Credit hire companies and non party costs Orders

I have been asked on many occasions by insurance companies and their instructed solicitors how one “gets round” QUOCS. The answer for the most part, is “you can’t.”

QUOCS represents part of the post LASPO 2012 settlement in personal injury and clinical negligence claims, where as part of the package which included the abolition of recoverable success fees and ATE premiums, defendants and paying parties are required to stand their own costs, even when vindicated at trial.

There are exceptions to this general principle within the rules however.

The principal exceptions which will be relevant after a trial are set out in rule 44.16 which provides as follows:

(1) Orders for costs made against the claimant may be enforced to the full extent of such orders with the permission of the court where the claim is found on the balance of probabilities to be fundamentally dishonest.

(2) Orders for costs made against the claimant may be enforced up to the full extent of such orders with the permission of the court, and to the extent that it considers just, where –

(a) the proceedings include a claim which is made for the financial benefit of a person other than the claimant or a dependant within the meaning of section 1(3) of the Fatal Accidents Act 1976 (other than a claim in respect of the gratuitous provision of care, earnings paid by an employer or medical expenses); or

(b) a claim is made for the benefit of the claimant other than a claim to which this Section applies.

(3) Where paragraph (2)(a) applies, the court may, subject to rule 46.2, make an order for costs against a person, other than the claimant, for whose financial benefit the whole or part of the claim was made.

Most claims which are lost at trial, will not be lost for reasons of fundamental dishonesty. Most claims are lost at trial because a witness fails to come up to proof, the defendant’s witnesses are more compelling, the claimant’s lawyers have miscalculated, or some other example of the vissitudes  of litigation has occurred.

But where a claim is brought for the financial benefit of a third party, the broad sunlit uplands of the non-party costs jurisdiction can be trespassed upon for the benefit of the defendant.

The principal type of claim where this will prove to be of interest, is where alongside a modest claim for personal injuries, there is a more substantial claim for credit hire.

I elect upon credit hire with deliberation.

This is because the example of a credit hire claim is expressly contemplated by the Practice Direction to part 44 as an example of a claim brought for the financial benefit of someone else, namely the credit hire company.

Paragraph 12.2 provides as follows:

Examples of claims made for the financial benefit of a person other than the claimant or a dependant within the meaning of section 1(3) of the Fatal Accidents Act 1976 within the meaning of rule 44.16(2) are subrogated claims and claims for credit hire.

So far so good.

But there is a problem with this Practice Direction in that it appears to conflict with the analysis of the House of Lords in the case of Giles.v.Thompson [1994] 1 AC 142 where Lord Mustill, rebutting suggestions that the credit hire companies in that case were engaged in maintenance and champerty observed as follows:

Although the arguments before the Court of Appeal, and initially before the House, proceeded on the footing that the two appeals were the same, it is I believe clear that there are significant differences between them, and that they call for separate consideration. I will begin with Devlin v Baslington. An essential preliminary is to answer certain questions concerning the rights and liabilities created by the hiring agreement. Since, however, I believe that the resolution of this particular appeal admits of no doubt I will deal with these questions quite briefly.

The first is this: what rights does the company possess in the sums recovered by the motorist from the defendant? The answer is plainly: none. Neither the contract nor the form of authority purported to create a charge over the proceeds of the claim, either as regards the hiring charges, or the damages for personal injuries, or any other item. Clause 5(iv) merely required the motorist to press ahead with the recovery of sufficient funds to discharge her indebtedness to the companies. Equally, there was no assignment of the proceeds of the action or of the cause of action itself. As for the second part of the form of authority, even if this was irrevocable (which I doubt) it was no more than a mechanism designed to ensure that, once the motorist was put in funds by the successful actions, the appropriate part of them reached the company.

And in the second appeal, that of Giles v Thompson:

As in Devlin v Baslington an essential preliminary is to ascertain the rights and obligations created by the hiring agreement. First, one must see whether the companies obtain any direct rights over the fruits of the claim for the element of damages representing the hire charges. Here, the answer is just as clear as it was before. The companies have no interest, whether by charge or assignment, which give them any claim to the proceeds which they can enforce against the defendant. Nor is any part of the recovery shared with the motorist, in the sense (for example) that they have a preferential claim to it against the other creditors of the motorist. The position is simply that the success of this part of the claim will equip the motorist with extra money, from which the hire charges can be satisfied.

This seems clear enough: in those cases at least, the credit hire companies had no financial interest in the litigation on the analysis propounded by Lord Mustill.

That does not of course mean that in all conceivable factual scenarios where a a credit hire claim is made that there can never ever be a financial benefit accruing to a credit hire company, but where does it leave paragraph 12.2 of the Practice Direction which seems to contemplate that all credit hire claims will be caught? And whether or not a non-party costs order can be properly made against a credit hire company?

The simplest answer is that paragraph 12.2 must be “read down” as an ordinary exercise in construction, so that it only applies to credit hire claims where there is something more or additional to Lord Mustill’s analysis based on the facts before him, and so the paragraph should be given a narrow construction.

The bolder answer is to conclude that paragraph 12.2 is ultra vires. The law has been established by Giles v Thompson and as a Practice Direction is neither primary or secondary legislation, not being made by Parliament in either an Act of Parliament or a statutory instrument, it is not open to a Practice Direction to alter the substantive law as declared by the House of Lords.

The answer to this question matters tremendously.

It will dictate whether the cost of the “saecular war” still raging between the insurance industry and the credit hire companies, is borne by the insurance industry, come what may.

Assignment of CFAs: are your retainers bullet proof?

A steady flow of assignment points continue to arise and to cross my desk on a weekly basis.

Solicitors who have purchased cases from administrators, merged firms with another firm, changed their employment, reconstituted from an unlimited liability partnership to an LLP, all seem to have elected upon assignment as the tool of choice for transferring the value in their cases in changed circumstances.

The problem is particularly acute in personal injury and clinical negligence litigation, but also arises in general litigation where substantial success fees are at stake, as paying parties are now probing assiduously for cracks in the retainer.

I can help.

If you would like me to consider your retainers, and advise on their validity and whether remedial steps need to be taken to safeguard your work in progress, I am happy to advise under my usual terms, found on this website.

Please feel free to contact me in chambers accordingly.


Third party costs assessments reconsidered

Third party costs assessments are rare beasts. The context in which they commonly arise is in the context of challenging a solicitor’s costs for administering an estate, when disappointed beneficiaries find that the residuary pot from which their legacies have been drawn, has been depleted rather more than they had hoped.

The starting point is to note that the work is non-contentious business and accordingly as a point of substantive law pursuant to section 56 (7) of the Solicitors Act 1974 the assessment of a bill of costs of a solicitor in respect of non contentious business is to be subject to the provisions of any Remuneration Order made under the section.

The Solicitors (Non-contentious Business) Remuneration Order 2009 is the order currently in force and this provides crucially at article 3 the criteria by which a solicitors fees or costs are to be judged.

In particular there is a requirement that a solicitor’s costs must be fair and reasonable having regard to all the circumstances of the case and in particular; to the complexity of the matter or the skill or novelty of the questions raised; the skilled labour specialised knowledge and responsibility involved; the time spent on the business; the number and importance of the documents prepared or considered, without regard to length; the place where the circumstances in which the business or any part of the business is transacted; the amount of value of any money or property involved; whether any land involved is registered land within the meaning of the Land Registration Act 2002; the importance of the matter to the client; and the approval (express or implied) of the entitled person and the express approval of the testator to the solicitor undertaking all or any part of the work giving rise to the cost; or the amount of the costs.

In the “interpretations” contained in article 2 an entitled person means a client or an entitled third-party and an entitled third-party means the residuary beneficiary absolutely and immediately and not contingently entitled to an inheritance where a solicitor has charged the state for his professional costs for acting in the administration of the estate and the only personal representatives are solicitors or their like.

It is open to  residual beneficiaries to apply for a assessment known as a third-party assessment under section 71 (3) of the Solicitors Act 1974.

The case of Tim Martin Interiors Ltd-v-Akin Gump LLP [2011] EWCA Civ 1574 is particularly interesting,  given that purportedly it applies in respect of personal representatives who hold estates and beneficiaries who wish to challenge the amount of costs incurred and paid out of the fund per paragraph 2 of Lord Justice Lloyd’s judgement which reads as follows:

The same problem may arise in other situations. A purchaser may be liable to pay costs incurred by a vendor, a tenant the costs incurred by a landlord, an insurer may have to pay costs incurred by its insured, or one party the costs incurred by another in some other kind of transaction.  By analogy, the liability to bear the burden of the costs may arise because the solicitor’s client is a fiduciary, a trustee or personal representative holding a trust fund or estate, or an office-holder in an insolvency or a receivership, and a beneficiary or creditor may wish to challenge the amount of the costs incurred and paid out of the fund.

In particular terms paragraphs 82 to 84 of the judgement of Lord Justice Lloyd which seems to truncate horribly the scope of an assessment under section 71 are of concern:

None of the older cases seems to show that the court allowed the recovery of a lesser amount for some item in the bill on the basis that some expenditure on it was proper but that too much had been claimed. The cases all appear to me to show that items were either allowed or disallowed in whole.  In particular what Cozens-Hardy J said in Re Gray at page 246, quoted at paragraph [46] above, is inconsistent with Mr Saifee’s submission that on a third party taxation under section 38 of the 1843 Act, the amount allowable in respect of given work could be reduced as regards the liability of the third party even if it could not be reduced as regards the liability of the client under section 37.

Neither on the basis of precedent, therefore, nor as a matter of principle does it seem to me that it is open to the court on an assessment under section 71 to substitute a lower amount for a higher one, on the basis that something is allowable but that the rate claimed is unreasonably high, unless that substitution could have been made on an assessment under section 70 as well. Where the client has agreed the bill and paid it, such a substitution is not possible under section 70.

Thus, I accept Mr Saifee’s argument to the extent (but no further) that on an assessment under section 71, the court can strike out of a bill (a) any item which relates to business for which the third party is not liable at all (e.g. here the bankruptcy, which is outside the scope of liability under the mortgages) and (b) any item which, as a whole, would only be allowable as against the client on the basis of advice that it would not be recoverable against the third party, and therefore is to be treated as subject to a special arrangement between client and solicitor. I do not accept that either the cases or the statute allow the court to alter the amount of an item in the bill in respect of which something is properly chargeable, but where the court considers that the amount claimed is excessive and unreasonable, so that a lower amount should be allowed, unless that could be done on an assessment under section 70, as between the solicitor and the client directly.  I therefore agree with Lewison J who said at paragraph 34:

“On an assessment under section 71 the court is entitled to interfere with the hourly rate agreed between the solicitor and the client; but only to the extent that it could have interfered with it at the behest of the client.”

He went on to point out that in a case where the client had agreed the rate there was very little scope for such interference, because of the presumption under CPR rule 48.8(2)(b).

That is a serious limitation on the scope of an assessment under section 71 for determining the question what is properly due from the third party to the client. In his submissions Mr Saifee invoked the words of Kekewich J in Re Longbotham & Sons, quoted at paragraph [48] above, in support of the argument that the courts had been able to construe the section in a more constructive way, so as to be more useful to a third party, and that this approach should be maintained.  It is a fair comment that the courts were able to go quite a long way towards helping a third party in this situation, and also that, if this cannot be applied in present circumstances where the dispute is likely to include matters such as the proper hourly rate, then resort to an assessment under section 71 will rarely be of use to a third party.  Nevertheless, it seems to me that what Mr Saifee invited the court to sanction is not within the scope of the section.  I therefore agree with Lewison J that, while it was correct for Master Campbell to exclude from the assessment under section 71 matters to do with actual or possible bankruptcy proceedings against the guarantors, it was not open to him to reduce the amount chargeable in respect of items which, as such, were within the scope of the liability for costs under the mortgages.  In particular it was not open to him to assess the bill on the basis that no more than £225 per hour should be allowed for a Grade A fee earner’s time spent on the matter.  The Bank as client had agreed to these charges and could not itself have challenged them on an assessment, even if it had wanted to do so.  It follows that the third party could not challenge them by way of a section 71 assessment.

Indeed it contemplates that were for example an executor, to have agreed a bill of costs rendered to him by the solicitor, if this case applies to an application for an assessment by residuary beneficiaries there will be very little indeed that can be challenged by way of assessment as the executor, is of course, the client.

But this judgement can be distinguished on another ground. In particular it seems to me that there is a clear distinction to be drawn between the position of a mortgagor under section 71(1) of the Solicitors Act 1974 and section 71 (3) which is the section we are concerned with concerning the rights of residual beneficiaries.

This latter section lacks the crucial wording “as if he were the party chargeable with it”, indicating that the assessment under section 71(3) is wider in scope than that which applies under section 71(1).

That would be quite sensible: a beneficiary is not subject to the contractual obligations contemplated by section 71(1) and is never “liable” for the bill. That would serve as a point of distinction although  the wording of paragraphs 101 and 102 of the judgement  again contemplates that it is applicable to claims arising out of the administration of an estate.

Instead of seeking an assessment under section 71, therefore, in almost all cases a mortgagor or other party seeking to challenge the costs claimed and received by a mortgagee should bring a claim for an account of the sums due under the mortgage. I doubt that such proceedings for an account nowadays would be much more complex than assessment proceedings.  In practice the mortgagor would issue a claim form, perhaps under Part 8, in the Chancery Division or, where appropriate, in the county court, and on the first hearing before the Master or District Judge he would apply for an order that the costs in dispute be referred for assessment, normally to the SCCO.  From then on, the procedure would be as for an assessment under section 70, but with the right parties contesting it, namely the mortgagor and the mortgagee.  The costs judge will have the necessary expertise, and will be able to decide the dispute, on ordinary principles and processes of assessment, in an economical and efficient manner.  Once the assessment is complete, the result would be reported to the Master or District Judge, and the account would proceed on that basis.  Somewhat more by way of steps in the proceedings would be necessary than for an ordinary assessment, but not a great deal.  If there are other issues in dispute as well they can be dealt with in whatever is the appropriate way, by the Master or District Judge or, if necessary, by a judge.

A claim for an account may be the right approach for several situations which can throw up this sort of problem, for example in the case of a trust or the administration of an estate. In other cases that may not be the right approach, and it may be necessary to claim a declaration as to the amount properly due, especially if the amount claimed has had to be paid by the third party, no doubt under protest.

In the light of this judgment it may be anticipated that third party assessments will become rare, whereas claims for an account, and like proceedings in other types of case, where the real issue is as to the reasonableness of legal costs, best resolved by those experienced in the assessment of costs, may become much more frequent. With that in mind, it seems to me that it might be sensible for a dispute which is only, or mainly, about legal costs to be able to be commenced as an application for an account directly in the SCCO, rather than having to go via the Chancery Division.  So far as the jurisdiction of the county court is concerned, as regards an assessment under section 70 or 71 it is limited to a case where the bill relates wholly or partly to contentious business in the county court and where the bill does not exceed £5,000: see article 2(7) of the High Court and County Courts Jurisdiction Order 1991.  So far as I am aware, none of the financial limits on the jurisdiction of the county court in that article applies to a claim for an account under a mortgage.  It seems to me that the appropriate procedure for a dispute of this kind is a subject worthy of the attention of the Civil Procedure Rules Committee. 

It may be then that there is a simpler solution than prodding that sleeping Leviathan the Rules Committee: given that the Court of Appeal appear not to have noticed the difference in wording between sections 71(1) and (3) and were not concerned with a claim for costs arising from the administration of an estate, the comments could be said to be obiter dicta and per incuriam in any event.

Assignment: the plot thickens

An interesting decision on the issue of assignment of CFAs was handed down this week by District Judge Besford sitting in the County Court at Hull.

A copy of the judgment can be found here:

Budana v Leeds Teaching Hospitals NHS Trust 3KH000905

The appeal in Jones v Spire Healthcare has also been adjourned and is to be relisted later in the year.

It is clear that this point has a little way to run yet.

Facts and figures

The new edition of Litigation Funding comes out this week and I am pleased to note that my most recent article is inside.

Facts and Figures can be downloaded here: Facts and Figures

The article is about risk: a subject I feel is particularly pertinent at the current time, given the slow crucifixion a number of law firms in the personal injury market are currently enduring over the state of their finances.

Costs lecture 4th March 2016

On Friday 4th March 2016 in Nottingham, I shall be presenting my paper “Costs 2016” with a colleague at the Ropewalk Chambers Personal Injury Conference. I shall be speaking on issues including the assignment of CFAs, digital billing and J codes, and fixed costs amongst other matters.

There is no charge to attend, but places are limited, and I ask for a donation to a charity that we as a chambers, collect for each year.

If you would like to attend, please drop Alan, my clerk a line on or by telephone on 0115 947 2581 for more information.

The time has come

This week, ended with a flourish with a speech by Jackson LJ (delivered it seems with the concurrence of the Master of the Rolls) on the subject of fixed fees.

The text of the speech can be read here: Fixed Costs The Time has Come.

Already the internet has exploded with alarm, satisfyingly in tandem with the release of the Dads Army reboot, with complaints echoing Private Fraser’s famous cry of: “We’re all doomed!”

In truth, a broad based scheme of fixed costs which applies to all claims up to £250,000 has a lot to commend it in terms of facilitating access to justice. It will provide certainty.

It reduces the risk that the losing side to litigation will go bust, due to a huge and unknown costs liability and at a stroke, it means that the pointless and expensive costs budgeting regime can be locked away with the cutlass and the broadsword, as a relic belonging to another time.

It also is likely to overtake the move to J codes and digital billing: if virtually all costs are fixed, who will care when inter partes costs come to be awarded about time management and logging each and every individual letter? J codes can then be relegated to  solicitor own client charging, for those who choose to adopt them, which after all, is what they were designed for.

Such a regime might also kick start a properly funded and worthwhile BTE industry now able to more accurately gauge and quantify its exposure to adverse costs, with reasonable premiums and also provide stabilisation of the ATE industry.

It also, represents the reinvention of the way litigation used to be funded: devotees of the nineteenth century practice of costs, will  be well aware that most costs were fixed by scales, and event those who practised at the end of the twentieth century will recall with fondness the scale costs that applied then.

The only reason, that I could discern why scale costs were not carried forward into fixed costs under the Woolf reforms in 1999, was because the rules were rushed into force whilst half written, leading to endless updates as the vestigial remnants of the County Court Rules and Rules of the Supreme Court were gradually cleared away.

The biggest concern that the introduction of fixed costs will have, is one that affects the workload and the remuneration of the lawyers.

Fixed costs in Germany, undoubtedly affect the structure of the legal profession: most firms there are small, engaged with a very different court process than the one we have in England and Wales, and have the benefit of a very stable BTE insurance industry.

I cannot see how a significant proportion of the legal profession, which currently makes a living from disputes over costs and their quantification can continue in their current employment, or rather continue doing what they do now.

I also suspect that in absolute terms, it will lead to lower costs awards across the board, and a likely decrease in remuneration in traditional areas of work, although much will turn obviously, at what levels fixed costs will be set at.

However, equally, I think that areas of work which are currently in desuetude, due to LASPO 2012, might flare into life again: I have in mind particularly disability discrimination claims and environmental claims.

Moreover, fixed costs are more generally likely to cause cases to fight and go to trial, as defendants know that the downside to defending a case tooth and nail will be limited.

So the upshot of fixed costs could be more litigation rather than less: in which case, the solution for those lawyers who practise exclusively in costs, is perhaps to engage with what could be optimistically described as a process of “creative destruction” and start to think about the opportunities that this will create, and start planning for them now.

I would draw a parallel with industrial change. It is now more than 30 years since the miners strike of 1984-1985: the mining industry has effectively gone. Many of those miners, who lost their jobs in the decade after the strike, never worked again. But the demand for energy and the need for an energy industry has never been greater: the key is to ensure early recognition and adaptation to the way the legal services industry is going to change over the next few years to avoid the miners’ fate.



Non party costs orders revisited

An area of costs practice which is becoming increasingly overloaded with authority is the jurisprudence governing applications for non party costs Orders.

Such applications arise in a number of contexts: they may be made against directors of insolvent companies which are unable to pay costs awards against them, against funders of litigation, who may have funded litigation for a variety of reasons or in a variety of ways, insurance companies and credit hire organisations, and also, increasingly solicitors.

This latter category of case is likely to increase as defendants in personal injury cases, come up with ever more cunning plans to circumvent the QUOCS scheme and to seek recovery of costs from the deep pockets of a solicitor’s professional indemnity insurer.

The practical context of the burgeoning number of authorities, particularly at appellate level, is an increased burden of research when advising upon and arguing an application.

The recent authority of Deutsche Bank v Sebastian Holdings and Alexander Vik [2016] EWCA Civ 23 is accordingly of interest, as it signals a desire at appellate level to return to simplicity in setting out the criteria governing when such an order should or should not be made. The case also re-iterates the policy underlying the jurisdiction, which cuts across such concepts as limited liability, the order piercing the corporate veil to make an owner or officer of a company personally liable for the costs liabilities of a limited company.

A copy of the judgment can be found here: Deutsche Bank v Sebastian Holdings [2016] EWCA Civ 23

The facts of the case can be briefly drawn from paragraphs 2 and 3 of the judgment of the Court of Appeal:

2. The background to the appeal lies in proceedings between the Bank and Sebastian relating to the operation of accounts maintained by Sebastian with the Bank for trading in foreign currencies, shares and financial products. Except to the limited extent identified later in this judgment, it is unnecessary for present purposes to describe the course of dealing on the accounts or the relationship between the parties, other than to say that in January 2009 the Bank began proceedings against Sebastian in this country to recover the sum of approximately US$250 million due principally in respect of amounts owed on the closing out of various trading positions. Sebastian brought a counterclaim against the Bank for approximately US$8 billion in respect of the losses it alleged it had suffered as a result of the Bank’s breaches of contract in forcing it to close out certain open positions contrary to its wishes. In November 2013, after a trial lasting 44 days, Cooke J. gave judgment for the Bank on its claim in the sum of US$243,023,089 and dismissed Sebastian’s counterclaim. The judge also ordered Sebastian to pay 85% of the Bank’s costs, which are said to amount to about £60 million, on the indemnity basis. We shall refer to the proceedings between the Bank and Sebastian as “the main action”.

3. The appellant, Mr. Alexander Vik, was at all material times the sole shareholder and sole director of Sebastian, a company incorporated in the Turks and Caicos Islands which he used as a personal investment vehicle. Sebastian, which is now said to have no assets, failed to make any payment in respect of the judgment or the Bank’s costs and the Bank therefore applied to join Mr. Vik as a defendant with a view to obtaining an order that he pay the costs of the proceedings himself. The application was made on the basis that Mr. Vik owned and controlled Sebastian, that he had directed the litigation on its behalf, that he had funded the litigation, or had made funds available to enable Sebastian to pursue it, that it had been conducted for his personal benefit and that therefore he was the “real party” to the litigation. After a two-day hearing, at which Mr. Vik was represented by Leading and Junior Counsel, Cooke J. made the order to which we have referred. The order did not expressly state that the sum of £36,204,891 was to be paid on account of the Bank’s costs, but it is clear from the opening paragraph of his judgment that that was what the judge intended.

The Court of Appeal considered some guidance that had been formulated in the early years of the development of the non party costs jurisdiction:

14. In Aiden Shipping v Interbulk (The ‘Vimeira’) [1986] A.C. 965 the House of Lords held that section 51 gives the court jurisdiction to make orders for costs against persons other than parties to the proceedings, subject to any restrictions that might be imposed by rules of court. The decision thus opened the way for orders for costs to be made against third parties when their connection with the proceedings makes it just and equitable to do so. In Symphony Group Plc v Hodgson the plaintiff, a manufacturer of kitchen units, employed the defendant on terms under which he agreed not to engage in the manufacture or supply of kitchen furniture for a year after leaving its employment. Having left the plaintiff’s employment, the defendant immediately took a job with a competitor, Halvanto Kitchens Ltd. The plaintiff commenced proceedings seeking damages and an injunction. The defendant obtained legal aid and was represented under his legal aid certificate by the solicitors who acted for Halvanto. The trial judge found in favour of the plaintiff and made an order for costs against Halvanto, but this court set aside the order on the grounds that it was unfair to Halvanto, which had taken no part in the proceedings. It held that Halvanto could have been made a party to the proceedings, that it had been disadvantaged by the failure to warn it that an application for costs might be made against it and that its connection with the original proceedings was not close enough to justify admitting the judge’s findings of fact as evidence on the application for costs.

15. The case was cited to us principally for the guidance given in the judgment of Balcombe L.J., with whom Staughton and Waite L.JJ. agreed and in view of the importance which Mr. Cogley attached to it at various points in his argument, we think it appropriate to set it out in full. It runs as follows (pages 192H-194D):

“(1) An order for the payment of costs by a non-party will always be exceptional: see per Lord Goff in Aiden Shipping Co. Ltd v Interbulk Ltd [1986] A.C. 965, 980F. The judge should treat any application for such an order with considerable caution.

(2) It will be even more exceptional for an order for the payment of costs to be made against a non-party, where the applicant has a cause of action against the non-party and could have joined him as a party to the original proceedings. Joinder as a party to the proceedings gives the person concerned all the protection conferred by the rules, as to e.g. the framing of the issues by pleadings; discovery of documents and the opportunity to pay into court or to make a Calderbank offer (Calderbank v Calderbank [1976] Fam. 93); and the knowledge of what the issues are before giving evidence.

(3) Even if the applicant can provide a good reason for not joining the non-party against whom he has a valid cause of action, he should warn the non-party at the earliest opportunity of the possibility that he may seek to apply for costs against him. At the very least this will give the non-party an opportunity to apply to be joined as a party to the action under Ord. 15, r.6(2)(b)(i) or (ii).

Principles (2) and (3) require no further justification on my part; they 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: see Bahai v Rashidian [1985] 1 W.L.R.1337.

(5) The fact that the trial judge may in the course of his judgment in the action have expressed views on the conduct of the non-party constitutes neither bias nor the appearance of bias. Bias is the antithesis of the proper exercise of a judicial function: see Bahai v Rashidian [1985] 1 W.L.R.1337, 1342H, 1346F.

(6) The procedure for the determination of costs is a summary procedure, not necessarily subject to all the rules that would apply in an action. Thus, subject to any relevant statutory exceptions, judicial findings are inadmissible as evidence of the facts upon which they were based in proceedings between one of the parties to the original proceedings and a stranger: see Hollington v F. Hewthorne & Co. Ltd [1943] K.B. 587; Cross on Evidence, 7th ed. (1990), pp. 100-101. Yet in the summary procedure for the determination of the liability of a solicitor to pay the costs of an action to which he was not a party, the judge’s findings of fact may be admissible: see Brendon v Spiro [1938] 1 K.B. 176, 192, cited with approval by this court in Bahai v. Rashidian [1985] 1 W.L.R. 1337, 1343D, 1345H. This departure from basic principles can only be justified if the connection of the non-party with the original proceedings was so close that he will not suffer any injustice by allowing this exception to the general rule.

(7) Again, the normal rule is that witnesses in either civil or criminal proceedings enjoy immunity from any form of civil action in respect of evidence given during those proceedings. One reason for this immunity is so that witnesses may give their evidence fearlessly: see Palmer v Durnford [1992] Q.B. 483, 487. In so far as the evidence of a witness in proceedings may lead to an application for the costs of those proceedings against him or his company, it introduces yet another exception to a valuable general principle.

(8) The fact that an employee, or even a director or the managing director, of a company gives evidence in an action does not normally mean that the company is taking part in that action, in so far as that is an allegation relied upon by the party who applies for an order for costs against a non-party company: see Gleeson v J. Wippell & Co. Ltd [1977] 1 W.L.R. 510, 513.

(9) 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 (S.I. 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.”

16. Staughton L.J. said at page 196:

“Neither Mr. Bramley nor Halvanto had any warning that questions which would tend to make out such a case would be asked. Neither had reason to obtain professional advice on the topic before Mr. Bramley gave evidence. Neither was represented by counsel at the trial, who might, for example, have asked further questions in re-examination. The main purpose of pleadings is to inform one party of the case which the other will seek to make against him. That is an essential feature of justice, and was entirely absent here.

Nevertheless, there are cases, as Balcombe L.J. has shown, where a person may be ordered to pay costs on the basis of evidence given and facts found at a trial to which he was not a party. Before such an order is made, it must be just and fair that the stranger should be bound by that evidence and those findings. In my judgment that is not the case here. My second reason is that the deputy judge’s findings were reached without the assistance of submissions from counsel representing Halvanto, or of any further evidence that Halvanto might have called.”

Plainly in the view of the Court of Appeal in Deutsche Bank, the law had moved on in the twenty or so years, since these guidelines had been formulated:

17. A number of points emerge from that case. First, we think it is clear that all three members of the court assumed that the procedure to be adopted for deciding whether a third party should bear all or part of the costs of the litigation should be summary in nature, in the sense that the judge would make an order based on the evidence given and the facts found at trial, together with his assessment of the behaviour of those involved in the proceedings. Second, in order to justify the adoption of a summary procedure the third party must have had a close connection of some kind with the proceedings. Staughton and Balcombe L.JJ. both emphasised that the court should not make an order for costs against a third party unless it is just and fair that he should be bound by the evidence given at trial and the judge’s findings of fact. Whether that is so in any given case will depend on the nature and degree of his connection with the proceedings.

18. Third, we do not think that the court was seeking to do more than provide an indication of the kind of factors that judges should take into account, as appropriate in the particular cases before them, when asked to make an order of this kind. Factors such as failing to join the person concerned as a party to the proceedings or failing to warn him that an application for costs may be made against him may in some cases weigh heavily against adopting a summary procedure, but each case has to be considered on its own merits in order to ascertain whether the third party will suffer an injustice if he is held bound by the evidence and findings at the trial. Decisions made on applications of this kind since Symphony v Hodgson, to many of which we were referred, only serve to illustrate the wide range of circumstances in which orders for costs have been sought and made against third parties.

19. In Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39, [2004] 1 W.L.R. 2807 the Privy Council awarded the successful petitioner its costs, but since the respondents were unable to pay them, the petitioner applied for an order that they be paid by a third party, a company associated with one of the respondents which had promoted and funded the appeal substantially for its own benefit. Giving the judgment of their Lordships Lord Brown of Eaton-under-Heywood said:

“25. A number of the decided cases have sought to catalogue the main principles governing the proper exercise of this discretion and their Lordships, rather than undertake an exhaustive further survey of the many relevant cases, would seek to summarise the position as follows. (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 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”, described in para 40 of Hamilton v Al Fayed (No. 2) [2003] Q.B. 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”. 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, 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-see, for example, the judgments of the High Court of Australia in the Knight case 174 CLR 178 and Millett LJ’s judgment in Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 W.L.R. 1613. Consistently with this approach, Phillips LJ described the non-party underwriters in T G A Chapman Ltd v Christopher [1998] 1 W.L.R. 12, 22 as “the defendants in all but name”.”

20. A little later, summarising the principles to be derived from those and other authorities, he said:

“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. As explained in the cases, however, that is not to say that orders will invariably be made in such cases, particularly, say, where the non-party is himself a director or liquidator who can realistically be regarded as acting rather in the interests of the company (and more especially its shareholders and creditors) than in his own interests.”

21. These principles have been applied in a number of subsequent cases, but it is unnecessary to consider them in detail because they all turn to a greater or lesser degree on their own facts. When an order for costs is sought against a third party, the critical factor in each case is the nature and degree of his connection with the proceedings, since that will ultimately determine whether it is appropriate to adopt a summary procedure of the kind envisaged in the authorities, leading to what Neuberger L.J. in Gray v Going Places Leisure Travel Ltd [2005] EWCA Civ 189 described as “the overall order made by the court at the conclusion of the trial.” It is important to note, however, that, contrary to Mr. Cogley’s submission, the guidance given in Symphony v Hodgson has not been regarded as immutable, but has been developed and modified in subsequent cases to reflect the differing circumstances under which applications for orders of this kind have been made.

22. As the judge noted in paragraph 9 of his judgment, an application under section 51 does not involve the assertion of a cause of action; it is a request for the court to exercise a statutory discretion in relation to the costs of proceedings before it. Section 51 is now the source of the court’s discretion to determine who shall bear the costs of proceedings, whether they are parties to the proceedings or third parties. In principle, therefore, one would expect the procedure in each case to be substantially the same and the order to reflect broadly similar matters, such as the conduct of the proceedings and the nature of the party’s or third party’s involvement. In our view there is a clear distinction to be drawn between the process by which the court makes an order for costs at the conclusion of a trial, whether that order involves the parties alone or one or more persons who are not parties, and separate proceedings against a third party consequent upon the outcome of the trial. In the former case, the ordinary rules of evidence do not apply, precisely because the person against whom an order for costs is sought has had a sufficiently close connection with the proceedings to justify the court’s treating him as if he were a party.

The Court of Appeal further commented on the suggestion that a warning should be given of the possibility of an application for a costs order to a non party in these terms:

31. It is worth remembering that the Symphony guidelines as a whole were formulated in the context of an attempt by the plaintiff to obtain an order for costs against a third party whose connection with the proceedings was fairly tenuous. The second and third guidelines are concerned with ensuring that such a person has a fair opportunity to deal with any allegations that may affect his liability for costs before the judge makes his findings. They are not ostensibly directed to a case such as the present, in which an order for costs is sought against a third party who can properly be regarded as the real party to the litigation. The truth is that Mr. Vik had every opportunity to contest the Bank’s factual and legal case and took full advantage of it. We agree with the judge, therefore, that the only advantage that a warning could have given him would have been an opportunity to reconsider his own position in relation to the proceedings.

Interestingly the Court of Appeal doubted the correctness of certain dicta of Arden LJ, which had been interpreted in some quarters to provide an “out” for directors or officers who give evidence in proceedings:

42. Mr. Cogley submitted that to make an order for costs against Mr. Vik in the circumstances of this case would infringe the principle of witness immunity, as foreshadowed in the seventh of the Symphony guidelines, and in support of that argument he drew our attention to the decision of this court in Oriakhel v Vickers [2008] EWCA Civ 748. The case concerned a claim for damages alleged to have been suffered in a motor accident, but the defendant’s insurer had succeeded in proving at trial that the claimant and the defendant had concocted the claim, which was entirely spurious. The claimant had called as a witness a Mr. Khan, who claimed that he owned a garage, knew the defendant and had arranged for the damaged car to be brought in. The judge found that Khan was closely associated with the defendant and had given false evidence, but was not sure that he had been the mastermind behind the claim.

43. After the evidence had been closed the insurers informed Khan that they would apply for an order that he should pay the costs of the action on the grounds that he had been involved in setting up and running the claim. The judge declined to make such an order. He was not satisfied that Khan had funded or controlled the litigation, which he thought was a pre-requisite to making an order of that kind. This court held that to have been wrong and proceeded to exercise the discretion afresh, but it too decided that it should not make an order for costs against him. The leading judgment was given by Jacob L.J. He declined to make an order because he considered that Khan could have been joined as a defendant to an allegation of conspiracy and would then have been better able to protect his position. Also, he did not consider that Khan had had a sufficiently close connection with the proceedings to make it just to hold him bound by the judge’s findings of fact. Arden L.J. agreed with Jacob L.J., but added that to make an order for costs against Khan in the circumstances of that case would have infringed the law on witness immunity. Jacob L.J. agreed with those observations and Sir Anthony Clarke M.R. agreed with both judgments.

44. It is clear from paragraph 36 of the judgment in that case that the question whether to make an order for costs against a witness as a result of his evidence would infringe the law relating to witness immunity had not been the subject of argument. In our view Arden L.J.’s observations are obiter and should be treated with caution. They also have to be understood in the context of the case then before the court. Khan had not funded and controlled the litigation for his own benefit and so could not be regarded as the real party to the proceedings. Moreover, it was clearly open to the court to conclude that his involvement in them was not sufficiently close to justify holding him bound by the judge’s findings of fact. It is necessary to bear in mind that when making an order for costs the court is exercising a discretion, not giving effect to legal rights and obligations, but having said that, we consider it important for it to respectthe principles underlying witness immunity. In Symphony v Hodgson the court in its seventh guideline appears to have recognised that there may be cases in which it will be just to make an order for costs (not necessarily the whole costs of the action) against a witness and we do not think that the possibility should be excluded. The power to make such an order should, however, be exercised with considerable care. To make an order for costs against a witness simply because he has given false evidence might well infringe the principles of witness immunity, but to make such an order on the grounds that he had conspired with others to pursue a claim that was entirely fabricated would not, even if in order to support it he had given false evidence. We do not understand the court to have suggested otherwise; indeed Arden L.J. herself in paragraph 37 appears to have recognised that to be the case.

The Court of Appeal also emphasised the philosophical underpinning of the jurisdiction, where economic reality was found to cut across such norms as limited liability:

50. Mr. Cogley objected to this kind of analysis on the grounds that it amounts to piercing the corporate veil and treating Sebastian and Mr. Vik as one person. In one sense that might appear at first sight to be true, but it is necessary to bear in mind that on an application of this kind the court is not concerned with legal rights and obligations but with a broad discretion which it will seek to exercise in a manner that will do justice. In Threlfall v ECD Insight Ltd [2013] EWCA Civ 1444 Lewison L.J. said:

“13. If a non-party costs order is made against a company director, it is quite wrong to characterise it as piercing or lifting the corporate veil; or to say that the company and the director are one and the same. As Mr Shaw has demonstrated, the separate personality of a corporation, even a single-member corporation, is deeply embedded in our law. But its purpose is to deal with legal rights and obligations. By contrast, the exercise of discretion to make a non-party costs order leaves rights and obligations where they are. The very fact that the making of such an order is discretionary demonstrates that the question is not one of rights and obligations of a non-party, for no obligations exist unless and until the court exercises its discretion. Moreover the fact that the discretion, if exercised, is exercised against a non-party underlines theproposition that the non-party has no substantive liability in respect of the cause of action in question.”

51. It is for that reason that, in appropriate circumstances, the court may find that the third party is the real party to the litigation because he is controlling, and perhaps funding, the litigation and conducting it for his own benefit rather than that of the nominal party to the proceedings. Although the court will not ignore the corporate structure, it is entitled when exercising its discretion in relation to costs to have regard to considerations of that kind.

Finally in a postscript, the Court of Appeal observed:

61. It will be apparent from what we have said that Mr. Cogley sought to place great emphasis on the Symphony guidelines to the point of treating them, in particular the third guideline, as laying down requirements that must be satisfied unless the applicant can demonstrate a good reason for failing to do so. In our view that is not the correct approach. When considering those guidelines it is important to bear in mind that they were formulated not very long after the decision in Aiden Shipping v Interbulk, at a time when applications for costs against third parties were relatively uncommon, and that they were intended merely to provide guidance, not to lay down rules. Since then there have been many more applications for orders for costs against third parties under a wide variety of circumstances, as a result of which it has come to be recognised more clearly than perhaps it was at that time that each case turns on its own facts.

62. As all three members of the court observed in Petromec v Petrobras, the exercise of the discretion is in danger of becoming over-complicated by authority. The decision of the Privy Council in Dymocks, which contains an authoritative statement of the modern law, explains and interprets the Symphony guidelines in a way which reflects the variety of circumstances in which the court is likely to be called upon to exercise the discretion. Thus, the Privy Council has explained that an order of this kind is “exceptional” only in the sense that it is outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. Similarly, it has made it clear that the absence of a warning is simply one factor which the court will take into account in an appropriate case when deciding whether, viewed overall, it would be unjust to exercise the discretion in favour of making an order for costs against the third party. We think it important to emphasise that the only immutable principle is that the discretion must be exercised justly. It should also be recognised that, since the decision involves an exercise of discretion, limited assistance is likely to be gained from the citation of other decisions at first instance in which judges have or have not granted an order of this kind.


Costs and the rule of law

The working year has begun.

On the horizon are more reforms to the law and practice of costs, including the move to digital bills and J codes, the tortuous marrying up of costs budgets and bills, the introduction of fixed costs for NIHL claims and clinical negligence claims, the rise in the Small Claims Track limit to £5000 for personal injury claims and the abolition of the exception to LASPO 2012, for insolvency proceedings.

Reforms particularly procedural reforms, can often seem to fall into two types: ambitious top down plans, formulated to make existing procedures better or to introduce a new and improved way of doing things or perhaps more commonly, haphazard and bit piece reforms, reactive to a particular perceived deficiency, largely for the benefit of one sectional interest at the expense of another.

In truth, such a dichotomy is false: all reforms have their genesis in sectional interests, who promote vigorously their preferred course of action, seeking to overturn the natural bent to inertia inherent in any system.

If the groundswell for change, is sufficiently wide and prolonged, then reforms can take on a widespread nature and achieve systemic change. Equally, caution and a very human desire to keep to the status quo, means that probably the majority of reforms are piecemeal.

Surveying the landscape of the law and practice of costs, in early 2016, including the wreckage left after the Jackson reforms and the introduction of LASPO 2012, the conclusion I draw is that not only does the current state of the law of costs lack all symmetry or consistency of theme, it is failing to meet some of the most basic requirements of a legal system underpinned by the rule of law.

Confining myself to civil proceedings, it is possible to note that the personal injury market is well served, by an intricate and prolix code of fixed costs for low value claims, notable by its absence in relation to other types of dispute.

Due to the existence of qualified one way costs shifting a person can bring a personal injury claim, and not go bust if they lose: but if someone has an environmental dispute or a discrimination claim they may be practically prevented from bringing it, by the absence of public funding, the absence of costs protection and not even the cold comfort of being able to predict their liability for costs should they lose.

The decimation of Legal Aid, has meant that access to justice is dependent in large part, in lawyers being willing to defer or make contingent their fees, but if lawyers are unwilling to do so, then the current system sees no constitutional problem with the lawyer through their caution, effectively acting as a de facto gatekeeper to the court.

This is a massive constitutional shift, which transfers far too much power to the lawyers, at the potential expense of the citizen, but inevitable for those cases for which contingency fees are the only means of funding litigation.

Public law proceedings are even more restricted by funding restrictions and costs rules; the number of lawyers who have the necessary skillset and are in the right place, to challenge the egregious actions of local authorities or central government is dwindling, and the limited protection provided by the Civil Procedure Rules for Aarhus claims or costs capping orders made under the common law jurisdiction adds a deliciously random quality to the prospects of a public law claim proceeding.

The inescapable conclusion that I draw, is that if you were looking to draw up a fair, reasonable and efficient set of provisions for costs to underpin a fair, reasonable and efficient system of civil justice, not in 100 years of effort would you come up with the present system.

So what should costs law and procedure look like? And is a search for overarching principles a vain pursuit?

I do not believe that it is a vain pursuit: I think that the law and practice of costs needs to return to its origins: as a means of facilitating justice, rather than acting as an impediment to it, and the simplest touchstone is to ask how any rule, provision or criterion, runs with the grain of a civil justice system which does in fact provide justice, the vindication of the substantive rights given to citizens by our laws.

Thus the starting point must be that the first and foremost purpose of the civil justice system is to provide a fair and efficient way for the citizens of this country at affordable cost, to resolve their legal disputes with each other and the state, avoiding civil disorder or self help or simple injustice, by legal rules conferring rights and obligations which conform with the rule of law.

Last year I attended the excellent conference run each October by the Public Law Project and listened with interest to the opening address by Lord Justice Laws, which included consideration of the rule of law, both the “thin” theory and the “thick” theory, beloved of legal jurists to describe different aspects or interpretations of the meaning of the phrase “rule of law”.

The differences between the theories perhaps are less significant than the similarities; most lawyers would agree that the rule of law means as an irreducible minimum, a legal system governed by publically declared and available laws, which apply with prospective effect and which apply generally and with equality and certainty to all.

It follows that any laws (including those pertaining to costs) must also comply with and be part of the rule of law: a settled predictable set of rules, which apply generally and with equality and certainty to all. This in turn means that there must be judges trained in and conversant with the law, a system for appeals to ensure that the laws are actually applied and applied consistently and means of enforcing decisions of the court, made according to law.

In a post industrial society of more than 60 million citizens any body of rules, must cater for the myriad complexities of the society it applies to, will be necessarily complex and thus a need for a legal profession to advise upon and interpret the law is arises, as an essential part of the rule of law. Such a profession must be paid for: the question is by whom and on what basis and the law of costs thus takes on a constitutional role.

The practice of costs shifting, whilst not essential for the rule of law, must if it applies result in predictable awards of costs, whether by fixed costs or otherwise, in order to comply with the overriding requirements of the rule of law.

The courts are for the losers as well as the winners, and it is antithetical to the notion of justice that a dispute must end with the ruin of the losing party, due to excessive costs.

Equally, whilst not essential that the state directly funds the legal profession, it must put in place satisfactory measures, which ensure that the individual can access legal advice and representation and have their claims resolved in court.

Of course, these considerations are far removed from the daily bread of arguing the toss over yet another part 45 issue in the County Court, but by the time we come to leave 2016, we can but hope that the law and practice of costs is in a better state than it currently would appear to be.