a quantum merit basis.  That is not the case with Conditional Fee Agreements and as the condition precedent required before payment is due – a win – has not occurred, then on the face of it no payment is due from the estate.

 

If no payment is due from the estate, then the indemnity principle kicks in, no liability = no recovery.

 

Usually solicitors have asked the Personal Representatives to adopt the original Conditional Fee Agreement and to accept, on behalf of the estate, liability for costs incurred up to the date of death.

 

The old Law Society Model Agreement, applying to pre 1 April 2013 Conditional Fee Agreements, said:

 

“(c)         Death

 

This agreement automatically ends if you die before your claim for damages is concluded.  We will be entitled to recover our basic charges up to the date of your death from your estate.

 

If your personal representatives wish to continue you claim for damages, we may offer them a new conditional fee agreement, as long as they agree to pay the success fee on our basic charges from the beginning of the agreement with you”.

 

I have considerable doubts about the enforceability of that paragraph.  As at the time of death the case has not been won and it is strongly arguable that there is no liability for costs.  At the point of death the agreement terminates.  Why is anything due?  Why are such costs recoverable from the other side?

 

It seems to me that if the personal representatives have “a new conditional fee agreement” post 31 March 2013 then the success fee is clearly not recoverable from the other side as it is a “new” post 31 March 2013 agreement.

 

If the estate should be made liable to pay the success fee, then this may be one of those rare cases where a Damages-Based Agreement may be suitable as the 25% charge is not related to the amount of work done, and therefore it does not matter when the agreement is entered into.

 

Clearly if the client dies after 31 March 2013 then a retrospective or backdated new CFA does not help in relation to the recoverability of the success fee, but may help in relation to recovery of base costs since death.

 

I advise that the following agreements be entered into:

 

  1. A backdated deed under seal whereby the Personal Representative, often a widow or widower, adopts the original Conditional Fee Agreement.

 

  1. A fresh Conditional Fee Agreement, without a recoverable success fee.

 

Number 1 is under seal to defeat any argument about lack of consideration as there is no need for consideration in a deed under seal, the point being that on the face of it the estate is not receiving consideration; it could go elsewhere and start again. Arguably the consideration is the agreement of the solicitors familiar with the matter to carry on, but the work already done, for which there is no legal liability to pay, is clearly past consideration and past consideration = no consideration.

 

In Forde v Birmingham City Council [2008] EWHC 90105 (Costs) the Costs Judge held that the agreement of a firm of solicitors to continue to represent a client where there were doubts about the validity of the first Conditional Fee Agreement did amount to consideration for entering into the second Conditional Fee Agreement .

 

This is the preferred option as if found to be enforceable it backdates recovery of basic charges to the beginning and nothing is lost.

 

However if that adoption is held not to be valid, then the second Conditional Fee Agreement comes in to play and at least base costs are recoverable from the date of the second Conditional Fee Agreement.

 

Although the facts of the case meant that there were not in fact different simultaneous agreements in place, the concept of simultaneous Conditional Fee Agreements was recognized by the High Court in Forde v Birmingham City Council [2009] 1 WLR 2732.

 

In that case the High Court held the second of two Conditional Fee Agreements to be valid and enforceable, even though it was retrospective and the retrospective period covered a period prior to 1 November 2005, when there was a very different, much stricter, regime in place.

 

Consequently Conditional Fee Agreements which were defective under the pre 1 November 2005 regime could be “cured” by entering into a new, but retrospective, Conditional Fee Agreement.

 

It is clear beyond doubt that retrospective Conditional Fee Agreements are permissible, see, for example Holmes v Alfred McAlpine Homes (Yorkshire) Ltd [2006] EWHC 110, quoted in Forde.

 

That raises the issue of a retrospective, or backdated, Conditional Fee Agreement taking effect from pre 1 April 2013, so as to seek to preserve recoverability of the success fee. However the Personal Representatives would have no legal existence or standing prior to death, and thus on the assumption that the problem has been caused by a post Jackson death of a person with a pre Jackson Conditional Fee Agreement, this does not help.

 

 

Wills

 

Executors under a Will have immediate power to enter in to a Conditional Fee Agreement on behalf of the estate, but potential administrators have no power until Letters of Administration have been granted by the court.

 

Consequently administrators should enter into the new Conditional Fee Agreement retrospective to the date of death so as to ensure recovery of all base costs since then; realistically executors under a Will, often close relatives of the deceased, are unlikely to get round to dealing with a new Conditional Fee Agreement straightaway and so they too should enter into a Conditional Fee Agreement retrospective to the date of death.

 

Generally, when entering in to a Conditional Fee Agreement solicitors should insist that the client has a will, so as to avoid the potential gap between death and Letters of Administration.  This makes sense in any case, but especially in a serious personal injury case where there is an increased risk of the client dying during the currency of the matter.

 

It is also an excellent opportunity to market the firm’s will-writing service.

 

 

Solicitor Executors

 

If the client appoints as executors partners of the firm of solicitors dealing with the litigation then there is a seamless transfer of power on death to deal with that litigation.

 

 

Death of a Litigation Friend

 

Supposing that a client lacks capacity throughout the claim and the litigation friend dies. Can a pre April 2013 Conditional Fee Agreement between a dead litigation friend be taken over by a new litigation friend or is a new post Legal Aid, Sentencing and Punishment of Offenders Act 2012 Conditional Fee Agreement necessary, with the risk of loss of recovery?

 

My view is that a fresh Conditional Fee Agreement is not necessary. The true party has been the same throughout and the solicitors have been the same throughout and it is clearly a pre-April 2013 Conditional Fee Agreement. The litigation friend is just that and is not a party to the litigation. All that needs to happen is that the new litigation friend be formally advised of their responsibilities, with the Solicitor’s Certificate for suitability etc. being dealt with. The litigation friend is just that – the friend in the litigation and that does not affect the underlying contractual relationship.

 

As a belt and braces policy I advise the adoption of the suggestion I have made above, but also to enter into a fresh Conditional Fee Agreement with the litigation friend but stated to be on the basis that it only comes into play if the original Conditional Fee Agreement is found, for any reason, to be no longer valid. The authority for more than one Conditional Fee Agreement being in place at any given time is Forde v Birmingham City Council [2009] 1 WLR 2732.

 

In my view a court will work very hard to preserve the validity of the original Conditional Fee Agreement, and therefore recoverability of the success fee and indeed pre-death of litigation friend base costs as failure to do so would clearly discriminate against disabled people and is arguably unlawful and a breach of the Human Rights Act 1998. Litigation friends will generally only be necessary where a party is a minor or lacks mental capacity. Both situations involve protected characteristics for the purposes of discrimination legislation and both are afforded protection under the European Convention on Human Rights.

 

In any event a contract between a patient lacking capacity and a solicitor is not void but is voidable and so even if the contract was between the claimant and the patient that would not be fatal to the agreement.

 

That was the rule laid down in Imperial Loan Company Ltd v Stone [1892] 1 QB 599.

 

The paying party has no standing to interfere with that legal position and has no power to argue that the claimant/patient should be required to void the contract.

 

It would be curious indeed if a contract between someone lacking capacity and made pre-April 2013 would be upheld but one where a litigation friend had been properly appointed, but then had died, would not be upheld.

 

In the very recent decision in Blankley v Central Manchester and Manchester Children’s University Hospitals NHS Trust [2015] EWCA Civ 18 the Court of Appeal confirmed that the liability to pay a solicitor’s costs remains with the litigant, even a litigant without capacity, and not with the litigation friend. Thus if the client lacks capacity at the time of retainer, then that retainer is still with the litigant and the litigation friend is merely a statutory agent of the incapacitated litigant, and not a principal to the retainer.

 

This is essentially the same line of reasoning as the court adopted in Dunn v Mici [2008] EWHC 90115 (Costs) in relation to minors.

 

 


 

Bankruptcy of client

 

Section 306 of the Insolvency Act 1986 provides:

 

“(1)        The bankrupt’s estate shall vest in the trustee immediately on his appointment taking effect or, in the case of the official receiver, on his becoming trustee.

 

(2)          Where any property which is, or is to be , comprised in the bankrupt’s estate vests in the trustee (whether under this section or under any other provision of this Part), it shall so vest without any conveyance, assignment or transfer.”

 

Section 283 reads:

 

“(1)        Subject as follows, a bankrupt’s estate for the purposes of any of this Group of Parts comprises –

 

  • all property belonging to or vested in the bankrupt at the commencement of the bankruptcy, and

 

  • any property which by virtue of any of the following provisions of this Part is comprised in that estate or is treated as falling within the preceding paragraph.

 

(2)          Subsection (1) does not apply to:

 

  • such tools, books, vehicles and other items of equipment as are necessary to the bankrupt for use personally by him in his employment, business or vocation;

 

  • such clothing, bedding, furniture, household equipment and provisions as are necessary for satisfying basic domestic needs of the bankrupt and his family”.

 

Section 436 says…

 

“ “property” includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property…”.

 

Thus, on the face of it a legal action, being a thing in action, is property and vests in the trustee.  However that is not the whole story as the courts have consistently held that certain actions, including personal injury general damages only actions, do not vest in the trustee.

 

In Heath v Tang [1993] 3 All ER 694 the Court of Appeal said:

 

“The property which vests in the trustee includes “things in action”: see s.436 of the 1986 Act.  Despite the breadth of this definition, there are certain causes of action personal to the bankrupt which do not vest in his trustee.  These include cases which –

 

“the damages are to be estimated  by immediate reference to pain felt by the bankrupt in respect of his body, mind, or character, and without immediate reference to his rights of property.”  (See Beckham v Drake [1849] 2 HL Cas S79 at 604, 9 ER 1214 at 122 per Erle J.  See also Wilson v United Counties Bank Ltd [1920] Ac 102, [1918-19] All ER Reg 1035).

 

“Actions for defamation and assault are obvious examples.  The bankruptcy does not affect his ability to litigate such claims.  But all other causes of action which were vested in the bankrupt at the commencement of the bankruptcy, whether for liquidated sums or unliquidated damages, vest in his trustee.  The bankrupt cannot commence any proceedings based upon such a cause of action and, if the proceedings have already been commenced, he ceases to have sufficient interest to continue them.  Under the old system of pleadings, the defendant was entitled to plead the plaintiff’s supervening bankruptcy as a plea in abatement.  Since the Supreme Court of Judicature Act 1875, the cause of action does not abate but the action will be stayed or dismissed unless the trustee is willing to be substituted as plaintiff: see

 

Jackson v North Eastern Railway Co (1877) LR 5 Ch D 844.

 

In  Ord v Upton [2000] 1 All ER 193

 

the Court of Appeal quoted that passage and said:

 

“Section 436 is not in truth a definition of the word “property”. It only sets out what is included. As will appear later from the cases that have been decided over many years, actions which relate to a bankrupt’s personal reputation or body have not been considered to be property and therefore they do not vest in anybody other than the bankrupt. They relate solely to his body, mind and character and any damages recovered are compensation for damage to his body, mind and character as opposed to other causes of action which have been considered to be a right of property. Thus causes of action to recover damages for pain and suffering have been held not to vest in the trustee. That has led to a number of oddities. For example, the parties agree that if at the time of the bankruptcy, the bankrupt had in his bank a sum which included money paid as damages for a libel, that sum would vest in his trustee because the right to the money formed part of his estate and therefore was available to pay off the bankrupt’s creditors. That was to be contrasted with an action personal to the bankrupt, such as a libel action, which was not settled before the end of the bankruptcy. In such circumstances the cause of action would remain with the bankrupt as would any damages awarded after discharge. If a cause of action is not personal to the bankrupt, it vests in the trustee and therefore any damages awarded whether before or after the discharge will be available to discharge the bankrupt’s liabilities.”

 

In Ord the claim was a negligence action for personal injury, including special damages, and the issue was whether the existence of the special damages claim took the case out of the exception, meaning that it vested in the trustee, or remained wholly within the exception, or could be severed so that the general damages claim remained with the bankrupt but the special damages claim vested in the trustee.

 

The Court of Appeal held that that was a single, indivisible action and therefore it either all remained with the bankrupt or all vested in the trustee, and that it was a hybrid claim, in part personal in part relating to property.

 

The Court of Appeal held that the action vested in the trustee and to fall within the exception a claim must relate only to a cause of action personal to the bankrupt, adding “All causes of action which seek to recover property vest in the trustee whether or not they contain other heads of damage to which the bankrupt is entitled.”

 

In Beckham v Drake (1849) 11 HLC 1213 the Court of Exchequer Chamber repeatedly used the term “assignees” in relation to the passing of the action to the trustee, and the terms was also used in Stanton v Collier (1854) 23 LJQB 116  and subsequent cases.

 

In Ord the Court of Appeal undertook an extensive review of the authorities and concluded that although the whole of the action vested in the trustee the actual general damages belonged to the bankrupt and did not form part of the trustee’s fund, and thus the damages must be split between the trustee and the bankrupt.

 

Thus if the claim is for general damages only then the claim does not vest in the trustee at all and thus the original Conditional Fee Agreement continues in place and the base costs, together with a recoverable success fee in a pre 1 April 2013, can be recovered in the usual way.

 

If the claim includes any element of special damages then the whole claim passes to the trustee, although any general damages recovered will belong to the bankrupt.

 

If the claim passes to the trustee then the issue arises as to the validity of the original Conditional Fee Agreement, that is can it be validly assigned?

 

As set out above the courts frequently referred to the trustee as being an assignee of the action, which lends support to the idea of the Conditional Fee Agreement being assignable.

 

Clearly if the special damages form only a small part of the claim a policy decision needs to be made as to whether to jettison that part of the claim, leaving a general damages claim only which undoubtedly remains with the bankrupt personally and thus no issue arises as to the validity of the original CFA.

 

If that is not an option, then the Trustee should be strongly advised to have the original CFA assigned to him or her.

 

There is no authority in relation to assigning the Conditional Fee Agreement in such cases. However it seems to me that if the chose in action can be assigned, then the retainer, which is inevitably parasitic upon the chose, must also be capable of assignment.

 

It will virtually always be in the interests of the creditors for this to happen as it represents the best opportunity of maximising the recovery of assets and if the success fee remains recoverable from the other side, rather than being payable out of damages, then that represents significant extra assets for the creditors.

 

Section 304(1) of the Insolvency Act 1986 reads as follows:-

 

“(1)        Where on an application under this section the court is satisfied—

 

  • that the trustee of a bankrupt’s estate has misapplied or retained, or become accountable for, any money or other property comprised in the bankrupt’s estate, or

 

  • that a bankrupt’s estate has suffered any loss in consequence of any misfeasance or breach of fiduciary or other duty by a trustee of the estate in the carrying out of his functions,

 

the court may order the trustee, for the benefit of the estate, to repay, restore or account for money or other property (together with interest at such rate as the court thinks just)or, as the case may require, to pay such sum by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just.”

 

It is arguable that a failure by the Trustee to agree to the assignment of a Conditional Fee Agreement, especially a pre 1 April 2013 one, could result in a liability under section 304(1)(b).

 

 

Change of firm

 

Neither the Courts and Legal Services Act 1990, as heavily amended, nor the plethora of regulations, orders and statutory instruments dealing with Conditional Fee Agreements address the issue of assignment and thus the starting point is that common law principles apply.

 

The common law position is that the benefit of contract, but not the burden, can be assigned and therefore generally a Conditional Fee Agreement cannot be lawfully assigned to the new firm and thus the client must enter in to a new agreement with the new firm and thus forego the recoverable success fee.  For reasons I will deal with below that does not necessarily mean that recovery of the pre-transfer base costs is lost.

 

I must admit to struggling with the benefit/burden issue as all contracts must involve both, otherwise there is no consideration and no consideration equals no contract, unless it is a deed under seal.  Clearly from the client’s point of view the benefit is having the work done and the burden is paying the fee, but in reality the whole point of seeking to assign the agreement in these cases is to avoid the client paying any fee at all.  Thus from the client’s perspective what burden is assigned?  Of course in the Alice in Wonderland world of costs the indemnity principle means that the client has to have an entirely illusory liability to pay costs but it is entirely illusory and it is hard to see why a court applying common law principles should take any notice of illusions.

 

There is a further problem in that at common law there can be no assignment of a contract that is personal in nature, and a contract for the provision of legal advice is a classic example of such a contract.  Again one wonders how that proposition squares with the reality of a claims world in which many firms never see their client and where clients and cases are traded as mere commodities with the client meaning no more to his lawyer than a sack of corn.

 

Here I deal with possible practical ways round the Conditional Fee Agreement problem when it is the firm and not the client which changes.

 

There are at least sixpotential scenarios when the issue of assignment can arise:-

 

  1. that the client’s solicitor moves firm and that client wants to instruct that solicitor as he or she has trust and confidence in that solicitor;

 

  1. that the client loses trust and confidence in the existing solicitor and wishes to move to a new firm;

 

  1. that neither of the above applies but that the client moves firms of his or her own volition;

 

  1. the firm abandons that type of work and/or sells its caseload of that type of work to another firm.

 

  1. none of the above applies but the original firm ceases to exist through insolvency, lack of professional indemnity insurance, merger or any other reason;

 

  1. the legal status of the firm changes, e.g. through a merger or a partnership becoming a limited company.

 


 

Scenario 1

 

The client’s solicitor moves firm and that client wants to instruct that solicitor as he or she has trust and confidence in that solicitor

 

There is but one case on the subject and that is clearly not on all fours with the subject matter of this piece.

 

In Jenkins v Young Brothers Transport Limited [2006] EWHC 151 [QB]

 

the Queen’s Bench Division of the High Court found an exception to the general law against assignment in a case involving a Conditional Fee Agreement.

 

In Jenkins the solicitor dealing with Mrs Jenkins’ matter moved from one firm of solicitors to another and then to a third firm and on each occasion the Conditional Fee Agreement was assigned, creating two assignments and with three firms in all acting at some stage under the CFA.

 

The High Court held that where the events underlying the assignment were the trust and confidence that the client had in her solicitor the Conditional Fee Agreement could be assigned by one firm of solicitors to another.

 

The court worked hard to reach this conclusion, partly because any other decision would have given a windfall to the insurer and the courts do not like windfalls.  Not all of us are convinced of the correctness of this decision and indeed at paragraph 28 the High Court itself said that the facts in this case were singular and that it had not derived assistance from the authorities on the law of assignment.

 

Neither have I.

 

A key part of the court’s reasoning was that the relationship between client and solicitor involves personal confidence and that here that solicitor had moved firms and thus by allowing assignment the court was preserving, not breaking, that personal relationship for personal services.

 

This is scenario 1 above and my view is that a court looking at similar facts now would reach the same conclusion.

 

If the old firm merges with another law firm or is sold to another law firm and the actual solicitor who has conduct of the case works for the new entity and thus continues to deal with the matter, then the situation is no different from Jenkins v Young Brothers Transport Limited, and there should be no problem in assigning the original Conditional Fee Agreement.

 

 


 

Scenario 2

 

The client loses trust and confidence in the existing solicitor and wishes to move to a new firm

 

Scenario 2 involves trust and confidence, but the loss of it rather than the existence of it, by a client who is moving firms.

 

If this situation does not exist, that is that it will not be the same solicitor dealing with the matter, but the original firm no longer exists, then the client has no option but to move firm. There is no case law on this point in relation to conditional fee agreements.

 

If a firm falls into financial difficulties then clearly it is reasonable for the client to lose trust and confidence in that firm and it may well be that a court will arrive at the same conclusion as the High Court here, namely that it is sufficient to take the case out of the general rule against assignment.

 

However in the third scenario, where it is simply that the client wishes to move without having lost trust and confidence in their existing solicitor (Scenario 2) or without the client’s solicitor moving firm (Scenario 1), then I believe that the court is much less likely to find that there is a lawful assignment.

 

Scenarios 2 and 3 fall in between although if there is no inherent problem with the first firm (scenario 3) a client would be singularly badly advised to transfer firms from a position where the client has a recoverable success fee under a pre-1 April 2013 conditional fee agreement to a position whereby s/he has a post 31 March 2013 conditional fee agreement with a non-recoverable success fee.

 

Scenario 2, where the client loses trust and confidence in the existing solicitor, and thus wishes to move to a new firm, is difficult.  On balance my view is that a court would decline to hold that there is an assignment in such a case.

 

Scenario 4

 

Where the firm abandons that type of work and/or sells its caseload of that type of work to another firm

 

Scenario 4 can involve an overlap with Scenarios 1 or 2 as set out above.

 

Here I am assuming that the solicitor dealing with the matter has not moved firms and that the client has not lost trust and confidence in his or her existing solicitor at the existing firm but rather that the solicitor’s choice of firm has ceased to exist without the solicitor having conduct of the case going to the new entity.

 

My advice is that in such a situation the parties should:-

 

  1. Sign up to a new post 1 April 2013 Conditional Fee Agreement;

 

  1. Also have a Deed of Assignment entered into by the firm of solicitors and the client and assigning the original Conditional Fee Agreement to the new solicitor.

 

I cannot say with any confidence that the original Conditional Fee Agreement will be held to have been successfully assigned and therefore I cannot say that recoverability of the success fee from the other side will be achieved.

 

Defendants are likely to refuse to pay the success fee and indeed the pre-transfer costs in such circumstances as the lawfulness or otherwise of the assignment is potentially worth tens of millions of pounds to the insurance industry.

 

Furthermore the issue of whether this is a device to avoid the ban on referral fees is bound to be raised.

 

In the other scenarios there is a very significant risk that the courts will not hold an attempt to assign the Conditional Fee Agreement to be valid.

 

It is strongly arguable that the trading of cases and clients as commodities is the antithesis of any concept of preserving any form of personal relationship for personal services.  That is scenario 4.

 

In summary where there is any post 31 March 2013 change in the status of the solicitor acting under a conditional fee agreement there is a strong chance that the validity of the original retainer and its assignment will be challenged and that challenge may well be successful unless the Jenkins principle applies.

 

Scenarios 2 to 4 clearly fall outside Jenkins but in each case the original firm continues to exist and that provides a solution.

 

 

Solicitor’s costs for a period when the solicitor was not authorised to practice

 

In Jarrett v Tesco Store Ltd, Cambridge County Court 23 February 2015

 

the court found that the assignment of a Conditional Fee Agreement was ineffective in circumstances where it was originally assigned in February 2012 after the original firm of solicitors had closed and one of the partners decided to carry on in practice on his own but had not been authorised to do so under Rule 10.1 of the Solicitors Regulation Authority Practice Framework Rules 2011. The partner then joined another law firm and again the CFA was signed to that firm.

 

Here the court recognised that Jenkins v Young Brothers Transport Ltd [2006] EWHC 151 (QB) was authority for the proposition that there can be an assignment of a CFA from one firm to another. In that case the client followed the solicitor from one firm to another as he had trust and confidence in his skills and expertise.

 

However that did not extend to the unusual circumstances here where the client was seeking to recover solicitor’s costs for a period when the solicitor was not authorised to practice at all. The client’s trust and confidence could not properly repose in a solicitor whose Professional Practice Rules prevented him from acting as a solicitor at the relevant time.

 

Comment: The facts of this case are unusual and will not crop up very often.

 

 


 

Agency

 

As the old firm continues to exist then it can instruct the new firm on an agency basis as this preserves the original Conditional Fee Agreement and once the case is won then the client is liable to pay the original firm from the beginning under a pre 1 April 2013 Conditional Fee Agreement. Thus the success fee is recoverable, as well as all of the basic charges from the beginning. In other words the recovery is as though there had not been a change of solicitor.

 

Agency arrangements have a long history, with the concept of London Agents to deal with matters involving the courts in the capital very well established. Thus this model should be safe from attack, apart from the relatively minor issue of whether there was any duplication of work due to the agent having to re-read the papers. However this will only lead to a minor reduction in costs; it does not threaten the whole basis of the agreement.  It is simply a solicitor and own client costs or between the parties costs issue.

 

In such circumstances there is no need to serve Notice of Change.

 

If the old firm has sold its work to the new firm then it is likely that the two firms can agree to an agency arrangement.  The client may be less happy and clearly a firm that simply abandons the client and the work part way through a conditional fee agreement is not entitled to any costs at all if the client chooses to instruct a completely different firm, that is not the new firm to whom the work has been sold.  Any issue of breach of contract does not need to be considered – this is good old doctrine of frustration territory.

 

Note too that such an arrangement between the selling firm and the buying firm helps avoid the very real risk that, where a personal injury workload is sold to a new firm which goes on the record, there is an unlawful referral fee, that is the original firm referring, for a fee, the cases to the new firm.

 

If the client moves because she or he is unhappy with the old firm, then the client may not be happy about the old firm remaining on the record and involved.  That unhappiness is likely to disappear when the client understands that such an arrangement will mean that all of the damages are kept, rather than being subject to a 25% deduction in a post 31 March 2013 conditional fee agreement.

 

Likewise the client who moves for no good reason.  There it may be the sacked solicitor who is unhappy about staying involved, but in practice that solicitor has a much greater chance of recovering costs if its own original conditional fee agreement is relied upon, together with an otherwise unrecoverable success fee.

 

Scenario 5

 

Where the original firm ceases to exist through insolvency, lack of professional indemnity insurance, merger or any other reason

 

Scenario 5 is the most difficult one. If the firm is in administration then the firm continues to exist and the above arrangement works, with the new firm being the agent of the administrators, but it is a risky arrangement which jeopardises the incoming firm’s right to any fees at all.

 

In such a case the new firm should enter in to a new conditional fee agreement with the client so as to guarantee its own costs, albeit that no success fee will be recoverable from the other side.  That in turn means that no notice in Form N251 needs to be served as in a post 31 March 2013 conditional fee agreement the other party has no more right to be informed of the nature of the retainer than if it is an old-fashioned hourly rate one.

 

It is a matter for the firm as to whether it wishes to charge the client a success fee under the new agreement.  It is entitled to do so but it means that the client is losing out through no fault of their own.

 

The new firm should also enter into a deed of assignment with the administrators and the client, assigning the original conditional fee agreement, although for reasons set out above I have my doubts as to whether that works.

 

If possible the old firm should be kept going for the sole purpose of concluding cases with an existing conditional fee agreement and/or recoverable after-the-event insurance policy.  It is a matter between the firms as to how any recovered costs are distributed; the key is to maintain the right to recover all costs.

 

If this is not possible then consider having the old firm as a temporary trading name of part of the new/merged firm for the purposes of conducting the relevant cases.  A change of ownership of the firm does not, of itself, affect entitlement to costs.  If it were otherwise then every time a partner retired or a new partner entered the partnership, all previous work under a conditional fee agreement would be irrecoverable.

 

The same applies to a situation where the old firm still exists, but for whatever reason one party is not prepared to enter into an agency arrangement.

 

 

Quantum Meruit

 

In Forde v Birmingham City Council [2009] EWHC 12 (QB), the Queen’s Bench Division held that it is contrary to public policy to allow costs on a quantum meruit basis in relation to work done under an unenforceable conditional fee agreement. Such a claim would be available in every case of non-compliance and this would render the statutory prohibition on enforcement illusory.

 

There is no unjust enrichment of the client in such a case. The court, as a matter of justice, should not impose upon a client an obligation to pay in circumstances where Parliament has provided that the agreement under which he agreed to pay the costs should not be enforceable against him. (paragraph 206 of the judgment).

 

The agreement to continue to act in the case under the second Conditional Fee Agreement was adequate consideration. No presumption of under influence arose in such circumstances. The second Conditional Fee Agreement could be retrospective even though that retrospective period covered a period before 1 November 2005, that is a period under the old, much stricter, regime. Consequently, Conditional Fee Agreements which were defective under the 1 November 2005 regime could be ‘cured’ by entering in to a new, but retrospective, Conditional Fee Agreement.

 

Here, ultimately, no success fee was sought but the court held, obiter in the circumstances, that if a retrospective success fee was sought and was held to be contrary to public policy then that would not vitiate the second Conditional Fee Agreement as a whole. The court, obiter, held that a retrospective success fee is not contrary to public policy.

 

In an old-fashioned hourly rate retainer there is an obligation to pay, whatever the outcome of the case and whatever stage has been reached. The result is immaterial. On transfer of the case the former solicitor is entitled to be paid in full, and thus no problem arises with the indemnity principle. Indeed all solicitors are familiar with this scenario and with the concept of the solicitor receiving the case undertaking to preserve the original firm’s lien for costs, which are then recovered by the new solicitor from the other side if the case is won and paid to the former solicitor, with the client always remaining liable for those costs.

 

As we have seen, that is not the case in relation to a Conditional Fee Agreement.

 

The potential outcome is this:-

 

  • the original firm has not created a liability to be paid as the case has not been won and the doctrine of quantum meruit does not apply;

 

  • the new firm has no right to pre-transfer costs and thus is only entitled to costs from the date of instruction by the client and hence the need for a new Conditional Fee Agreement;

 

 


 

Backdating and Retrospective Conditional Fee Agreements and Rectification

 

A backdated Conditional Fee Agreement is just that, for example an agreement entered into on, say, 1 August 2013 but dated 31 March 2013. A retrospective Conditional Fee Agreement is one entered into on, say, 1 August 2013 and dated 1 August 2013 but expressed to cover work for a period prior to that date, say 31 March 2013. The effect may appear to be the same, namely that all work from 31 March 2013 is covered, but the courts have not always treated them the same way, and there is a clear judicial preference for retrospective, rather than backdated, Conditional Fee Agreements.

 

In Motto v Trafigura Ltd [2011] EWCA Civ 1150, the Court of Appeal held that the costs of vetting cases were only recoverable if covered by the Conditional Fee Agreement as otherwise there was no retainer, but the Conditional Fee Agreement could be drafted in such a way as to encompass the period when the vetting work was done, even if that was prior to the date of the Conditional Fee Agreement. At paragraph 61 of the judgment the court said:

 

“Equally, although of course solicitors and their clients can agree terms otherwise (as in the case of conditional fee agreements 3, 5, 6 and 7) the natural presumption in a contract by which a person engages a solicitor to act for him must be, in the absence of such a term, that he is agreeing to pay for work done in the future, not for work already done.”

 

Thus it is not even necessary to backdate the Conditional Fee Agreement; all that is needed is for a Conditional Fee Agreement entered in to at any time to recite that it covers work already done. Here the court appears not to have considered the old legal maxim that ‘past consideration is no consideration’ but that problem can be avoided by the conditional fee agreement being a deed under seal, in which case no consideration is required.

 

#FootnoteB

 

#FootnoteE

Retrospective conditional fee agreements

 

In Forde v Birmingham City Council [2009] EWHC 12 (QB), the Queen’s Bench Division of the High Court held that retrospective Conditional Fee Agreements are permissible and that no consideration is required. Any changes to the basis of the retainer must be made prior to the entitlement to costs becoming crystallized. The terms of the backdating must be such that a reasonable client would not object, the point being that the actual client is unlikely to object because she will not be paying anything.

 

If the second Conditional Fee Agreement failed then the first one could be resorted to. The court also held that s 58(1) of the Courts and Legal Services Act 1990 (CLSA 1990) and the changes made thereto meant that even a seriously flawed conditional fee agreement is not illegal, but merely unenforceable (See paragraph 206 of the judgment).

#FootnoteB

#FootnoteE

 

In Ahmed v The Bread Roll Co Ltd [2009] EWHC 90141 (Costs), the Senior Courts Costs Office held that although a backdated Conditional Fee Agreement was valid it was best to date it correctly, that is as at the date of signing and make it retrospective so as to avoid any suspicion of misleading anyone. An appeal against this decision was settled on terms not disclosed to the court.

#FootnoteB

#FootnoteE

 

In King v Telegraph Group Ltd [2005] EWHC 90015 (Costs) Senior Costs Judge Master Hurst held that a conditional fee agreement could be retrospective and said that “there seems no doubt therefore that the claimant is entitled to recover base costs from the date when he instructed his solicitors until the signing of the conditional fee agreement.”

 

However he added:

 

‘“Although there is no prohibition in the legislation against backdating a success fee, such backdating seems to me to fly in the face of the CFA Regulations and the CPR”, pointing out that the solicitors do not assume any risk under the CFA until it is signed and that they are under no duty to serve Notice of Funding until it is signed.

 

“It seems to me therefore to be quite wrong, and contrary to public policy, to permit the claimant’s solicitors to recover a success fee prior to the signing of the CFA.”’

 

In Holmes v Alfred McAlpine Homes (Yorkshire) Ltd [2006] EWHC 110 (QB), the Queen’s Bench Division of the High Court held that where solicitors had failed to explain to a client that a conditional fee agreement had been backdated, the agreement was still enforceable as there had been no material effect on the protection afforded to the client nor on the administration of justice.

 

The client had understood that the agreement did not apply to work undertaken before it was signed, and there had been no allegation of impropriety on the solicitor’s part.

#FootnoteB

#FootnoteE

 

In The Commissioners for Her Majesty’s Revenue and Customs v Blue Sphere Global Limited [2011] EWHC 90217, the High Court upheld the principle of retrospective conditional fee agreements, and success fees, and followed the case of Forde v Birmingham City Council [2009] EWHC 12 (QB) allowing the recovery of the success fee for the retrospective period.

 

This was a VAT tribunal case where there was no formal requirement to serve a Notice of Funding on Form N251. The court also held that the lack of notice made no difference as the paying party would have conducted the proceedings in exactly the same way even if it had had notice.

 

In J M Dairies Limited v Johal Dairies Limited and another [2011] EWHC 90211 (Costs), Master Gordon-Saker accepted that retrospective conditional fee agreements were not contrary to public policy and were lawful, but held that on the facts it would be unreasonable to require the defendants to pay the large retrospective success fee, including £60,000 for work done before the conditional fee agreement had been entered into, in the absence of notice of the conditional fee agreement during that retrospective period.

 

He observed that there was significant judicial reluctance to allow recovery of retrospective success fees for the retrospective period, but allowed base costs for the retrospective period and both base costs and success fees thereafter.

 

It is clear that some commentators have misunderstood the rationale of Motto v Trafigura Ltd [2011] EWCA Civ 1150, where the Court of Appeal’s comments were not addressed to the lawfulness of retrospective success fees, but rather the separate issue of whether funding investigation costs are recoverable. There the Court of Appeal was not referred to Forde, and it is widely accepted that its statement that “Until the conditional fee agreement is signed, the potential claimant is not merely not a claimant: he is not a client” is very obviously wrong.

 

So retrospective conditional fee agreements are lawful but recovery of success fees in the retrospective period will depend upon the facts of each case, including whether there has been compliance with the CPR and the effect on the paying party of the retrospection, the point being that, generally, by definition, the Form N251 will also be retrospective.

 

It remains to be seen whether the courts will adopt the same attitude in relation to conditional fee agreements entered in to on or after 1 April 2013 when any success fee will be recoverable only from one’s own client, that is the person actually entering in to the Conditional Fee Agreement whether it be backdated, retrospective or rectified.

#FootnoteB

#FootnoteE

 

In Hawksford Trustees Jersey Ltd v Stella Global UK Ltd and another [2012] EWCA Civ 987, CA, the main issue concerned a claimant who had been unable to obtain ATE cover prior to the original trial. He was successful at trial and the defendant appealed. At this stage the claimant managed to obtain ATE cover that not only provided cover in relation to the costs of the appeal, but would also provide cover in relation to the costs of the original proceedings if the appeal succeeded. The court was concerned with the issue of whether that element of premium attributable to providing cover for the original proceedings was recoverable as costs of the appeal and held that it was not.

 

Of rather wider significance was part of the reasoning why the majority of the court concluded that it would be wrong to allow for such recovery. The importance of giving notice of funding to an opponent was highlighted. In the judgment of Lord Justice Rix:

 

“… the importance of fair notice being given to the other party of a potential liability in additional costs is entirely undermined if the premium which the respondent seeks to recover in the appeal, so far as it relates to costs of trial, could be recoverable. For the defendant would have incurred all the costs of trial together with its potential (but retrospective) liability for the respondent’s ATE premium in ignorance, necessarily so, of what was coming round the corner when it appealed. When, however, in the course of its appeal, it learns for the first time of the ATE premium taken out in the appeal embracing cover for the costs of trial, it is too late for the defendant to do anything. It cannot concede the claim – it has already fought the trial. And if it concedes the appeal, then, if the respondent is correct in its interpretation of section 29, it will have to pay the ATE premium for the costs of trial. This is despite the fact that, in obtaining an appeal, it has persuaded the trial judge or the Court of Appeal that permission to appeal should appropriately be granted to it (while there is no similar hurdle in the standard case of a domestic claim form). In my judgment, such a situation is both unfair and antithetical to the purposes of the section. Moreover, although the matter was not debated before us, it is not clear to me that such unfairness can be dealt with as a matter of the question which arises before the costs judge of “whether the cost of insurance cover is reasonable” as a matter of quantum: see CPR 44 PD 11.10. The present issue is rather a matter of principle and jurisdiction.”

 

It appears that exactly the same reasoning could be used to decline to allow recovery of a retrospective success fee.

#FootnoteB

#FootnoteE

 

By virtue of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, recoverability of the success fee in a conditional fee case has been abolished in relation to conditional fee agreements entered in to on or after 1 April 2013. Thus the precise date of the agreement will determine who pays the success fee.

 

Clearly an agreement dated post 1 April 2013 but retrospective will not avoid the provisions of the Act and the courts have found against rectification – see Oyston v Royal Bank of Scotland [2006] EWHC 90053 (Costs) below. However, it is arguable that an agreement actually entered in to on or after 1 April 2013 but backdated is not caught by the Act as although the courts clearly prefer retrospective conditional fee agreements they have not gone as far as actually to prohibit backdated conditional fee agreements.

 

In Forde v Birmingham City Council [2009] EWHC 12 (QB) the High Court held the second of two conditional fee agreements to be valid and enforceable, even though it was retrospective and the retrospective period covered a period prior to 1 November 2005, when there was a very different, much stricter, regime in place. Consequently conditional fee agreements which were defective under the pre-1 November 2005 regime could be ‘cured’ by entering in to a new, but retrospective, conditional fee agreement.

 

The same logic could be applied in relation to conditional fee agreements entered into post 1 April 2013, but backdated to bring them within the pre-Legal Aid, Sentencing and Punishment of Offenders Act 2012 regime.

 

However, in such circumstances a court would almost certainly exercise its discretion to disallow recoverability both because the notice to the paying party will have retrospective effect, although not backdated, and also so as to give effect to the clear will of Parliament; as we have seen even where a backdated conditional fee agreement is valid the courts have been very reluctant to allow recoverability from the period prior to the actual date of signing.

#FootnoteB

#FootnoteE

 

 

Unlawful agreement – attempt to rectify by severance

 

In Oyston v Royal Bank of Scotland [2006] EWHC 90053 (Costs), the claimant had entered into a conditional fee agreement with his solicitors that provided for a 100% success fee and payment of a bonus in the event that damages in excess of a certain amount were recovered.

 

This was clearly an illegal agreement and the parties subsequently entered into a deed of variation that removed the reference to the bonus payment but the defendant argued that the conditional fee agreement was invalid as it was in breach of s 58(4) of the Courts and Legal Services Act 1990.

 

The claimant argued that the original agreement had been rectified by a consensual deed of variation and that it was possible to vary the agreement retrospectively, and that the departure from the statutory requirement had not had a materially adverse effect on the protection afforded to the client as the condition for triggering the bonus fee had not been met and that the use of severance was possible as the amount of the bonus element would not change the contract.

 

The court held that the Conditional Fee Agreement was in clear breach of s 58(4) and that the deed of variation was ineffective to rectify the situation as against the paying party. It had only been entered into when it was realised that the original agreement had a potentially fatal defect and it could not be right that a deed of variation could be used to impose a greater burden on the paying party than existed before judgment (see Kellar v Williams [2004] UKPC 30).

 

The fact that the claimant agreed to the variation was irrelevant. A breach of s 58(4)(b) and (c) would inevitably have a materially adverse effect upon the administration of justice and therefore the claimant’s argument on materiality failed (see Jones v Caradon Catric Ltd [2005] EWCA Civ 1821).

 

Severance was not available as it would be contrary to public policy to permit it; otherwise all defective agreement could be put right late in the day, even after the paying party had pointed out the alleged defects. That would not accord with either the statutory framework approach to public policy.

 

The conditional fee agreement was unlawful and unenforceable (see Spencer v London Wood (2004) Times, 30 March and Awwad v Geraghty & Co [2001] QB 570).

 

It seems from the case law set out above that had the parties entered in to a new, retrospective, conditional fee agreement it would have been valid and enforceable, albeit that the success fee may not have been recoverable from the paying party.

 

 

Pre-Assignment Base Costs

 

If there has been no valid assignment and the new firm has to rely on a new conditional fee agreement one of the key issues is whether it is all or nothing, that is whether in a non-assignable conditional fee agreement nothing is recoverable, either the success fee or the pre-transfer base costs.

 

Could the courts logically allow pre-transfer base costs but no success fee, bearing in mind that courts do not like windfalls, here the windfall to the losing tortfeasor being off the hook for pre-transfer base costs as well as the success fee?

 

If the new post-transfer conditional fee agreement is retrospective to the date of the original agreement then the answer may be that the court could so find.  Retrospection in contracts has always been allowed and was specifically sanctioned in conditional fee cases by the Court of Appeal in Forde v Birmingham City Council [2009] EWHC 12 (QB) which case also sanctioned concurrent CFAs.  This allows firms to seek to rely on the original, assigned, agreement but in default to rely on the new retrospective agreement.

 

If the new agreement needs to be relied upon, then it is very unlikely that the recoverability of the success fee will be allowed.  Even assuming – which is highly doubtful – that a CFA retrospective to pre-1 April 2013 could lawfully provide for a success fee, the courts have always been unwilling to allow recoverability prior to notice being given on Form N251.

 

This is because the idea of such notice being served was that the potential paying party might change its behaviour, for example by increasing an offer to settle.  A party that is unaware of a potential additional liability cannot do that and obviously notice, as a matter of logic, cannot be given retrospectively.

 

However the disallowance of a recoverable success fee does not prevent a court from allowing recoverability of normal between the parties costs on a standard basis from the date that the CFA is stated to begin.

 

Thus in a post-31 March 2013 CFA there is nothing inherently wrong in a court allowing ordinary costs back to the beginning of the case but disallowing any success fee.

 

Where there has been a change in the nature of the client, rather than a change in the status of the firm, this presents no difficulty, although as discussed above it is in those cases that the court is most likely to find a solution which allows recovery of the base costs and the success fee.

 

If the firm has changed then can the new firm have a retrospective CFA that picks up a previous firm’s costs?  By agreement with the client there is no reason why not.  Note that past consideration is no consideration and no consideration equals no contract unless the contract is a deed under seal.  It is arguable that a retrospective agreement does not involve past consideration; that is the whole point of retrospectivity, but it is best not to take any chances, so make the retrospective CFA a deed under seal.

 

A new firm taking over an issued matter maybe one of the few instances warranting a Damages-Based Agreement as this allows the new firm to charge a flat 25% of damages to the client however little work the new firm does.  A client may see it differently and prefer to pay by the hour in such circumstances.

 

That raises the issue of recoverability.  There is no requirement to claim costs from the other side on the old basis of hours X appropriate level of fee-earner.  In principle there is no reason why the costs claimed should not be a straight 25%, irrespective of the work done, which would fully protect the client.  How a court assessing such a costs claim will react is as yet unknown.  It is true that a DBA is a mixture of a fee for work done and a fee for taking the risk.  In a CFA those matters are, and have always been, separated out with the base costs being the fee for work done and the success fee being the risk fee.  Consequently it could be argued that recoverability of the full DBA would amount to the recovery of a success fee but the CPR make the indemnity rule apply in full to DBAs, suggesting that that is what is intended.

 

 

Qualified One Way Costs Shifting

 

Qualified One Way Costs Shifting is dealt with very shortly in the Civil Procedure (Amendment) Rules 2013 at new CPR 44.13 to 44.17.

 

 

Exceptions

 

Pre-action disclosure applications are not protected by QOCS, nor are proceedings where a claimant has entered into a pre-commencement funding arrangement before 1 April 2013.

 

Put simply if, prior to 1 April 2013, there is in place a conditional fee agreement or collective conditional fee agreement or ATE or membership organisation indemnity, then QOCS protection will not apply.

 

I can understand why, if ATE insurance or membership organisation protection is in place, QOCS should not apply as it would be unfair for a defendant to pay the recoverable ATE premium to a clamant who, on the face of it, is at no risk of paying costs.

 

However the success fee is to reward the lawyer for taking the chance of getting no fee because the case is lost. What on earth has that got to do with the risk of the defendant’s costs being payable?

 

This thinking is as woolly as a mammoth.

 

A pre-commencement funding arrangement is a creature “as defined in rule 48.2” (new CPR44.17). So, naturally, one looks at new CPR48.2, where at CPR 48.2(1)(a)(i) one will find the following:

“48.2(1) A pre-commencement funding arrangement is-

………..

  • a funding arrangement as defined by rule 43.2(1)(k)(i) where……”

 

CPR 43.2(1)(k)(i) defines a funding arrangement as “an arrangement where a person has –

  • entered into a conditional fee agreement or a collective conditional fee agreement which provides for a success fee…..”

 

A first day trainee can do better than that.

 

So QOCS applies to all personal injury proceedings where there is no pre-1 April 2013 recoverable success fee or ATE or membership organisation premium in place.

 

 

Retrospection of QOCS 

 

Thus it is fully retrospective in all other cases, covering cases that have been going on for years, which may come as a shock to insurers. This has recently been confirmed by the Court of Appeal in Wagenaar v Weekend Travel Ltd t/a Ski Weekend and Serradj (Third Party) [2014] EWCA Civ 1105, 31 July 2014.

 

The transitional provision is new CPR 44.17.

 

“44.17 This Section does not apply to proceedings where the claimant has entered into a pre-commencement funding arrangement (as defined in rule 48.2)”.

 

See above for my analysis of this definition, but, as a pre-commencement funding arrangement can, under new CPR 48.2 ONLY be pre-1 April 2013, it follows that any other pre-1 April 2013 arrangement is covered by QOCS.

 

On the face of it a claimant without a CFA or ATE with, say, a £200,000 costs order against them prior to 1st April 2013 does not now have to pay. A costs order where the defendant won on liability is worthless. Where the defendant won on a Part 36 offer, then generally the order is only as good as the level of damages recovered by the claimant.

 

This also highlights one of the odd aspects of the Court of Appeal’s decision in Simmons v Castle (No 2) [2012] EWCA Civ 1288 re the 10% general damages uplift to all claimants who prior to 1 April 2013 did not have a Conditional Fee Agreement with recoverable success fee in place.

 

Such a claimant, for example funded by a before-the-event insurance (BTE) policy, will get 10% extra general damages to compensate them for the non recovery of a non-existent success fee AND will benefit from QOCS to avoid them having to buy adverse costs insurance which in fact they already have through their BTE policy.

 

Furthermore a defendant gets no Part 36 costs protection until a costs order is made, so late acceptance of a defendant’s Part 36 offer does not trigger costs, whereas it did prior to 1 April 2013. So acceptance post  1 April 2013, out of time and the last one, two, three years’ costs liability goes, unless you have a CFA with recoverable success fee or you have recoverable ATE.

 

However I suspect that the defendant will refuse to pay costs unless a set-off for post-Part 36 costs is made, forcing the claimant to go to detailed assessment, except that if the bill is for £75,000 or less it will be a paper-only provisional assessment in the first instance. I hope that no-one in the Court of Appeal is planning any holiday any time soon.

 

 

Retrospective retrospection

 

Are you free to tear up any agreement providing for the recoverability of an additional liability and thus gain QOCS protection?

 

The relevant rule is CPR 44.17 which reads:

 

“This Section does not apply to proceedings where the claimant has entered into a pre-commencement funding arrangement (as defined in rule 48.2).”
New CPR 48.2 is long and complicated but CPR 48.2(1)(a)(i)(aa) – I have not made that up – defines a funding arrangement as itself defined by CPR 43.2(1)(k)(i) – I have not made that up either – as where  “the agreement was entered into before 1 April 2013 specifically for the purposes of the provision to the person by whom the success fee is payable of advocacy or litigation services in relation to the matter that is the subject of the proceedings in which the costs order is to be made;
or
……..”

 

This deals with CFAs, (bb) deals with CCFAs, 48.2(1)(ii) deals with ATE and 48.2(1)(iii) with membership organisation self-insurance.

 

Any one of these disapplies QOCS. By ending any relevant agreement can you disapply the disapplication and retrospectively achieve retrospective QOCS protection?

 

Thus it depends upon the meaning of “has entered into”. Clearly the better wording would have been “had entered into” or “has ever entered into” which would have put it beyond doubt. “Has” is not tense specific. “Has my client got a CFA ?” is present tense.

 

It is clearly arguable either way, but equally clearly the intention of Parliament was to disapply QOCS where recoverability of an additional liability was in place, so on the basis that courts should adopt a purposive construction of legislation, my view is that anyone who has ever had a recoverable liability does not get QOCS protection.

 

Don’t get me started on CPR 48.2(1)(a)(i)(aa) and its reference to the claimant paying the success fee in a pre-1 April 2013 when the whole point of it all is the abolition of recoverability – the client was not allowed to pay the success fee!

 

Thus my view is that an unassignable pre 1April 2013 CFA which provided for a success fee is a bar to QOCS, even though the success fee is not recoverable.

 

That has been reinforced by the decision of Master Haworth in Landau v The Big Bus Company, 31 October 2014, Master Haworth, SCCO.

 

 

After-the-Event Insurance

 

Care needs to be taken in relation to after-the-event insurance, where the position is slightly different. The policy is between the client and the after-the-event insurance company and therefore there is nothing to stop the policy continuing and, in the case of a pre 1 April 2013 premium, remaining recoverable from the other side.

 

However many after-the-event insurance policies provide that the policy ends if the client moves firms.

 

If the after-the-event policy is cancelled then clearly the premium will not be payable by anyone and this is not recoverable, whatever the outcome of the case; the after-the-event insurer is off risk but has also lost any chance of getting a premium and typically such premiums are not paid by anyone until the end of the case and in the event of defeat are not paid at all.

 

If the policy is not cancelled, then there should be no problem. If it is then there are a variety of options:-

 

  1. to continue without after-the-event insurance in place;

 

  1. for the new firm to self-insure, that is to accept liability for any adverse costs Order; this is perfectly lawful – see Sibthorpe and Morris v Southwark London Borough Council (Law Society intervening) [2011] EWCA Civ 25;

 

  1. for the new firm to fund the unrecoverable after-the-event insurance premium; the lawfulness of this has been confirmed by the Court of Appeal in Flatman and Germany v Weddall and Barchester Health Care Limited [2013] EWCA Civ 278;

 

  1. for the client to pay the premium himself; generally such a premium is a so-called “silver bullet” one which is payable only in victory, and therefore the client would not physically have to pay anything out unless and until the case is won; payment can then be taken by deduction from damages;

 

  1. for the solicitor to self-insure or arrange the insurance and pay for it out of an overall charge to the client, typically 25% of damages in a post-31 March 2013 Conditional Fee Agreement, although it is perfectly permissible to charge more, say 30%, to reflect the extra service of providing an indemnity against adverse costs.

 

In any situation where the client pays, directly or indirectly, for the after-the-event insurance premium he or she is likely to have a valid complaint that this expense has been forced upon him or her by the conduct of both the outgoing firm and the incoming firm.

 

In my view, in the absence of the after-the-event insurer allowing the policy to continue with the new firm, the firms should arrange between them for the insurance to be obtained, or an indemnity given, at no cost to the client.

 

Clearly the most satisfactory outcome is for the After-the-Event insurance provider to agree to allow the policy to continue with the new or merged firm and the After-the-Event insurer in each case should be approached and be asked to agree.

 

Clearly the benefit to the After-the-Event insurer is that they stand to recover a premium in a case which they had previously agreed to insure and where the risk profile should not have changed.

 

Note that in clinical negligence cases an element of the after-the-event insurance premium remains recoverable even if the insurance is taken out after 31 March 2013.

 

By virtue of a new Section 58C(2) to (4) of the Courts and Legal Services Act 1990 the Lord Chancellor is empowered to make Regulations allowing recovery of just that element of an after-the-event insurance premium relating to the costs of a claimant’s own risk of having to pay for one or more expert’s reports.

 

The Recovery of Costs Insurance Premiums in Clinical Negligence Proceedings (No 2) Regulations 2013, effective 1 April 2013, provide that recovery of the ATE premium is only allowed if

 

  • the financial value of the claim for damages in respect of clinical negligence is more than £1,000; and

 

  • the risk insured is of incurring liability to pay for an expert relating to liability or causation, and

 

  • recoverability is limited to that part of the premium relating to the “risk of incurring liability to pay for an expert or reports relating to liability or causation in respect of clinical negligence in connection with the proceedings.”

 

See also my blog Clinical Negligence and ATE Recoverability.

 

 

READERS’ COMMENTS:-

 

John Hall’s comment on 8 October 2015:-

 

Hi Kerry

How, if at all, will this decision affect Deeds of Adoption where a pre April 2013 CFA is adopted by Executors or Administrators of the claimant’s estate?

 

Kerry Underwood’s reply:-

 

Depends on wording of CFA- Law Society one ends on death so cannot be adopted or assigned, but with appropriate wording generally no problem when it is the status of the client, rather than the law firm which changes, eg death, achieving majority, losing capacity etc.

 

Kerry

 

John Hall’s reply:-

 

Thanks Kerry. That is a relief!

 

Ed Wegorzewski’s comment on 8 October 2015:-

 

Kerry the benefit of the original solicitors’ retainer needs to be assigned, otherwise the second solicitor can’t claim the first solicitor’s costs. But we are there talking about the historical retainer. So if the new solicitor did nothing else, he could now seek payment of the first solicitor’s costs. Going forward, there clearly needs to be a new retainer. The purported assignment of the CFA, which was held to in fact be a novation because the first CFA itself couldn’t be assigned, was it; the client was held to have entered into a new CFA on the same terms as the first CFA. The problem was, due to changes in requirements, the “new CFA” was not enforceable. The judgment did not say that the new solicitors had no retainer, but that for non-compliance, it was unenforceable. No representations re disbursements seem to have been heard.

 

Kerry Underwood’s reply:-

 

Ed

 

On what basis can first solicitor’s costs be claimed if no assignment? There is no quantum meruit in CFA cases- see Forde v Birmingham Council. The job has not been done. The case has not been won. Would the lay client be liable for the first solicitor’s costs? Very clearly not, so indemnity principle applies.

 

In my view should be assignable, but if CFA is not assignable, as found here, then I do not see what retainer there is to assign. You make the point yourself- new CFA defective, therefore no other retainer for new firm to rely on, so no costs.

 

Kerry

 

Jeff Zindani’s comment of 8 October 2015:-

 

The DJ accepted without any proper consideration or analysis that this was a personal contract which was akin to a footballer or artist and so inherently personal that the rules relating to assignment prohibited this when in reality the client did not know the partner who signed the CFA or had much to do with the fee earner. Obviously, in complex cases or where the client has instructed an individual lawyer then it may be different but not here.

As Prof Bridge pointed out a few years ago “The law should be slow to conclude that particular categories of contract invariably give rise to non-assignable rights.” but clearly not in the Liverpool County Court!

 

Kerry Underwood’s reply:-

 

I don’t disagree with that. In any event what is the modern justification for the common law rule against assignment anyway?

 

Kerry

 

Mac McCaskill’s comment on 13 October 2015:-

 

Interesting article.

I refer my learned friend to the comments made by Mr Bumble, the Beadle.

 

Kerry Underwood’s reply:-

 

😄

 

Costs curious’ comment on 13 October 2015:-

 

Kerry, if there are no pre-April 2013 CFAs (and therefore recoverable success fees) to worry about, what is to stop the new firm that has “bought” the client base from a firm that is going into Administration from entering into a new CFA with the Claimant that is retrospective and covers all of the work done by the original solicitor if the original solicitor terminates their CFA and waives their right to claim the costs from the Claimant? New firm get all of the costs and the Claimant is no worse off as their success fee will be capped at 25% of their claim for damages. Admittedly, the new firm might have to implement a lower success fee (i.e less than 100% based on the risk of the case (as they might have admissions of liability)

 

Kerry Underwood’s reply:-

 

Yes, I think that that is theoretically possible and indeed one may choose not to charge the client a success fee, so the client is no worse off than if nothing had ever happened to the first firm. Retrospectivity is allowed. However: IBC v Bailey etc: can Firm B claim costs ON ITS OWN BEHALF for work it never did?

 

I do not think so.

 

Kerry

 

Mark Ellis’ comment on 14 October 2015:-

 

I have a situation where the client has entered into a pre April 2013 CFA with solicitors which provides for success fee but also has the benefit of after the event insurance cover for adverse costs, should the claim be unsuccessful.

 

Due to the client moving he instructed us, a more local firm (under a new CFA) post April 2013 for which we are unable to recover success fee or any insurance premium.

 

How do we protect the former solicitors costs, success fee and insurance premium going forward now that proceedings are to be served?

Do we have to serve two separate Notices of Funding?

The ATE Insurance have indicated that they are willing to continue to provide cover for adverse costs going forward.

Your views would be much appreciated

 

Kerry Underwood’s reply:-

 

Why cannot you recover the insurance premium? I is incurred by the client anti is irrelevant which firm was acting at the time; it is no different form, say, a court fee.

 

Unless you have an agency agreement with the former solicitors it is unlikely that any success fee can be recovered, or indeed any of the previous firm’s costs, but see the Spire Healthcare case, which in my view is wrong on this, but is useful for you.

 

Remember also that as proceedings have not been issued you should get QOCS if the ATE does not continue- see the Llandaff case and my blog on it.

 

You do not need to serve Notice of Funding as such but you should serve notice of fact that client continues to be covered by ATE even though change of solicitor. This should be done for the sake of transparency and also tactically, so that the other side know that your client is protected.

 

Note that, depending on the terms of the original CFA, and the precise terms of it ending, your client may be liable for the first solicitor’s costs and be unable to recover them.

 

Kerry

 

Ian Valentine’s comment on 30 November 2015:-

 

What if SGI Legal varied the Barnetts CFA by claiming a 0% success fee? Would SGI still be required to impose the damages-based cap at 25% even though they are effectively waiving their success fee?

 

Kerry Underwood’s reply:-

 

A clear statement that the success fee will be capped at 0% of damages complies with the law. It is a MAXIMUM of 25% – it is not FIXED at 25%.

 

Kerry

 

Alex Brown’s comment on 30 June 2014:-

 

Very good blog covering numerous angles. For what it is worth, I understand the ruling in Blankley is due to be heard in the Court of Appeal in November. Very important pre and post Jackson guidance on frustration as Defendants seek to strike out large chunks of bills, especially where capacity is in dispute.

 

Kerry Underwood’s reply:-

 

Many thanks.

 

Sue’s comment on 14 August 2014:-

 

Hi Kerry – could I just be clear on this point. Client with a pre 1.4.13 CFA which provides for the recovery of a success fee moves with his trusted solicitor to a new firm and the CFA is assigned to that new firm post 1.4.13. Whilst it is almost certain that that assignment could not be challenged (and for the purposes of the indemnity principle the CFA continues to provide a valid retainer for the recovery of inter parte base costs), recovery of any success fee on work done post 1.4.13 from the opposition (in the event of a win of course) would not be possible because of the change in the law? The client would have to be advised that, in choosing to stay with the individual solicitor at the new firm, is likely to cost him? The way round this would be for the new firm to deal with the matter on an agency basis possibly? Or is there no correct way to preserve the recoverability of the success fee from the paying party? Many thanks,

 

Kerry Underwood’s reply:-

 

The law of assignment is of great complexity and is often difficult to apply to any given situation.

 

I disagree with your statement “whilst it is almost certain that that assignment could not be challenged…”

 

It is true that in the case of Jenkins v Young Brothers Transport Ltd [2006] EWHC 151 [QB] the High Court upheld the validity of an assignment from one firm to another, and indeed to a third firm, where the solicitor had moved firms. That is all dealt with in my blog under the heading Scenario One.

 

That is a High Court decision and as such is binding on courts below, but many of us think that that decision was wrongly decided, albeit a fair decision in the circumstances.

 

It is important to remember that under the old regime the Claimant solicitor would have lost all costs if there was no valid Conditional Fee Agreement in place.

 

Either the Conditional Fee Agreement is validly assigned, or it is not. If it is validly assigned then the original agreement continues in place and if that is a pre-1 April 2013 Conditional Fee Agreement then both base costs and the success fee are recoverable from the losing party.

 

If the Conditional Fee Agreement is not validly assigned then there is no retainer in place and thus there could be no recovery of any costs and this is due to the indemnity principle.

 

A fresh Conditional Fee Agreement can be entered into on the basis that it only comes into play if the original one is held not to be validly assigned. The starting point with a fresh agreement is that no success fee would be recoverable, because it is post 31 March 2013, and that no base costs prior to the date of the new Conditional Fee Agreement could be recovered either.

 

Theoretically it is possible to make the Conditional Fee Agreement retrospective to the start of the case but my view is that there would still be no recoverability of the success fee as the Conditional Fee Agreement would be post 31 March 2013, even though made retrospective to a date before then.

 

If the agreement was with the same firm and there had simply been a problem with the earlier one then there is no problem. However there is obviously a problem in firm B having an agreement retrospective to a date when they were not acting for the client and when the client was represented by firm A. In other words even if the agreement is retrospective the new firm cannot claim for work that it never did.

 

The new firm is of course free to take the case on on the same basis as the original agreement, that is without charging the client a success fee. Note also that most Conditional Fee Agreements allow the original firm to charge the client in full if they move firms. The irony of that position is that although it is potentially harmful to the client the indemnity principle means that those costs would be recoverable from the other side in the event of ultimate victory.

 

Acting on an agency basis solves the problem.

 

All of this is dealt with in my blog which I suggest you read in full as it does deal with all of these points.

 

All of these comments must be read subject to the comments of the Supreme Court in the case of Coventry and Others v Lawrence and Another (2) [2014] UKSC46 where the Supreme Court suggested that recoverability is of itself a breach of a paying party’s right to a fair trial and Article 6 of the European Convention on Human Rights and potentially an unjustified deprivation of property contrary to Article 1 of the First Protocol to the Convention.

 

Put more simply there is now no guarantee that anyone will recover any additional liabilities from the losing party but this is subject to a final decision of the Supreme Court. All of this is dealt with in my blog – Recoverability May Be Illegal Rules Supreme Court.

 

Kerry

 

Paul Davis’ comment on 2 September 2014:-

 

Kerry. Do you happen to have a precedent for an assignment of a CFA that you would share?

 

Kerry Underwood’s reply:-

 

Yes, £750 plus VAT. Contact me on 01442 430900 or kerry.underwood@lawabroad.co.uk

 

Kerry

 

Simon’s comment on 31 October 2014:-

 

On a case where the client becomes bankrupt after the commencement of the claim, I understand he ceases to have sufficient interest to continue. If a Trustee in Bankruptcy refuses to have the CFA assigned to him, will we have to discontinue as the current CFA is of no value, and we cannot draw up a new CFA for the client.

 

Kerry Underwood’s reply:-

 

Please read my blog: Personal Injury: Acting for Bankrupts and my blog Assignment of Conditional Fee Agreements where this issue is dealt with in detail and your question answered.

 

Kerry

 

Simon’s comment on 1 November 2014:-

 

Hi Kerry, I had already read it. The claim is for PI & specials. The specials are medium, so we can’t dump them (£2 or £3K). I have asked the T in B to have the CFA assigned to him with reference to the provision of the IA you mentioned at the end of the blog and a threat of a potential for a claim against him for lost costs if he did not agree.

 

I was wondering what to do if he still refuses to have the CFA assigned to him.

 

In that circumstance do we either:

 

~ continue with the claim and proceed against the T in B for costs at the end; or

 

~ discontinue once he refuses the assignment and then proceed against the T in B for his failure to assign the CFA.

 

BTW, thanks for the fantastic talk at the Solicitors Group in Manchester last week.

 

Kerry Underwood’s reply:-

 

I note the position.

 

My view is that the whole case rests in the Trustee in Bankruptcy but that the Trustee in Bankruptcy then has effectively a reverse trust to account to the claimant for the general damages element of the claim.

 

In my view neither of the options that you propose is feasible.

 

If the claim vests in the Trustee in Bankruptcy, and if it includes special damages that is the case, then you cannot continue with the claim as you have no standing.

 

If the claim is discontinued then, generally that is that, and the claimant would be unable to proceed, and therefore that is not an option.

 

Assuming that the matter rests in the Trustee in Bankruptcy and he refuses to have the CFA assigned to him, then the potential loss to the client is in having to pay the success fee out of damages, whereas it would have been recoverable in a pre-1 April 2013 CFA. However if the Trustee in Bankruptcy agrees to waive that charge, that is to enter into an agreement with the Claimant whereby nothing is taken from the claimant’s damages, then the loser is the Trustee in Bankruptcy who is charging a lower fee than otherwise he would have charged.

 

Provided that those costs are generally not charged, and therefore do not come out of the estate, the client and the estate suffer no loss.

 

If in fact the Trustee in Bankruptcy does make such a charge then I believe your client would have an action against him in relation to any deduction from general damages, as of course those general damages still revert to the claimant, even though bankrupt.

 

In relation to any deduction made in relation to special damages then this would be a claim by the estate as that element of damages would go into the bankrupt’s estate, rather than to the bankrupt.

 

You risk losing all costs as there is clearly an argument that there is no valid retainer in place for pre-bankruptcy work as the pre-condition of a charge under the Conditional Fee Agreement, a win, has not been achieved and in that sense it is akin to the death of the claimant, when again no payment is due.

 

Your ability to charge your own client will depend upon the terms of the Conditional Fee Agreement, but I suspect that you have no right to charge the client.

 

That throws up a dilemma. The loss is effectively yours, but it is of course trite law that costs belong to the client and not to the solicitor. My feeling is that you would not have a freestanding action against the Trustee in Bankruptcy and any action would be at the suit of your client. However under the indemnity principle if your client has no obligation to pay you then the client, who I believe is the only person with a potential cause of action, in fact has no loss and thus has no claim.

 

I am unaware of any case law on this point.

 

This also throws up the issue of whether, in the absence of a recoverable additional liability, the Trustee in Bankruptcy acquires Qualified One-Way Costs Shifting for the client. I deal with all of this in my blog – Qualified One-Way Costs Shifting. My view is that Qualified One-Way Costs Shifting is not acquired in those circumstances.

In Landau v Big Bus Company and another [2014] EWCA Civ 1102 the Court of Appeal held that where there had been a recoverable additional liability, in that case in relation to the first instance proceedings, then even though there was no recoverable additional liability in the appeal proceedings, as there was a fresh CFA and ATE insurance, Qualified One-Way Cost Shifting did not apply in the Court of Appeal because there had been a recoverable additional liability in those proceedings.

 

Thus it must be the case that in the claim and proceedings, that is without the additional factor of a separate appeal, the existence at any time of a recoverable additional liability disqualifies the claim from QOCS. That is, as we used to say, a fortiori – that is if it cannot apply in an appeal then it is even more the case that it cannot apply in a continuation of the first instance proceedings.

 

Emma’s comment on 2 March 2015:-

 

I have just stumbled across your excellent blog whilst trying to find clarification on a tricky issue – I wonder if you might be able to help?

 

Client lacks capacity throughout the claim – can a pre-April 2013 CFA between litigation friend and solicitor be ‘adopted’ by a new litigation friend upon the death of the original litigation friend, or is a new post-LASPO CFA necessary?

 

Any guidance much appreciated!

 

Thanks

 

Kerry Underwood’s reply:-

 

Thank you for your response.

 

My view is that you do not need to have a fresh Conditional Fee Agreement. The true party has been the same throughout and the solicitors have been the same throughout and it is clearly a pre-April 2013 Conditional Fee Agreement. The litigation friend is just that and is not a party to the litigation. All that needs to happen is that the new litigation friend be formally advised of their responsibilities, with you giving the Solicitor’s Certificate for suitability etc. The litigation friend is just that – the friend in the litigation and that does not affect the underlining contractual relationship.

 

As a belt and braces policy I advise you to adopt the suggestion I have made above, but also to enter into a fresh Conditional Fee Agreement with the litigation friend but stated to be on the basis that it only comes into play if the original Conditional Fee Agreement is found, for any reason, to be no longer valid. The authority for more than one Conditional Fee Agreement being in place at any given time is Forde v Birmingham City Council [2009] 1WRL 2732.

 

In my view a court will work very hard to preserve the validity of the original Conditional Fee Agreement, and therefore recoverability of the success fee and indeed pre-death of litigation friend base costs as failure to do so would clearly discriminate against disabled people and is arguably unlawful and a breach of the Human Rights Act 1998.

 

In any event a contract between a patient lacking capacity and a solicitor is not void but is voidable and so even if the contract was between the claimant and the patient that would not be fatal to the agreement.

 

That was the rule laid down in Imperial Loan Company Ltd v Stone [1892] 1 QB 599.

 

The paying party has no standing to interfere with that legal position and has no power to argue that the claimant/patient should be required to void the contract.

 

It would be curious indeed if a contract between someone lacking capacity and made pre-April 2013 would be upheld but one were a litigation friend had been properly appointed, but then had died, would not be upheld.

 

In my view you should have no problems.

 

More detailed information is contained in my blog – Conditional Fee Agreements, Damages-Based Agreements and Contingency Fees.

 

In the very recent decision in Blankley v Central Manchester and Manchester Children’s University Hospitals NHS Trust [2015] EWCA Civ 18 the Court of Appeal confirmed that the liability to pay a solicitor’s costs remains with the litigant, even a litigant without capacity, and not with the litigation friend. Thus if the client lacks capacity at the time of retainer, then that retainer is still with the litigant and the litigation friend is merely a statutory agent of the incapacitated litigant, and not a principal to the retainer.

 

This is essentially the same line of reasoning as the court adopted in Dunn v Mici [2008] EWHC 90115 (Costs) in relation to minors.

 

Please keep me updated.

 

Kerry

 

Emma’s reply:-

 

Hi Kerry – thank you for your response. The client lacks capacity under the MCA ’05 and has done throughout, although I cannot find any authority to say that a new CFA is not needed in the circumstances..

Emma

 

Richard Satyanadhan’s comment on 26 March 2015:-

 

I came across your brilliant, and very helpful, article whilst trying to find an answer to whether Jenkins would apply where a firm was transferring to an LLP (and it was not possible for both firms to run in tandem). Your article is helpful, but I was wondering whether there was anything that would assist (or whether you have anything that my firm could purchase!) to deal with the issue. It is only three or four of the old style agreements, and all clients would be more than happy to confirm that they are transferring to the solicitor, not the firm. Any assistance most gratefully received.

 

Kerry Underwood’s reply:-

 

Many thanks for your kind remarks!

 

All dealt with in correspondence now 🙂

 

Kerry

 

The General’s comment on 12 May 2015:-

 

Hi Kerry, what if C, as part and parcel of their BTE insurance, was entered onto a CCFA dated pre- 1.4.13.

 

Does the presence of the CCFA prevent a 10% uplift in general damages, or does the CCFA fall foul of s.44(6) LASPO 2012: “the agreement was entered into specifically for the purposes of the provision to P of advocacy or litigation services in connection with the matter that is the subject of the proceedings in which the costs order is made…”.

 

i.e. can a pre-accident CCFA ever be entered with the requisite specificity?!

 

Thanks as ever.

 

Kerry Underwood’s reply:-

 

You appear to be confusing the issues of recoverability of success fees and the 10% uplift in General Damages.

 

The Legal Aid, Sentencing and Punishment of Offenders Act 2012 does not deal with the 10% uplift in General Damages. Section 44 deals with the recoverability of success fees and nothing else. In relation to the recoverability of a success fee the test is whether the agreement was entered into specifically for the purposes of the provision to a person of advocacy or litigation services in connection with a matter that is the subject of the proceedings in which the costs order is made, or advocacy or litigation services were provided to that person under the agreement in connection with that matter before the commencement day.

 

Section 44(6)(a) deals with Conditional Fee Agreements and section 44(6)(b) deals with Collective Conditional Fee Agreements.

 

Thus the test is not whether the agreement was entered into prior to the commencement date of 1 April 2013 but rather whether advocacy or litigation services were provided to the actual person under that Collective Conditional Fee Agreement in connection with that matter before 1 April 2013.

 

This is to avoid the situation where a pre-1 April 2013 CCFA is used to justify the recoverability of the success fee even though the cause of action only arose after 31 March 2013.

 

A pre accident Collective Conditional Fee Agreement does not need to be specific; indeed an ordinary Conditional Fee Agreement does not need to be specific and nor should it – see my recent blog – CFAs: Never Name the Defendant!

 

The issue of the 10% uplift in General Damages was not dealt with by legislation but rather by the Court of Appeal in its two decision in Simmons v Castle [2012] EWCA Civ 1039.

 

True it is that those cases said that General Damages were increased by 10% unless the claimant had a Conditional Fee Agreement with a success fee and thus fell within section 44(6).

 

Thus the existence of BTE insurance is not relevant and indeed nor is the existence of ATE insurance. Neither of those make any difference to the 10% increase which is designed to deal with the non-recoverability of the success fee and nothing else and this is dealt with in paragraph 12 of the Court of Appeal’s revised Judgment. What you do not say is whether or not there was a recoverable success fee in the Collective Conditional Fee Agreement.

 

If there was then the 10% increase does not apply; if there was not then the 10% uplift does apply.

 

Kerry

 

Phil’s comment on 18 June 2015:-

 

Dear Kerry

 

Didnt quite know where on the blog to place this.I am really struggling.I have been instructed in a commercial case where liabilty is admitted.I want to put the client on a CFA but I dont have a precednt CFA for use in such cases.I have tried everywhere to find one.I dont know if you might have one that would assist me.I hate to ask but I am completely stuck.

 

Regards

 

Phil

 

Kerry Underwood’s reply:-

 

I sell a complete set of 49 precedent conditional fee agreements for £900 plus VAT, reduced to £750 plus VAT for those who have attended Underwood on Tour or Kerry on Tour. Contact me on 01442 430900 or Kerry.underwood@lawabroad.co.uk

 

Kerry

 

 

 

Written by kerryunderwood

December 2, 2015 at 5:11 am

Posted in Uncategorized

WASTED COSTS AND NON-PARTY COSTS ORDERS: UNIFIED

with 12 comments


This piece brings together all other pieces and is correct and complete up to 15 January 2016

 

Look here for Kerry’s new course on this subject. 

 

COSTS AGAINST LAWYERS

 

General

 

The power of the court to award Wasted Costs against a legal representative arises from the Courts and Legal Services Act 1990, Section 4(1), which enacted a new section 51 of the Supreme Court (now Senior Courts) Act 1981 (“SCA 1991”), which relates to both the High Court and County Court, as well as the Court of Appeal. The power to make a non-party costs order also derives from section 51. Wasted costs orders can only be made against representatives; non-party costs orders can be made against anyone.

 

Sections 51(1) and (3) of the Senior Courts Act 1981 read:-

 

“51         Costs in civil division of Court of Appeal, High Court and County Courts.

 

  • Subject to the provisions of this or any other enactment and to rules of court, the costs of and incidental to all proceedings in—

 

  • the civil division of the Court of Appeal;

 

  • the High Court; and

 

  • any county court,

 

shall be in the discretion of the court.

 

  • The court shall have full power to determine by whom and to what extent the costs are to be paid.”

 

WASTED COSTS

 

Section 51(6) deals with wasted costs orders.

 

“(6)        In any proceedings mentioned in subsection (1), the court may disallow, or (as the

case may be) order the legal or other representative concerned to meet, the whole of any wasted costs or such part of them as may be determined in accordance with rules of court.”

 

The concept of wasted costs includes both disallowing costs and also ordering actual payment of costs.

 

Need for evidence as to costs wasted

 

In Nwoko v Oyo State Government Nigeria [2014] EWHC 4538

 

the judge said:-

 

“Mr Newman originally suggested that I should somehow summarily assess those costs by taking a broad brush. At one stage it was suggested that the relevant figure was 20%, and another time it was suggested it should be 80% of that figure. That approach is quite unacceptable. In order for the court to deal with it, even on a broad brush basis, it is incumbent upon a party to come before the court with proper evidence to identify what costs have been caused by what deficient conduct. I accept that in many cases it may be that some estimates have to be made, but it is unacceptable for any party simply to throw at the court a large schedule, a schedule containing a large bunch of figures which the court is then expected to plough through in order to arrive at some principled decision. It is simply impossible for the court to do that.”

 

A party can succeed in an application for a wasted costs order against its own lawyer, or against the other side’s lawyer (Medcalf v Mardell [2002] UKHL 27 [2003]).

 

The introduction of Qualified One-Way Costs Shifting, and consequent non-liability of a losing claimant in a personal injury matter to pay costs, appears to have led to an increase in applications by defendants for wasted costs orders against solicitors for claimants. The wasted costs jurisdiction is not affected by Qualified One-Way Costs Shifting.

 

Although the system has been in place since 1 April 2013 it only applies to cases where there is no recoverable additional liability, that is a success fee or After-the-Event insurance premium, and thus there is a long tail of pre 1 April 2013 cases. Furthermore the issue of whether a case attracts Qualified One-Way Costs Shifting or not cannot be made until the end of the case, and therefore there needs to be either a trial or a disposal hearing. Consequently few cases have yet reached that stage and we do not yet know how successful defendants who would be unable to recover costs from the actual claimant, will use the wasted costs jurisdiction.

 

In any event early indications are that courts are adopting a low threshold for the fundamental dishonesty test and thus are depriving claimants of costs protection in many lost personal injury cases. See my blog Qualified One Way Costs Shifting.

 

Non-party costs orders are bound to increase as a result of Qualified One-Way Costs Shifting as the CPR gives specific power for such orders to be made against the recipients of special damages, subject to exceptions.

 

A solicitor representing a party in an action can be made the subject of a non-party costs order, which involves a lower threshold for a wasted costs order.

 

Wasted Costs Orders

 

The SCA 1981, section 51(7) defines the concept of “wasted costs” as being costs incurred by a party resulting from the improper, unreasonable or negligent act or omission of any legal or other representative or anyone employed by the representative, or costs which, in the light of any such act or omission occurring after the costs are incurred, the court considers it is unreasonable to expect that party to pay.

 

A wasted costs order always involves criticism of the party against whom it is made. Consequently such orders are likely to be on the indemnity basis, although the court is free to make a wasted costs order on the standard basis. As set out below section 67 of the Criminal Justice and Courts Act 2015 now requires a court to report to the regulator any lawyer against whom a wasted costs order is made.

 

A lawyer is not allowed to charge her or his own client those costs. So if, for example, a wasted costs order is made at the suit of the other party the lawyer cannot pass that charge on to the client.

 

Where the court is considering making a wasted costs order under this section the rule which applies is CPR 46.8 which states as follows:

 

“46.8

  • This rule applies where the court is considering whether to make an order under section 51(6) of the Senior Courts Act 19813 (court’s power to disallow or (as the case may be) order a legal representative to meet, ‘wasted costs’).

 

  • The court will give the legal representative a reasonable opportunity to make written submissions or, if the legal representative prefers, to attend a hearing before it makes such an order.

 

  • When the court makes a wasted costs order, it will –

 

  • specify the amount to be disallowed or paid; or

 

  • direct a costs judge or a district judge to decide the amount of costs to be disallowed or paid.

 

  • The court may direct that notice must be given to the legal representative’s client, in such manner as the court may direct –

 

  • of any proceedings under this rule; or

 

  • of any order made under it against his legal representative.

 

Practice Direction 46

5.1        A wasted costs order is an order –

 

  • that the legal representative pay a sum (either specified or to be assessed) in respect of costs to a party; or

 

  • for costs relating to a specified sum or items of work to be disallowed.

 

5.2          Rule 46.8 deals with wasted costs orders against legal representatives. Such orders can be made at any stage in the proceedings up to and including the detailed assessment proceedings. In general, applications for wasted costs are best left until after the end of the trial.

 

5.3          The court may make a wasted costs order against a legal representative on its own initiative.

 

5.4          A party may apply for a wasted costs order –

 

  • by filing an application notice in accordance with Part 23; or

 

  • by making an application orally in the course of any hearing.

 

5.5          It is appropriate for the court to make a wasted costs order against a legal representative, only if –

 

  • the legal representative has acted improperly, unreasonably or negligently;

 

  • the legal representative’s conduct has caused a party to incur unnecessary costs, or has meant that costs incurred by a party prior to the improper, unreasonable or negligent act or omission have been wasted;

 

  • it is just in all the circumstances to order the legal representative to compensate that party for the whole or part of those costs.

 

5.6          The court will give directions about the procedure to be followed in each case in order to ensure that the issues are dealt with in a way which is fair and as simple and summary as the circumstances permit.

 

5.7          As a general rule the court will consider whether to make a wasted costs order in two stages –

 

  • at the first stage the court must be satisfied –

 

  • (i) that it has before it evidence or other material which, if unanswered, would be likely to lead to a wasted costs order being made; and

 

  • (ii) the wasted costs proceedings are justified notwithstanding the likely costs involved;

 

  • at the second stage, the court will consider, after giving the legal representative an opportunity to make representations in writing or at a hearing, whether it is appropriate to make a wasted costs order in accordance with paragraph 5.5 above.

 

5.8          The court may proceed to the second stage described in paragraph 5.7 without first adjourning the hearing if it is satisfied that the legal representative has already had a reasonable opportunity to make representations.

 

5.9          On an application for a wasted costs order under Part 23 the application notice and any evidence in support must identify –

 

  • what the legal representative is alleged to have done or failed to do; and

 

  • the costs that the legal representative may be ordered to pay or which are sought against the legal representative.”

 

Mandatory Reporting

 

Section 67 of the Criminal Justice and Courts Act 2015 requires a court to report to the appropriate regulatory body any lawyer who is made the subject of a wasted costs order.

 

67         Wasted costs in certain civil proceedings

 

This sectionnoteType=Explanatory Notes has no associated

  • Section 51 of the Senior Courts Act 1981 (costs in civil division of Court of Appeal, High Court, family court and county court) is amended as follows.

 

  • After subsection (7) (wasted costs) insert—

 

“(7A)Where the court exercises a power under subsection (6) in relation to costs incurred by a party, it must inform such of the following as it considers appropriate—

 

  • an approved regulator;

 

  • the Director of Legal Aid Casework.”

 

  • After subsection (12) insert—

 

“(12A) In subsection (7A)—

 

“approved regulator” has the meaning given by section 20 of the Legal Services Act 2007;

 

“the Director of Legal Aid Casework” means the civil servant designated under section 4 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012.””

 

It is the court that makes the order for wasted costs not a costs judge. In the normal course of events it is the trial judge who should make the order. In Re P (a Barrister), (wasted costs order) [2001] EWCA Crim 1728, [2002] 1 Cr App Rep 207, (2001) Times, 31 July, the Court of Appeal held that in almost all wasted costs applications the trial judge should be the judge to deal with the matter. The court concluded that the jurisdiction was a summary jurisdiction to be exercised by the court which had ‘tried the case in the course of which the misconduct was committed’. Although the trial judge could decline to consider an application in respect of costs, it would only be in ‘exceptional circumstances’ that it would be appropriate to pass the matter to another judge.

 

As we have seen usually the trial judge will hear the wasted costs application.

 

However in Mengiste v Endowment Fund [2013] EWCA Civ 1003

 

the Court of Appeal held that this was an exceptional case where apparent bias had been shown by the judge and the Court of Appeal concluded that the judge should have recused himself.

 

Apparent bias was shown by:-

 

  1. his criticisms of the solicitors as being responsible for the expert’s failings; these were unnecessary for his findings;

 

  1. his criticisms left no scope for explanation by these solicitors, suggesting that the judge closed his mind;

 

  • the repetition of his criticisms of the solicitors.

 

Once a judge does deal with the wasted costs order it is difficult to overturn that decision, as in Persaud v Persaud [2003] EWCA Civ 394, 147 Sol Jo LB 301 where the Court of Appeal held that it was not right to interfere with the judge’s discretion.

 

The leading authority and guide to wasted costs is Ridehalgh v Horsefield [1994] Ch 205, [1994] 3 All ER 848, CA, where in appeals backed by the Bar Council, the Law Society and the Solicitors Indemnity Fund, the Court of Appeal set aside wasted costs orders against two solicitors and a barrister and in the lead case declined to make an order in a case referred to them by a different division of the Court of Appeal. In delivering the judgment of the court the Master of the Rolls said, at Page 38 LTL, that while judges must not reject the weapon which Parliament intended to be used for the protection of those injured by the unjustifiable conduct of the other side’s lawyers, they must be astute to control what threatened to become a new and costly form of satellite litigation.

 

Lord Bingham reiterated this view in Medcalf v Mardell [2002] UKHL 27 [2003] approving the approach of the Privy Council in a New Zealand case that wasted costs orders should be confined to questions which are apt for summary disposal by the court, such as failures to appear; conduct which leads to an otherwise avoidable step in the proceedings; the prolongation of a hearing by gross repetition or extreme slowness in the presentation of evidence or argument. Such matters can be dealt with summarily on agreed facts or after a brief enquiry. Any hearing to investigate the conduct of a complex action is itself likely to be expensive and time-consuming. Compensating litigating parties who have been put to unnecessary expense is only one of the public interests to be considered.

 

In Jackson v Cambridgeshire County Council UK EAT/0402/09, the Employment Appeal Tribunal (EAT) made the point that where an application cannot be fairly resolved without disproportionate investigation it can be dismissed on that basis alone.

 

In future, anyone considering applying for a wasted costs order should think twice.

 

The Practice Direction supplementing rule 46.8 helpfully embodies the major findings of the Court of Appeal in Ridehalgh. Because wasted costs orders are made under the statute, and rule 46.8 and its supplementary Practice Direction govern merely the practice and procedure, not the principles, this is an area in which decisions made prior to 26 April 1999 are still of relevance and assistance.

 

In Harrison v Harrison [2009] EWHC 428 QB, the High Court held that wasted costs were neither a punitive nor a regulatory jurisdiction, but rather a compensatory one and thus as a prerequisite an applicant had to show that the conduct complained of had caused them loss – see Ridehalgh.

 

In addition even where ‘improper, unreasonable and negligent’ conduct was shown, an order was within the court’s discretion.

 

Here the applicant applied for a wasted costs order against junior counsel who had acted for the respondent in a without notice application. Costs had been agreed at £205,000 of which all but £20,000 had been paid by the time of the application and the applicant conceded that the respondent was likely to pay the balance.

 

The applicant contended that the without notice application had been settled and argued by counsel without any or sufficient regard to her duty to bring to the attention of the court facts or arguments which were adverse to her client’s case and thus her conduct had been ‘improper, unreasonable and negligent’ in terms of section 51(7) of the SCA 1981.

 

The court held that on the balance of probabilities the applicant had failed to prove loss even if all of the allegations were proved, and thus no order should be made.

#FootnoteB

 

That judgment confirmed a three-stage test to be adopted when considering a costs order as set out in Re a Barrister (wasted costs order) (No 1 of 1991) [1993] QB 293, [1992] 3 All ER 429:

 

  • Has there been an improper, unreasonable or negligent act or omission?

 

  • As a result, had any costs been incurred by a party?

 

 

  • Should the court exercise its discretion to order the lawyer to meet the whole or any part of the relevant costs?

 

Only if all three questions were answered in the affirmative would an order be made. (See para 53.4 of the Practice Direction about costs supplementing CPR Pts 43–48.)

 

Improper, unreasonable or negligent conduct

#FootnoteE

 

“Improper” covered, but was not confined to, conduct which would ordinarily be held to justify disbarment, striking off, suspension from practice or other serious professional penalty. It also covered conduct which according to the consensus of professional, including judicial, opinion could be fairly stigmatised as being improper whether it violated the letter of a professional code or not (Page 23 Judgment, Ridehalgh v Horsefield [1994] Ch 205, [1994] 3 All ER 848, CA).

#FootnoteB

 

#FootnoteE

“Unreasonable” included conduct which was vexatious, designed to harass the other side rather than advance the resolution of the case: it made no real difference that the conduct was the product of excessive zeal and not improper motive.

 

Legal representatives should not lend assistance to proceedings which were an abuse of process and they were not entitled to use litigious procedures for purposes for which they were not intended, as by issuing or pursuing proceedings for purposes unconnected with success in the litigation, or pursuing a case known to be dishonest. Nor were they entitled to evade rules intended to safeguard the interests of justice, as by, knowingly failing to make full disclosure on a without notice application or knowingly conniving in incomplete disclosure of documents. However, conduct was not unreasonable simply because it led to an unsuccessful result or because other more cautious legal representatives would have acted differently. The acid test was whether the conduct permitted a reasonable explanation. It is not unreasonable to be optimistic.

 

“Negligent” did not mean conduct which was actionable as a breach of the legal representative’s duty to his own client. There is of course no duty of care to the other party. Negligence should be understood in an untechnical way to denote failure to act with competence reasonably expected of ordinary members of the profession. However, the court firmly rejected any suggestion that an applicant for a wasted costs order needed to prove under the negligence head anything less than he would have had to prove in an action for negligence. It adopted the test in Saif Ali v Sydney Mitchell & Co [1980] AC 198, [1978] All ER 1033, HL, ‘advice, acts or omissions in the course of their professional work which no member of the profession who is reasonably well-informed and competent would have given or done or omitted to do’; an error ‘such as no reasonably well-informed and competent member of that profession could have made’.

 

In Persaud v Persaud [2003] EWCA Civ 394, 147 Sol Jo LB 301, the Court of Appeal held that there had to be something more than negligence, more akin to abuse of process or breach of duty to the court, to make a legal representative subject to jurisdiction for a wasted costs order.

 

However, in Dempsey v Johnstone [2003] EWCA Civ 1134, [2004] PNLR 2, [2004] 1 Costs LR 41 the Court of Appeal held that negligence alone would justify the making of a wasted costs order, and the correct test was whether no reasonably competent legal representative would have continued with the action when there was a hopeless case.

#FootnoteB

 

Wasted costs orders should carefully balance two important public interests:

 

that lawyers should not be deterred from pursuing their clients’ interests by fear of incurring a personal liability to their clients’ opponents and that they should not be penalised by orders to pay costs without a fair opportunity to defend themselves and that such orders should not become a back-door means of recovering costs not otherwise recoverable against a legally aided or impoverished litigant; and

 

that litigants should not be financially prejudiced by the unjustifiable conduct of litigation by their or their opponents’ lawyers.

 

In Wall v Lefever [1998] 1 FCR 605, (1997) Times, 1 August, CA, Lord Woolf warned that appeals against wasted costs orders or the refusal thereof should not be used to create subordinate or satellite litigation which was as complex and expensive as the original litigation.

 

In Gill v Humanware Europe plc [2010] EWCA Civ 799, [2010] ICR 1343, [2010] IRLR 877, the Court of Appeal reviewed existing case law, in the context of an appeal from a decision of the Employment Appeal Tribunal (“EAT”).

 

The court accepted that the principles to be applied were the same as in a non-employment case. Employment tribunals and the EAT have their own set of rules but in relation to wasted costs the relevant wording is identical, rule 34C of the Employment Appeal Tribunal (Amendment) Rules 2004, stating:

 

“ (1)       The Appeal Tribunal may make a wasted costs order against a party’s representative.

(2)       …

(3)       “Wasted costs” means any costs incurred by a party (including the representative’s own  client and any party who does not have a legal representative):

(a)          as a result of any improper, unreasonable or negligent act or omission on the part of any representative; or

(b)          which, in the light of any such act or omission occurring after they were incurred, the Appeal Tribunal considers it reasonable to expect that party to pay.

 

Here there was a dispute about the facts of the alleged improper conduct of the respondent’s barrister at the employment tribunal hearing and the EAT made a wasted costs order against her, without giving her the chance to make oral submissions.

 

The Court of Appeal allowed her appeal and held that the jurisdiction in a wasted costs application should only be exercised in a reasonably plain and obvious case. Courts should think carefully before hearing a wasted costs application in a case in which there is a conflict of evidence to be resolved.

 

Here a better course would have been to report the matter to the Bar Standards Board, which could have investigated the alleged misconduct properly and, if appropriate, referred it to a hearing before a disciplinary tribunal, which had the power to order compensation.

 

In Casqueiro v Barclays Bank plc [2012] ICR Digest D 37

 

the Employment Tribunal allowed an appeal against a wasted costs order made by an Employment Tribunal Judge under Rule 48 of the Employment Tribunals Rules of Procedure 2004 where the Judge had failed to specify the amount, as required by Rule 48(7), but instead had ordered the costs to be assessed by the county court.

 

The EAT also held that the Employment Judge had failed to apply the correct test as set out in Ridehalgh v Horsefield, in particular by failing to address whether the representative’s conduct had caused the other party to incur unnecessary costs and whether it was just to order him to compensate the respondent for the whole or part of the costs.

 

Rule 48(1) allows for wasted costs orders against a party’s representative and Rule 48(7) provides:

 

‘“When a tribunal or employment judge makes a wasted costs order it must specify in the order the amount to be … paid.”’

 

Rule 41(1), which applies to an “ordinary” costs order, provides:

 

‘“The amount of a costs order against the paying party shall be determined in any of the following ways-

 

(a)          the tribunal may specify the sum which the paying party must pay to the receiving party…

 

(c)           the tribunal may order the paying party to pay the receiving party the whole or a specified part of the costs of the receiving party, with the amount to be paid being determined by way of a detailed assessment in a county court…”’

 

As there was no express provision in Rule 48 for county court assessment, in contrast to Rule 41(1)(c), there was no power to refer a wasted costs order to a county court for assessment.

 

The two-stage approach

 

The court will consider the making of a wasted costs order in two stages. First, the court must be satisfied that the evidence before it, if unanswered, would be likely to lead to a wasted costs order being made and the wasted costs proceedings are justified notwithstanding the likely costs involved. Secondly, the court will give the legal representative the opportunity to give reasons or show cause why the order should not be made and then consider, in the light of any such evidence, whether to make the wasted costs order. The Court of Appeal has emphasised that judges should approach their task with caution and, where possible, consider the applicability of other sanctions of a disciplinary nature. (See section 53.6 of the Practice Direction about costs supplementing CPR Pts 43–48.)

 

In Re Wiseman Lee (Solicitors) (Wasted Costs Order) (No 5 of 2000) [2010] EWCA Civ 799, [2010] ICR 1343, [2010] IRLR 877 the court made a wasted costs order against the defendant solicitors in their absence with permission to make representations against the order by a given date. When no representations were received, the order was drawn up. The solicitors’ appeal was allowed on the ground that a legal representative must be allowed to make representations before a wasted costs order is made under CPR 48.7(2). Although this was a criminal matter the principle applies equally to civil matters.

 

In Gill v Humanware Europe plc [2010] EWCA Civ 799, [2010] ICR 1343, [2010] IRLR 877 the Court of Appeal said that on the facts of that case the EAT should have referred the matter to the Bar Standards Board, rather than make a wasted costs order, and pointed out that the appropriate disciplinary body had power to order compensation.

 

Threats

 

The threat of a wasted costs order should not be used as a means of intimidation. However, if one side considered that the conduct of the other was improper, unreasonable or negligent and likely to cause a waste of costs it was not objectionable to alert the other side to that view. There appears to be a fine line between ‘threatening’ and ‘alerting’.

 

Advocacy

 

Although the legislation intended to encroach on the traditional immunity of the advocate by subjecting him or her to wasted costs jurisdiction, full allowance must be made for the fact that an advocate in court often had to make decisions quickly and under pressure. Mistakes would inevitably be made, things done which the outcome showed to have been unwise. Advocacy was more an art than a science; it could not be conducted according to formulae. It was only when, with all allowances made, an advocate’s conduct of court proceedings was quite plainly unjustifiable that it could be appropriate to make a wasted costs order against him.

 

In Robinson and another (appellants) v Hall Gregory Recruitment Ltd [2014] IRLR 761 EAT, the Employment Appeal Tribunal reminded itself that the wasted costs jurisdiction should be approached with caution, bearing in mind the constitutional position of the advocate and the fact that from their point of view the jurisdiction was penal.

 

The application

 

Applications for wasted costs are best left to the end of the trial and are governed by CPR Pt 23. Applications can be made orally in the course of any hearing or on application under CPR Pt 23. Such application, and the evidence in support, must identify what the legal representative is alleged to have done or not to have done and the costs that he may be ordered to pay. In addition the court has power to make a wasted costs order on its own initiative. The court should be slow to initiate an enquiry because:

 

  • the court does not serve a pleading informing the lawyer of the precise charges to be answered;

 

  • the court will be both the prosecutor and the adjudicator;

 

  • difficult and embarrassing issues on costs could arise if an order was not made. The costs of the enquiry would have to be borne by someone and it would not be the court.

 

In Gill v Humanware Europe plc [2010] EWCA Civ 799, [2010] ICR 1343, [2010] IRLR 877, the Court of Appeal held that the procedure to be adopted should depend upon the circumstances. Sometimes the application will be made at the end of a substantive hearing, sometimes not. Sometimes the person against whom it is to be made will have been present throughout that hearing, sometimes he or she will not.

 

If the application is made at the end of a hearing at which the respondent has been present, it may be possible to deal fairly with the whole application there and then. On the other hand it may be necessary to allow an adjournment for the respondent to make representations or even to call evidence from witnesses not then present.

 

In particular, there is no invariable requirement for a two-stage process, at which the court considers first whether there is a strong prima facie case for the making of a wasted costs order and then at a second stage decides whether it is appropriate to make one.

 

If the respondent has not been present at the hearing at which his or her conduct has been considered, there will have to be an adjournment. Whether or not there will then have to be an oral hearing will depend upon the nature of the issues in question and the way in which they will have to be resolved.

 

A relevant issue is the amount of money at stake. If it is small then it may be sensible, fair and proportionate to decide matters without an oral hearing. If the sum is large, or if a reputation is at stake, or issues of fact have to be decided, then an oral hearing will be necessary.

 

If no oral hearing is to be held then the respondent to the wasted costs application should be asked if he or she wishes to amplify their written submissions in the light of that decision.

#FootnoteB

 

In Ridehalgh v Horsefield [1994] Ch 205, [1994] 3 All ER 848, CA, the Court of Appeal considered some situations where it would be appropriate for the judge to initiate a wasted costs enquiry. These included a failure to appear at court, lateness and negligence leading to an otherwise avoidable adjournment, gross repetition or extreme slowness.

#FootnoteB

#FootnoteE

 

Judges should not make lawyers ‘show cause’ where the issue went to the merits. This should be left to the parties. An example of a case where the court did intervene was R v Secretary of State for the Home Department, ex p Abbassi (1992) Times, 6 April, CA.

#FootnoteB

#FootnoteE

 

On an application under CPR Pt 23, the court may proceed to the second of the two-stage process without adjourning the hearing if it is satisfied that the legal representative has already had a reasonable opportunity to give reasons why the court should not make a wasted costs order; in other cases the court will adjourn the hearing before proceeding to the second stage (See para 53.7 of the Practice Direction about costs supplementing CPR Pts 43–48).

#FootnoteB

 

#FootnoteE

The court should determine the procedure to be followed to meet the requirements of the individual case. The overriding requirements are that any procedure has to be fair and as simple and summary as the circumstances permit. Elaborate pleadings should in general be avoided. No formal process of discovery or interrogatories would be appropriate. The court could not imagine any circumstances in which the applicant should be permitted to interrogate the respondent lawyer (Ridehalgh v Horsefield [1994] Ch 205, CA, p 38).

 

In Godfrey Morgan Solicitors Ltd v Cobalt Systems Ltd (UKEAT/0608/10/LA) [2012] ICR 305, 155 Sol Jo (no 34) 31, EAT, the EAT held that in this context ‘interrogate’ meant to serve written interrogatories and did not prevent the cross-examination of the lawyer on the subject of the application.

#FootnoteB

#FootnoteE

 

On the other hand, the respondent must be entitled to present a full defence and must be informed of the conduct complained of, the amount claimed and the alleged causal link between the two. Hearings should be measured in hours, not days or weeks.

 

One of the drawbacks of the summary procedure was that the lawyers involved were often unable to make use of documents protected by legal professional privilege to justify their actions, it being a matter for the clients alone to decide whether to waive their privilege. The matter was considered by the House of Lords in Medcalf v Mardell [2002] UKHL 27, [2003] 1 AC 120, [2002] 3 All ER 721 on 27 June 2002. The court concluded that a party can seek a wasted costs order against his opponent’s legal representatives as well as his own. However, this poses a problem if the opponent does not wish to waive his privilege to assist his legal representative. The legal representative then has no ammunition with which to defend himself. The case centred around allegations of fraud contained in a notice of appeal drafted by leading and junior counsel and whether counsel had before them reasonably credible material which as it stood established a prima facie case of fraud. In order to justify their pleading counsel would need to obtain a waiver of privilege from their clients to release such material: such waiver was not forthcoming. The barristers argued that that they could not tell their tale to the court and fairness required that all relevant material should be before the court and if this could not happen, then no order for wasted costs should be made.”

#FootnoteB

 

#FootnoteE

At paragraph 23 Lord Bingham stated:

 

“Where a wasted costs order is sought against a practitioner precluded by legal professional privilege from giving his full answer to the application, the court should not make an order unless, proceeding with extreme care, it is:

 

  • satisfied that there is nothing the practitioner could say, if unconstrained, to resist the order; and

 

  • that it is in all the circumstances fair to make the order.”

 

At paragraph 40 Lord Steyn recognised that the burden of proof is on the party applying for the order. There is no shift in the evidential burden when barristers, and presumably solicitors, are prevented by professional privilege from telling their side of the story. The court should not speculate or guess about the material that was before the lawyers. Lord Steyn observed:

 

“Without knowing the barristers’ side of the story, I am unwilling to speculate about the nature of the documents before them … Lawyers are entitled to procedural justice. Due process enhances the possibility of arriving at a just decision. Where due process cannot be observed it places in jeopardy the substantive justice of the outcome.”

 

It was impossible to determine the issues fairly and the wasted costs order had to be quashed.

 

At paragraph 61, Lord Hobhouse reiterated the observations in Ridehalgh v Horsefield [1994] Ch 205, [1994] 3 All ER 848, CA that the respondent lawyers are entitled to the benefit of any doubt. He stated:

 

“The answer given therefore was not to treat the existence of privileged material as an absolute bar to any claim by an opposing party for a wasted costs order but to require the court to take into account the possibility of the existence of such material and to give the lawyers the benefit of every reasonably conceivable doubt that it might raise.

 

So, all that the lawyer has to do is to raise a doubt in the mind of the court whether there might not be privileged material which affected its decision whether or not to make a wasted costs order and, if so, in what terms and the court must give the lawyer the benefit of the that doubt in reaching its decision, including the exercise of its statutory discretion. I see nothing unfair about this approach.”

#FootnoteB

#FootnoteE

 

The Court of Appeal followed this approach in Dempsey v Johnstone [2003] EWCA Civ 1134, [2003] All ER (D) 515 (Jul) where a costs order was made against the defendant solicitors for pursuing a hopeless case. It was held that in the absence of privileged material it is not possible to reach a conclusion adverse to the defendant on the question of whether no reasonably competent legal adviser would have evaluated the chance of success as justifying continuation of the proceedings. Without any waiver of privilege in relation to counsel’s advice, it was impermissible to infer from the continuance of legal aid that the claimant’s legal representatives were asserting good prospects of success.

#FootnoteB

 

The House of Lords concluded that it should not make an order unless (Medcalf v Mardell [2002] UKHL 27, [2003] 1 AC 120, [2002] 3 All ER 721):

 

  • it is satisfied there is nothing the lawyer could say, if privilege had been waived, to resist the order; and

 

  • that it is in all the circumstances fair to make the order.

 

In this case, the court concluded it was impossible to determine the issues fairly as they were unaware of the nature of the documents before the barristers and consequently quashed the wasted costs order.

 

Solicitor’s liability for costs when representing a bankrupt

 

In Thames Chambers Solicitors v Miah [2013] 4 Costs LR 82

 

Mr Justice Tugendhat, sitting in the High Court, held that a judge had been correct to make a wasted costs order against solicitors who had acted for a bankrupt client for two and a half years. Any competent solicitor would have known that the assets of a bankrupt vest in his trustees and that proceedings to enforce a claim can only be pursued with the trustee’s consent, which had not been forthcoming. The solicitors had acted improperly, negligently and unreasonably and so would pay the wasted costs of the defendant.

 

 

#FootnoteB

#FootnoteB

 

 

In Nelson v Nelson [1997] 1 WLR 233, CA, a firm of solicitors instituted proceedings, including obtaining a Mareva Injunction, on behalf of a client whom they were unaware was an undischarged bankrupt. A bankrupt was not entitled to bring an action relating to his property, the cause of action having vested in his trustee in bankruptcy.

 

The injunction was duly unchanged nevertheless, he had the capacity and authority to retain solicitors, and solicitors acting for him without knowledge of his bankruptcy were saying no more than that they had a client and that the client had authorised the proceedings. The solicitors did not represent that a client had a good cause of action, and in commencing the proceedings warranted no more than they had authority from the client to do so. In those circumstances there had been no breach by them of their duty to the court, nor had they been negligent, and thus the court should exercise its discretion in their favour when considering an application for costs against them personally by a defendant.

#FootnoteB

 

#FootnoteE

No wasted costs on ex parte application

 

There is no power in the court to make a wasted costs order in favour of, or (by parity of reasoning) against, a person who elected to oppose an ex parte application for leave to apply for judicial review. In R v Camden London Borough Council, ex p Martin [1997] 1 All ER 307, [1997] 1 WLR 359, such a person was not a party for present purposes. The modern practice of the court in regularly hearing and sometimes inviting the participation of such persons could not make it otherwise; only legislation or a rule change could make it so.

#FootnoteB

 

#FootnoteE

Stay need not be lifted to seek wasted costs order

 

If a case is settled and stayed by way of consent order, it is still possible for a party to make an application for a wasted costs order. In Wagstaff v Colls [2003] EWCA Civ 469, (2003) Times, 17 April, 147 Sol Jo LB 419, the Court of Appeal reversed a judgment that disallowed a party’s application to lift a stay so an application for wasted costs could be made. The court held it to be unnecessary to require the stay to be lifted for the purpose of bringing a wholly different claim which might be connected with the stayed proceedings but where the connection was wholly tangible. There was thus nothing to prevent an application for a wasted costs order being made and entertained after a final order had been made, and perfected, entering judgment for or against the claimant.

 

#FootnoteE

Consideration of the issue of whether wasted costs should be awarded was only sensible if the scope of the costs sought was narrow and clear

 

In Kagalovsky v Balmore Invest Ltd [2015] EWHC 1337 QB

 

the Queen’s Bench Division of the High Court dismissed an application for a wasted costs order at the first stage of the process on the ground that the application was clearly not suitable for what is a summary procedure.

 

It noted that the second stage was expected to take two to three days, that the number and the variety of allegations meant that it was not “a plain and simple case” as per Re: Freudiana Holdings Ltd, Court of Appeal, The Times 4 December 2005, and that the allegations questioned the professional integrity of lawyers with an unblemished reputation.

 

Furthermore the application would involve considering matters not before the trial court. Also the costs of the application by the end of the first stage were nearly £200,000.00 in relation to a potential wasted costs order of £400,000.00.

 

In (1) Regent Leisuretime Ltd (2) Stephen Amos (3) Peter Barton v (1) Philip Skerrett (2) Ken Pearson & Reynolds Porter Chamberlain [2006] EWCA Civ 1032, [2006] All ER (D) 34 (Jul), the appellant third party firm of solicitors (R) appealed against the judge’s decision that the issue as to whether R should be liable for wasted costs should be investigated. The first claimant company (L), the second claimant (A) and the third claimant (B), who were directors and shareholders of L, had issued proceedings against the first and second defendant solicitors (S and P), alleging professional negligence in the performance of their duties in earlier proceedings. R, who had been instructed to act in the matter by P’s insurers, acknowledged service of the claim form on behalf of both S and P, although R had no instructions from S and did not contact him in connection with the matter. R subsequently served a defence, and further amended defences on behalf of both P and S. When P informed S of R’s actions, S contacted R and stated that they had no authority to act for him. As S had not been served personally with the claim, he then assumed that it was not proceeding against him. However, R later contacted S informing him to prepare for trial in the matter. S applied for the claim against him to be struck out. The judge granted that application on the grounds that:

 

S had been an undischarged bankrupt at the time the claim was issued and no permission had been sought from or given by the court to bring proceedings against him; and

 

the proceedings had never been served on S.

 

S then applied for an order that R pay all his costs lost, wasted or thrown away on an indemnity basis. A and B made a similar application on their own behalf. The judge found that it was obvious that R had had no authority to act as they had, and considered that the issue as to whether R should be liable for wasted costs should be investigated. R contended that the judge had erred in his decision because he had not received the required quantification of the costs sought to decide whether they were likely to be awarded, or whether a separate hearing would be proportionate. A and B submitted that, if R had not acknowledged service on S’s behalf, they would have served him another way, so that their pre-trial costs had been wasted. S submitted that, as a result of R’s conduct, he had incurred costs in trying to extricate himself from the action.

 

HELD: Appeal allowed.

 

The referral to the second stage of the issue as to whether wasted costs should be awarded was only sensible if the scope of the costs sought was narrow and clear. In the instant case, there had been insufficient material for the judge to make that determination. S, A and B were all litigants in person and their recoverable costs would, in any event, be limited. Further, both A and B had, in any event, incurred costs in pursuing the action against P, and their wasted costs in respect of the claim against S were likely to be modest. Moreover, so far as S was entitled to recover his costs in applying for the claim to be struck out, the parties liable for those costs were A and B, as in the light of S’s status as an undischarged bankrupt, no claim against him should have been made in any event. The judge’s order for assessment of wasted costs was, accordingly, set aside.

#FootnoteB

 

In Chief Constable of British Transport Policy v Soods Solicitors Ltd (2012) 156 Sol Jo (29) 31, [2012] All ER (D) 163 (Jul), DC, the Divisional Court dismissed the appeal by way of case stated against the District Judge’s refusal to award wasted costs against the respondent firm of solicitors. The claimant chief constable applied for the forfeiture, pursuant to s 298 of the Proceeds of Crime Act 2002 (‘PCA 2002’), of money which had been seized from an individual H. Shortly before the hearing, the respondent firm of solicitors came on the record purporting to act for a Ugandan company, SFK, which applied to be joined to the action pursuant to s 301 of the PCA 2002. That application was refused and the matter was adjourned.

 

It subsequently became clear that SFK was not a real company and that documents that had been provided by it had been forged. The forfeiture proceedings then proceeded unopposed and, following the conclusion of those proceedings, the claimant applied for wasted costs from the respondent, pursuant to s 145A(1) of the Magistrates’ Court Act 1980.

 

In May 2011, a district judge refused that application on the basis that, although the respondent should have exercised greater caution in its dealings with SFK, the claimant’s costs would have been incurred in any event as SFK would have made the application as an unrepresented party if necessary. The appellant appealed by case stated.

 

The principal question posed for the consideration of the court was whether, in the circumstances, the judge had applied the correct test for causation for wasted costs. He had. The appeal would be dismissed.

 

In the instant case, the appellant’s argument was fatally flawed as no wasted costs order could be made unless there had been a finding of fault against the respondent. The judge had not made a finding of fault against the respondent and there was no question before the court as to whether the judge had been correct or incorrect in so finding. Accordingly, the appeal would be dismissed as the real point had not been stated in the case and had not been for decision at the instant hearing.

 

In Tolstoy-Miloslavsky v Aldington [1996] 1WLR 736 the Claimant sought to set aside a libel judgment on the basis that it had been obtained by fraud; the application was struck out as an abusive process.
The successful party applied for a non-party costs order against both solicitor and counsel for the unsuccessful applicant.

 

The judge ordered the solicitors to pay 60% of the defendant’s costs on the ground that they have put themselves in the position of third party funders of the litigation.

 

In Medcalf v Mardell [2002] UKHL 27, [2003] 1 AC 120, [2002] 3 All ER 721, the House of Lords had to consider whether s 51(6) of the SCA 1981 conferred a right on a party to seek an order against the legal representative of the other party. The court upheld an earlier decision of Brown v Bennett (No 2) [2002] 2 All ER 273, [2002] 1 WLR 713 where Mr Justice Neuberger concluded that s 51(6) should be construed on a wide basis to cover the legal representative of any party to the proceedings. The House of Lords affirmed that judgment. Wasted costs orders are likely to become more common.

 

In F v M [2015] EWHC 3259 (Fam)

 

the Family Division of the High Court made a limited Wasted Costs Order against the firm of solicitors acting for the father.

 

Both parties had been in default of case management directions and an application listed for three days was resolved on the morning of the first day and a Notice to Show Cause in relation to wasted costs was issued against the father’s solicitors.

 

The bundle had been filed late, witness statements had not been lodged and the court had not been kept informed.

 

The solicitors were ordered to pay £1,250.00 toward the mother’s costs, or 25% of the assessed costs of the mother in relation to the hearing, whichever was the lower.

 

The judge appeared unaware that he is required by Section 51(7A) of the Senior Courts Act 1981, inserted by Section 67 of the Criminal Justice and Courts Act 2015, to report the matter to the appropriate regulator that is the Solicitors Regulation Authority.

 

#FootnoteE

Unsuccessful applications

 

If the application is unsuccessful it is clear that the unsuccessful applicant can expect to pay the costs. In Bellamy v Central Sheffield University NHS Trust [2003] All ER (D) 50 (Jul), CA, the Court of Appeal upheld the principle that an unsuccessful applicant should normally pay the costs to the respondent. Denial of a successful party’s costs of success had to be explained. Some idea of the costs that can be incurred in a wasted costs application can be gathered by the estimates in Chief Constable of North Yorkshire v Audsley [2000] Lloyd’s Rep PN 675. The costs of the wasted costs application were estimated to be £130,000 when the amount in dispute was £169,000. Unsurprisingly the judge declined to issue a Notice to Show Cause on the grounds that the costs of the application were likely to be disproportionate.

#FootnoteB

 

In Hallam-Peel & Co v Southwark London Borough Council [2008] EWCA Civ 1120, [2008] All ER (D) 200 (Oct), the Court of Appeal held that a wasted costs order should not have been against solicitors who raised a new point in possession proceedings which led to further adjournments.

 

The judgment points out that different lawyers will look at the same case in different ways and have thoughts and ideas about them that others will or may not have. The same lawyer may also see it differently six months on and consider investigating an angle which had not previously occurred to him or her.

 

Here it meant that the solicitor should not be penalised by a wasted costs order when their counsel thought of a new point which they had not previously considered.

#FootnoteB

 

In Koo Golden East Mongolia v Bank of Nova Scotia [2008] EWHC 1120 (QB), [2008] All ER (D) 254 (May), the defendant bank claimed a wasted costs order against the solicitors who had acted for the unsuccessful claimant in a claim to trace and recover missing gold. It contended that it was entitled to a wasted costs order because the solicitors’ conduct was persistently negligent and unreasonable in making and continuing to have the Central Bank of Mongolia as a party to the action because the solicitors should have appreciated that the bank was immune from suit because of the provisions of the State Immunity Act 1978. In dismissing the claim the court gave the following reasons:

 

  • a bill of costs should have been served before making the application;

 

  • the claimant should have been given a proper opportunity to pay the costs;

 

  • the absence of an application to strike out the claim was hardly consistent with the submission that it was misconceived;

 

  • the suggestion that ‘no reasonable solicitor could have been optimistic’ was well below the threshold for sufficient negligence or unreasonableness to justify a wasted costs order;

 

  • even a binding authority fatal, or almost fatal, to the client’s case might not justify a wasted costs order.

#FootnoteB

 

The power to make a wasted costs order is discretionary. In R (on the application of Hide) v Staffordshire County Council [2007] EWHC 241 (Admin), [2007] All ER (D) 402 (Oct), the claimant’s advocate had engaged in behaviour which could properly be regarded as improper, unreasonable and/or negligent. The proceedings were entirely unnecessary and were doomed to failure and a reasonably competent solicitor would have known that. Nevertheless, the judge concluded that no wasted costs order should be made against the solicitor as it was likely to result in the solicitor’s bankruptcy and that would be a disproportionate consequence.

#FootnoteB

 

#FootnoteE

Tribunals

 

From 3 November 2008, the Tribunal Procedure (Upper Tribunal) Rules 2008 and the Tribunal Procedure (First-Tier Tribunal) (Health, Education and Social Care Chamber) Rules 2008 provide that a tribunal shall not make an order in respect of costs other than for wasted costs or if the tribunal considers that a party or its representative has acted unreasonably in bringing, defending or conducting the proceedings. The Upper Tribunal may also make an order in respect of costs in proceedings on appeal from another tribunal, to the extent and in the circumstances that the other tribunal had the power to make an order in respect of costs. Either tribunal may make an order for costs on an application or on its own initiative. The amount of costs to be paid may be ascertained by:

  • summary assessment;

 

  • agreement of a specified sum by the paying person and the person entitled to receive the costs;

 

  • assessment as to the whole or a specified part of the costs incurred by the receiving person, if not agreed.

 

Following an order for assessment, the paying person or the receiving person may apply to the High Court in the Upper Tribunal and to the county court in the First-Tier Tribunal for a detailed assessment of costs in accordance with the Civil Procedure Rules 1998 on the standard basis or, if specified in the order, on the indemnity basis.

 

CPR 44.14 provides that on an assessment of costs between the parties where a party or his legal representative fails to comply with a rule, practice direction or court order or it appears to the court that the conduct of a party or his legal representative, before or during the proceedings which gave rise to the assessment proceedings, was unreasonable or improper the court may:

 

  • disallow all or part of the costs which are being assessed; or

 

  • order the party at fault or his legal representative to pay costs which he has caused any other party to incur.

 

However, unlike s 51 of the SCA 1981, CPR 44.14 contains no provision preventing the solicitor from rendering a charge to his or her client in respect of any between-the-parties costs which have been disallowed. This is the case even though CPR 44.14(3) requires the solicitor to notify the client in writing of any order based upon his misconduct no later than seven days after the solicitor receives notice of the order if the party is not present when the order is made. One possible remedy is for the court to ask the solicitor to undertake not to render a charge to the client as an alternative to the court initiating an investigation under s 51 of the SCA 1981.

 

Employment tribunals

 

Employment tribunals have a significant personal injury jurisdiction in their own right but decisions on wasted costs are also relevant to cases conducted in the ordinary courts. Indeed, many recent decisions are those of the Employment Appeal Tribunal (“EAT”).

 

In Robinson and another (appellants) v Hall Gregory Recruitment Ltd [2014] IRLR 761 EAT

 

the Employment Appeal Tribunal dealt with the issue of costs orders and wasted costs.

 

Here a 17 year old girl brought various Employment Tribunal claims and lost all of them except one in respect of notice pay of £285.00.

 

Among her claims was one for personal injury, specifically that she had suffered a miscarriage as a result of her treatment at work. The Employment Tribunal said in relation to this that the claimant had “made a very serious assertion for which she has provided no evidence.”

 

It ordered her to pay £5,025.00 costs and made a wasted costs order of £10,050.00 against the solicitor.

 

The Employment Appeal Tribunal overturned both orders. In relation to the Claimant it held that the Employment Tribunal had omitted an important stage in the process of deciding to make a costs order, namely that of considering whether it had been appropriate to have done so as required by Rule 40(2) of the 2004 Rules of Procedure.

 

The claimant had been 17 years old and, on its finding in relation to the solicitor Mr Ojo, had not been properly advised. The tribunal did not appear to have had regard to those matters. It should have been obvious that, particularly given her age, her means were likely to have been of relevance both in deciding whether to make an order and as to how much it should be. The tribunal ought not to have made findings against her in relation to her means without having given her an opportunity to make representations or present evidence and thus the appeal against the costs order would be allowed.

 

The relevant part of Rule 40 reads as follows:-

 

“(2) A tribunal… shall consider making a costs order against a paying party where, in the opinion of the tribunal…, any of the circumstances in paragraph (3) apply. Having so considered, the tribunal… may make a costs order against the paying party if it… considers it appropriate to do so.

 

(3) The circumstances referred to in paragraph (2) are where the paying party has in bringing the proceedings, or he or his representative has in conducting the proceedings, acted vexatiously, abusively… or otherwise unreasonably…”

 

Rule 41 provides that the tribunal can specify a sum to be paid up to £20,000.00 and at Rule 41(2) that the tribunal “may have regard to the paying party’s ability to pay when considering whether it… shall make a costs order and how much that order should be.”

 

In relation to the wasted costs order the EAT reminded itself that an Employment Tribunal  had to approach that jurisdiction with caution, bearing in mind the constitutional position of the advocate and the fact that from their point of view the jurisdiction was penal.

 

The tribunal had to consider the possibility that issues of privilege might prevent a representative mounting a proper defence and that they should be given the benefit of any doubt.

 

A representative could (and indeed had to) argue a case which they considered hopeless and for which they had been advised was hopeless if those were the instructions of the client. There was a clear distinction between that situation and that of a representative lending assistance to proceedings which were an abuse of process.

 

Even if proper advice had been given it was possible that the Claimant would have insisted that the case continue and the solicitor would have been obliged to carry on.

 

Rule 48 of the Employment Tribunals (Constitution and Rules of Procedure) Regulations 2004, insofar as relevant reads:-

 

“(1) A tribunal… may make a wasted costs order against a party’s representative.

 

(2) In a wasted costs order the tribunal… may:—

 

  • disallow, or order the representative of a party to meet the whole or part of any wasted costs of any party…

 

(3) “Wasted costs” means any costs incurred by a party: —

 

(a)          as a result of any improper, unreasonable or negligent act or omission on the part of any representative; or

 

(b)          which, in the light of any such act or omission occurring after they were incurred, the tribunal considers it unreasonable to expect that party to pay.

 

(4) In this rule “representative” means a party’s legal or other representative or any employee of such representative, but it does not include a representative who is not acting in pursuit of profit with regard to those proceedings. A person is considered to be acting in pursuit of profit if he is acting on a Conditional Fee Agreement.

 

(6) … The tribunal… shall also have regard to the representative’s ability to pay when considering whether it shall make a wasted costs order or how much that order should be.”

 

It should also be noted that although there is reference to a Conditional Fee Agreement it is illegal to act under such an agreement in Employment Tribunal matters – see Regulation 1(4) and 1(6) of the Damages-Based Agreements Regulations 2013.

 

In Godfrey Morgan Solicitors Ltd v Cobalt Systems Ltd (UKEAT/0608/10/LA) [2012] ICR 305, 155 Sol Jo (no 34) 31, EAT, the EAT gave guidelines on the proper approach to applications for wasted costs orders.

 

The appellant solicitors, Godfrey Morgan Solicitors, appealed against a wasted costs order made against them by an employment tribunal. They had been acting under a contingency fee agreement for an employee, Mr Willimott, in an unfair dismissal claim against the respondent employer Cobalt Systems Ltd.

 

The claim was listed for a two-day hearing. When the solicitors told C that he would have pay for counsel, Mr Willimott stated that he had understood that he would not have to pay anything upfront and that he could not afford to proceed with the claim.

 

The solicitors did not inform Cobalt’s solicitors that the claim had been withdrawn until a few days before the hearing. Cobalt’s solicitors applied for a wasted costs order against Godfrey Morgan Solicitors. The tribunal found that Godfrey Morgan Solicitors had wanted a settlement but when that was not available, they had failed promptly to advise Mr Willimott about his position and had failed to implement Mr Willimott’s instruction to withdraw the claim.

 

The tribunal ordered Godfrey Morgan Solicitors to pay the costs incurred by Cobalt’s solicitors from the date at which it became clear that the case would not settle. Godfrey Morgan Solicitors submitted that the judge had (1) erred in refusing to allow them to produce documents which cast doubt on criticisms made about their advice to Mr Willimott; and (2) acted contrary to the rule laid down in Ratcliffe Duce & Gammer v Binns (t/a Parc Ferme) UKEAT/0100/08/CEA, by allowing Cobalt to cross-examine them and to make submissions on the wasted costs issue.

 

HELD:

 

  • The correspondence and attendance notes Godfrey Morgan Solicitors sought to produce showed them in a less bad light. However, the judge’s decision not to allow those documents in so late in the day was within his discretion.

 

  • There was no general rule as Elias J. appeared to propound in Ratcliffe. His observations were on any view obiter and were made in the context of a very different procedural situation. As regards the making of submissions, it was standard practice in the context of other kinds of issue for one party to be able to comment on the other party’s submissions; there was nothing different about a wasted costs application. As for cross-examination of the representative against whom costs were sought, it was a fair and proportionate way of helping the tribunal get the right result in the instant case.

 

  • Save in straightforward cases tribunals should be reminded not only of the terms of the Employment Tribunals (Constitution and Rules of Procedure) Regulations 2004 SI 2004/1861, Sch 1, para 48, but also of the Court of Appeal’s guidance in Ridehalgh v Horsefield [1994] Ch 205, CA (Civ Div) at pp.226–239, and to refer to the relevant aspects of that guidance in its reasons.

 

The statement in Ridehalgh that the court could not imagine any circumstances in which the applicant should be permitted to interrogate the respondent lawyer referred to written interrogatories and did not prohibit cross-examination.

 

It was always wise to follow the approach outlined in Ridehalgh at p.231 F–G. As emphasised in Ridehalgh, the right procedure for determining claims for wasted costs would depend on the circumstances of the particular case. Proportionality was an important consideration. The only essential requirement was that the representative had a reasonable opportunity to make representations as to whether an order should be made. That could mean that an application for wasted costs could not be dealt with in the substantive hearing.

 

Tribunals would often understandably wish to deal with such applications there and then in the interests of economy. However, sometimes that would simply not be fair, and the representative would be entitled to more time to make representations.

 

As the Court of Appeal said in Ridehalgh, although the procedure had to be as simple and summary as possible, that could only be so far as fairness permitted.

 

Applications for wasted costs orders would often involve not only quite large sums but also what might be very serious criticisms of the representative’s competence or conduct which might have serious repercussions. Judges had to resist the temptation to treat wasted costs issues as matters of ancillary significance.

 

In any case where privilege had not been waived the tribunal had to give full weight to the warnings in Ridehalgh and ought to make it clear that it had done so. However, it would not always be necessary for a tribunal to consider privileged material in order to decide whether a representative was at fault.

 

The amount of detail required in written reasons in relation to a wasted costs order would vary enormously. The issues would sometimes be important and would not always be straightforward. In such cases, thorough treatment would be required.

 

Wasted costs orders were also disproportionately likely to generate appeals, so the EAT would need to have a clear account of the tribunal’s reasoning: Ridehalgh applied (para 36). Appeal dismissed.

#FootnoteB

 

In Fisher Meredith v JH and PH (Financial Remedy: Appeal: Wasted Costs) [2012] EWHC 408 (Fam), [2012] 2 FCR 241, the High Court revisited all of the authorities in relation to wasted costs and reaffirmed their relevance in a rapidly changing costs environment. Costs do not now follow the event in family matters, but the court here held that that made no difference to the principles in relation to applications for wasted costs. This is significant as the trend in all civil litigation is moving away from costs following the event.

 

In personal injury matters there has been no date announced for any increase in the small claims limit but since 1 April 2013 there has been a system of Qualified One Way Costs Shifting whereby claimants will, in general, not be liable for defendants’ costs in the event of defeat. Clearly parties and their lawyers are likely to look more closely at making wasted costs applications if ordinary costs are not available. It is equally clear that there will be no lowering of the significant threshold to be overcome to succeed in such an application.

 

In Flatman and Germany v Weddall and Barchester Health Care Limited [2013] EWCA Civ 278 the Court of Appeal held that solicitors who help their clients by funding the cost of disbursements should not be liable for costs if the case fails even if no After-the-Event insurance is in place.

 

Although both appeals related to pre-Jackson cases the Court of Appeal recognised that the situation was likely to become much more common post-Jackson with the abolition of legal aid for all but a small number of clinical negligence cases and with the abolition of recoverability of After-the-Event insurance premiums.

 

The issue of solicitors being able to fund disbursements without being at risk of an adverse costs order is regarded as one of access to justice and the Court of Appeal allowed the Law Society to intervene. The Court of Appeal specifically approved the funding of disbursements generally with the client repaying the solicitor at the end and also the solicitor paying disbursements on a contingency basis, that is without recovering them from the client if the case is lost. Although not necessary for the judgment in these two cases by extension it allows solicitors to agree only to charge the client for disbursements actually recovered from the other side.

 

The Court of Appeal also recognised the importance of the decision in relation to Qualified One Way Costs Shifting:

 

“Defendant’s insurers can undermine the principle of qualified one way costs shifting (which will limit recovery of costs by insurers in failed personal injury actions) by pursuing the solicitors acting for the claimant who fails.”

 

The point here is that, contrary to popular belief, costs orders against claimants are made for the full sum, but may only be enforced beyond the level of damages with permission of the court.

 

Under CPR 44.16(3) where the claim is for the benefit of another, the court will usually order that beneficiary to pay costs. Thus if the solicitors had been held to be beneficiaries, then they could be ordered to pay the excess of costs awarded over the damages sum. The Court of Appeal conducted an exhaustive analysis of case law, stating at Paragraph 45:

 

“…the legislation does visualise the possibility that a solicitor might fund disbursements and, in that event, it would not be right to conclude that such a solicitor was ‘the real party’ or even ‘a real party’ to the litigation.”

 

and at paragraph 47:

 

“…payment of disbursements, without more, does not incur any potential liability to an adverse costs order.”

 

Shortly afterwards the Court of Appeal came to the same conclusion in another case.

 

In Heron v TNT (UK) Limited and Mackrell Turner Garrett (a firm) [2013] EWCA Civ 469 the Court of Appeal dismissed an attempt by the employers’ insurers to obtain an order for costs against solicitors who had been acting for the employee until they withdrew from the case.

 

The claimant had not had after-the-event insurance. In a passage quoted with approval by the Court of Appeal the Judge at first instance said:

 

“As to the suggestion [the solicitors] stood to gain a substantial financial benefit from the case (both in terms of profit costs and a success fee), this is undoubtedly true in the sense that any solicitor engaged on a CFA has an interest in the outcome of the case. If the submission [is] that this of itself will render a solicitor liable to a [wasted costs order] or [non party costs order], it is simply contrary to the public policy that parties, and in particular, impecunious parties, should have access to justice when they do not have the means to fund litigation themselves. There must be additional factors before an order can be appropriate.”

 

The Court of Appeal went on to say, at paragraphs 36 – 38:

 

“36.        Based on the facts as found by the judge and with which I would not interfere, the application has to be put on the basis that the failure by MTG to obtain ATE insurance (and the subsequent failure to admit that fact to Mr Heron) is itself sufficient not only to give rise to a breach of duty to him but, in addition, to demonstrate that MTG had become a ‘real party’ to the litigation, the person ‘with the principal interest’ in its outcome, or that it was acting ‘primarily for his own sake’. If that was so, as I have said, every act of negligence by a solicitor in the conduct of litigation (thereby giving rise to a conflict) which means that an opposing party incurs costs which might not otherwise have been incurred would be sufficient. When pressed by Beatson LJ during the course of argument, Mr Bacon was unable to identify a principled way of drawing the line so as to avoid this consequence.

 

  1. I do not accept that the law goes anything like that far. A solicitor is entitled to act on a CFA for an impecunious client who they know or suspect will not be able to pay own (or other side’s costs) if unsuccessful (see Sibthorpe v Southwark BL [2011] 1 WLR 2111 at para. 50; Awwad v Geraghty [2001] QB 570 at 588; Dolphin Key v Mills [2008] 1 WLR 1829 at para. 75). As far as the other side is concerned, whether the solicitor has negligently failed to obtain ATE insurance to protect his client (as opposed to not being able to obtain such insurance) does not impact on the costs they will incur unless it is demonstrably provable that the costs would not have been incurred (as in Adris). That is not the case here.

 

  1. Mr Sachdeva argued that the appeal was an attempt to short circuit threatened professional negligence proceedings by Mr Heron to which MTG would be able to put in issue questions of breach, causation, contributory negligence and quantum all of which could be challenged by cross examination. Speaking for myself, I doubt how live some of those issues will be but that arguments can be deployed with the benefit of tested evidence is beyond question. It is certainly appropriate for that forum to determine the extent to which MTG may be liable to compensate Mr Heron for any costs that he will have to pay to his employers’ insurers; this summary procedure is not.” (emphasis added)

 

 

Damages-Based Agreements

 

Lord Justice Jackson has suggested that solicitors acting under a damages-based agreement may be liable for the other side’s costs in the event of defeat, following the principles set out in

 

Arkin v Borchard Lines Ltd & Ors [2005] EWCA Civ 655 Arkin v Borchard Lines Ltd & Ors [2005] EWCA Civ 655Arkin v Borchard Lines Ltd [2005] EWCA Civ 655, [2005] 3 All ER 613

 

Few others share this view and in any event almost no damages-based agreements have been signed, except in employment matters where there is generally no costs-shifting in any event.

Arkin v Borchard Lines Ltd & Ors [2005] EWCA Civ 655 #FootnoteB

 

In Wilsons Solicitors (In a Matter of Wasted Costs) v Craig and Sybil Johnson and Others UK EAT/0515/10/DA, the employment judge had made a wasted costs order on the ground that a Case Management Discussion had been abortive due to the appellant’s solicitors not having properly prepared the case. On appeal the EAT upheld the order and gave the following guidance:

 

“Wasted costs orders are always, as the cases emphasise, a serious matter, involving as they do a finding of negligence (at least) on the part of the representative. We have observed a tendency among some judges to deal with them without full reasoning. That is to be deprecated. In every case where a wasted costs order is made the judge should remind himself or herself of the terms of rule 48 and of the relevant principles appearing from the authorities; and it is good practice to do so explicitly in the reasons given. But the Judge’s reasons here have to be assessed in the light of the submissions made. It is clear from the materials that we have set out above that Mr Wilson took no point before the Judge about the extent of his own responsibility for the defects in the presentation of his clients’ case: rather, he attempted to defend his pleadings and his conduct of the hearing on their merits. There are of course strict limits on what he could have said: the whole point about privilege is that the representative is unable to disclose what passed between him and his client. But in our view it would have been perfectly proper for Mr Wilson, as he did before us, to draw the Judge’s attention to the well-known passages in Ridehalgh and/or Ratcliffe and to have made the point, as a matter of principle, that the Judge could not assume that deficiencies in the way the case was formulated were his responsibility rather than his clients. He did not do so. Instead his case apparently was that his pleadings had been satisfactory and the case sufficiently clarified. In those circumstances we do not think that the Judge can be blamed for not explicitly addressing the question of whether Mr Wilson might not have been responsible for the defects which she found.”

#FootnoteB

 

Amercing

 

In the 15th Century a litigant who had wasted the court’s time, for example by failing to attend a hearing or to comply with an interim order, could be amerced by being ordered to pay compensation to the Crown. Indeed both parties could be amerced if, say, they had settled the matter but not let the court know thus leaving the judge with nothing to do. Given that the court service is now required to be a profiteering sector, some would say racketeering given the astronomical court fees and poor service, it is surprising that the revival of amercing has not found its way on to the statute book.

 

 

NON-PARTY COSTS ORDERS

 

General

 

The power to make a non-party costs order is derived from sections 51(1) and (3) of the Senior Courts Act 1981:

 

51 Costs in civil division of Court of Appeal, High Court and county courts.

 

  • Subject to the provisions of this or any other enactment and to rules of court, the costs of and incidental to all proceedings in—

 

  • the civil division of the Court of Appeal;

 

  • the High Court; and

 

  • any county court,

 

shall be in the discretion of the court.

 

  • The court shall have full power to determine by whom and to what extent the costs are to be paid.”

 

Non-Party Costs Orders are also known as Third Party Costs Orders.

 

The principles, law and practice in relation to Non-Party Costs Orders have very recently been thoroughly reviewed by Mr Justice Akenhead in Weatherford Global Products Ltd v Hydropath Holdings Ltd [2014] EWHC 3243 (TCC). The case creates no law but it is a very useful examination of the law.

 

Other recent cases which have considered the authorities in non-party costs orders include:-

 

Excelerate Technology Ltd v Cumberbatch & Ors (Rev 1) [2015] EWHC 204 (QB) (16 January 2015)

 

Deutsche Bank AG v Sebastian Holdings Inc and Another [2014] 4 Costs LR 711.

 

The fact that the court is considering making a Wasted Costs Order against a lawyer does not prevent it also considering a Non-Party Costs Order against that lawyer, or indeed anyone else. (See Excalibur Ventures and Others v Psari Holdings and Others [2014] EWHC 3436.

 

The breadth of the court’s discretion has often been stressed and successful appeals will be rare; the appellant court should not interfere with the discretion of the trial judge unless he has plainly erred – see Alan Phillips Associates Ltd v Dowling (t/a the Joseph Dowling Partnership) [2007] EWCA Civ 64, [2007] BLR 51.

 

This has recently been confirmed by the Court of Appeal in Systemcare (UK) Ltd v Services Design Technology Ltd [2011] EWCA Civ 546.

 

Longer standing guidance was given by the High Court in 1994 in the case of Symphony Group Plc v Hodgson [1994] QB 179.

 

There the Queen’s Bench of the High Court Division considered previous cases and said that courts had been prepared to order a non-party to pay the costs of proceedings:-

 

  • Where a person has some management of the action e.g. the director of an insolvent company, who causes the company improperly to prosecute or defend proceedings…

 

  • Where a person has maintained or financed the action…

 

  • Solicitors (legal representatives).

 

  • Where the person has caused the action…

 

  • Where the person is a party to a closely related action which has been heard at the same time but not consolidated;

 

  • Group litigation, where one or two actions are selected as test actions.

 

(3) deals with solicitors and legal representatives and I have dealt with this extensively above.

 

These categories are neither rigid nor closed, but indicate the sort of connection which had previously lead the courts to consider costs orders against non-parties.

 

In the Symphony case, on appeal, the Court of Appeal gave guidance as to how first instance judges should approach non-party costs orders:-

 

“(1)        An order for the payment of costs by a non-party will always be exceptional. The judge

should treat any application for such an order with considerable caution.

 

  • It will be even more exceptional for a NPCO where the applicant has a cause of action against the non-party and could have joined him as a party to the original proceedings.

 

  • The applicant should warn the non-party at the earliest opportunity of the possibility that he may seek to apply for costs against him.

 

  • The applicant should warn the non-party at the earliest opportunity of the possibility that he may seek to apply for costs against him. The last two principles are an obvious application of the basic principles of natural justice.

 

  • An application for payment of costs by a non-party should normally be determined by the trial judge.

 

  • The fact that the trial judge may in the course of his judgment have expressed views on the conduct of the non-party constitutes neither bias nor the appearance of bias.

 

  • The procedure for the determination of costs is a summary one and is not subject to all the rules that would apply in an action. This point was also made in relation to a Wasted Costs Order in the case of Agdrich v Standard Bank London [2008] EWCA Civ 905.

 

The judge should be alert to the possibility that an application against a non-party is motivated by an inability to obtain an effective costs order against a litigant who cannot satisfy a costs order. Previous examples include legally aided clients but is now likely to include the vast majority of claimants.”

NON-PARTY ORDERS “EXCEPTIONAL”

 

In Relfo v Varsani [2012] EWHC 3848 (Ch) the liquidator of the claimant company applied for a non-party costs order against two respondents, following critical comments about them by the trial judge.

 

The Chancery Division of the High Court held that non-party costs orders were exceptional and should be approached with caution – see Symphony Group v Hodgson [1994] QB 179.

 

However, here the respondents were to be regarded as parties to the action as they stood to benefit from the defence case and had exercised a significant degree of control over it and had funded it – see Dymocks Franchise Systems (NSW) Pty Ltd v Todd (Costs) [2004] UKPC 39 [2004] 1 WLR 2807.

 

It was just and fair to make a non-party costs order against them, even though they had not been warned that such an order might be made. It is not mandatory that a warning be given; it is merely a material consideration to be weighed alongside others.

 

The full basis of their involvement had not become clear until it emerged in evidence at the trial and it had not been realistic to issue a warning before the judgment had been received. The respondents had had a full opportunity to explain themselves and had been able to adduce evidence. A non-party costs order was made against both respondents on a joint and several liability basis and on the indemnity basis.

#FootnoteB

 

In Aiden Shipping Co Ltd v Interbulk Ltd, The Vimeira (No 2) [1986] AC 965, [1986] 2 All ER 409, HL, the House of Lords confirmed that s 51 allowed a court to award costs against a person who was not a party to the proceedings, although such orders will only be made in exceptional circumstances.

 

In R (Conservative and Unionist Party) v Election Commissioner [2010] EWCA Civ 1332 the Court of Appeal held that a non-party could not be made the subject of a costs order after a final costs order had already been made.

 

Here a petitioner to an election court had been awarded costs but they remained unpaid and so she sought costs against the respondent’s political party and its local association, which had not been parties to the action.

 

Courts had wide powers as to costs and could hear arguments as to costs after publication of a draft judgment and could finalise that judgment and issue a certificate while reserving the decision on costs.

 

However that was not the case here. The Commissioner had made a final order for costs; he had ordered the respondent to pay them on an indemnity basis. The business for which the court had been set up had been concluded.

 

Thereafter the petitioner wanted the Commissioner to reopen his costs decision and to consider making an order against a third party.

 

There was no authority to do so.

 

The case of Plymouth and South West Co-Operative Society Ltd v Architecture, Structure and Management Ltd [2006] EWHC 3252 (TCC), 111 Con LR 189 concerned negligent advice by the defendant architects who had a standard professional indemnity policy with a limit of £2 million.

 

The claimant was awarded damages of just over £2 million plus costs estimated at £1 million. The defendant’s insurers paid the indemnity limit of £2 million towards damages. The defendant itself had ceased trading at about the time the claim was brought and had virtually no assets to meet the shortfall.

 

The claimant sought to recover the £1 million costs from the defendant’s insurers and the court found exceptional circumstances warranting a third-party order against the insurers as:

 

  • they had all along determined that the claim would be fought;

 

(b)       they funded the entirety of the defence;

 

(c)       they had full conduct of the claim;

 

(d)       they fought the claim exclusively to defend their own interests and in doing so caused additional costs for the claimant;

 

(e)       the defence failed completely.

 

This is the second such case in the last ten years, the first being TGA Chapman Ltd v Christopher [1998] 2 All ER 873, [1998] 1 WLR 12, CA.

 

Rule 44.3(1) of the Civil Procedure Rules 1998 SI 1998/3132 (CPR) sets out the court’s discretion as to costs:

“(1)     The court has discretion as to:

 

  • whether the costs are payable by one party to another;

 

(b)       the amount of those costs;

 

(c)       when they are to be paid.”

 

Where the court is considering whether to exercise its power to make a costs order in favour of or against a person who is a non-party to proceedings, that person must be added as a party to the proceedings for the purposes of costs only (CPR 48.2(1)(a)) and he must be given a reasonable opportunity to attend a hearing at which the court will consider the matter further (CPR 48.2(1)(b)).

 

The Court of Appeal considered the authorities on the issue of whether the law required a case to be ‘exceptional’ before an order under the SCA 1981, s 51 could be made. The case of Globe Equities v Globe Legal Services Ltd [1999] BLR 232 was referred to on the point Lawtel – LTL 8/3/99, para 21.

 

“The test is whether they are extraordinary in the context of the entire range of litigation that comes to the courts.”

 

The Court of Appeal went on to warn of the danger of treating the requirement that circumstances are ‘exceptional’ as being part of the statute when it is not. Exceptional circumstances are not a pre-condition to the exercise of the power to award costs. It is a matter for the judge to exercise his discretion to decide whether the circumstances relied on are such to make it just to order some non-party to pay the costs.


 

JOINING PARTY

 

The procedure for a third party costs order requires the non-party to be added to the action before the court considers whether to make the order sought (CPR 48.2(1)).

 

In a judgment given on 11 October 2005 (but not published in writing until February 2006), Mr Justice Etherton held that there is no substantive threshold test to be met when the applicant seeks to join a third party to the proceedings – Dranez Anstalt v Hayek (11 October 2005, unreported).

 

The judge said that, while the court has a discretion whether to add the non-party to the proceedings, he rejected the third party’s submission that it was possible challenge joinder on the ground that the application had no real prospect of success. As such, the test is far less rigorous than that applied in a summary judgment application under CPR Pt 24. The procedure is a summary one, and it would not be ‘sensible or efficient’ to have a preliminary hearing on the merits. The judge also held that it was possible to challenge joinder to give the non-party the protection conferred by the rules of court, for example as to the use of statements of case and disclosure of documents, in accordance with the views expressed in Aiden Shipping Co Ltd v Interbulk Ltd, The Vimeira (No 2) [1986] AC 965, [1986] 2 All ER 409, HL (see para [671] above). The process was not intended to give the non-party the opportunity to make preliminary objections.

 

The judgment makes it clear, however, that the court retains its power to strike out applications that are an abuse of process ‘whether on the ground of delay or other misconduct … or because the application is manifestly so fundamentally misconceived as to amount to an abuse of process’. On the facts, he rejected a submission that there had been inexcusable delay in bringing the application. The court held that delay would not be fatal to the application at the joinder stage unless so severe as to amount to an abuse of process.

 

 

DISCLOSURE

 

In Owners and/or demise charterers of dredger ‘Kamal XXVI’ and barge ‘Kamal XXIV’ v Owners of ship ‘Ariela’ [2010] EWHC 2531 (Comm), [2011] 1 All ER (Comm) 477, [2011] 1 Lloyd’s Rep 291 the High Court allowed an application for disclosure relevant to whether a third party costs order should be made.

 

Documents were disclosable as relevant to the issues of whether the Third Party underwriters had determined that the claim be fought, had controlled and conducted the litigation and had done so exclusively or predominantly for their own interests.

 

The underwriters and the solicitors, instructed in part by the underwriters and in part by the fraudulent client, were used as the mechanism for achieving the claimant’s fraud. Therefore the fraud exception applied and there was neither legal advice privilege nor litigation privilege available to the solicitors or the underwriters.

 

The judgment contains a detailed discussion of previous cases in relation to this topic.

 

In Thomson v Berkhamsted Collegiate School [2009] EWHC 2374 (QB), [2009] NLJR 1440, Blake J, the applicant school sought orders for disclosure to be made ancillary to the hearing of a third party costs claim against the interested parties. A former pupil of the school had brought a claim for damages for failure to take proper measures to prevent him from being bullied whilst he was at the school. Two weeks into the trial he discontinued his claim. The school sought its substantial costs in defending the action, which it alleged was wholly misconceived. The pupil’s costs had been met by a third party. Accordingly, the school applied for a costs order against the funder pursuant to the Supreme Court Act 1981, s 51 and CPR 48.2. Pursuant to that application orders were sought requiring the funder to file and serve disclosure statements setting out correspondence between them and the pupil’s solicitors, experts and counsel.

 

The High Court held that the court needed to consider when a third party costs order was likely to be made in cases such as the instant one. The law as to third party costs was sufficiently stated in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (Costs) [2004] UKPC 39, [2004] 1 WLR 2807, and the following principles were relevant:

 

  • such an order was exceptional;

 

(b)       the application should normally be determined by the trial judge;

 

(c)       pure funders with no personal interest in the litigation would not normally have the discretion exercised against them. Hamilton v Al-Fayed (Costs) [2002] EWCA Civ 665, [2003] QB 1175 applied;

 

(d)       it was relevant but not decisive that the defendant had warned the non-party of the intention to seek costs or the non-party’s funding had caused the defendant to incur costs it would not otherwise have had to incur;

 

(e)       the conduct of the non-party in the course of the litigation was of relevance;

 

(f)        in a family funding context courts had been reluctant to impose third party costs orders against those family members who assisted a party for philanthropic and disinterested reasons;

 

(g)       the inherent strength of the application was always a relevant factor. Dymocks applied.

 

In the instant case, the funders were not merely funders but were directly concerned with the facts of the claim and played an active role in the litigation. There was substance to the suggestion that the litigation was speculative as to its prospects of success. It was doubtful that it would have been funded if T had not made funds available themselves. Accordingly, an application for third party costs had a reasonable prospect of success. The only doubt was over whether the funder gained a benefit from the litigation and sought to control its course. In order to establish those elements a disclosure order was sought and ordered.

 

Here the pupil had claimed legal professional privilege to limit disclosure, but the court held that an analysis of the documents was required to determine which, if any, attracted privilege. The correspondence sought was likely to be probative and not privileged in its entirety, and it was not disproportionate for the material to be sought.

 

 

SECURITY FOR COSTS AGAINST A NON-PARTY 

 

In Chilab v King’s College and Another, The Times 8 November 2012, CA

 

the Court of Appeal held that an application for security for costs against a non-party and under CPR 25.14 (2) (b) could only be made if the third party had contributed or agreed to contribute to the claimant’s costs in return for a share of any proceeds.

 

Such an agreement could be implied, but where a spouse provided financial support it was to be inferred that that contribution had been made out of natural love and affection and not for any share in the proceeds recovered.

 

For an order for security of costs against the third party to be justified there had to be something quite different from the natural love and affection which appeared to be the motivation in this case.

 

 

EVIDENCE

 

In Centrehigh Limited v Karen Amen and others [2013] EWHC 625 (Ch)  the claimant company sought permission to cross-examine eight witnesses in relation to its application for a third party costs order against the 4th and 5th defendants pursuant to section 51 of the Senior Courts Act 1981 and CPR 48.2.  The claimant argued that the cross –examination should be allowed as the underlying facts had never been subject to an investigation at trial as the claim had settled and that the application for a third party costs order could only be justly determined if the witnesses were cross-examined.  The court dismissed the application, stating that as a matter of policy, section 51 applications should not involve a full trial with cross-examination of witnesses and full pre-trial procedures, even where, as here, the matter had settled without trial and where the court had not had a chance to assess the witnesses and documents.

 

 

Solicitors

 

Wasted Costs Orders can only be made against legal representatives, including solicitors and barristers and such orders are made under section 51(6) of the Senior Courts Act 1981 and are dealt with in my piece above – Wasted Costs Orders.

 

However where a court declines to make a Wasted Costs Order it can still make a costs order against a solicitor, or other lawyer, under the general, and very wide power to make a Non-Party Costs Order under sections 51(1) and (3) of the Senior Courts Act 1981, set out above.

 

However in Tolstoy-Miloslavsky v Aldington [1996] 1WRL 736

 

the Court of Appeal held that there was no jurisdiction under sections 51(1) and (3) to make an order for costs against legal representatives acting purely as legal representatives; in such cases an order could only be made under the Wasted Costs Orders Provisions of section 51(6).

 

In that case the Court of Appeal stated that there were only three categories of conduct which can give rise to an order for costs against a solicitor:-

 

  • if it is within the wasted costs jurisdiction;

 

  • if it is otherwise a breach of duty to the court, for example acting without authority, or in breach of an undertaking;

 

  • if the solicitor acts outside the role of solicitor, for example in a private capacity or as a true third party funder for someone else.

 

The fact that a solicitor is working on a contingent fee, or no fee at all, as compared with an old fashioned retainer is irrelevant. In Tolstoy the court said:-

 

“There is, in my judgment, no jurisdiction to make an order for costs against a solicitor solely on the ground that he acted without fee. It is in the public interest, and it has always been recognised that it is proper, for counsel and solicitors to act without fee. The access to justice which this can provide, for example in cases without the scope of legal aid, confers a benefit on the public. Section 58 of the Act of 1990, which legitimises conditional fees, inferentially demonstrates Parliament’s recognition of this principle. For it would be very curious if a legal representative on a contingent fee and, therefore, with a financial interest in the outcome of litigation, could resist an order for costs against himself but one acting for no fee could not. Whether a solicitor is acting for remuneration or not does not alter the existence or nature of his duty to his client and the court, or affect the absence of any duty to protect the opposing party in the litigation from exposure to the expense of a hopeless claim. In neither case does he have to “impose a pre-trial screen through which a litigant must pass:” see per Sir John Donaldson M.R. in Orchard v South Eastern Electricity Board [1987] QB 565 572-574.

 

The mere fact of acting under a Conditional Fee Agreement is not a factor which points in favour of imposing a non-party costs order, even though there is a financial interest in winning which is not present under a normal retainer: Hodgson v Imperial Tobacco [1998] 1 WLR 1056.

 

In Hodgson a large number of plaintiffs brought actions against three tobacco companies, claiming damages for personal injuries by reason of cancer caused by smoking cigarettes manufactured by the defendants. The plaintiffs had conditional fee agreements with their legal representatives under section 58 of the Courts and Legal Services Act 1990.

 

The defendants requested the disclosure of the agreements, indicating that in due course the might, if so advised, wish to seek an order for costs against the plaintiff’s legal advisers personally. The plaintiffs refused to disclose the agreements and applied for an order debarring the defendants from seeking costs against the plaintiff’s legal representatives other than by way of a wasted costs order. At a hearing for directions in chambers the judge refused to make a pre-emptive order relating to costs and, further, ordered that the parties and their legal advisors should not make any comment to the media about the litigation without leave of the court.

 

The Court of Appeal dismissed the appeal against the refusal to make the pre-emptive order relating to costs. It held as follows:

 

  • The existence of a conditional fee agreement did not entitle a legal adviser to come to any additional or collateral arrangement with his client which would not be permissible without such an agreement.

 

  • Therefore, a legal adviser acting a under a conditional fee agreement which complied with section 58 of the Act of 1990 was no more at risk of being made personally liable for the costs of a party other than his client than one who was not acting under such an agreement.

 

  • In any event, any pre-emptive order would have to be so qualified that in practice it would not provide the plaintiff’s lawyers with any legal protection.

 

  • Accordingly, in the circumstances it would not be appropriate to make such an order.

 

The Court of Appeal said:

 

“There is no reason why the circumstances in which a lawyer acting under a conditional fee agreement can be made personally liable for the costs of a party other that his client should differ from those in which a lawyer who is not acting under a conditional fee agreement would be so liable…it is in the public interest and perfectly proper for counsel and solicitors to act under a conditional fee agreement.”

 

The Court of Appeal revisited this subject in Flatman and Germany v Weddall and Barchester Healthcare Ltd [2013] EWCA Civ 728 and quoted from the Judgment in Myatt v National Coal Board (Number 2) [2007] 1WLR 1559:

 

”       In my judgment, the third category described by Rose LJ in the Tolstoy-Miloslavsky case should be understood as including a solicitor who, to use the words of Lord Brown in Dymocks Franchise Systems (NSW) Pty Ltd v Todd, is ‘a real party … in very important and critical respects’ and who ‘not merely funds the proceedings but substantially also controls or at any rate is to benefit from them’. I do not accept that the mere fact that a solicitor is on the record prosecuting proceedings for his or her client is fatal to an application by the successful opposing party, under s.51(1) and (3) of [the Senior Courts Act 1981], that the solicitor should pay some or all of the costs. Suppose that the claimants had no financial interest in the outcome of the appeal at all because the solicitors had assumed liability for all the disbursements with no right of recourse against the clients. In that event, the only party with an interest in the appeal would be the solicitors. In my judgment, they would undoubtedly be acting outside the role of solicitor, to use the language of Rose LJ.”

 

  1. Thus, as Eady J put it, if a funder is “a real party” in the sense that he has an interest in the outcome of the litigation it may not matter that it would be inappropriate to describe that funder as “the real party”. Eady J went on:

 

“It may suffice, depending upon the circumstances, that the funder has something to gain alongside the nominal party. In the case of a solicitor, for example, it is not necessary to demonstrate that in the event of the litigation leading to a successful outcome he would be the sole beneficiary. Even though his client may recover compensation for himself, the solicitor could still be regarded as benefiting, or potentially benefiting, from the case to the extent that a costs order should be made against him.”

 

In Myatt the Court of Appeal had upheld the lower court’s decision that the Conditional Fee Agreements were unenforceable and went on to hold that a non-party costs order could be made against solicitors on the record. Here the court did make such an order as the appeal proceedings had been launched so as to protect the solicitors claim for costs.

 

The court of appeal specifically confined its decision to cases where litigation was funded by a Conditional Fee Agreement and where the issue was the enforceability of that agreement.

 

In such cases parties considering applying for an order should warn the solicitor at risk at an early stage, so as to give the solicitor a reasonable opportunity to decide whether to continue with the proceedings.

 


 

Orders against Solicitors – Case Law

 

In HU v SU [2015] EWFC 535

 

the Family Court made a Wasted Costs Order against the mother’s solicitors in respect of a directions hearing which was necessary because of the failure of the solicitors to seek the leave of the court to extend the time for compliance with the directions order given at an earlier hearing and their failure to comply with those directions.

 

The conduct of those solicitors was characterised by the court as incompetence and “redolent of past poor practices which should no longer feature in private or public law family proceedings.”

 

The court said that it was satisfied that the conduct of the solicitors was so serious and so inexcusable that it amounted to improper and unreasonable conduct and it caused the father to incur unnecessary costs.

 

It thus satisfied the provisions of CPR 46.8 and the three stage test set out by the Court of Appeal in Ridehalgh v Horsefield [1994] Ch 205.

 

The court ordered the costs to be paid on an indemnity basis.

 

The conduct included incorrectly addressing two letters to the court, sending letters to the father’s solicitors and not to the court and failing to give any idea as to when the steps required by the earlier directions order would be complied with.

 

The mother was legally aided. The father was privately funded.

 

In Globe Equities v Globe Legal Services Ltd, an order under the SCA 1981, s 51 was made against a firm of solicitors who had created a limited liability company through which to lease their office premises. The company litigated with the freeholder and lost. The court held that the solicitors were the real defendants and the actions were continued for their benefit which enabled them to remain in the premises for over two years without paying rent; furthermore that the defences and counterclaims in the actions were hopeless. The Court of Appeal having analysed the authorities came to the firm conclusion that pure funders with no personal interest in the litigation, who do not stand to benefit from it, are not funding as a matter of business and do not seek to control its course, are immune from an order for costs under the SCA 1981, s 51.

 

The governing principle is as stated by Millet LJ in Abraham v Thompson [1997] 4 All ER 362, [1997] 37 LS Gaz R 41, CA:

 

“It may be unjust to a successful defendant to be left with unrecovered costs, but the plaintiff’s freedom of access to the courts has priority … it is preferable that a successful defendant should suffer the injustice of irrecoverable costs than that a plaintiff with a genuine claim should be prevented from pursuing it.”

 

Simon Brown LJ concluded that nothing in the facts of this case took it out of the general principle that pure funders generally are exempt from the SCA 1981, s 51 liability for costs.

 

#FootnoteB

 

Funding disbursements

 

In Flatman and Germany v Weddall and Barchester Health Care Limited [2013] EWCA Civ 278, the Court of Appeal held that solicitors who help their clients by funding the cost of disbursements should not be liable for costs if the case fails even if no After-the-Event insurance is in place.

 

Although both appeals related to pre-Jackson cases the Court of Appeal recognised that the situation was likely to become much more common post-Jackson with the abolition of legal aid for all but a small number of clinical negligence cases and with the abolition of recoverability of After-the-Event insurance premiums.

 

The issue of solicitors being able to fund disbursements without being at risk of an adverse costs order is regarded as one of access to justice and the Court of Appeal allowed the Law Society to intervene. The Court of Appeal specifically approved the funding of disbursements generally with the client repaying the solicitor at the end and also the solicitor paying disbursements on a contingency basis, that is without recovering them from the client if the case is lost. Although not necessary for the judgment in these two cases by extension it allows solicitors to agree only to charge the client for disbursements actually recovered from the other side.

 

The Court of Appeal also recognised the importance of the decision in relation to Qualified One Way Costs Shifting:

 

“Defendant’s insurers can undermine the principle of qualified one way costs shifting (which will limit recovery of costs by insurers in failed personal injury actions) by pursuing the solicitors acting for the claimant who fails.”

 

The point here is that, contrary to popular belief, costs orders against claimants are made for the full sum, but may only be enforced beyond the level of damages with permission of the court.

Under CPR 44.16(3) where the claim is for the benefit of another, the court will usually order that beneficiary to pay costs. Thus if the solicitors had been held to be beneficiaries, then they could be ordered to pay the excess of costs awarded over the damages sum. The Court of Appeal conducted an exhaustive analysis of case law, stating at Paragraph 45:

 

“…the legislation does visualise the possibility that a solicitor might fund disbursements and, in that event, it would not be right to conclude that such a solicitor was ‘the real party’ or even ‘a real party’ to the litigation.”

 

and at paragraph 47:

 

“…payment of disbursements, without more, does not incur any potential liability to an adverse costs order.”

 

Shortly afterwards the Court of Appeal came to the same conclusion in another case.

 

In Heron v TNT (UK) Limited and Mackrell Turner Garrett (a firm) [2013] EWCA Civ 469, the Court of Appeal dismissed an attempt by the employers’ insurers to obtain an order for costs against solicitors who had been acting for the employee until they withdrew from the case.

 

The claimant had not had after-the-event insurance. In a passage quoted with approval by the Court of Appeal the Judge at first instance said:

 

“As to the suggestion [the solicitors] stood to gain a substantial financial benefit from the case (both in terms of profit costs and a success fee), this is undoubtedly true in the sense that any solicitor engaged on a CFA has an interest in the outcome of the case. If the submission [is] that this of itself will render a solicitor liable to a [wasted costs order] or [non party costs order], it is simply contrary to the public policy that parties, and in particular, impecunious parties, should have access to justice when they do not have the means to fund litigation themselves. There must be additional factors before an order can be appropriate.”

 

The Court of Appeal went on to say, at paragraph 37:

 

“A solicitor is entitled to act on a CFA for an impecunious client who they know or suspect will not be able to pay own (or other side’s costs) if unsuccessful.”

 

In Adris and Others v Royal Bank of Scotland [2010] EWHC 941

 

the solicitor took on claims under the Consumer Credit Act 1974 on the basis that it was cost free to the claimants whose cases had been referred by a claims management company. Here the solicitor’s literature had represented that “your solicitor will purchase, at their cost, a legal expenses insurance policy” [i.e. ATE insurance] but had failed to do so.

 

However the solicitors failed to obtain after-the-event insurance and failed to explain to the claimants that they would have to pay the other side’s costs if the claims were lost.

 

The High Court held that this was a “gross breach of duty” towards the clients and that the solicitors were effectively acting without instructions as the clients were “prevented from giving instructions on anything like an informed view of the case” and said “it is obvious that if the clients had been told of the true position they are likely to have instructed (the law firm) not to progress the claims”.

 

The solicitors were made the subject of a non-party costs order upon the application of the defendant.

 

In Tinseltime Ltd v Roberts and Others (Defendants) & Gavin Edmondson (Respondent) [2012] EWHC 2628 (TCC)

 

the Technology and Construction Court refused to make an order against the Respondent firm of solicitors in relation to the defendants’ costs, either as wasted costs or on the basis that the solicitors were non-party funders, that is a non-party costs order.

 

The court, at paragraph 2, identified the issue:-

 

“2. The application for a non-party costs order in this case raises an issue of some general importance and controversy, namely whether or not a solicitor who takes on a case for an impecunious claimant under a conditional fee agreement (CFA) where there is no after the event (ATE) insurance policy in place, and who also agrees to fund the disbursements necessary to allow the case to proceed, thereby constitutes himself a non-party funder and renders himself liable to a non-party costs order in the same way as if he was a commercial non-party litigation funder.”

 

The court held that in none of those circumstances did the solicitor become a non-party funder rendering himself liable to a non-party costs order.

 

The court said that if it was wrong on that it would not have considered it appropriate to make an order requiring the solicitors to contribute more than the amount expended by them on disbursements; that was on the basis of the principles set out in the well-known case of Arkin v Borchard Lines [2005] 1 WLR 3055 in relation to the extent of the liability of a commercial funder.

 

#FootnoteB

 

Solicitors Litigating Personally

 

In Virdi v RK Joinery Ltd [2014] EWHC 3492

 

the High Court upheld a Costs Order against a non-party, and commented on the nature of such orders and the duties of solicitors when litigating personally.

 

The High Court rejected the first instance judge’s finding that it was appropriate to apply the same standards to Mr Virdi’s conduct of his personal affairs as would have applied to his professional conduct.

 

“I see no justification for holding a solicitor, or any other professional person, to the same standards in the conduct of his private affairs as would apply to him when acting for a client in the course of his profession. The responsibilities and burdens of professional life are, quite rightly, of a stringent nature and subject to regulation in the public interest. But lawyers (or other professionals) are entitled to conduct their personal affairs as they chose, so long as they do not bring their profession into disrepute or otherwise infringe the Code of Conduct which governs their professional lives. The judge appears to have been judging Mr Virdi’s conduct as if he had been the solicitor on the record acting for Mrs Virdi, but that was not the position.”

 

Nevertheless the original order was upheld and the High Court found that the crucial point was that Mr Virdi, and Mr Virdi alone, generated Mrs Virdi’s unsuccessful defence in the action. With his legal knowledge and experience he was clearly the dominant partner. He “made the running in the events that led up to the litigation.”

 

The High Court took the view that the judge’s refusal to find that Mr Virdi had acted dishonestly was “possibly benevolent.”

 

He went on to say:-

 

“60. The case for making a Costs Order against him would, of course, be much stronger if he had acted dishonestly and deliberately persuaded his wife to advance a defence which he knew to be force… there is a wide spectrum of circumstances in which the discretion to make a third party costs order may legitimately be exercised. The authority shows that dishonesty is not a necessary ingredient, and (importantly) that the pursuit of speculative litigation falls into the same category as impropriety.”

 

Consequently Mr Virdi could be regarded as the “real party” and thus could properly be made the subject of a non-party costs order.

 

 

CLAIMS MANAGEMENT COMPANIES

 

In Farrell v Birmingham City Council [2009] EWCA Civ 769, [2009] All ER (D) 172 (Jun), the Court of Appeal held that the defendant, a claims management company, pay 80% of the costs of the original defendant, Birmingham City Council, by way of a third-party costs order. In dismissing the appeal, the Court of Appeal said that the court would have been entitled to order the company to pay all of Birmingham City Council’s costs.

 

This was a fraudulent credit hire claim. The Court of Appeal held that the claims management company, while not party to the fraud, was the instigator of the litigation. It controlled the litigation, albeit through solicitors and it managed and pursued the claim. Consequently it was liable for costs as a third-party funder.

 

In Ahmed v Elliott and Road Range Accident Assistance 21 April 2010, Burnley County Court made a non-party costs order against the credit hire company, Road Range. Here Mr Ahmed brought a credit hire claim for £1,645.00 but told the judge at a pre-trial hearing that he had never hired a car. His claim was subsequently struck out and the first defendant applied for a non-party costs order against Road Range.

 

The judge accepted that Mr Ahmed had put the whole handling of the claim in the hands of Road Range, and that the claim for hire charges were false. Directing himself in accordance with Symphony Group plc v Hodgson [1993] 4 All ER 143 (CA), the judge made an order against Road Range in relation to the first defendant’s costs of, and associated with, investigating the hire charges claim.

 

This decision should be compared with the Court of Appeal decision in Oriakhel v Vickers and others [2008] All ER (D) 69 (July). There it was claimed that Mr Khan, a witness to an alleged accident, was part of a dishonest conspiracy in a fabricated and unsuccessful claim. No proceedings were issued against Mr Khan but an application for a non-party costs order against him was made. The application was refused on the ground, amongst others that the defendant had a primary cause of action against Mr Khan as part of a conspiracy and it would be highly exceptional to make a non-party costs order in what was effectively satellite litigation without proceedings being issued in the primary litigation.

 

 

INTERESTED PARTIES

 

Strictly an interested party is a party and not a non-party, but effectively for costs purposes they are generally treated as non-parties.

 

The courts have the power to make costs orders against interested parties, and indeed non-parties, and courts also have the power to award costs to interested parties. These powers are given by the very wide provisions of section 51(3) of the Senior Courts Act 1981.

 

In Bolton Metropolitan District Council v the Secretary of State for the Environment (1995) [1WLR 1176] the House of Lords, in dealing with an interested party application, famously said:-

 

“As in all questions to do with costs, the fundamental rule is that there are no rules. Costs are always in the discretion of the court, and a practice, however widespread and longstanding, must never be allowed to harden into a rule.”

 

In Group M UK Ltd v The Cabinet Office [2014] EWHC 3863 (TCC)

 

Mr Justice Akenhead, sitting in the Technology and Construction Court, part of the High Court, reviewed the authorities and awarded an interested party costs.

 

He also allowed Relief from Sanctions in relation to late service of the Schedule of Costs, which he clearly did not regard as a serious breach.

 

The judge also allowed the following hourly rates, as asked,

 

Partner –                                             £650.00

Junior Solicitor –                               £480.00

Even more Junior Solicitor –        £415.00

Trainee –                                             £165.00

 

These costs were those allowed on the standard basis, and were not indemnity costs.

 

 

INSURERS

 

In the case of Palmer v Palmer [2008] EWCA Civ 46, [2008] Lloyd’s Rep IR 535, [2008] 4 Costs LR 513, a six-year-old girl was seriously injured in a car crash which had killed her uninsured father. PZP manufactured the Klunk-Klip device attached to her seat and the trial judge found that this was unsafe and had substantially contributed to her injuries. Damages would exceed £2 million, but PZP’s product liability policy was limited to £500,000. The Motor Insurers’ Bureau therefore sought an order that the product liability insurers, RSA, pay the costs of the action personally. The judge asked himself whether RSA was motivated either exclusively, or at least predominantly, by its own interests in the way it conducted the defence of the litigation. He found that self-interest was the material governing consideration, which pushed this case into the exceptional type of case which justifies a non-party costs order.

 

The appeal: RSA appealed the judge’s order that they pay the costs personally on the grounds that it was doing that which it was entitled to do under the policy, namely defending the case on behalf of its insured for the mutual benefit of both insured and insurer. RSA submitted that there was nothing unusual, let along exceptional, about the circumstances of this case which would justify a costs order against them.

 

The decision: The appeal judges rejected RSA’s appeal. Even though PZP’s director had wanted to defend the claim at trial rather than settle it, the reality was that PZP had no commercial interest in pursuing its defence to that extent as sales of the Klunk-Klip had totally dried up and the company was close to being insolvent. RSA was funding, controlling and directing the defence of the litigation in its own interest, which was enough to merit the costs order.

 

Comment: This decision follows the case of Plymouth and South West Co-operative Society Ltd v Architecture, Structure & Management Ltd [2006] EWHC 3252 (TCC), 111 ConLR 189 where the professional indemnity insurers of an architect’s practice were ordered to pay the costs of an action personally, resulting in a pay-out well above the policy limit.

 

 

 

 

 

Costs Against Experts

 

A court can now make a costs order against an expert who has acted unreasonably according to the protocol for experts, relying on comments made in the High Court in Phillips v Symes [2004] EWHC 2330 (Ch), [2005] 4 All ER 519, [2005] 2 All ER (Comm) 538.

 

 

The Guidance for the instruction of experts in civil claims states:-

 

“91.        If proceedings have been started the court has the power under CPR 44 to impose sanctions:

  1. cost penalties against those instructing the expert (including a wasted costs order) or the expert (such as disallowance or reduction of the expert’’ fee) (CPR 35.4(4) and CPR 44).”

 

 

 

Disallowing Experts’ Costs

 

The courts can disallow the costs of an expert whose evidence has not assisted the court – see Thomas Johnson Coker v Barkland Cleaning Co [1999] TLR 6 December, Court of Appeal.

 

In Siegel v Pummell [2015] EWHC 195 (QB)

 

the High Court ordered that the costs of the recall of an expert witness to deal with a written statement produced by the other side’s expert during the trial and at the order of the court should be paid on an indemnity basis.

 

The court said:-

 

“37.  In my judgment, however, the fact that the court was obliged to ask Professor Trimble, in the middle of his evidence, to provide a written statement as to what exactly his evidence was and the basis upon which he was saying that the Claimant’s continuing symptoms were psychogenic did arise from serious shortcomings in the way in which Professor Trimble approached the giving of his evidence. It was helpful to the court to have that material but it was necessary for the Claimant to recall Dr Allder to deal with this new basis upon which Professor Trimble was finally presenting his evidence.

 

  1. In my judgment, that conduct on the part of Professor Trimble was so out of the norm that it justifies an order for indemnity costs.

 

  1. Accordingly, I order that the costs of the recall of Dr Allder, occasioned by the production by Professor Trimble of the final written statement of his position shall be awarded on an indemnity basis. I make an order for indemnity costs but limited in that way.”

 

 

 

COSTS AGAINST COURTS

 

In R (on the application of Davies) v Birmingham Deputy Coroner [2004] EWCA Civ 207, [2004] 3 All ER 543, [2004] 1 WLR 2739, the Court of Appeal set out guidelines in relation to litigants obtaining costs orders against courts, having conducted an exhaustive review of the authorities. Here the claimant unsuccessfully sought judicial review of a deputy coroner’s verdict, but was successful on appeal due to a change in the law between the original hearing and the appeal at which the deputy coroner chose to appear. The claimant sought costs for both hearings and the Court of Appeal ordered the deputy coroner to pay the costs on the appeal, but not the original hearing. Relevant factors were:

 

  • codification of costs rules in the CPR;

 

(ii)       reluctance by the state to agree to costs out of central funds;

 

(iii)      public bodies’ increased tendency to seek to recover costs;

 

(iv)      the statutory indemnity given to coroners for costs;

 

(v)       the growing number of unfunded High Court challenges; and

 

(vi)      human rights.

 

When an inferior court or tribunal resisted proceedings by appearing and lost it had to pay the costs following the event, but if its role was neutral or as an amicus curiae no order for costs, for or against, would be made. Inferior courts and tribunals remain liable when they behave improperly, whether or not they appear in the proceedings. Courts should consider orders where:

 

  • a party has financed its own litigation; and

 

  • it would be wrong for that party to incur expense where a tribunal or inferior court had gone wrong in law; and

 

  • no-one else could be ordered to pay costs.

 

The Court of Appeal said:

 

“The very heavy pressures on the funds available to the Legal Services Commission no longer make it possible to justify the refusal of a costs order on the basis that one public fund would simply be paying another.”

 

 

COSTS AGAINST LEGALLY AIDED PARTIES

 

Hatton v Hopkins [2005] EWHC 3337 (Ch), [2007] 2 Costs LR 172 is a High Court appeal concerning the court’s powers to assess the liability of an assisted person on a costs order, under s 11 of the Access to Justice Act 1999. Mr Justice Rattee held that the beneficiary of such an order could not wait until the conclusion of the proceedings, and the determination of all costs orders between the parties, before making his s 11 application. The application must be made within three months of the order. The appellant in this case was a solicitor called Jonathan Hatton who had the benefit of a costs order made in his favour in March 2003. The respondents had had the benefit of public funding for part, but not all, of the complex legal proceedings between Hatton and his former clients. In June 2003, Hatton commenced detailed assessment proceedings, but did not at the same time make an application under s 11 for an assessment of the respondents’ liability on the orders. The case eventually came before Master Gordon Saker, sitting as a costs judge, who ordered the appellant to issue an application for an extension of time for a s 11 application by 8 December 2004. Hatton made the application at the same hearing, but the Master dismissed it. Hatton appealed.

 

The detailed provisions governing s 11 applications are set out in regs 9–12 of the Community Legal Services (Costs) Regulations 2000 SI 2000/441. Regulation 10 provides that a receiving party may, within three months of the costs order being made, request a determination of the amount payable by the assisted person. Regulation 12(3) permits applications outside of this three-month time limit, but only on the grounds set out in reg 12(4). Of these, ground (4)(c) is ‘other good reasons justifying the … failure to make an application within the time limit’. Hatton argued, before both the Master and then on appeal, that it was appropriate to wait until all the proceedings had concluded before making an application under s 11. This argument was rejected by both the Master and the judge. Mr Justice Rattee, on appeal, said that reg 10(2) required any application to be made within three months of any order for costs against an assisted party, and not to wait until the end of the proceedings and make a single s 11 application in relation to all costs orders against the respondents.

 

There are two other points of interest in the decision. First, the court appeared to accept that it was reasonable for a party to await the outcome of an appeal of the order which included the costs order, before making a s 11 application. Secondly, Rattee J explicitly did not rule on whether the making of one unsuccessful application for an extension of time would prevent a later application for an extension on different grounds. The question of whether such an application could be made in the event of a change in the assisted party’s financial circumstances was therefore not ruled upon.

 

The principles of this case should apply to decisions made under the successors to the Access to Justice Act 1999 in relation to legal aid and to any current legal aid regulations for the time being.

 

In Symphony Group plc v Hodgson [1994] QB 179, Balcombe LJ said:

 

“The judge should be alert to the possibility that an application against a non-party is motivated by resentment of an inability to obtain an effective order for costs against a legally aided litigant. The courts are well aware of the financial difficulties faced by parties who are facing legally aided litigants at first instance, where the opportunity of a claim against the Legal Aid Board under section 18 of the Legal Aid Act 1988 is very limited. Nevertheless the Civil Legal Aid (General) Regulations 1989 (SI 1989 No. 339/89), and in particular regulations 67, 69, and 70, lay down conditions designed to ensure that there is no abuse of legal aid by a legally assisted person and these are designed to protect the other party to the litigation as well as the Legal Aid Fund. The court will be very reluctant to infer that solicitors to a legally aided party have failed to discharge their duties under the regulations – see Orchard v South Eastern Electricity Board[1987] Q. B. 565 – and in my judgment this principle extends to a reluctance to infer that any maintenance by a non-party has occurred”

 

 

WITNESSES

 

In Oriakhel v Vickers [2008] EWCA Civ 748, [2008] All ER (D) 69 (Jul), the Court of Appeal upheld the trial judge’s refusal to make a non-party costs order against a person who had given evidence in the trial pursuant to a dishonest conspiracy to make a fabricated claim. The court held that the proper course was to join the witness as a party and claim damages for conspiracy.

 

 

BAD FAITH

 

In Goodwood Recoveries Ltd v Breen [2005] EWCA Civ 414, [2006] 2 All ER 533, [2006] 1 WLR 2723, the Court of appeal held that bad faith is not a precondition of a costs order against a non-party and nor is it necessary to show impropriety in the way that the litigation was prosecuted.

 

In Locabail (UK) Ltd v Bayfield Properties Ltd (No 3) [2000] 2 Costs LR 169, (2000) Times, 29 February, the Chancery Division of the High Court decided that bad faith on the part of the person funding the litigation was a relevant consideration in making a costs order against a non-party, but was not a prerequisite to making such an order. In this case the funder was the first husband of the second defendant who gave evidence at trial on behalf of his former wife and the court found the evidence to be unsatisfactory and prone to exaggeration. The court referred to the guidelines in Symphony Group plc v Hodgson [1994] QB 179, [1993] 4 All ER 143, CA and considered that while the bona fides of the funder were relevant this was not determinative. It was not appropriate to punish the funder by awarding costs against him on the basis of funding litigation of another and behaving unsatisfactorily as a witness. However, it was correct to order costs for the following reasons:

 

  • he funded proceedings knowing his former wife would be unable to satisfy a costs order if unsuccessful;

 

  • his intense identification with his former wife’s position in his own evidence;

 

  • his indifference to the legal and factual issues in the case; and

 

  • the court’s rejection of the factual basis of his former wife’s case.

 

#FootnoteB

 

DIRECTORS

 

In Trident Australasia Pty v Versabuild LLC and Cox and Others (Costs Respondents) [2015] EWHC 2890 (Comm)

 

the Commercial Court, a division of the High Court, made a non-party costs order against an individual who was the Chairman, Managing Director and Sole Shareholder of the claimant company and who had funded the litigation on its behalf. He exercised control over the conduct of the proceedings and was to be regarded as the real party to the litigation in that he was materially funding and controlling it, and was the person who most stood to benefit from it.

 

However he refused to make non-party costs orders against two employees of the claimant company who had foregone salary and other benefits due to the company’s cash flow problems.

 

In relation to Ms Robinson, one of the employees, the vast majority of the money involved was non-payment of her salary and other benefits, albeit treated in the company’s accounts as loans by her.

 

The court said that “the foregoing of salary started as a means by which a loyal employee could help tide her employer over a cash flow difficulty.”

 

The court also recognised that had the company been successful in the litigation she would probably have been paid and therefore in a sense was a beneficiary of litigation.

 

“35. There is in my view a material difference between a person who specifically advances sums to fund the legal expenses of a claimant, and an employee who foregoes salary and benefits because of the cash-flow position of her employer. There is also in my view a material difference between benefitting from litigation in the sense of being able as a result to receive unpaid salary and benefits, and benefitting in the sense of having a cash loan advanced for legal expenses repaid, or having an equity interest in the claimant increase in value by reason of any funds received. While it would not be inaccurate to describe Ms Robinson as in some senses an indirect funder and prospective beneficiary of the litigation, the nature of her funding and prospective benefit are not, in my judgment, such as to make it just (without more) to make her responsible as a non-party for some or all of the costs of these proceedings.”

 

The position was broadly the same in relation to the other employee involved.

 

Thus the judge held that there was a material difference between sums foregone by way of salary and other benefits of employees of the claimant to assist with cash-flow as compared with cash advances made specifically to fund the litigation.

 

The judgment is a useful summary of the principles to be considered on an application for a non-party costs order and shows the court’s approach when deciding whether to grant what is still an exceptional order.

 

In Merchantbridge & Co Ltd v Safron General Partner & Co Ltd [2011] EWHC 1524 (Comm), [2011] All ER (D) 39 (Jul), the respondents funded the defence of an action in order to protect their own interest. The court held that although their interest in the litigation was legitimate and not concealed it was a business interest and not the ‘pure’ litigation funding of disinterested parties. It will be relevant to the court’s exercise of discretion whether the non-party is responsible for the litigation taking place and has caused the successful litigant to incur costs which it would not otherwise have incurred, as here.

 

This factor was also present in Raleigh UK Ltd v Mail Order Cycles Ltd [2011] EWHC 883 (Ch), [2011] All ER (D) 41 (Mar). Raleigh issued proceedings against the defendant (MOC) for a relatively small sum, which would have been heard in the county court had MOC not raised allegations of unlawful retail price maintenance against Raleigh, thus increasing greatly the costs incurred.

 

MOC was the vehicle of its directors, the Coes, who funded the litigation and were responsible for its (unreasonable) conduct. They knew that MOC would be unable to meet an adverse costs order. MOC’s defence was based on evidence given by Mrs Coe which was not merely inaccurate but which showed a ‘careless attitude to the truth’.

#FootnoteB

 

In Ashley Carter v Hofman & Mountford Ltd [2010] EWHC 2349 (QB), the court made a non-party costs order against directors of an insolvent company (HML) whose conduct of the litigation had been ‘reprehensible’, holding that it had been wholly unreasonable for the respondents to have raised and pursued any defence of the claims on their and HML’s behalf. Indemnity costs were awarded against the directors as named defendants under CPR 44.3, and as non-parties for the purposes of HML’s costs under CPR 48.2.

 

In Kirby v Hoff [2011] EWHC 777 (Ch), the fact that the non-party was the only real creditor behind the insolvent company was relevant because he stood to reap any benefit that flowed from the proceedings.

 

In Europeans Ltd v Revenue & Customs Commissioners [2011] EWHC 948 (Ch), [2011] STC 1449, [2011] All ER (D) 147 (Apr), Mr Meghrabi was the managing director of and the sole shareholder in EL, which appealed the VAT and Duties Tribunal’s finding that EL had been involved in missing-trader fraud to the High Court. In May 2009, the judge dismissed the appeal and ordered EL to pay HMRC’s costs. EL entered into voluntary liquidation. In November 2010, HMRC applied for a non-party costs order against Mr Meghrabi.

 

The court granted the application. Mr Meghrabi was the sole witness for EL in the tribunal, and the only person giving instructions to EL’s solicitors. The tribunal had found that his evidence was dishonest and that he had actual knowledge of the chain of fraudulent transactions. He had a clear incentive to clear his name by reversing the tribunal’s finding that he had masterminded a serious VAT fraud. EL had no separate interest in bringing the appeal. It was plain that Mr Meghrabi had viewed and treated EL as his ‘cypher’, and its business had been carried on for his personal benefit.

#FootnoteB

 

Motivation: The court may consider what motivates a director to bring or defend a claim on behalf of an insolvent company. In Ashley Carter v Hofman & Mountford Ltd, the court found that the respondent directors were motivated by harming the claimants rather than acting in HML’s best interests, and that they had put HML into voluntary liquidation in order to prevent the claimants recovering anything.

 

In Kirby v Hoff, Mr Kirby controlled a company (AAL) that had employed Mr Hoff, who had won damages for constructive unfair dismissal. AAL subsequently issued proceedings for negligence and breach of contract against him, and the damages were paid into an escrow account pending resolution of AAL’s action. The action was struck out when AAL failed to provide security for costs. AAL was ordered to pay Mr Hoff’s costs but was subsequently placed in voluntary liquidation.

 

On appeal, Davis J agreed with Master Fontaine that Mr Kirby both controlled AAL and the conduct of the litigation. While Mr Kirby did not directly fund the litigation, AAL was only afloat and able to commence litigation because of the considerable sums he had loaned it. AAL’s solicitors had advised that, save for the funds held in the escrow account, Mr Hoff did not have the funds to pay if the claim was successful. The proceedings were motivated by spite and Mr Kirby’s determination that Mr Hoff should not even recover the small sum awarded to him the employment proceedings.

 

The Court of Appeal in Systemcare (UK) Ltd v Services Design Technology Ltd [2011] EWCA Civ 546 upheld the trial judge’s award of a non-party costs order against the managing director, 90% shareholder and ‘moving spirit’ of the insolvent company. It was Mr Sharif’s dishonesty that had caused the dispute and, by drafting an ‘at best speculative’ counterclaim, prolonged the litigation.

#FootnoteB

 

In Secretary of State for Trade and Industry v Backhouse [2001] EWCA Civ 67, [2001] 1 BCLC 468, (2001) Independent, 9 February, the Court of Appeal upheld an order against a company director to pay the costs of two winding up orders made against two companies. Mr Backhouse was unable to hide behind the veil of incorporation of his two companies. The costs orders were challenged on the basis of the circumstances not being sufficiently exceptional to result in an award for costs to be paid by a non-party. The judge had accepted that the companies had been operated as mere alter egos of Mr Backhouse and he took the petitions as being an attack on his personal integrity which he tried to vindicate by taking the matters to trial. The key was whether the director, or directors, of a company held a bona fide belief that:

 

  • the company had an arguable defence; and

 

  • it was in the interests of the company to advance the defence.

 

If there was such a belief then costs orders should not be made as this would constitute an unlawful inroad into the principle of limited liability.

 

 

In a corporate setting non-parties, such as a director, controlling shareholder or liquidator, are inevitably close to a company litigant and will be the controlling mind and, if the company is insolvent or near insolvent, may be funders too. The concern in such cases as Metalloy Supplies v MA (UK) Ltd [1997] 1 All ER 418, [1997] 1 WLR 1613, CA and Goodwood Recoveries v Breen [2005] EWCA Civ 414, [2006] 2 All ER 533, [2006] 1 WLR 2723 was to avoid trespassing illegitimately on the concept of the separate liability of the company. In Metalloy, the court held that it is not sufficient to render a director liable for costs because he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where proceedings are brought bona fide and for the benefit of the company, the company is the real claimant. If in such a case an order for costs could be made against a director in the absence of impropriety or bad faith, the doctrine of separate liability would be eroded and the principle that such orders should be exceptional would be nullified. Millett LJ said:

 

“The court has a discretion to make a costs order against a non-party. Such an order is, however, exceptional, since it is rarely appropriate. It may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the suit. It may also be made where the third party has been responsible for bringing the proceedings and they may have been brought in bad faith or for an ulterior purpose or there is some other conduct on his part which makes it just and reasonable to make the order against him. It is not, however sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified.”

 

The Court of Appeal recently reviewed the application of these principles in Sims v Hawkins [2007] EWCA Civ 1175, [2008] 5 Costs LR 691. Following judgment in Mr Sims’ favour for £15,000 after costly proceedings (Mr Sims’ costs alone appear to have been well in excess of £200,000), the judge made a personal costs order against Mr and Mrs Hawkins, the sole director and company secretary of the defendant company (who were also the company’s shareholders). The order covered the costs from a date a few months before trial when, in the judge’s view, their personal motives, rather than the motives of the company, began to make it just to conclude that they were acting substantially for their own benefit. Mr Sims appealed, contending that the order should have been made so as to apply right from the outset of the dispute or from some other date, such as when the company ceased to trade. His appeal was dismissed. The judge had carried out the difficult exercise of fixing the point of time at which it could be said that personal motives rather than the interests of the company began to fuel the directors’ determination to see the litigation through. It was not necessarily an all or nothing question.

 

As was pointed out in Goodwood Recoveries, the case of a defendant and its funders is not necessarily the same as that of a claimant and its funders. While the jurisprudence under s 51 of the SCA 1981 shows that non-party costs orders certainly can, and have, been made against the funders of defendants, their positions are not necessarily the same. A speculative claim does not have to be brought, but a defence has to be made or else, in the absence of settlement, there has to be a submission to judgment. Furthermore, the judge had dealt correctly with the question of notice. As is clear from Symphony Group v Hodgson [1994] QB 179, [1993] 4 All ER 143, CA, the successful party should warn the non-party at the earliest opportunity of the possibility that he may seek to apply for costs against him, but failure to warn is not sufficient ground for not making the order if the circumstances otherwise justify it (North West Holdings plc, Re [2001] EWCA Civ 67, [2001] 1 BCLC 468, (2001) Independent, 9 February). Mr and Mrs Hawkins should have appreciated that they were personally at risk in costs. Liability did not depend upon express notice, although its presence or its absence was a factor.

#FootnoteB

 

In Systemcare (UK) Ltd v Services Design Technology Ltd [2011] EWCA Civ 546, the Court of Appeal upheld the trial judge’s decision to join the controlling mind and majority shareholder of the defendant company and to order him to pay the costs of the action on the ground that the company had brought a counterclaim that was without merit and based on bogus documents.

 

Here Systemcare brought a claim against Services Design Technology (SDT) to recover money due in relation to telephone calls etc supplied, and the amount was within the small claims limit. SDT counterclaimed for fraudulent misrepresentation, and negligence, resulting in the matter being allocated to the multi-track with experts being instructed. The claim succeeded and the counterclaim failed and the defendant went into liquidation. The judge joined the third party and ordered him to pay the costs. The decision was upheld by the Court of Appeal which considered the following cases: Symphony Group plc v Hodgson, Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39, [2005] 4 All ER 195, [2004] 1 WLR 2807, Goodwood Recoveries Ltd v Bree4, Metalloy Supplies Ltd (In Liquidation) v M A (UK) Ltd, and Petromec Inc v Petroleo Brasileiro SA Petrobras (No 4) [2006] EWCA Civ 1038, 150 Sol Jo LB 984, [2007] 2 Costs LR 212.

 

In Gulf Azov Shipping Co Ltd v Idisi (Costs) [2004] EWCA Civ 292, [2004] All ER (D) 284 (Mar) G claimed that the fourth and fifth defendants, E and O, should pay a substantial part of the costs of the action against the first three defendants. G had been successful in claiming judgment against the first three defendants I, and two of his companies, and G contended that E and O had funded the first three defendants for specific periods during the litigation and that the first three defendants could not have continued their defence without this assistance. G argued that the greater part of their costs in the litigation had arisen because of this funding and assistance.

 

The Court of Appeal held, allowing the appeal, that:

 

  • a funder to litigation was exposed to a costs order where he had controlled or directed the conduct of the litigation in a manner which had resulted in undue expense or hardship to the successful party;

 

  • on the evidence there was no doubt that the sums had been provided to I from E’s own resources. E was also closely involved with the conduct of I’s defence particularly during a critical hearing for I. E had permitted his niece, one of his employees, to be actively involved in the conduct of the litigation. E had been one of three men who assisted I financially from June 1999 to February 2000;

 

(3)  it was probable that E, an experienced lawyer, would also have given advice to I as to how his litigation in England should be conducted. E must have realised that I’s conduct in Nigeria in detaining the vessel and crew was plainly unlawful and that he had no defence to the claim. It was unlikely that E would have gone to so much trouble without substantial benefit;

 

(4)  O seemed to have colluded with I in respect of I’s payments being paid into O’s account. O was not only one of the three men funding I’s defence but he also collaborated in a serious contempt of court by helping I put money, which would otherwise have been sequestered, beyond the reach of the court. In so doing, O benefited himself through the payments to his account;

 

(5)  E and O were not pure funders in the context of the test set out in Hamilton v Al-Fayed [2002] EWCA Civ 665, [2003] QB 1175 and were not therefore exempt from s 51 orders, Hamilton considered; and

 

(6)  there was no evidence that E and O had acted in collusion.

 

Costs orders would be made against both E and O.

#FootnoteB

 

In Dymocks Franchise Systems (NSW) Pty Ltd v Todd (Costs) [2004] UKPC 39, [2005] 4 All ER 195, [2004] 1 WLR 2807, the petitioner D lodged a petition seeking an order for costs against a non-party following its successful appeal against T. As T was unable to meet the costs order, D sought to recover its costs from a company, A, which was a private company, that had advanced substantial sums to T effectively to fund the litigation against D, and T had subsequently become bankrupt. A contended that:

 

  • the Privy Council had no further jurisdiction to make a costs order after having made a final order on the appeal;

 

(2)  D had to prove that, but for A’s involvement, the appeals would probably not have been brought; and

 

(3)  it was unfair to order that A pay the costs given that T’s solicitors had apparently indicated their willingness to proceed with the appeals in the absence of funding.

 

The Privy Council held, granting the petition, that:

 

  • on the jurisdiction issue, the order sought, although against a non-party, was supplemental to the judgment already pronounced and was not a variation of it;

 

  • on the facts, T would not have pursued their appeals but for A’s involvement, resulting in the further incursion of costs; and

 

  • there was no evidence from T’s solicitors that they would have been prepared to conduct the appeals without the funding provided by A. Although costs orders against non-parties were ‘exceptional’, that merely meant outside the normal run of cases where parties pursued or defended claims at their own expense and for their own benefit. The ultimate test was whether the making of the order was just. Generally, the court would not exercise its discretion in favour of making a costs order against ‘those with no personal interest in the litigation, who do not stand to benefit from it, are not funding it as a matter of business, and in no way seek to control its course’ (Hamilton v Al-Fayed [2002] EWCA Civ 665, [2003] QB 1175, [2002] 3 All ER 641 considered). However, where a non-party substantially controlled the proceedings or was to benefit from them as well as funding them, justice required that they pay the successful party’s costs. Where a non party promoted and funded proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs. A took the all-important decision to fund and thereby promote the appeals.

 

The Privy Council added:

 

“The authorities establish that, whilst any impropriety or the pursuit of speculative litigation may of itself support the making of an order against a non-party, its absence does not preclude the making of such an order.”

 

In Petromec Inc v Petroleo Brasileiro SA Petrobras (No 4) [2006] EWCA Civ 1038, 150 Sol Jo LB 984, [2007] 2 Costs LR 212, Longmore LJ said:

 

“I would only observe that, although funding took place in most of the reported cases, it is not, in my view, essential, in the sense of being a jurisdictional pre-requisite to the exercise of the court’s discretion. If the evidence is that a respondent (whether director or shareholder or controller of a relevant company) has effectively controlled the proceedings and has sought to derive potential benefit from them, that will be enough to establish the jurisdiction. Whether such jurisdiction should be exercised is, of course, another matter entirely and the extent to which a respondent has, in fact, funded any proceedings may be relevant to the exercise of discretion.”

#FootnoteB

 

The key point when considering such cost orders against non-parties is the participation of the funder in the case itself. Whereas the funders of Neil Hamilton simply paid their contributions and took no further part in the action, in the three cases the non-parties had direct or indirect influence on the proceedings and thus made themselves potentially liable for a costs order if the case failed and the losing party was unable to meet a costs order in favour of the other party.

 

In Gemma Ltd v Gimson [2005] EWHC 69 (TCC), 102 ConLR 87, [2005] BLR 163, the successful defendants sought and obtained third party orders against the claimant’s director and secretary, as the claimant was insolvent and unable to satisfy the costs order. The judge held that an officer of an insolvent company would be liable for costs where they had stood to benefit from the litigation, controlled and directed it or pursued it unreasonably or with ulterior motives. The claimant could not have maintained its role in the litigation without the funding provided by the directors. The litigation had been unreasonably pursued, was not in the company’s best interests and was the product of a vendetta against the defendants.

 

That decision was extended in Goodwood Recoveries v Breen [2005] EWCA Civ 414, [2006] 2 All ER 533, [2006] 1 WLR 2723, a Court of Appeal decision. The court said that the law on s 51 orders had developed: if a director is the ‘real party’ litigating for his own benefit, controlling and/or funding the litigation, a costs order can be made against him or her even if he or she acted in good faith or without impropriety. The pursuit of speculative litigation is put into the same category as impropriety. This was a notable case for the strong criticisms made of the respondent to the application. It was said that he had ‘been dishonest in failing to disclose a key document, had lied in his evidence, and had attempted by means of an ‘intimidating and grossly improper letter’ to persuade a witness from coming from overseas to give evidence’.

 

A third party shareholder found himself liable to pay costs in CIBC Mellon Trust Co v Stolzenberg [2005] EWCA Civ 628, [2005] 2 BCLC 618, (2005) Times, 8 June. Here, the court held that funding, controlling and directing litigation in a shareholder’s own interests (including his interest as a shareholder) can give rise to liability.

 

The courts have been alive to the fact that such applications of s 51 erode the principle of a company’s separate legal personality. It has been said that the critical distinction is whether the proceedings were brought bona fide and for the benefit of the company, such that the company is the ‘real party’. If they were, then to make an order would be an unacceptable inroad into the principle of limited liability – Metalloy Supplies (in liq) v MA (UK) Ltd [1997] 1 All ER 418, [1997] 1 WLR 1613. Contrast this with Goodwood Recoveries, which indicates that lack of bona fides is not necessary. Despite what, at first glance, may appear to be incompatible dicta, the decisions are reconcilable by virtue of the concept of the ‘real party’: unlike Metalloy, Goodwood Recoveries deals with the situation where the director (not the company) is the ‘real party’ litigating for his or her own benefit.

 

Goodwood Recoveries has since been applied in Petroleo Brasileiro SA v Petromec Inc [2005] EWHC 2430 (Comm), [2005] All ER (D) 48 (Nov). The judge in this case, Moore-Bick LJ, commented that it had ‘not been suggested that the commencement or conduct of either of the two actions … [in the proceedings]… was motivated by any improper considerations or tainted by bad faith’. He went on to find that the respondent had controlled the litigation, made available the funds to maintain it, and had an interest in its outcome: he was the ‘real party’, and was made jointly and severally liable for the costs. Additionally, the court rejected a submission that the application should have awaited a detailed assessment of the costs.

 

This decision was upheld by the Court of Appeal and reported as Petromec Inc v Petroleo Brasileiro SA Petrobras (No 4) [2006] EWCA Civ 1038, 150 Sol Jo LB 984, [2007] 2 Costs LR 212.

 

In Globe Equities v Globe Legal Services Ltd, an order under the SCA 1981, s 51 was made against a firm of solicitors who had created a limited liability company through which to lease their office premises. The company litigated with the freeholder and lost. The court held that the solicitors were the real defendants and the actions were continued for their benefit which enabled them to remain in the premises for over two years without paying rent; furthermore that the defences and counterclaims in the actions were hopeless. The Court of Appeal having analysed the authorities came to the firm conclusion that pure funders with no personal interest in the litigation, who do not stand to benefit from it, are not funding as a matter of business and do not seek to control its course, are immune from an order for costs under the SCA 1981, s 51.

 

The governing principle is as stated by Millet LJ in Abraham v Thompson [1997] 4 All ER 362, [1997] 37 LS Gaz R 41, CA:

 

“It may be unjust to a successful defendant to be left with unrecovered costs, but the plaintiff’s freedom of access to the courts has priority … it is preferable that a successful defendant should suffer the injustice of irrecoverable costs than that a plaintiff with a genuine claim should be prevented from pursuing it.”

 

Simon Brown LJ concluded that nothing in the facts of this case took it out of the general principle that pure funders generally are exempt from the SCA 1981, s 51 liability for costs.

#FootnoteB

#FootnoteB

 

#FootnoteE

Total Spares & Supplies Ltd v Antares SRL

 

In Total Spares & Supplies Ltd v Antares SRL [2006] EWHC 1537 (Ch), [2006] BPIR 1330

 

The facts: The claimant brought a claim against three companies for breach of franchise. Shortly before the trial of the action, defendant 1 transferred all its assets to an Italian company (defendant 5). The claimant was not informed. Defendant 1 was later dissolved. The claimant issued a third party costs application against defendant 5. The claimant contended defendant 5 had been a knowing transferee of the business with knowledge of its purpose and that its conduct had been responsible for the claimants’ inability to enforce the costs order against defendant 1. Defendant 5 contended that it had not caused the costs to be incurred and so was not liable, per Arkin v Borchard Lines Ltd [2005] EWCA Civ 655, [2005] 3 All ER 613, [2005] 2 Lloyd’s Rep 187.

 

The decision: Costs orders against non-parties are outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense, and in that sense they are ‘exceptional’. The key issue in these cases is whether it is just to make a third party costs order. Causation is often a key factor in deciding whether it is just to make an order to indemnify a successful party for the costs incurred.

 

On the facts, the transfer, the merger and the dissolution of defendant 1 had deprived the second claimant of any realistic opportunity of recovering its costs and so it was just that a third party order be made.

 

Mr Justice David Richards made the following observation:

 

“In light of these recent statements, it cannot in my judgment any longer be said that causation is a necessary pre-condition to an order for costs against non-party. Causation will often be a vital factor but there may be cases where, in accordance with principle, it is just to make an order for costs against a non-party who cannot be said to have caused the costs in question. In my judgment the circumstances of this case are such as to make it just to make an order against AWE.”

 

 


 

FUNDERS

 

In Harcus Sinclair v Buttonwood Legal Capital Ltd and Others [2013] EWHC 1193 (Ch)

 

the Chancery Division of the High Court allowed a third-party funder to terminate the agreement.

 

Here Buttonwood sought to terminate the agreement following a review of the case’s prospects of success, which it considered to have fallen below its required 60% threshold.

 

Funding had been granted on the basis of a preliminary opinion of counsel, which had not been updated as promised and when the solicitors failed to obtain a further advice the funders obtained their own advice. This showed the prospects of success to be less than 60% and so the funder terminated the agreement and the court held that they were entitled so to do.

 

Pure Funders

 

The essential policy is that the unfunded party’s ability to recover costs must yield to the funded party’s right of access to the courts to litigate the dispute in the first place.

 

Thus pure funders will not be liable for costs.

 

In Hamilton v Al Fayed (2) [2002] EWCA Civ 665 [2003] QB 1175

 

the claimant lost a libel action and was made bankrupt and there was still costs of £ 1.19 million owed and the successful defendant applied for an order for costs under section 51 of the Supreme Court Act 1981, as it then was, against the 18 largest contributors to a fund to support Mr Hamilton.

Several of the contributors settled with the defendant but nine contested liability.

 

The application was rejected and that  decision was upheld by the Court of Appeal which held as follows:-

 

“(1)        Pure funders were generally exempt from liability under section 51(3) of the 1981 Act for the costs of the successful unfunded party.

 

  • The unfunded party’s ability to recover costs must yield to the funded party’s right of access to the court.

 

  • The pure funding of litigation was in the public interest provided that its essential motivation was to enable the funded party to litigate what the funders perceived to be a genuine case.

 

  • Such an approach ought not to be confined merely to relatives of a party moved by natural affection but should extend to anyone who wished to ensure that a genuine dispute was not lost by default or by being inadequately contested.

 

  • If the law allowed impoverished parties to litigate without having to provide security for their opponent’s costs those sympathetic to their plight should not be discouraged from assisting them to secure representation.”

 

“44.        It is time to state my conclusions on the appeal. As I observed earlier (see paragraph 16

above) conflicting principles are here in play and only one can prevail. Should the law accord priority to the funded party gaining access to justice or to the unfunded party recovering his costs if he wins?

 

  1. Although none of the authorities to my mind precisely dictates the result of this appeal, I

conclude that on balance they clearly favour the respondents’ argument and that the unfunded party’s ability to recover his costs must yield to the funded party’s right of access to the courts to litigate the dispute in the first place. That seems to me to be the essential policy underlying the cases. Perhaps most conspicuously this is so in two of the categories of case discussed above: the CFA cases and those concerning security for costs. The respondents’ argument arising out of the CFA ruling is really a very powerful one: if in these cases solicitors (or, indeed, barristers) are not to be liable for the other side’s costs if their client’s claim fails, why should the pure funder be? True, the client may obtain insurance and secure the other side’s costs in that way, but this will not always be so and is certainly not a condition of acting under a CFA. True too, the lawyers will generally not be prepared to act under a CFA unless the claim has reasonable prospects of success thus arguably securing in a different way the public interest referred to by Sir Thomas Bingham MR in Roache v News Group Newspapers Ltd [1998] EMLR 161 (of deterring actions likely to be lost), deterrence perhaps less likely to be achieved in funding cases where the backers will probably not be exercising the same careful judgment as the CFA lawyers. As against that, however, it must be remembered that in CFA cases the lawyers are entitled to a substantial uplift in costs if the claim succeeds, and for this the defendant will be liable. The defendant’s potential liability for costs in a CFA case is therefore greater than in an ordinary case and, of course, greater still than if the claimant is either unrepresented or represented pro bono. It could, indeed, be argued that unless both sides’ costs are (a) the same and (b) actually able to be recovered in the event of success, the playing field of justice is uneven. That, however, is very plainly not the approach taken by the law. Rather, the law’s policy with regard to CFAs is plainly to favour access to justice.

  1. The court’s approach to security for costs is similar: see in particular Millett LJ’s judgment in Abraham v Thompson [1997] 4 All ER 362, 377 cited in paragraph 34 above. The law allows a claimant to litigate, at any rate at first instance, however clear it is that the defendant’s costs could not be met—even, indeed, if the claimant can be shown to be expending all his assets in meeting his own costs. This same policy, moreover, underlies the legal aid scheme as it applies at first instance: the only circumstances in which the successful unfunded party can recover his costs from the fund are (a) if he is the defendant and (b) if he would otherwise suffer hardship. True it is that in a legal aid case—as Macpherson J pointed out in the Singh case [1989] 2 All ER 751, 757 (see paragraph 20 above)—counsel are required “to give fearless opinions as to the merits of a case as a condition of continuing legal aid”. Against that, however, it should be borne in mind that in legal aid cases the sanction of bankrupting the unsuccessful funded party—which Millett LJ in the Abraham case, at p 377, said “has always been regarded as a sufficient deterrent to the bringing of proceedings which are likely to fail”—is unavailable.

 

  1. By the same token that Phillips LJ in the Murphy case [1997] 1 WLR 1591 found legal expenses insurance to be in the public interest (see paragraph 26 above) so too in my judgment the pure funding of litigation (whether of claims or defences) ought generally to be regarded as being in the public interest providing only and always that its essential motivation is to enable the party funded to litigate what the funders perceive to be a genuine case. This approach ought not to be confined merely to relatives moved by natural affection but rather should extend to anyone—not least those responding to a fund-raising campaign—whose contribution (whether described as charitable, philanthropic, altruistic or merely sympathetic) is animated by a wish to ensure that a genuine dispute is not lost by default (or, as concerned Lord Portsmouth here, inadequately contested). I recognise, of course, the very real differences between the Murphy case and the present, not least in that the two specific benefits identified by Phillips LJ as likely to accrue to the other party from legal expenses insurance—the early consideration of the claim’s merits and the provision of funds which may cover an adverse costs order—are substantially less likely to accrue in the case of pure funding (although it is by no means impossible that the funds provided may enable the funded party to meet at least part of his costs liability if he loses). Whereas in the Murphy case, however, the court expressed itself unconcerned as to whether or not the making of section 51 orders against insurers would reduce the availability of such cover, here it seems to me plain beyond question that if pure funders are regularly exposed to liability under section 51, such funds will dry up and access to justice will thereby on occasions be lost.

 

  1. In expressing my conclusions thus far I have intentionally spoken in very general terms and sought to deal with pure funding cases as a broad category. It seems to me that nothing could be more inconvenient and productive of satellite litigation than to hold that some pure funding cases are likely to attract section 51 orders, others not, depending merely on the sort of considerations which moved Judge John Hicks QC to decide against the funder in the Thistleton case 32 Con LR 123. For my part, therefore, whilst I am disposed to accept Miss Gloster’s argument that hitherto the courts have not clearly laid down a rule that pure funders are generally to be regarded as exempt from section 51 orders, I am against her submission that they should ordinarily be held liable. So long as the law continues to allow impoverished parties to litigate without their having to provide security for their opponent’s costs, those sympathetic to their plight should not be discouraged from assisting them to secure representation. Thus is access to justice promoted, and another benefit too—fewer litigants in person.” (emphasis added)

 

 

Third Party Funders

 

The key difference between Pure Funders and Third Party Funders is that Third Party Funders invest in a case in order to make a profit out of it.

 

Unlike After-the-Event insurance, Third Party Funding generally covers the clients own legal costs in full or in part, and Third Party Funders who fund a losing case are potentially liable for the other side’s costs to the extent of their own contribution.

 

Thus a Third Party Funder provides £100,000 but the case is lost.  The Funder can be ordered to pay up to £100,000 to the successful party by way of costs, giving a total of £200,000 in all – see

Arkin v Borchard Lines Ltd [2005] EWCA Civ 655 [2005] 3 All ER 613

 

Consequently Third Party Funders will often insist upon After-The-Event insurance being taken out to cover that risk.

 

Lord Justice Jackson has suggested that in a Damages-Based Agreement case the court might hold the solicitor liable, in accordance with the principles in Arkin – see below.

 

If After-the-Event insurance is not taken out and the funder is willing to bear the adverse costs risk then inevitably the Funder will charge an even higher fee to the client. If there is no After-the-Event insurance in place and the Third Party funder is not indemnifying the client against an adverse costs order then it must be determined who will be liable to satisfy the adverse costs order.

 

A funding agreement will invariably comprise a contract to support litigation in exchange for a fee similar to that contained in the CFA model. Such funding agreements are not regulated by statute but are governed largely by common law principles, recently to a more limited extent by the CPR and finally by the jurisdiction on costs contained in s 51 of the Senior Courts Act 1981.

 

Such funding fills a gap which exists where clients cannot afford to pay lawyers and experts.  Experts are expected not to work on terms which are conditional or contingent.

 

Great care must be taken in drafting the various agreements between the client, the solicitor, the After-the-Event insurer and the Third Party Funder.

 

In particular it is of crucial importance to agree in advance the order of priority of application of damages in the event that the eventual recovery is insufficient to discharge all of the fees and disbursements, which will include the After-the-Event insurance premium, the Funder’s Fee and the lawyer’s fees and disbursements, including the lawyer’s success fee.

 

The leading case in relation to Third Party Funding is

 

Arkin v Borchard Lines Ltd [2005] EWCA Civ 655, [2005] 3 All ER 613

 

 

The Arkin case

 

Mr Arkin, having originally had legal aid, switched to a CFA with solicitors and counsel but required funding for the forensic support and evidence of Ernst & Young. The case involved an alleged shipping cartel. The funder was Managers and Processors of Claims (MPC) who ended up funding £1.3 million for disbursements and forensic support. Their fee arrangement was 25% of damages (the claim was £80 million). The defendants incurred costs of nearly £6 million.

 

Mr Arkin lost. The judge at first instance decided that no third party costs order should be made against MPC on the grounds that this would act as a disincentive for professional funders of litigation. The Court of Appeal decided that there had to be a balance between access to justice on the one hand and being fair to defendants on the other. Their compromise was to order that a professional funder shall be liable for third party costs to the extent of their investment in the case.

 

In so deciding, they accepted that the funding arrangement was not champertous. To arrive at this conclusion, they satisfied themselves that the funder did not exercise control over the conduct of the litigation, and that control remained at all times with the claimant and his lawyers.

 

The case was more about the liability of the funder for adverse costs than about the minutiae of funding agreements themselves.

 

Here was the kind of funding usually afforded by a non-lawyer who finances a claim on terms in exchange for a shire of the proceeds. The funding is invariably specific to the facts and is usually agreed as a last resort means of advancing litigation.

 

It is also important to stress that they type of agreement which was made in Arkin was approved of by the court as the funder did not retain any control over the litigation.  At all times control remained with the claimant and his lawyers and not the funder.

 

The Court of Appeal formulated a solution so as to give effect to the twin public policy objectives of:

 

  1. encouraging funding which enables access to justice; and

 

  1. ensuring defendants who successfully defend such claims can still recover costs if the claimant is a man of straw.

 

The decision has implications for:

 

  • the extent to which such agreements can now be said to be lawful and therefore enforceable as between the parties;

 

  • the effect which the solution will have on the price a claimant must pay for funding.

 

 

Interplay between Third Party Funding and Maintenance and Champerty

 

The funding of litigation by third parties without an interest in the dispute is classic maintenance and champerty and has traditionally been unlawful and indeed was a criminal offence until 1967.  It has been illegal since at least as early as 1275 when the Statute of Westminster codified the ban on such arrangements.

 

However for more than a century there has been a tension between that principle and the recognition that without third party funding many, probably most, claimants could not afford to pursue perfectly valid claims.

 

Although “access to justice” is a modern phrase that was the principle behind the courts allowing various litigation to be funded by various third parties, such as:

 

  • a master funding a servant’s litigation;

 

  • trades’ unions funding members’ litigation;

 

  • insurance companies funding their insured’s litigation;

 

  • legal aid;

 

  • lawyers working pro bono.

 

The Criminal Law Act 1967 abolished criminal and tortious liability for maintenance and champerty (section 14(1)) but section 14(2) unhelpfully provided that such abolition “shall not affect any rule of that law as to the cases in which a contract is to be treated as contrary to public policy or otherwise illegal,” a measure described by Lord Neuberger, President of the Supreme Court, as giving the rule against maintenance and champerty “a continuing half-life.” (Speech: From Barretry, Maintenance and Champerty to Litigation Funding, Harbour Litigation Funding First Annual Lecture – 8 May 2013.

 

As early as 1883 the Court of Appeal questioned the rule against maintenance and champerty. In Alabaster v Harness [1895] 1 QB 339 Lord Esher, Master of the Rolls, said:-

 

“The doctrine of maintenance…does not appear to be founded so much on general principles of right and wrong or of natural justice as on considerations of public policy. I do not know that, apart from any specific law on the subject, there would necessarily be anything wrong in assisting another man in his litigation.”

 

Here the Court of Appeal held that maintenance was permissible if given by “a man in (sic) behalf of a poor man, who but for the aid of his rich helper could not assert his rights, or would be oppressed and overbourne in his endeavour to maintain them.”

 

Thus a contract could be declared unenforceable on public policy grounds, although not of itself illegal.  This was very much the model followed in relation to conditional fees in both the Courts and Legal Services Act 1990 and the Access to Justice Act 1999 and indeed is central to the concept of the indemnity principle.

 

In terms it is a message, essentially to lawyers but also to third party funders, that although nothing is now illegal in terms of funding you will always be taking a substantial risk as to whether you will be able to recover your costs from the other side or from your own client.  Furthermore you are at risk of paying the other side’s costs in the event of defeat.

 

However the courts have worked hard to make conditional fees, and to a lesser extent, third party funding, work and there is no doubt that overall the senior judiciary take the view that the ethical problems are outweighed by the need to give access to justice to people of ordinary means in a post-legal aid world.

 

Lord Justice Jackson devotes a whole chapter of his Final Report to Third Party Funding (see below) and refers to the “uncertain ambit” of the law of maintenance and champerty casting “doubt as to the precise boundaries of proper conduct in relation to litigation funding” but does not offer any clear answers.

 

He supports the continued existence of section 14(2) of the Criminal Law Act 1967 but suggests that it be made clear “either by statute or by judicial decision that if third party funders comply with whatever system of regulation emerges from the current consultation process, then the funding agreements will not be overturned on grounds of maintenance and champerty”.

 

 

Overseas

 

Overseas, the Courts have been giving positive encouragement to Third Party Funding.

 

 

Jersey

 

In Barclay Wealth Trustees (Jersey) Limited v Equity Trust Jersey Limited and Equity Trust Services Limited, June 2013

 

the Royal Court of Jersey has supported the concept of Third Party Funding saying:

 

“There is a strong public interest in persons being able to obtain funding to enable them to bring proceedings to vindicate their rights”.

 

The court rejected an argument that such funding arrangements were unlawful as contrary to the law of champerty and the Jersey Code of 1771.

 

It made it clear that public policy requires that third party funding is properly structured, but that where it is “it facilitates the important objective of access to justice”, and that the Jersey Code of 1771 was designed to prevent the trafficking of claims, that is their sale, purchase and assignment.  It was not a bar to funding arrangements which did not involve assignment.

 

In the Jersey case the Royal Court also considered what the position would have been if, contrary to its finding, the funding agreement had infringed a Jersey statute.

 

It held that even if the funding arrangement was void, voidable or unenforceable the defendants would not have been able to stay or strike out the proceedings as an abuse of process.

 

Claimants have a right to pursue their claims.  Whether the claimant and the funder have an enforceable contract is not a defence to the claim.

 

This follows the Royal Court of Jersey’s similar decision in

 

In the Matter of the Valetta Trust, 25 November 2011

 

 

Canada

 

In E Eddy Bayens and others v Kinross Gold Corporation and others 2013 ONSC 4974

 

the Ontario Superior Court approved the use of third party litigation funding in one of the first cases of its kind in Canada, stating that in the absence of funding the exposure to the risk of adverse costs was a barrier to access to justice.

 

The court held that court approval was required in any class action before third party funding could be used.

 

The court would need to be satisfied that the following principles were satisfied:

 

  • non-interference by the litigation funder and no reduction in either the plaintiff’s right to control the litigation or the lawyer’s duties to the client;

 

  • an undertaking by the litigation funder in relation to its duty of confidentiality;

 

  • a finding that litigation funding is necessary to provide access to justice;

 

  • fair and reasonable financial terms, with the benchmark being the percentage charged by the Ontario Class Proceedings Fund.

 

 

New Zealand, Bermuda, British Virgin Islands

 

The New Zealand Court of Appeal and the Supreme Courts of Bermuda and the British Virgin Islands have also given their support to the concept of Third Party Funding.

 

In Saunders v Houghton [2012] NZCA 545

 

the New Zealand Court of Appeal said that the involvement of a litigation funder should provide reassurance for the defendants that the litigation will be conducted responsibly, as well as appropriately funded.

 

 

Liability for adverse costs

 

Jackson supports the notion that third party funders should be liable for all adverse costs, stating that it was wrong in principle that a litigation funder who stood to recover a share of damages in the event of success should be “able to escape part of the liability for costs in the event of defeat”.

 

He said that going against the Arkin principle, whereby third party funders’ liability for adverse costs was limited to a sum equal to the extent of the funding provided (see above), would not inhibit third party funding.

 

“There is no evidence that full liability for adverse costs would stifle third party funding or inhibit access to justice”.

 

Well, obviously there is no evidence as it has never happened, but some would say that it speaks for itself – res ipsa loquitor in language that Lord Justice Jackson may understand.

 

He points out, with justification, that such limited liability “is unjust not only to the opposing party (who may be left with unrecovered costs) but also to the client (who may be exposed to costs liabilities which it cannot meet)”.

 

However Lord Justice Jackson appears not to see the irony in this.  Until 1 April 2013 after-the-event insurance dealt with all of these problems at no cost to the claimant, but it is the Jackson Report itself which has successfully argued for the abolition of recoverability of after-the-event insurance premia, now enacted in Section 45 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 and now in force.

 

He also argues that experience in Australia was “to the opposite effect” in that only five costs orders, out of 200 funded cases, had been made against third-party funded claimants.

 

However in Australia third party funders themselves are not liable at all for adverse costs, following the decision of the High Court of Australia:

 

Jeffery and Katauskas Pty Ltd v SST Consulting Pty Ltd [2009] HCA 43

 

Consequently it may be that cases were settled which otherwise would not have been, maybe on a drop hands basis, as the potentially successful defendant knows that it cannot get costs from the third party funded claimant, who is unlikely to be good for the costs.  If they were then they are unlikely to have entered into a third party funding agreement to start with.

 

Lord Justice Jackson states that it is perfectly possible for litigation funders to have business models encompassing full liability for adverse costs.  “This will remain the case, even if ATE insurance premiums cease to be recoverable under costs orders”.

 

That is correct, but it will come at a heavy price to the claimant, maybe 40% to 45% of damages, with the lawyer taking up to 25% of damages by way of a conditional fee success fee, so the client being left with just 30%.

 

What is almost certain to happen is that certain Alternative Business Structures will offer claims management services and third party funding comprising after-the-event insurance and legal services and take a very hefty slice of damages – possibly as much as 50%.

 

It could be worse.  Let us look at a variation on the clinical negligence action looked at earlier. The third party funder agrees to fund expensive disbursements and, say, half of the claimant’s solicitors costs in the event of defeat, but this time not to cover an adverse costs order.  Because s/he is receiving something in any event the solicitor charges 15% of damages as a success fee rather than the maximum 25%.  In fact the case settles for £40,000.00, which is distributed as follows:

 

Damages £40,000.00
to Third Party Funder – 40% £16,000.00
Success fee to solicitor – 15% £6,000.00

_________

Balance £18,000.00

 

out of which the after-the-event insurance premium has to be paid.  That could be as much as £20,000.00, leaving the successful client with a shortfall of £2,000.00.

 

It is Claims Direct and the Accident Group all over again.

 

The issues were not addressed in the Jackson Report.  The formal recommendations are:

 

“6.1        I do not consider that full regulation of third party funding is presently required. I do, however, make the following recommendations:

 

  • (i) A satisfactory voluntary code, to which all litigation funders subscribe, should be drawn up. This code should contain effective capital adequacy requirements and should place appropriate restrictions upon funders’ ability to withdraw support for ongoing litigation.

 

  • (ii) The question whether there should be statutory regulation of third party funders by the FSA ought to be re-visited if and when the third party funding market expands.

 

  • (iii) Third party funders should potentially be liable for the full amount of adverse costs, subject to the discretion of the judge.”

 

Unfortunately this chapter also dealt with Maintenance and Champerty and even more unfortunately recommended retaining the rule, and even more unfortunately that the rule should be abrogated for third party funders.

 

So, a qualified extremely heavily regulated, insured solicitor who agrees to indemnify his or her client against an adverse costs order breaks the rule.

 

A voluntary coded (weren’t they discredited 30 years ago) unqualified Third Party Funder Claims Management Company Alternative Business Structure is free from such restriction.

 

Why?

 

Because “A number of respondents pointed out that abolishing the common law doctrine of maintenance could have unintended consequences”.

 

Well, that could apply to any proposal ever made anywhere.  That is the problem with unintended consequences – they are just that – unintended.

 

Furthermore Lord Justice Jackson, speaking in January 2012, suggested that solicitors acting on a contingency fee basis should be liable for adverse costs orders.  I have dealt with this issue above, but this threat makes contingency fee agreements in civil litigation even less attractive to lawyers.

As solicitors have to deduct, pound for pound, any costs received from the other side from the Damages-Based Agreement charged to the client, and as they do NOT have to do that in relation to a conditional fee success fee it will almost never be in the solicitor’s interest to act on a contingency fee basis as compared with a conditional fee agreement. Furthermore the indemnity principle applies in full to Damages-Based Agreements, giving the tortfeasor a windfall.

 

For clients the opposite is true – they will nearly always be better off under a Damages-Based Agreement than under a conditional fee agreement.

 

The risk of solicitors being liable for adverse costs under a Damages-Based Agreement, but not a conditional fee agreement reinforces this point.

 

Six months in to Jackson it is clear that almost no Damages-Based Agreements have been signed, outside the employment field where they are compulsory if acting on a contingent or conditional basis.

 

 

Third Party Funders and Indemnity Costs

 

In Excalibur Ventures and Others v Psari Holdings and others [2014] EWHC 3436 the court awarded costs on an indemnity basis against third party funders.

 

The claimants brought what turned out to be a very speculative claim against the defendants and consequently costs were awarded against them on an indemnity basis.

 

However they did not pay and an application was made that the third party funders pay; some admitted liability to pay but not on an indemnity basis and others denied liability and one third party funder did not acknowledge service.

 

The claimants had been ordered to provide security for costs but there was a shortfall of £4.8 million between the security provided and the amount of costs.

 

The security that was paid, as ordered, was £17.5 million and that was supplied from funds from three sets of third party funders.

 

The basis of the security ordered was, as normal, the standard basis and the shortfall between the security provided and the amount of costs was almost entirely represented by the difference between standard costs and indemnity costs.

 

The court held that the fact that the security was inadequate was not a ground for declining to make a non-party costs order; indeed it may be the reverse – see Petromec Petroleo Brasileiro Petrobras [2006] EWCA Civ 1038 and Dolphin Quays Developments v Mills [2008] 1WLR 1829.

 

At paragraph 58 of the judgment Christopher Clarke LJ sets out a lengthy list of reasons as to why he awarded indemnity costs against the claimant.

 

The judge then said:-

 

“60. The purpose of an order for indemnity costs is not to impose a penalty on the unsuccessful litigant (or his funders). It is to afford the successful party a more generous criterion for assessing which of his actual costs should be paid by his opponent because of the way in which the latter, or those in his camp, have acted. I set out some of the principles relating to the grant of indemnity costs in the costs judgment.”

 

The judge then dealt with the law concerning making a costs order against a non-party, commenting that the discretion under section 51(3) of the Senior Courts Act 1981 is very wide and the test is whether in all the circumstances it is just to exercise the power – see Globe Equities Ltd v Globe Legal Services Ltd [1999] BLR 232,240.

 

That discretion extends to the form of the order and the proportion of any costs to be paid and the amount of any award – see Nelson v Greening [2007] EWCA Civ 1358.

 

A third party order does not have to be on the basis of joint and several liability with the litigant.

 

Although there can be no comprehensive checklist of necessary or sufficient factors – see Systemcare (UK) Ltd v Services Design Technology Ltd [2011] EWCA Civ 546 [26] [64], the principles upon which the discretion should be issued were set out in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1WLR 2807 [25] as follows:-

 

“(1) A costs order against a non-party is “exceptional”, but “exceptional” means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question in any such “exceptional” case is whether in all the circumstances it is just to make the order.”

 

(2) The discretion will not generally be exercised against “pure funders” but where;

 

“the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is “the real party” to the litigation…”

 

(3) The most difficult cases are those in which non-parties fund receivers or liquidators (or, indeed financially insecure companies generally, in litigation designed to advance the funder’s own financial interests. Lord Brown said this at [29]:-

 

“In the light of these authorities their Lordships would hold that, generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails.”

 

(4) Where a funder says that there is no impropriety in promoting a claim because it received “encouraging advice” from its lawyers;

 

“This cannot, however, avail them. The authorities establish that, whilst any impropriety or the pursuit of speculative litigation may of itself support the making of an order against the non-party, its absence does not preclude the making of such an order.”

 

On this point the judge concluded:-

 

“66. In the light of those principles I have no doubt that Psari and Mr Lemos… should be liable to the defendants for their costs. The claim could not have been brought without their assistance; they stood to benefit from its success to the tune of a healthy multiple of their investment. That the pursuit of speculative litigation is in the same category and to be viewed in the same way as impropriety for these purposes was affirmed by Rix LJ in Goodwood Recoveries Ltd v Breen [2006] 2 All ER 533 at [59]. Similar considerations apply to the other funders.

 

  1. In the same case Rix LJ, with whom May LJ agreed, accepted that where a non-party director could be described as “the real party”, seeking his own benefit, controlling and/or funding the litigation, then:

 

“even where he has acted in good faith or without any impropriety, justice may well demand that he is liable in costs on a fact sensitive and objective assessment of the circumstances”.

 

This is a change from the earlier requirement that there must be impropriety or a lack of good faith as set out in Metalloy Supplies Ltd v M/A. (UK) Ltd [1997] 1 WLR 1613, 1620; this approach was applied in Landare Investments Ltd v Welsh Development Agency [2004] EWHC 946 (QB).

 

In Systemcare the court pointed out the “and/or” formulation and said that it was not necessary for both elements to be present. So a third party can be liable in costs if they have controlled or funded the litigation. In Sims v Hawkins [2007] EWCA Civ 1175 the court referred to the principal question as “whether the non-party (who renders himself liable to the regime, whether by funding or controlling the litigation or even in some other way)” was the “real party” to the litigation.”

 

 

Indemnity Costs against the Funders 

 

The judge then went on to consider the issue of whether the costs to be paid by the funders should be on the indemnity basis.

 

The judge had no doubt that costs should be ordered on that basis if indemnity costs were appropriate generally in the case, and he had found that they were. “To do otherwise would, in my judgment, be unfair to the Defendants and their personnel, who were on the receiving end of claims and actions of the character that I described in the costs judgment.”

 

The Divisional Court had taken a similar view in R v SSHD Ex Parte Osman [1993] COD 204 and a similar approach was taken by the court in Murphy v Rayner [2014] 1 WLR 672.

 

The judge said:-

 

“112. To make an order for indemnity costs would not be to penalize but to recompense. The sum presently in issue – about £ 4.8 million – is not disproportionate to the total monies contributed by Psari (and other funders), or to the individual contributions of most of them, and certainly not disproportionate to the anticipated return.”

 

The judge then reviewed, at length, the authorities in relation to indemnity costs against third party funders, which are essentially fact sensitive. The judge had this to say:-

 

“128.      I recognize that there are, in this context, potentially competing public policies. If professional funders are exposed to the risk not only of standard but also of indemnity costs they may decline to fund, or only be prepared to do so at a higher cost or, perhaps more likely, against some form of indemnity or an increased reward for success, even in relatively standard cases. In either case access to justice may be curtailed…

 

  1. I do not regard these considerations as compelling. Indemnity costs are awarded in circumstances (including but not limited to the conduct of a party and not necessarily involving dishonest, morally culpable or improper behaviour) which are outside the norm.”

 

 

Wasted Costs

 

The judge also said that he did not regard the possibility of a wasted costs order against the claimant’s solicitors, Clifford Chance, as a reason not to make an indemnity costs order against the third party funders.

 

 

The “Arkin Cap”

 

The principle of the “Arkin Cap” is that a professional funder should normally be potentially liable to the opposing party only to the extent of the funding provided. Thus if a funder provides £1 million they should not be liable to the other side for more than £1 million.

 

Here the court explained it in this way:-

 

“70.        The position of a professional funder i.e. a funder who has a commercial interest in the outcome of the litigation, as opposed to a “pure funder” was considered by the Court of Appeal in Arkin v Borchard Lines Ltd (numbers 2 and 3) [2005] 1 WLR 3055. The Court recognised that there were two competing principles. The first was that costs should follow the event so that a funder who wholly or partly causes the defendant to incur costs should be liable for those costs. The second was the policy of ensuring access to justice. Exposure of funders to the risk of having to pay costs of the opposing party assessed on an indemnity basis might increase the risk and hence the price of funding litigation.

 

  1. The solution derived by the Court was to hold that a professional funder who financed part of a claimant’s costs of litigation (£1.3 million in respect of the cost of expert evidence), should be potentially liable for the costs of the opposing party to the extent of the funding provided. The Court said that it could see no reason in principle why the solution suggested should not also apply where the funder had contracted the greater part, or even all, of the expenses of the action. But it reached no decision on the point.

 

  1. It seems to me that it is appropriate to apply the Arkin Cap in the present case. The position might be different if a funder had behaved dishonestly or improperly or if, as the Court put it in Arkin, “the funding agreement falls foul of the policy considerations which render an agreement champertous” e.g. if the funder has taken complete control over the litigation. In such a case it may be that there should be no cap at all.”

 

 

What was the Funder’s Exposure?

 

Here the court considered, apparently for the first time in any case, whether the cap should be the sum contributed by the funders for the claimant’s costs and thus not take into account the additional money provided for security of costs or whether it should be the total sum provided, including the sum provided for security of costs.

 

The court found that it was the total sum provided, including the sum provided for security of costs.

Thus if a funder provided £5 million towards the Claimant costs and then say £7 million for security of costs its total exposure in relation to an adverse costs order is £12 million.

 

Of course the amount provided by way of security of costs would go straight to the other party and would thus reduce the balance payable and thus it would not always be the case that the total further sum payable would equal the total sum invested by the funder.

 

The judge said:-

 

“135. The provision of money to Excalibur in order that it may provide security for costs is not the equivalent of a payment of costs ordered at the end of the case. It was a form of funding of the claim in exchange for a return attributable to the monies provided for that purpose – in effect an investment.”

 

The judge went on to say:-

 

“137. If the position were otherwise a funder whose sole contribution was to provide money for security for costs, without which the action would not have continued, would be in the happy position of facing no possible exposure under section 51; whereas those who funded the costs would bear that burden (alone). This would be the position even though, had the claim succeeded, the security for costs provider would have a right to share in the proceeds increased by a percentage reflecting what he had contributed in respect of security. In effect such a provider would have, so far as exposure to an order under section 51 was concerned, a “free ride”, on the back of those financing the costs. This could not be just and cannot be right.”

 

 

Legal Aid Privatisation?

 

Speaking to the Association of Costs Lawyers annual conference in May 2013, Mr Justice Ramsey, the High Court judge responsible for implementing the Jackson reforms, referred to the future of third-party litigation funding as one of the “great questions” of the post-Jackson era.

 

He said that he expected greater certainty in the market over the next three years, which would give investors confidence to fund more cases.

 

“Funders should be able to make a decent profit and in effect transfer legal aid from the public sector to the private sector.”

 

 

 

 

 

Children

 

The words on the door of The Old Bailey read “Defend the Children of the Poor and Punish the Wrongdoer.”

 

They appear not to have been brought to the attention of Lord Justice Jackson during the preparation of his report, or to the attention of Parliament, or the Rules Committee, or indeed anyone else.  It was probably not at the forefront of the minds of the Worshipful Company of Rich Commercial Litigators and other such consultees.

 

How children are to fare post-Jackson is entirely unaddressed by everyone – see my piece Jackson’s Children – Children, Patients, Costs and Deductions from Damages.

 

In this piece I will pass over the apparent ignorance of all of the above of another Old Bailey inscription:

 

“The welfare of the people is supreme”.

 

The move towards costs not following the event throws in to sharp relief the issue of deducting costs from the damages of someone under a legal disability, typically a child.

 

This arises in the context of a solicitor seeking to charge solicitor and own client costs/success fee and also in relation to the deduction of a Third Party Funder’s fee, and to the taking out of after-the-event insurance with a non-recoverable premium.

 

It is clear beyond doubt that no money may be deducted from an award to a child or a protected party without the permission of the court (CPR 46.4).

 

Generally there must be a detailed assessment (CPR 46.4(2)), although in most cases that will now take the form of a paper-only provisional assessment.

 

The court need not order detailed assessment of costs in the circumstances set out in Practice Direction 46 (CPR 46.4(3)).

 

Practice Direction 46, Paragraph 2.1 reads:

 

“2.1        The circumstances in which the court need not order assessment of costs under rule 46.4(3), are as follows –

 

  • where there is no need to do so to protect the interests of the child or protected party or their estate;

 

  • where another party has agreed to pay a specified sum in respect of the costs of the child or protected party and the legal representative acting for the child or protected party has waived the right to claim further costs;

 

  • where the court has decided the costs payable to the child or protected party by way of summary assessment and the legal representative acting for the child or protected party has waived the right to claim further costs; and

 

  • where an insurer or other person is liable to discharge the costs which the child or protected party would otherwise be liable to pay to the legal representative and the court is satisfied that the insurer or other person is financially able to discharge those costs.”

Thus (b) allows a Litigation Friend to agree to pay a child claimant’s solicitor a success fee.

 

Once the child achieves adulthood then none of the rules concerning court approval and assessment that are particular to children apply.

 

Thus it is perfectly proper to have an agreement with a Litigation Friend that provides that if the child achieves majority before the case is resolved then the now adult claimant will pay solicitor and own client costs and a success fee or whatever.  The claimant’s only remedy then would be a Solicitors Act 1974 solicitor and own client assessment, the same as any other adult client.

 

 

Summary Assessment

 

By Practice Direction 60th Update Annex B Practice Directions 44-48 Practice Directions 44, paragraph 9.9, the court will not make a summary assessment of the costs of a receiving party who is a child or a protected party within the meaning of Part 21 unless the legal representative acting for the child or protected party has waived the right to further costs. (9.9(1)).

The court may make a summary assessment of costs payable by a child or protected party. (9.9(2)).

 

 

QOCS

 

There are no special rules relating to children in relation to Qualified One Way Costs Shifting.

 

 

Court’s discretion

 

The key question is as to how the courts exercising their discretion in the post-Jackson world of uneconomic portal fees where it is simply not worth lawyers taking on cases where they cannot charge the client an element of solicitor and own client costs over and above the low, fixed recoverable portal costs.  25% of damages has become the standard charge.

 

Any increase in the personal injury small claims limit exacerbates the problem, as obviously no costs at all are then recoverable.

 

The courts are faced with the dilemma of sanctioning a costs charge to a protected party, something that they have traditionally disliked, or risking children and protected parties becoming a no-go zone for lawyers, especially now that legal aid has been abolished for all except babies under eight weeks old with a clinical negligence claim.

 

Reports are varied, but it is clear that many judges are refusing to allow any deduction from damages.

 

 

 

 

 

ATE Insurance

 

CPR 21.12 provides that a Litigation Friend who incurs expenses on behalf of a child is entitled to recover them out of monies received provided that the expenses have been reasonably incurred and are reasonable in amount.

 

CPR 21.12(6) limits the total expenses that a Litigation Friend may recover to 25% of the sum awarded where the claim dos not exceed £5,000 unless the court orders otherwise and in any event must not exceed 50% of the sum agreed or awarded.

 

An after-the-event insurance premium is specifically an expense, rather than legal costs, because CPR 21.12(2)(a) says so:

 

“(2)        Expenses may include all or part of –

 

(a)          a premium in respect of a costs insurance policy (as defined by section 58C(5) of the Courts and Legal Services Act 1990.”

 

All of the costs principles in relation to children apply in relation to Third Party Funding, which is not specifically mentioned in the Civil Procedure Rules or Practice Directions relating to children.

 

Presumably the incurring of a Third Party Funder’s fee is potentially a legitimate expense of a Litigation Friend under CPR 21.12, but unlike an after-the-event insurance premium, it is not specifically mentioned.

 

As Third Party Funding nearly always involves an adverse costs indemnity it is sensible to state a separate and precise figure for that element in cases involving children.

 

The issue is not decided until detailed assessment at the end of the case, which is obviously too late for the solicitor to change his or her mind.  Early Court of Appeal guidance would be welcome.

 

The abolition of recoverability of the success fee and ATE insurance premia and the abolition of legal aid may lead to an increase in BTE insurance, and therefore an increase in applications under s 51 of the Senior Courts Act 1981 for non-party costs orders against legal expense insurers. Such cases are generally fact sensitive, but three leading Court of Appeal cases given guidance on the topic.

 

In Murphy v Young & Co’s Brewery plc and Sun Alliance and London Insurance plc1, the BTE insurers provided over up to £25,000 in favour of an unsuccessful claimant in a wrongful dismissal claim.

 

The successful defendants were refused a non-party costs order for the costs of the action over and above that limit of £25,000. The Court of Appeal relied on the fact that the insurers had exercised no control over the litigation and also referred to public policy considerations in not making insurers liable in excess of their contractual liability.

 

In Chapman v Christopher2, the insurers were primary liability insurers rather than just legal expenses insurers and had the sole conduct and direction of the defence and knew from the outset that the claimant’s claim exceeded the limit of their indemnity.

 

The indemnity limit of £1 million was used up in settlement of the claimant’s successful damages claim. The Court of Appeal ordered the insurers to pay the claimant’s costs, holding that the test was whether the features of the case were ‘extraordinary in the entire range of litigation that comes to the courts’. Here the court found that the features were extraordinary, the key point being the total control of all aspects of the litigation by the insurers.

 

In Cormack v Excess3, the Court of Appeal summarised the law and said that the concept of ‘exceptionality’ was fixed by the two Court of Appeal cases referred to above, but expanded on what circumstances are likely to constitute such exceptionality.

 

The Court of Appeal said that key point is whether the insurers’ conduct of the action was ‘sufficiently self-motivated to the exclusion of the defendants’ interests’ to justify a section 51 order, but that that was not the only indicator of exceptional circumstances.

 

It was also necessary to have regard to the reasonableness and good faith of the insurer in its involvement of the insured and its responsiveness to his interest and concerns.

 

READERS’ COMMENTS:-

 

Hector’s comment on 7 July 2015:-

Apologies Kerry, it’s been a long day and my brain is no doubt misfiring, but I am a little unclear how a solicitor for the Defendant putting forward, on behalf of the Defendant, a reasonable damages offer joined with an unreasonable or poor offer for the Claimant’s costs, would be likely to be the subject of a successful wasted costs order application? I have also looked at both the further articles you referred to but am still non the wiser. Have I misunderstood the issue?

Kerry Underwood’s reply:-

Hector

I stand by my comments – please see blog – Clinical Negligence – Defendants At It Again. If I was hearing the matter I would certainly entertain a Wasted Cost application. Pre-action conduct is relevant and may be taken in to account by a court in considering costs. If wholly unreasonable pre-action conduct in relation to costs occurs- as here – forcing a party to issue, then that party should get indemnity costs and the court should consider a Wasted Costs order. I do not see how you fail to understand that. The old days of being able to justify anything as long as it was on instructions have gone.

Kerry


Written by kerryunderwood

December 1, 2015 at 2:01 pm

Posted in Uncategorized

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