Third Party Costs Orders against Solicitors 1. This article discusses the rise in applications against solicitors for third party costs orders, where solicitors have acted on conditional fee agreements and may be said to have funded or controlled litigation. 2. The jurisdiction to make such an order against a third party arises under section 51 of the Senior Courts Act; this gives no guidance on when such a third party costs order should be made: it merely provides in sub-section (1) that costs are in the discretion of the Court and in sub-section (3) that The court shall have full power to determine by whom and to what extent the costs are to be paid. 3. In Symphony Group PLC v Hodgson [1994] QB 179 Balcombe LJ stated that an order for the payment of costs by a non-party will always be exceptional. Subsequently, the threshold seems to have been set somewhat lower than that phrase might imply. 4. In Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39 Lord Brown clarified: 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. 1
Generally speaking the discretion will not be exercised against pure funders, described in paragraph 40 of Hamilton v Al fayed 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 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, a concept repeatedly invoked throughout the jurisprudence...nor indeed is it necessary that the non-party be the real party..., provided that he is a real party in...very important and critical respects 5. So the test is whether the solicitor was a real party in the proceedings in the sense that it not only funded the proceedings but controlled or was to benefit from them. 6. A number of cases have considered applications against solicitors acting on CFAs, and the courts have grappled with the question of when the solicitor s conduct has been such as to indicate that it is a real party to the proceedings, beyond the mere fact of acting on a CFA - which of course in itself cannot be criticised, but where the solicitor by definition does have a financial interest in a favourable outcome to recover its profit costs and a success fee from the opponent. 2
7. In Germany v Flatman [2011] EWHC 2945 Eady J was concerned with an application for disclosure against solicitors and placed importance on the solicitor s expectation of recovering any funds it had advanced: 23. It is thus necessary for me not to lose sight of the public policy aim of discouraging weak claims and, in particular, enabling successful defendants to recover their costs in actions brought against them by indigent claimants. This is a factor which has relevance to the present appeals. 24. The CFA regime offers solicitors the opportunity sometimes to profit significantly from a piece of litigation. In these two cases, GMS plainly stood to gain if the litigation could be sustained. In such cases, where the proposed claimant is impecunious, it may take only a limited sum of money to launch the litigation and thus provide those opportunities. Yet the litigant himself may not be in a position to prime the pump with the necessary disbursements. That is the kind of situation where there is scope for ambiguity. 25. If the solicitor pays for the court fees (say) or expert reports at the beginning of a personal injury claim, on the basis that the client will reimburse him later, there is nothing inherently improper about that: see e.g. the observations of Lord Brown in Dymocks, cited above, at [35]. On the other hand, if the sums are paid out by the solicitor, whether from client account or office account, on the basis that they will be recovered from the other side, in the event of success, or not at all in the event of failure, that would be a different matter. The solicitor would indeed then have become a funder, albeit sometimes in only a small way. He may have the capacity to make the difference between the defendant in question being sued, with all the cost 3
and vexation involved, and his being left in peace. What is more, in such a hypothetical situation the solicitor would clearly be providing the funds in the way of business in effect laying out a modest investment with a view to significant gains for himself or his firm if the claimant succeeds (perhaps greater gains than those actually accruing to the client). For reasons of public policy, it may well be thought that any such funding role, on the part of a solicitor, should only be countenanced, and regarded as legitimate, if it carries with it at least the risk of having to pay the defendant s costs, or part of them, if he is ultimately successful. 8. In Myatt v National Coal Board [2007] EWCA Civ 307 the Claimants solicitors CFAs were found by the Court of Appeal to be unenforceable, with the consequence that the ATE policies were also void. The Court of Appeal then made an order that the solicitors, Ollerenshaws, pay 50% of the Defendant s costs of the appeal. Relevant factors seem to have been the following: (a) (b) the Court of Appeal inferred that the main reason why the appeal was launched was to protect the solicitors claim to their profit costs: at stake on the appeal for the individual claimants was the disbursements of approximately 2,500 each; so far as the solicitors were concerned, it was their profit costs of approximately 12,000-16,000 in the four cases, but more significantly these were four test cases out of approximately 60 case, so that their profit costs in the region of 200,000 in all those cases were at stake; the solicitors liability was reduced to take into account the fact that they had not been given earlier notice of the possibility of the application for a costs order against a non-party. This despite the fact 4
that the solicitors could not apparently say whether such notice would have made any difference: [counsel for Ollerenshaws] did not tell us whether, if they had received such a warning at an early stage, Ollerenshaws would have abandoned the appeal. The fact that Ollerenshaws have not felt able to say that this is what they would have done leads me to conclude that it is unlikely that, faced with such a warning, they would have abandoned the appeal. Nevertheless, they were denied the opportunity of taking that course. 9. Lloyd LJ stated that the relevance of the case was limited to cases where litigation was funded by a CFA and the issue was enforceability of the CFA. However it is difficult to see why the application of the case should be limited in that way, and it has certainly been applied in subsequent cases. 10. In Clarke v Oldham (Oldham County Court 14.04.2008) HHJ Armitage QC considered Myatt and stated: In Myatt the Court of Appeal apportioned the costs liability in accordance with a rough and ready assessment of the financial stakes of the claimants and their solicitors. I adopt a different approach. It seems to me that where, as here, a single claim is pursued by two parties whose interests are at least publicly inseparable, the liability should be joint and several. I consider that this analysis of Myatt is incorrect: the main factor in apportioning liability for the costs to the solicitors seems to have been the fact that they were not put on notice of the applications, rather than a relative assessment of the financial stakes: in Myatt the Court of Appeal concluded that the solicitors had a far greater financial stake, so if that was the critical 5
factor, it would be surprising that they were not ordered to pay a substantially higher percentage. 11. In the Clarke v Oldham case, an order for costs was made against the solicitors, Smith Jones, because: 34. The evidence leads me to the conclusions that Smith Jones pursued this litigation without ATE insurance, without their client's express instructions to do so in the changed circumstances of Insurance having been refused and that, when an adverse costs order was made, the solicitors funded the modest debt without reference to or instructions from the claimant. 35. I am satisfied that Smith Jones had a financial interest in the litigation, namely their profit costs, which they were prepared to pursue without telling their client that she did not have the protection of Insurance which they had advised was desirable. In the event the claimant was unaware of her risk on costs, which she was running in part to allow the solicitors to pursue their chance of "success" which would have enabled them to recover their reasonable ordinary and agreed success fees from the defendants. Even if she was aware of the risk the claim was pursued for the benefit of both. Each had a financial stake in the successful prosecution of the claim. The stakes were different. For the claimant the stake was a modest sum of damages (which would normally be undertaken without risk as to costs). For the solicitors, the stake was profit costs, which in the event, could only be obtained if the adverse costs order was financed by them - or so they treated it. 6
I am satisfied that the modest sum advanced by them to cover the adverse costs order was advanced to ensure the continuation of the claim (for their joint benefit). I am satisfied that they had no intention of seeking to recover that sum from the claimant, even if the claim had succeeded. 14. In Adris v RBS [2010] Costs LR 598 the solicitors, CCLS, similarly failed to obtain ATE insurance and to tell their clients. It was held by HHJ Waksman, sitting as a High Court Judge, at paragraph 43: In my judgment, an NPCO against CCLS is clearly justified for the following simple reason. As already explained above, it was the responsibility of CCLS to obtained ATE insurance for its clients. Not only did it fail to do so, it failed to tell them and was effectively acting without instructions. It is obvious that if the clients had been told the true position they are likely to have instructed CCLS not to progress the claims. As no insurance was ever obtained for any client the overwhelming likelihood is that if CCLS had acted as it should have done these cases would not have been issued or progressed and the costs then incurred by the Defendants would not have been incurred. There is a direct causal link between the defaults of CCLS (ie Mr Burley) and the costs generated by those cases...it must also follow that Mr Burley through CCLS was in a very real sense controlling the litigation since decisions were being taken without proper instructions from the clients and I do not accept that anyone else was controlling it. 15. In a very recent case of Heron v TNT and Mackrell Turner Garrett (Guildford County Court 23.04.2012) HHJ Reid QC had to consider the following allegations against solicitors MTG: 7
(a) (b) (c) (d) (e) MTG stood to gain substantial financial benefit from the case in terms of profit costs and success fee; MTG had substantial control over the manner in which the case developed and progressed; the solicitors paid disbursements without securing prior funding from the client; MTG negligently failed to obtain ATE insurance so the Claimant was inhibited from settling case once unfavourable medical evidence was obtained; MTG had an undeclared conflict of interest (as failure to obtain ATE insurance) so motivated to press on in hope of winning; otherwise they would have been able to terminate the CFA; MTG failed to provide competent advice to its client. 16. The judge dismissed the application for a costs order against MTG. Although only a first instance county court decision, the well-reasoned judgment is persuasive. HHJ Reid QC found that: (a) (b) It will generally be relevant to the court s exercise of the discretion whether the non-party is responsible for the litigation taking place and caused the successful litigant to incur costs which he would not otherwise have incurred ; it is important to warn the potential respondent to a NCPO application as early as practicable, so as to give him a reasonable opportunity for deciding whether or not to continue with the proceedings. Failure to do this should be taken into account in deciding whether (and if so to what extent) an order should be made against the non-party. 8
(c) (d) (e) (f) (g) unlike Adris and Clarke, the Claimant was not promised ATE insurance, and was warned of the costs consequences of failing to beat the offers made; there was no evidence that the solicitor appreciated the conflict of interest or that it motivated him to conduct the litigation as he did; there was no evidence to suggest conscious impropriety, rather than ineptitude; simply standing to gain financially from the litigation is insufficient as that would always be the case with a solicitor acting on a CFA, there must be additional factors; it was noteworthy that in the end MTG was willing to forego all its profit costs in an effort to assist the client in settling the case; the solicitor did not have substantial control over the litigation; the reality of the situation was demonstrated by the client s decision to withdraw a Part 36 offer against the advice he was receiving; although MTG paid some disbursements, this was not a case in which MTG was paying out of its office account with no expectation of recovering the disbursements from the client, and the client had in fact discharged substantial sums, albeit that substantial sums remained to be met. Conclusions 16. I would suggest that particular features emerge from the caselaw as follows: (a) careful consideration needs to be given by the solicitors to ensure that the level of ATE cover is adequate (of course, in addition to the relevance to third party costs orders, I have seen a number of instances 9
recently where this has been the subject of a negligence claim by the client against the solicitor) (b) (c) (d) the solicitors need to think carefully about the level of disbursements they are funding and to keep under review how, realistically, they expect to recover those disbursements from the client if the claim fails; although causation as such (in the sense used in a negligence claim) is not expressly one of the issues in a third party costs order application, the court must consider as part of its discretion whether the solicitor was responsible for the litigation taking place; there may well be scope for solicitors to argue that some or all of the costs would have been incurred in any event, for example where a client would still have continued with the litigation in person if the solicitors had not funded his claim; giving notice of the possible third party costs order application as early is possible is clearly very important for the party seeking the order; if it does not do so, the respondent solicitor may well have significant scope for arguing that it should not be liable for all or part of the costs sought; I anticipate that there will be further litigation over what reduction should be made according to the extent to which giving notice earlier would have cause the respondent solicitor to act any differently. Stephen Innes 4 New Square 25 July 2012 10