WASTED COSTS AND NON-PARTY COSTS ORDERS: UNIFIED

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:-

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

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

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.

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.

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;

(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;

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.”

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.

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

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.

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:

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:

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.

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.

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.

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:

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

#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?

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.

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.

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.

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:

encouraging funding which enables access to justice; and

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.

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…

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.

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.

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 60^th 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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December 1, 2015 at 2:33 pm

Reply
Hi Kerry

Is it possible to apply for a costs order in relation to the wasted costs incurred as a result of the fault of HMCTS?

We had a recent Order from the Court, following a number of adjourned hearings, stating, “the parties are to make any application for costs from HM Court Service of and occasioned by todays adjournment” (the Court had accidentally shredded the prepared Trial Bundles prior to Trial and the part-heard Trial was then erroneously relisted in front of an incorrect Judge).

Having made the said application, within the requisite timescale, a further order from the Court has now been received stating that the relevant paragraph of the previous order is “ultra vires and therefore a nullity. In the event the parties wish to pursue a claim for costs against HMCTS, they must do so through the usual channels.”

What are the usual channels for pursuing a claim for costs against HMCTS?

Paul

April 7, 2016 at 11:52 am

Reply
- Paul
  
  This is all dealt with on my current QOCS courses – just two left – one in London on Wednesday 13 April and one in Liverpool on Friday 29 April.
  
  Section 51(3) of the Senior Courts Act 1981 provides:-
  
  “(3) The court shall have full power to determine by whom and to what extent the costs are to be paid.”
  
  Section 51(1) provides that that applies to the Civil Division of the Court of Appeal, the High Court, and any County Court.
  
  Consequently HMCTS will need to be joined as a party and then an application made against them.
  
  Wasted Costs Orders can only be made against lawyers and orders against other parties are known as Non-Party Costs Orders and also Third Party Costs Orders. They are the same thing.
  
  In R (on the Application of Davies) v Birmingham Deputy Coroner [2004] EWCA Civ 207
  
  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:
  
  (i) 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:
  
  (i) a party has financed its own litigation; and
  
  (ii) it would be wrong for that party to incur expense where a tribunal or inferior court had gone wrong in law; and
  
  (iii) 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.”
  
  Note the comment that inferior courts and tribunals remain liable when they behave improperly, whether or not they appear in the proceedings.
  
  I appreciate the facts of R v Birmingham Deputy Coroner are different from yours but in my view the principles are the same.
  
  Kerry
  
  kerryunderwood
  
  April 8, 2016 at 11:33 am
  
  Reply
  - Thanks very much for all your help, Kerry. Much appreciated. Where can I find further details of your QOCS courses?
    
    Paul
    
    April 8, 2016 at 3:48 pm
Blog: Kerry’s 60th Birthday tour, but I can tell you – just two left: London this coming Wednesday 13 April and Liverpool 29 April. Includes course material and book. Can book online or by phoning Claire Long here on 01442 430900. £200 plus VAT and including lunch.

Kerry

kerryunderwood

April 8, 2016 at 4:50 pm

Reply
Hi kerry,

Is it is the case as I think that as a Litigation Friend acting for the Claimant has all of the cost liabilities of the Claimant? i.e. the defendants costs.

Is it retrospective so if the Litigation Friend signs up later in the case are they liable for costs of the defendant incurred before they became a Litigation Friend?

thanks

Afit

July 5, 2016 at 11:58 am

Reply
- This subject warrants a book in its own right, but yes, the general rule is that a Litigation Friend must pay any costs as ordered by the court. Generally proceedings have to be issued before there is any liability for costs as, absent proceedings being issued the work is non-contentious. A Litigation Friend is only needed once proceedings are issued – hence the name. So a Litigation Friend should have been made aware by the solicitor of the law relating to costs and that a potential liability for all pre-issue work in the event of subsequent defeat/discontinuance/failure to beat a Part 36 offer etc. is created by the very fact of issuing proceedings. In that sense it is not truly retrospective as it is the Litigation Friend’s decision to issue proceedings which triggers the potential liability, so it is no more retrospective than when a party without a Litigation Friend creates a liability for pre-issue costs by issuing.
  
  What happens is that that work which was non-contentious retrospectively becomes contentious upon issue of proceedings. Provided the Litigation Friend was made fully aware of the position then, yes, the general rule will be that s/he is liable for all of the costs.
  
  Of course it can happen that there is a change of Litigation Friend during the proceedings, and the court is then free to make whatever order it thinks fit provided it exercises its very wide costs discretion properly.
  
  If the solicitor had not advised the Litigation Friend fully and properly of her or his obligations, then the Litigation Friend has a legal and professional remedy against the solicitor and/or the court could make a Wasted Costs order or Non-Party Costs Order against the solicitor.
  
  These cases are always going to be fact-sensitive.
  
  Qualified One Way Costs Shifting applies in cases involving Litigation Friends just as it does in any other case.
  
  Kerry
  
  kerryunderwood
  
  July 5, 2016 at 3:10 pm
  
  Reply
  - Thanks kerry,
    
    Afit
    
    July 7, 2016 at 2:29 pm
HI Kerry. FYI. Horwich Farrelly now routinely threaten to make wasted costs applications at disposal hearings in low value cases if their ‘reasonable offer’ is not accepted prior to it. Presumably they would not do so if their offer was beaten but that’s not what their standard letter says (as follows);

‘should this matter proceed to a disposal hearing, we shall have no alternative but to seek wasted costs.’

It just winds me up.

dominicmoss

February 14, 2017 at 4:06 pm

Reply
- Dominic
  
  The courts and judges get to know particular firms.
  
  Kerry
  
  kerryunderwood
  
  February 14, 2017 at 4:12 pm
  
  Reply
Kerry–I am a solicitor and have instructed another firm under CFA–I have ATE insurance in place–On Monday I discovered the firm had made several requests to increase insurance cover but had been declined on grounds my case was weak—this was all concealed from me–if costs go against me are we in Wasted Costs territory?

Nicholas Mills

March 28, 2017 at 10:29 pm

Reply
- Nicholas
  
  These matters are very much fact-sensitive. Your potential remedy looks to be in negligence and breach of contract. Generally, but not always, a Wasted Costs application is made by one party against the lawyer/s for the other party, so I would expect any application to be by your opponent. I presume that this is not a personal injury matter; if it is then the starting point is that QOCS applies. If it does then a costs order is made in the usual way and thus the successful party has a much greater incentive to apply for a Wasted Costs order as it can be a way of enforcing against the claimant’s solicitor an otherwise unenforceable order. However the courts have made it clear that they will not allow such applications if the true reason is to avoid QOCS.
  
  If the winning party has the effective protection of the losing party’s ATE insurance, then generally they will rely on that, rather than seeking to obtain a Wasted Costs order; such applications are never easy.
  
  Without more information I cannot be more specific. Also surprised that ATE insurers are not withdrawing cover, rather than simply refusing to increase it, if they consider that your case is weak.
  
  Kerry
  
  kerryunderwood
  
  April 4, 2017 at 6:21 pm
  
  Reply

Kerry Underwood