non party costs orders - 39 essex chambers€¦ · non party costs orders introduction 1. ......
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Non Party Costs Orders
Introduction
1. A person on the street would be surprised to hear that costs orders may be made against
those who have never been parties to litigation.
2. There have been interesting recent attempts to extend the ambit of such orders, but the
higher courts continue to favour the right of access to the courts over the winning
party’s right to recover costs, as with the narrow construction of the law of security for
costs.
Jurisdiction
3. Sections 51(1) and (3) Senior Courts Act 1981 state as follows:
“51.— Costs in civil division of Court of Appeal, High Court and county
courts.
(1) Subject to the provisions of this or any other enactment and to rules of court,
the costs of and incidental to all proceedings in—
(a) the civil division of the Court of Appeal;
(b) the High Court; and
(c) any county court,
shall be in the discretion of the court.
…
(3) The court shall have full power to determine by whom and to what extent
the costs are to be paid.”
Recognised Categories of NPCO
4. In Aiden Shipping Co. Ltd v Interbulk Ltd [1986] AC 965 the vessel Vimeira was
chartered by Aiden to Interbulk under a time charter. Interbulk then sub-chartered the
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vessel to ICCO under a voyage charter, under which the vessel discharged a cargo of
grain in Holland, but in doing so suffered rudder damage.
5. It was alleged that there had been a breach of the safe port clause in both charters. The
owners commenced arbitration proceedings in London against the charterers, and the
charterers commenced similar proceedings against the sub-charterers. The charterers
sought an indemnity from the sub-charterers. Both arbitrations were determined on
points which were not in issue, and they were remitted to the arbitrators.
6. The owners then applied to introduce a new point demonstrating the lack of safety of
the port. Charterers added the same point against the sub-charterers.
7. The judge dismissed the owners' application against the charterers, and in consequence,
the charterers' application against the sub-charterers was also dismissed.
8. A question then arose as to the order for costs. It was plain that the charterers were
entitled to an order against the owners that they should pay the charterers' costs of the
owners' application, and that the sub-charterers were entitled to a similar order against
the charterers. But the question arose whether the judge had jurisdiction to order that
there should be included, in the charterers' costs which the owners were liable to pay,
the costs which the charterers were ordered to pay to the sub-charterers.
9. The judge held that, having regard to the wide terms of section 51(1) of the Act of 1981,
he had jurisdiction to make such an order which, in the exercise of his discretion, he
then made. He therefore ordered that the owners pay the charterers' costs of the
application (such costs to include any costs paid by the charterers to the sub-charterers
in the sub-arbitration proceedings).
10. The owners then appealed to the Court of Appeal against the judge's order as to costs,
who allowed the appeal, holding that they were bound by previous decisions of the
court to hold that an order for costs could only be made against a party to the
proceedings in question.
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11. The House of Lords held that what was then s51(1) Supreme Courts Act 19811 did not
contain an implied limitation to those who were parties to the litigation.
12. In Symphony Group Plc v Hodgson [1994] 1 QB 179 the Claimant, a manufacturer of
kitchen units, employed the defendant under a contract which included a term
restricting him from engaging in the manufacture or supply of kitchen furniture for one
year after termination of his employment with the plaintiff.
13. The employee accepted an offer from a competitor, and alleged that the employer had
repudiated the contract, having taken advice from his new employer’s solicitors. The
previous employer successfully obtained an order injuncting the employee from
working for the new employer.
14. The previous employer also sought the costs of the application from the new employer
under section 51(1) of the Supreme Court Act 1981 1, and was granted them. However
the new employer was granted leave to appeal.
15. The Court of Appeal held as follows:
(1) Since issues on which the Claimant had relied in the action formed the basis of
a cause of action against the new employer, it would be unjust to allow them to
be raised in the summary application for costs where the new employer was
deprived of the procedural protection to which it would have been entitled if it
had been a defendant to the action;
(2) The new employer had been disadvantaged by the failure of the Claimant to
inform it of its intention to make the application;
(3) The new employer’s connection with the original proceedings was not close
enough to justify admission of the judge's findings of fact in the action as
evidence in the costs application; and
(4) Accordingly, the circumstances were not such as to justify the exercise of the
court's discretion to make an order for costs against the new employer.
1 “Subject to the provisions of this or any other Act and to rules of court, the costs of and incidental to all
proceedings in the civil division of the Court of Appeal and in the High Court, including the administration of
estates and trusts, shall be in the discretion of the court, and the court shall have full power to determine by whom
and to what extent the costs are to be paid.”
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16. Significantly, NPCOs were divided into the following categories by Balcombe LJ (at
[191G – 192E]):
(1) Where a person has some management of the action (ie controllers) eg the
director of an insolvent company who causes the company improperly to
prosecute or defend proceedings. It was noted that, while it was not suggested
in any of the cases cited that it would never be appropriate to order the director
to pay costs, in none of them was the director so ordered.
(2) Where a person has maintained or financed the action (funders).
(3) Solicitors (legal representatives).
(4) Where the person has caused the action (causative persons) eg where D’s
negligence had caused P to suffer brain damage, causing a personality change
which precipitated a divorce. The CA held that D’s agreement to pay the costs
of the divorce proceedings could be justified.
(5) Where the person is a party to a closely related action which has been heard at
the same time but not consolidated (related persons).
(6) Group litigation, where one or two actions are selected as test actions.
17. Balcombe LJ accepted that these categories were neither rigid nor closed, but indicated
the sorts of connection which had so far led the courts to entertain a claim for costs
against a non party (at 192E).
18. He went on to give guidance for first instance judges as follows (at 192H – 194D):
(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.
(2) 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.
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(3) 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.
(4) An application for payment of costs by a non-party should normally be
determined by the trial judge.
(5) 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.
(6) The procedure for the determination of costs is a summary procedure2, not
necessarily subject to all the rules that would apply in an action. For instance it
may well be appropriate for judicial findings being admissible as evidence of
the facts upon which they were based in proceedings between one of the parties
to proceedings and a stranger (the non party).
(7) The judge should be alert to the possibility that an application against a non-
party is motivated by a resentment of an inability to obtain an effective costs
order against a legally aided litigant.3 The courts are well aware of the financial
difficulties faced by parties who are facing legally aided litigants at first
instance, but the Regulations lay down conditions designed to ensure that there
is no abuse of legal aid, and the court will be very reluctant to infer that solicitors
to a legally aided party have failed to discharge their duties under the
Regulations. This principle extends to a reluctance to infer that any maintenance
by a non party has occurred.
Pure Funders/Controlling Litigation
19. In Tolstoy – Miloslavsky v Aldington [1996] 1 WLR 736 the Claimant sought to set
aside a substantial libel judgment on the basis that it had been induced by fraud. The
application was struck out as an abuse of process.
20. An application was made for a NPCO against the solicitors and Counsel, who had acted
pro bono.
2 See also Hedrich v Standard Bank London Ltd [2008] EWCA Civ 905 [2009] PNLR 3 at [6]; [10] – [13], and
[78], making a similar point in the context of wasted costs orders. 3 Or, it might be added, against any other litigant who cannot satisfy a costs order.
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21. The judge ordered the solicitors to pay 60 per cent of the defendant's costs on the ground
that they had put themselves in the position of “third party funders” of the litigation.
22. The Court of Appeal held that there was no jurisdiction, under section 51(1) and (3) of
the Act of 1981, to make an order for costs against legal representatives acting as such;
but that, on the facts, the solicitors' conduct was so unreasonable as to found a wasted
costs order under section 51(6) of the Act, and the judge's order was correct.
23. At 745H – 746A Rose LJ stated that there were only three categories of conduct which
can give rise to an order for costs against a solicitor: (1) if it is within the wasted costs
jurisdiction; (2) if it is otherwise a breach of duty to the court eg acting without authority
or in breach of an undertaking, and (3) if he acts outside the role of solicitor, eg in a
private capacity or as a true third party funder for someone else. Nor is it relevant that
a legal representative is on a contingent fee, as opposed to a normal retainer, or no fee
at all: 746B – D.
24. He went on to comment as follows (at 746B – D):
“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 outwith 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] Q.B. 565, 572–574.”
25. The mere fact of acting under a CFA is not a factor which points in favour of imposing
a NPCO, even though there is a financial interest in winning which is not present under
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a normal retainer: Hodgson v Imperial Tobacco [1998] 1 WLR 1056, 1065G, 1067F –
G.
26. In that case a large number of plaintiffs brought actions against the defendants, three
tobacco companies, claiming damages for personal injuries by reason of cancer which
they claimed was caused by smoking cigarettes manufactured by the defendants. The
plaintiffs entered into conditional fee agreements with their legal representatives
pursuant to section 58 of the Courts and Legal Services Act 1990. Under the agreements
the lawyers were to recover the costs of representing the plaintiffs only if the action was
successful.
27. The defendants requested the disclosure of the agreements, indicating that in due course
they might, if so advised, wish to seek an order for costs against the plaintiffs' legal
advisers personally. The plaintiffs refused to disclose the agreements and applied for
an order debarring the defendants from seeking costs against the plaintiffs' 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 advisers should not make any comment to the
media about the litigation without leave of the court.
28. The Court of Appeal dismissed the appeal against the refusal to make the pre-emptive
order relating to costs. It held as follows:
(1) 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.
(2) Therefore, a legal adviser acting 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.
(3) In any event, any pre-emptive order would have to be so qualified that in practice
it would not provide the plaintiffs' lawyers with any protection.
(4) Accordingly, in the circumstances it would not be appropriate to make such an
order.
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29. The essential policy underlying the cases is 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. This is so most conspicuously in the CFA cases and those
concerning security for costs. The argument that pure funders should not be liable to a
NPCO is given powerful support by the policy on CFA cases. Although the client may
obtain insurance (and therefore secure the other side’s costs) this will not always be so
and is certainly not a condition of acting under a CFA: per Simon Brown LJ in Hamilton
v Al Fayed (No. 2) [2002] EWCA Civ 665 [2003] QB 1175 at [45].
30. Lord Justice Simon Brown (as the then was) described the facts as follows:
“1 On 21 December 1999, following a five-week trial before Morland J and a
jury, Mr Neil Hamilton famously lost his libel action against Mr Al Fayed
arising out of the "cash for questions" scandal. To the question "Are you
satisfied on the balance of probabilities that Mr Al Fayed has established on
highly convincing evidence that Mr Hamilton was corrupt in his capacity as a
Member of Parliament?", the jury returned the answer "Yes". Mr Hamilton was
ordered to pay Mr Al Fayed's costs.
2 On 15 January 2001, following Mr Hamilton's failed application to the Court
of Appeal (Lord Phillips of Worth Matravers MR, Sedley and Hale LJJ) [2001]
EMLR 394 for permission to appeal against the jury's verdict in the light of Mr
Al Fayed's subsequently revealed purchase of documents stolen during the trial
from Mr Hamilton's counsel's dustbin, those costs were assessed in default in
the sum of £1,467,576. Some £1.19m of that sum remains unpaid, Mr Hamilton
personally having paid nothing towards it and having now been bankrupted.
3 The present proceedings relate to Mr Al Fayed's efforts to recover his unpaid
costs from a number of individuals who backed Mr Hamilton's unsuccessful
action…”
31. Following the claimant's failed application to the Court of Appeal for permission to
appeal against the jury's verdict, those costs were assessed in the sum of £1,467,576.
Some £1.19m of that sum remained unpaid, the claimant personally having paid nothing
towards it and having subsequently been made bankrupt. The defendant applied for an
order for costs under section 51 of the Supreme Court Act 1981 against the 18 largest
contributors to the fund. Several of the contributors settled with the defendant, except
for nine who contested their liability.
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32. The judge rejected the defendant's application, holding that the contributors were pure
funders and not liable.
33. The Court of Appeal dismissed Mr. Al-Fayed’s appeal:
(1) Pure funders were generally exempt from liability under section 51(3) of the
1981 Act for the costs of the successful unfunded party.
(2) The unfunded party's ability to recover his costs had to yield to the funded party's
right of access to the courts.
(3) 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.
(4) Such an approach ought not to be confined merely to relatives moved by natural
affection but should extend to anyone who wished to ensure that a genuine
dispute was not lost by default or inadequately contested.
(5) 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.
(6) Accordingly, the judge was right to conclude that the nine contributors were
pure funders who were not liable for the successful defendant's costs.
34. The leading judgment was given by Simon Brown LJ:
“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?
45 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
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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.
46 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.
47 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
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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.
48 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)
35. In Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39 [2004] 1 WLR
2807 Lord Brown summarised the principles governing the exercise of discretion as
follows (at [25]):
(1) Although costs orders against non-parties are to be regarded as “exceptional”,
exceptional in this context means no more than outside the ordinary run of cases
where parties pursue or defend claims for their own benefit and for their own
expense. The ultimate question in any such “exceptional” case is whether in all
the circumstances it is just to make the order. It must be recognised that this is
inevitably to some extent a fact-specific jurisdiction and that there will often be
a number of different considerations in play, some militating in favour of an
order, some against.
(2) Generally speaking the discretion will not be exercised against “pure funders”
i.e. 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
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its course. In their case the court’s usual approach is to give priority to the public
interest in the funded party getting access to justice over that of the successful
unfunded party recovering his costs and so not having to bear the expense of
vindicating his rights.
(3) Where the non-party not merely funds the proceedings but substantially 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”,
or… “a real party…” to the litigation.
36. A NPCO should not be made when the relevant costs would have been incurred anyway
without the involvement of the non-party: Dymocks at [18] – [20]; Systemcare at [23].
37. In Flatman v Germany [2013] EWCA Civ 278 the Court of Appeal described the
position post-Dymocks as follows (at [26] – [28]):
“26. In the Knight case, the High Court of Australia dealt with the issue in this
way (per Mason CJ and Deane J at page 192):
"For our part, we consider it appropriate to recognise a general category of case
in which an order for costs should be made against a non-party and which would
encompass the case of a receiver of a company who is not a party to the
litigation. The category of case consists of circumstances where the party to the
litigation is an insolvent person or man of straw, where the non-party has played
an active part in the conduct of the litigation and where the non-party, or some
person on whose behalf he or she is acting or by whom he or she has been
appointed, has an interest in the subject of the litigation. Where the
circumstances of a case fall within that category, an order for costs should be
made against the non-party if the interests of justice require that it be made."
27. Applying these observations to the position of a solicitor, in Myatt v
National Coal Board (No 2) [2007] 1 WLR 1559, Dyson LJ explained the
current position at [8]-[9]:
"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
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'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."
28. 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."”
Solicitors
38. In Myatt v National Coal Board (No. 2) [2007] EWCA Civ 307 [2007] 1 WLR 1559
the Court of Appeal had dismissed the Claimants’ appeals against the finding that the
conditional fee agreements were unenforceable. The issue was whether there was
jurisdiction to make an order that the Claimants’ solicitors, Ollerenshaws, pay some or
all of the Defendant’s costs.
39. Dyson LJ held that the mere fact that a solicitor is on the record prosecuting proceedings
for his or her client was not fatal to an application for a NPCO: Myatt at [8]. An NPCO
was made in the case because the main reason why the appeal was launched was to
protect the solicitor’s claim to their profit costs of £200,000 in all 60 cases: [12]. The
decision was expressly limited to cases where the litigation was funded by a CFA and
where the issue was as to the enforceability of the CFA: [23].
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40. It was important to emphasise the need for parties who think that they may apply for an
order for costs against solicitors in similar circumstances to warn the solicitors at an
early stage, so as to give them a reasonable opportunity for deciding whether or not to
continue with proceedings: per Dyson LJ at [14].
41. Despite Lord Brown’s description of a respondent funding proceedings (paragraph
43(3) above), funding the proceedings is not a jurisdictional pre-requisite to making a
NPCO; it is sufficient to establish jurisdiction if a respondent has effectively controlled
the proceedings and has sought to derive potential benefit from them: Systemcare at
[27].
42. If a solicitor funds disbursements as the case proceeds, does that render a NPCO likely
if the claim fails? In Flatman v Germany [2013] EWCA Civ 278 the Court of Appeal
answered in the negative (at [45] – [46]):
“45. In my judgment, therefore, 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. As for the policy imperative argued by Mr Brown, after the event
insurance is not a pre-requisite of bringing a claim on a CFA (see King v
Telegraph Group [2005] 1 WLR 2282 at paragraph 100 and Floods of
Queensferry Ltd v Shand Construction Ltd (supra) at paragraph 37). The fact
that a litigant can (or cannot) afford an expert report or the court fee says nothing
about his or her ability to fund the costs incurred by opponents in an
unsuccessful claim and, indeed, Eady J (at paragraph 25 of his judgment)
recognised that the solicitor could advance disbursements with a technical
(albeit improbable) obligation for repayment.
46. That much is also clear from the fact that solicitors are entitled to act on a
normal fee or conditional fee for an impecunious client whom 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 paragraph 50; Awwad v
Geraghty [2001] QB 570 at 588; Dophin Quays Developments Ltd v Mills
[2008] 1 WLR 1829 at paragraph 75.”
43. There has been no case in which mere alleged negligence on the part of solicitors in
relation to obtaining After the Event Insurance (“ATE”) has been sufficient on its own
to justify a NPCO.
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44. In Heron v TNT and Mackrell Turner Garrett [2013] EWCA Civ 469 the Court of
Appeal held that failure to obtain ATE alone was not sufficient to justify a NPCO.
45. The case started out as a claim that the solicitors firm had negligently failed to obtain
ATE and had then influenced the litigation so as to conceal their negligence from their
client, in going to extreme lengths to avoid paying the other side’s costs, even though
it should have been clear that C would not beat D’s offers at trial.
46. Leveson LJ stated as follows:
“31. There is no doubt that a non-party costs order can be made against legal
representatives but that, in every case, such an order is exceptional (see per
Balcombe LJ in Symphony Group Plc v Hodgson [1994] 1 QB 179 at 192). The
principles were then subject to elaboration by Lord Brown in Dymocks
Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39 [2004] 1 WLR 2807
(at para. 25) in these terms:
"(1) Although costs orders against non-parties are to be regarded as
'exceptional', exceptional in this context 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. It must be recognised that this is inevitably to some extent a
fact-specific jurisdiction ….
(2) Generally speaking the discretion will not be exercised against 'pure
funders', described in para 40 of Hamilton v Al Fayed (No 2) [2003] QB
1175, 1194 as "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". …
(3) Where, however, 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… Nor, indeed, is it necessary that the non-party be 'the
only real party' to the litigation in the sense explained in the Knight case
[Knight v FP Special Assets Ltd (1992) 174 CLR 178] provided that he
is 'a real party in … very important and critical respects'."
16
32. Mr Bacon also relied on the observations of Dyson LJ (as he then was) in
Myatt v National Coal Board (No 2) [2007] 1 WLR 1559 when he said (at para.
8):
"In my judgment, the third category described by Rose LJ in the Tolstoy-
Miloslavsky case [acting outside the role of solicitor] 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."
33. The context of that decision is, however, important. It concerned the
enforceability of a specific type of CFA agreements and had the potential to
impact on the solicitors' ability to claim profit costs in some 60 cases. Dyson LJ
made the point that although the decision had wider relevance, its relevance
"was limited to cases where the litigation is funded by a CFA and where the
issue is as to the enforceability of the CFA" (para. 23).
34. Mr Bacon also relied on two first instance decisions which he said were
illustrative examples of cases in which judges had made non-party costs orders
against solicitors in circumstances very similar to those which obtain here. In
Adris v The Royal Bank of Scotland plc [2010] 4 Costs LR 598, [2010] EWHC
941, Judge Waksman QC (sitting as a judge of the High Court) was concerned
with discontinued county court cases in relation to s.78 of the Consumer Credit
Act 1974 and made an order against a solicitor whose literature had represented
that "your solicitor will purchase, at their cost, a legal expenses insurance policy
[ie. ATE insurance]" but had failed to do so and failed to explain the costs
consequences. He also considered it "obvious" that the clients would not have
proceeded with this litigation without ATE insurance so that they would not
have been issued or progressed (see para. 43). That is clearly not this case and
in this fact-sensitive jurisdiction is entirely distinguishable.
35. The second case to which Mr Bacon directed our attention was an
unreported county court decision. In my judgment, that decision does not take
the analysis further even if (about which, with respect, I have real reservations)
it was correctly decided. On the wider issue and in any event, I deprecate an
ever-widening reference to judgments which have no authoritative value and
may be no more than examples of the exercise of judicial discretion.
17
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.
37. 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.
38. 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)
2 July, 2013
VIKRAM SACHDEVA
39 Essex Street
London WC2R 3AT
18
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