Avoiding Qualified One Way Costs Shifting: costs against solicitors

In many ways, the Jackson reforms, represent a return to the halcyon days of the 1990s, when success fees and ATE premiums were not recoverable inter partes, “Friends” appeared to be on endless loop and Mr Blair invited us all to join him in celebrating Cool Britannia.

Nowhere is the similarity, so marked, as in the introduction a fortnight ago, of the system of Qualified One Way Costs Shifting (QUOCS), a system of costs protection for claimants in personal injury actions, expressly based on the similar provisions which applied to claimants in receipt of public funding under the Legal Aid Act 1988 or latterly the Access to Justice Act 1999.

What is often forgotten, is that the “shield” created by these provisions, in turn sparked satellite litigation against the solicitors who represented unsuccessful claimants, alleging that for reasons x, y and z, those solicitors should pay the wasted costs of the action personally: the solicitors and their indemnity insurers, representing the only deep pocket a successful defendant could hope to get its costs back from.

It can readily be anticipated, that the introduction of costs shifting again, will spark a similar wave of litigation, against claimants’s solicitors both under the familiar wasted costs jurisdiction and the non-party costs jurisdiction.

An interesting recent case on non-party costs, illustrates the point. The conjoined appeals of Flatman.v.Germany and Weddall.v.Barchester Health Care [2013] EWCA Civ 278 concerned applications for disclosure, for the purposes of non-party costs orders against solicitors. As Leveson LJ noted:

2. The facts underline the potential for profit by solicitors against the limited downside risk and although the costs regime will change with the coming into force of Part 2 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, for certain types of litigation, the issues with which this appeal grapples will still arise. Indeed, in one sense, they may become more acute if Defendant‟s insurers can undermine the principle of qualified one way costs shifting (which will limit recovery of costs by insurers in failed personal injury actions) by pursuing the solicitors acting for the claimant who fails.

The appeals are particularly interesting, as they deal with the vexed issue, as to whether a solicitor who extends credit to a client, to fund disbursements, or even bears the cost of the disbursements himself, is “funding the litigation” and thus committing maintenance or champerty: circumstances, which might justify making a non-party costs order against the solicitor.

The Court of Appeal stated:

35. With that policy in mind, it is necessary to turn to the legislation. Section 58 of the Courts and Legal Services Act 1990 (as amended) makes CFAs lawful. A conditional fee agreement is defined by s. 58 (2)(a) as “an agreement with a person providing advocacy or litigation services which provides for his fees and expenses or any part of them to be payable only in specified circumstances”. The term „expenses‟ is not defined by the Act and at the core of this appeal has been its true meaning. Mr Carpenter for the solicitors, supported by Mr Holland Q.C. for the Law Society, argues that as a matter of ordinary language and on authority the word “expenses” includes own side‟s disbursements; Mr Brown for the insurers argues that, as a matter of principle and established use, a disbursement is to be distinguished from a solicitor‟s expense, which has important and practical implications in areas such as VAT.

36. The line between the practical effect of these different approaches is fine. Mr Brown argues that because disbursements are not included within the permissible category of costs, they cannot be made the subject of payment by the client conditional on success. That is not to say that the solicitor must insist on prepayment of disbursements by the client; the agreement, however, must require the client to remain responsible for them (whether or not the solicitor goes to the trouble and expense of pursuing repayment if the client, having lost his action, is impecunious). Mr Carpenter and Mr Holland argue that as a matter of ordinary language, once the solicitor has paid the cost of a disbursement (such as a court fee or a medical report) it becomes an expense and can be subject to a prior agreement that it will not have to be reimbursed (as opposed to a subsequent decision that it is not worth pursuing). This distinction can be remarkably fine: if photocopying of the court bundle is done in house, it is a cost to the solicitor; if it is sent out to a copying firm, it is a disbursement.

37. The significance of this narrow question of statutory construction goes back to the test identified in Tolstoy-Miloslavsky because it is argued that the solicitors could not be acting „outside the role of a solicitor‟ (so as to bring themselves within the third category identified by Rose LJ) if they were doing no more than the legislation which set up CFAs rendered lawful and not caught by the laws of maintenance or champerty.

38. Mr Brown took the court to different examples of the use of the terms „expenses‟ and „disbursements‟ but it seems to me that the phrase “fees and expenses” must be construed in the context of the legislation in which it appears. On the face of it, once it is conceded (as seems to me is inevitable) that the solicitor does not have to be in funds before incurring costs (such as the obtaining of a medical report), that cost has been borne by the solicitor (at least for the time being) and becomes an expense of providing advocacy or litigation services. To put it another way (which may be more relevant to the precise question which has to be answered), the cost may have to be the subject of an account to the client as a disbursement but the credit afforded to the client in respect of that cost is part of the service provided by the solicitor to his client.

This in turn led to the conclusion:

 47. In those circumstances, contrary to the submissions of Mr Brown, I agree with the issue of principle advanced by the Law Society (and Mr Carpenter) that payment of disbursements, without more, does not incur any potential liability to an adverse costs order. That, however, is not an end of this appeal because the issue in fact decided by Judge Maloney and Eady J was not to order costs but, rather, to order disclosure ofinformation prior to the insurers considering whether to apply for an order of costs. That is a different question and requires separate consideration.

After dealing with the disclosure obligations, Leveson LJ then went on helpfully to set out a meaningless exercise that insurance companies could fruitlessly follow under the new regime. Meaningless, because a claimant who has the benefit of QUOCS, so that an order for costs cannot be enforced against them will simply not bother to reply.

54. I appreciate that what has emerged in Weddall would not normally become known to a successful opponent in the absence of some sort of disclosure. I equally recognise that insurers will not wish to go to the expense of a costs assessment and enforcement exercise against an impecunious litigant simply in the hope that some detail will emerge which might alert them to the prospect that costs might be recovered against the solicitor. It is, however, a comparatively straightforward matter to deal with. The Law Society makes it clear that if solicitors have agreed to indemnify their client (as is entirely lawful: see Sibthorpe), the solicitors could not then seek to deny the existence of that indemnity or prevent their client from relying upon it. For my part, without seeking disclosure of documents, I see no reason why a successful insurer should not obtain an order for costs in principle against the claimant, together with an interim payment on account and invite the claimant to reveal the extent to which the litigation had been supported by any third party and to provide any reason why the costs order should not be enforced. I appreciate that it will not assist in many cases: examples such as Weddall, however, stand a prospect of being exposed thereby permitting the insurer to decide what, if any, further steps need to be taken.

NB: The “Rachel” haircut: due to return too?

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