Cost benefit analysis

Date: 
20 October 2016

Costs orders: who pays & when, asks Kerry Underwood

    • Wasted costs orders in civil litigation—a rapidly developing area of law.

    Wasted costs orders can only be made against a representative, whereas non-party costs orders can be made against anyone, including a representative.

    In both cases the power derives from s 51 of the Senior Courts Act 1981. Sub-section (3) provides that “the court shall have full power to determine by whom and to what extent the costs are to be paid” and this covers the county court, High Court and the civil division of the Court of Appeal (s 51(1)).

    This piece deals with wasted costs orders in civil litigation (but there are similar sanctions in the criminal courts and in tribunals) and non-party costs orders.

    Wasted costs

    Wasted costs includes disallowing costs and ordering payment of costs (s 51(6)) and can be at the suit of the representative’s own client or the other side (Medcalf v Mardell [2002] UKHL 27, [2002] All ER (D) 228 (Jun)).

    Section 51(7) defines wasted costs as costs incurred by a party as a result of any improper, unreasonable or negligent act or omission on the part of any legal or other representative or any employee of such a representative or which, in the light of any such act or omission occurring after they were incurred the court considers it unreasonable to expect that party to pay.

    A wasted costs order always involves criticism and thus will normally be on the indemnity basis. Section 67 of the Criminal Justice and Courts Act 2015 requires a court making a wasted costs order to report the lawyer to his or her regulator.

    A lawyer is not allowed to charge the client those costs. Thus if a wasted costs order is made at the suit of the other party then the lawyer cannot pass that charge on to the client.

    CPR 46.8 and Practice Direction 46 set out the procedure. The trial court must make any order but may then direct the costs judge or district judge to determine the amount (46.8(3)).

    The court must give the representative a reasonable opportunity to make written submissions or attend a hearing (46.8(2)).

    The leading case of Ridehalgh v Horsefield [1994] Ch 205, [1994] 3 All ER 848 CA where the Court of Appeal said that:

    • “Improper” covered conduct ordinarily justifying disbarment, striking off, suspension or other serious professional penalty and also conduct which according to the consensus of professional, including judicial, opinion could be fairly stigmatised as being improper, whether it violated the letter of a professional code or not.
    • “Unreasonable” included conduct which was vexatious, or designed to harass the other side rather than advance the resolution of the case.
    • “Negligence” should be understood in an untechnical way to denote failure to act with the competence reasonably expected or ordinary members of the profession, but an applicant for a wasted costs order had as high a burden as in an action for negligence.

    Balance

    Wasted costs orders need to balance two important public interests:

    1. that lawyers should not be deterred from pursuing their clients’ interests by fear of incurring a personal liability to their clients’ opponents; and
    2. that litigants should not be financially prejudiced by the unjustifiable conduct of litigation by their or their opponents’ lawyers.

    It is not for solicitors to conduct a pre-trial screening process even if they consider the case doomed to fail. In Ridehalgh the Court of Appeal said: “It is rarely if ever safe for a court to assume that a hopeless case is being litigated on the advice of the lawyers involved. They are there to present the case; it is (as Samuel Johnson unforgettably pointed out) for the judge and not the lawyers to judge it.”

    Professional privilege

    The courts have always recognised that lawyers will often be unable properly to defend themselves as they will be unable to make use of documents protected by legal professional privilege to justify their actions, it being a matter for the client alone to decide whether to waive privilege.

    In Medcalf v Mardell [2002] UKHL 27, [2002] All ER (D) 228 (Jun) the House of Lords held that a party can seek a wasted costs order against his opponent’s legal representatives as well as his own. However if the opponent declines to waive privilege to assist his own legal representative then they may have no ammunition with which to defend themselves.

    The House of Lords held that in such circumstances the court should not make an order unless, proceeding with extreme care, it is:

    1. satisfied that there is nothing the practitioner could say, if unconstrained, to resist the order; and
    2. that it is in all the circumstances fair to make the order.

    Qualified one-way costs shifting

    Since 1 April 2013 in personal injury matters there has been in place a system of qualified one-way costs shifting (QOCS) whereby losing claimants will not normally be liable for the successful defendants’ costs.

    Clearly parties and their lawyers will look more closely at making wasted costs applications if ordinary costs are not available.

    In Flatman & Germany v Weddall and Barchester Healthcare Ltd [2013] EWCA Civ 278, [2013] 4 All ER 349 the Court of Appeal held that solicitors who helped their clients by funding the cost of disbursements should not be liable for costs if the case fails even if no after-the-event insurance is in place. Indeed it was a practice to be encouraged.

    The Court of Appeal recognised the importance of its decision in relation to QOCS: “Defendants’ 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.”

    No costs jurisdiction

    Costs do not follow the event in family matters but in Fisher Meredith v JH & PH (Financial Remedy Appeal: Wasted Costs) [2012] EWHC 408 (Fam), [2012] All ER (D) 157 (Mar) the High Court held that that made no difference to the principles in relation to applications for wasted costs.

    This will be important in relation to personal injury claims once the small claims limit rises from £1,000.00 to £5,000.00 which is expected to take place in October 2017.

    Kerry’s new book on the subject Kerry on…Wasted & non-party costs orders is expected to be published in spring 2017.

    Non-party costs orders

    Non-party costs orders, also known as third party costs orders, can be made against anyone, including a representative and the court’s power derives from s 51 of the Senior Courts Act 1981.

    The principles were originally set out in Symphony Group Plc v Hodgson [1994] QB 179, [1993] 4 All ER 143.

    1. An order for the payment of costs by a non-party will always be exceptional and the court should treat an application with considerable caution.
    2. It will be even more exceptional where the applicant has a cause of action against the non-party and could have joined that party to the original proceedings as then they would have had the protection conferred by rules of court and the knowledge of all of the issues through pleadings and disclosure.
    3. A non-party should be warned at the earliest opportunity so as to give them an opportunity to be joined as a party, but failure to do so is not fatal (Relfo v Varsani [2012] EWHC 3848 (Ch), [2013] All ER (D) 171 (Jan)).
    4. The trial judge should normally determine any application.
    5. Even where the trial judge has expressed views as to the conduct of a non-party it does not necessarily constitute bias or the appearance of bias.
    6. The procedure is summary and the judge’s findings of fact are admissible provided that the non-party was sufficiently connected with the proceedings so as not to suffer any injustice.
    7. Witnesses generally enjoy immunity from civil action.
    8. The fact that an employee or director of a company gives evidence does not necessarily mean that the company is taking part in the action for the purposes of a costs order against a non-party company.

    Security for costs

    In Chilab v King’s College [2013] EWCA Civ 147, [2013] All ER (D) 352 (Feb) the Court of Appeal held that an application for security for costs against a non-party could only be made against a third party funder, that is someone who had contributed or agreed to contribute to the claimant’s costs in return for a share of any proceeds.

    Disclosure

    In Kamal v Ariela [2010] EWHC 2531, [2011] 1 All ER (Comm) 477 the High Court allowed an application for disclosure relevant to whether a third party costs order should be made.

    Evidence

    In Centrehigh Ltd v Amen [2013] EWHC 625 (Ch), [2013] All ER (D) 261 (Mar) the Chancery Division of the High Court held that s 51 applications should not involve a full trial with cross-examination of witnesses and full pre-trial procedures, even where, as here, the matter had settled without trial and where the court had not had a chance to assess the witnesses and documents.

    Solicitors

    Where a court declines to make a wasted costs order it can still make a non-party costs order against lawyers, but it cannot make such an order against a representative acting purely as a legal representative—Tolstoy-Miloslavsky v Lord Aldington [1996] 1 WLR 736, [1996] 2 All ER 556.

    In Tolstoy the Court of Appeal held that there were only three categories of conduct which can give rise to an order against a lawyer:

    1. if it is within the wasted costs jurisdiction;
    2. if it is otherwise a breach of duty to the court, for example acting without authority, or in breach of an undertaking; and
    3. if the lawyer acted outside the role of lawyer, for example in a private capacity or as a true third-party funder for someone else.

    The fact that a solicitor is working on a contingent fee, or no fee at all, is irrelevant.

    Claims management companies

    In Farrell v Birmingham City Council [2009] EWCA Civ 769, [2009] All ER (D) 172 (Jun) the Court of Appeal ordered a claims management company to pay 80% of the costs in relation to a fraudulent credit hire claim tham it had instigated.

    Credit hire companies

    In Ahmed v Elliot & Road Range Assistance, Burnley County Court, 21 April 2010 the court made a non-party costs order against a credit hire company in relation to a false claim.

    Insurers

    In Plymouth & Southwest Co-Operative Society Ltd v Architecture, Structure and Management Ltd [2006] EWHC 3252 (TCC), [2006] All ER (D) 248 (Dec) the High Court ordered professional indemnity insurers to pay the costs of an action directly, resulting in a payment well above the policy limit.

    Experts

    Orders can be made against experts—Phillips v Symes [2004] EWHC 2330 (Ch), [2005] 2 All ER (Comm) 538 and now under CPR 35.4(4) and CPR 44.

    Courts

    Orders can be made against courts and the Court of Appeal set out guidance in R (on the Application of Davies) v Birmingham Deputy Coroner [2004] EWCA Civ 207, [2004] 3 All ER 543.

    Directors

    Orders against directors are the most common form of non-party costs orders and there are very many cases involving directors.

    The principles in Symphony Group v Hodgson—see above—must be applied.

    Funders

    Pure funders

    The Court of Appeal has held that pure funders will not be liable for costs as the unfunded party’s ability to recover costs must yield to the funded party’s right of access to the court to litigate the dispute in the first place—Hamilton v Al Fayed (2) [2002] EWCA Civ 665, [2002] All ER (D) 266 (May).

    Third-party funders

    The key difference between pure funders and third party funders is that the latter invest in a case in order to make a profit out of it.

    In Arkin v Borchard Lines Ltd [2005] EWCA Civ 655, [2005] All ER (D) 410 (May) the Court of Appeal held that a third-party funder will be liable to the other side in costs to the extent of its own contribution to the action.

    Thus a third-party funder provides £100,000 but the case is lost. The funder can be ordered to pay up to £100,000 to the successful party, giving a total of £200,000.00.

    Costs can be awarded on the indemnity basis against third-party funders—Excalibur Ventures LLC v Texas Keystone Inc [2014] EWHC 3436.

    This is a rapidly developing area of law. Watch this space.

    Kerry Underwood is author of the book Kerry on…Qualified One-Way Costs Shifting, Section 57 and Set-Off available from Amazon for £25.00 plus p&p or direct from Kerry at kerry.underwood@lawabroad.co.uk for £30.00 including p&p.

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