England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM ORDER OF HIS HONOUR JUDGE LLOYD QC

		Royal Courts of Justice Strand London WC2 Wednesday, 29th May 2002

1. LORD JUSTICE BUXTON: I refer to the various protagonists as follows: Strand Construction Ltd ("SCL"), Floods of Queensferry ("FOQ"), Mr David Charles Flood ("Mr Flood") and Winward Fearon ("WF").
2. There are two appeals before the court, both of which arise from a very lengthy construction dispute that was tried before His Honour Judge Lloyd QC. The appeals concern matters relating to costs that the judge had to determine subsequently to the conclusion of the main proceedings. The judge delivered what was, if I may be permitted to say so, an extremely helpful and detailed judgment in which the history is set out in detail, as are the authorities that were put before him. For that reason it is not necessary for me to say more than a very few words to make sense of the rest of this judgment. Any further detail that is required can be collected from Judge Lloyd's judgment, which has not been, in this respect, criticised before us at all.
3. FOQ were sub-contractors on a building project. In October 1994 they commenced proceedings against SCL, the main contractors on that project, in which they claimed payment of monies owed and also damages for misrepresentation. In March 1995 SCL made a payment into court in respect of those claims in the sum of £350,000. That sum was described by SCL's counsel, Mr Colin Reese QC, as having been generous. Whether or not that was a correct characterisation of it, the fact that the payment was not taken out - and in due course as we see FOQ did not succeed in beating it - was a significant matter of criticism adduced in these proceedings on SCL's part.
4. FOQ, throughout the proceedings, had difficulties in funding its claim in the action. In 1995 security was obtained in the sum of £75,000 and the proceedings were stayed until that amount was paid. The principal director and, I think, majority shareholder in FOQ was Mr David Flood ("Flood"), other members of his family - this being a comparatively small family company - being involved in the company in other capacities. There is no doubt that it was Flood who drove the affairs of FOQ and took, as the judge found, an extremely close interest in the litigation, going beyond that which one would normally expect on the part of a director who was not a qualified lawyer. Mr Flood was involved in a number of interlocutory moves designed to ease the course of FOQ in the course of these proceedings. In January 1996 he obtained legal aid as an assignee of FOQ's claims. That assignment was later struck down by this court. He then obtained legal aid to act as fiduciary to FOQ but that grant of legal aid was quashed in judicial review proceedings in this court.
5. There were continuing exchanges between WF and Flood with regard to payment of WF's fees. From about December 1996 WF sought as a condition, stressed with varying degrees of intensity, of continuing to represent the company a personal guarantee from Mr Flood in respect of fees owed by FOQ to WF. In June 1997 however FOQ put in place a legal expenses insurance policy issued by a company called Greystoke, and thereupon WF did not pursue its request for a formal guarantee by Mr Flood. That policy, in its terms, covered costs owed by both Mr Flood and FOQ in the context of this particular litigation and covered exposure they might have either to their solicitors, WF, or to what was described in the policy as the nominated party, meaning thereby the opposite party SCL. The terms of that policy, the circumstances in which it was entered into and the legal implications of all those matters, are heavily in dispute in one of these appeals.
6. While all these exercises were going on the main action was proceeding. It was heard in two parts by Judge Lloyd; first, the claim for costs and, secondly, the misrepresentation claim. The misrepresentation claim failed. The claim for payment was partly successful though at a level significantly less than FOQ claimed and significantly less than the money already paid into court. Because of those two circumstances SCL was awarded a substantial costs order. FOQ did not have and does not have funds to meet those claims. We were told it is now the case that FOQ has really only been kept in existence in order to pursue the litigation. It is believed to be - indeed, there is no doubt I think that it is - significantly insolvent. But - a matter again to which I will have to return - it has never been put into liquidation.
7. Faced with the most unwelcome circumstance that SCL had defended the litigation, where it had very significant doubts about the funding of the other side, and where it had made a significant payment into court which in due course, by a judge's ruling, had been shown to be relevant, SCL sought other ways (other than directly attacking FOQ) to recover its costs. It first started proceedings under Section 51 of the Supreme Court Act 1981 against Mr Flood, making various allegations in that connection to which I shall have to return. Having received the evidence and disclosure that was originally ordered in those proceedings, SCL then formed the view that WF were also vulnerable to a Section 51 order, and they also were joined in the capacity as Part 20 defendants for that claim to be pursued against them.
8. There was then the matter of the proceeds of the insurance policy. The limit of the insurance policy was £200,000. Although it does not appear that a formal claim was made by or on behalf of FOQ, or at least we have not seen one, it was clear to the insurers that they were liable up to the limit of the policy. It will be recalled that the insured under the policy were both Mr Flood and FOQ. But at that stage, the Section 51 proceedings still being unresolved, only FOQ had an actual obligation as to costs; and therefore it was, in the event, the only beneficiary of the policy.
9. SCL, understandably, were anxious to secure, if possible, the whole of that fund or, if they did not succeed in doing that, at least to ensure, pending the outcome of the costs proceedings generally, that it did not disappear in a direction inappropriate for its disposition in view of the reason why it was in existence in the first place. Originally, SCL sought relief from Judge Lloyd in terms of a restraining order or something that approached what was I think at that time still called a Mareva injunction. As we understand it, the judge saw difficulties about that but suggested instead that SCL should seek a garnishee order nisi in respect of proceeds of the Greystoke insurance policy.
10. There was then a number of complicated exchanges as to whether to garnish the proceeds of an insurance policy was an appropriate procedure. Rather than become entangled in those complications Greystoke, sensibly enough, decided that it would seek or agree to an order that it should simply pay the money into court and await the court's order as to how the money should be discharged. Though I think it was not quite expressed as such - Greystoke were effectively paying the money into court by way of interpleader. There is no other basis, as far as I can see, upon which it could be said that money could be brought within the court's control. The money being in court, there is an active dispute between SCL and WF as to which, if either, of them should receive the £200,000, and in what proportions, if any. That dispute was listed for hearing before Judge Lloyd at the same time as he dealt with the Section 51 claims. There were no formal proceedings. The matter was dealt with perfectly sensibly on an interlocutory or ancillary basis.
11. The judge dealt with the two claims together, one after another, as this court has ordered the two matters to be dealt with one after another, although not informally conjoined appeals. He did so by reference to five questions he set out in paragraph 4 of his judgment. The shape of this judgment does not exactly follow the structure of those questions but they provide a useful agenda to show what was before the judge and is before us:

"The issues which I have now to determine are agreed and are the following:

1. Did the second claimant, Mr David Flood, fund and/or maintain and/or finance the proceedings, or any part thereof, brought by the first claimant against the defendants?

2. Is it just in all the circumstances to make Mr David Flood pay the unrecovered costs (or a proportion thereof or a fixed lump sum representing a part of the unrecovered costs) of the proceedings?

3. Does the court have jurisdiction to make an order against Winward Fearon? Did the second Part 20 defendant, Winward Fearon, fund and/or maintain and/or finance the proceedings or any part thereof, brought by the first claimant against the defendants?

4. Is it just in all the circumstances to make Winward Fearon pay the unrecovered costs (or a proportion thereof or a fixed lump sum representing a part of the unrecovered costs) of the proceedings?

5. To whom should the insurance monies which were paid into Court pursuant to the order dated 9 June 2000 be paid?

(The last issue refers to legal costs insurance which was obtained by FOQ in 1997 and 1998.)"

12. The judge held, and various parties complain, as follows. In the first appeal - SCL's appeal - SCL appeal against the judge's decision that neither Mr Flood nor WF should be held liable under Section 51 (3) to make payments in respect of costs incurred by SCL in defending the claim. In respect of the dispute about the insurance fund, WF appeal to this court against the judge's decision that the proceeds of the legal expenses insurance policy should be paid in whole to SCL rather than to WF or, alternatively, stay in court.
13. I deal with those matters in turn. I deal first with the Section 51 appeals. The claim against Mr Flood and the claim against WF are dependent upon the same broad principles, but there is a particular issue in respect of WF in relation to their position as solicitors.
14. I will deal first with the general issues. It was accepted by Mr Colin Reese that the principles that should guide us were to be found in two places. The first is the judgment of this court in Taylor v Pace Developments [1991] BCC 406. The second is the judgment of this court in Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613, in that case the illuminating general statement being that of Lord Justice Millett at page 1619. In respect of Taylor v Pace Developments which, as in this case, involves a company director, Lord Justice Lloyd addressed an argument that had been advanced by Mr Rix QC (as he then was) in an earlier case, based upon the claim that Section 51 relief should be available against persons, as Mr Rix put it, "substantially responsible for causing the costs to be incurred". I interpose to say that was said in this case to be the problem of Mr Flood. Lord Justice Lloyd did not accept that submission. He said at page 409 F:

"It would be very difficult to apply the principle in the case of a one-man company. The controlling director of a one-man company is inevitably the person who causes the costs to be incurred in one sense by forcing the company to defend the proceedings. But it could not be right that in every such case he should be made personally liable for costs even in the face that the company would not be able to meet the plaintiffs' costs should the company prove unsuccessful. That would be far too great an in-road on the principle of limited liability. I do not say that there may not be cases where a director may not be liable for costs because he might be made liable if the company's defence is not bona fide, as, for example, where the company has been advised there is no defence and the proceedings have ended up through spite or for the sole purpose of causing the plaintiffs to incur irrecoverable costs. No doubt, there will be other cases but such cases must necessarily be rare. In the great majority of cases the director of an insolvent company which defends proceedings brought against it should not be at personal risk of costs."

15. At the end of his judgment, which was agreed to in full by the other two members of the court, Lord Justice Lloyd made it clear thatt his court has only limited powere to review the exercise of the trial judge's discretion in exercising powers under Section 51. He said at page 410 F:

"I would reject counsel's attack on the judge's discretion based on Mr Rix's proposition ..... No other grounds have been advanced which would justify us interfering with the judge's discretion."

16. In Metalloy, Lord Justice Millett again returned to the position of a director of a company. He said:

"The court has a discretion to make a costs order against a non-party. Such an order is, however, exceptional, since it is rarely appropriate. It may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of a suit. It may also be made where the third party has been responsible for bringing the proceedings and they have been brought in bad faith or for an ulterior purpose or there is some other conduct on his part which makes it just and reasonable to make the order against him. It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified. The position of a liquidator is a fortiori."

17. We are not of course here concerned with a liquidator but we are concerned with the position of a company director, in the exact circumstances of which Lord Justice Millett spoke.
18. From those two authorities, which I emphasise are accepted on all sides as setting the correct boundaries of the Section 51 jurisdiction, I would venture to draw the following principles:

(1) the decision under Section 51 is a discretionary decision for the trial judge. The normal diffidence this court has in interfering with a discretionary decision will apply to it;

(2) the court will look for two circumstances in particular before it will be minded to intervene, more particularly in a case of a director of a company. The first is bona fides in the pursuit of the action. The second is conduct on the third party's part that is so exceptional as to make it just and reasonable for an order to be made against him.

19. The learned judge was well aware of this and other authority, a great deal of which he set out in his judgment. He summarised the matter in the following way. At paragraph 40 of his judgment he said:

"The fundamental issues appear to be whether Mr Flood's conduct was extraordinary and whether it would be just to make him pay the costs."

20. It is to be noted that is a direct quotation from Lord Justice Millett. The judge continued:

"I should consider `all the relevant circumstances of the case, including, of course, the nature of the proceedings, the purpose of the funding and the merits of the case ..... '"

21. That quotation was from the earlier judgment in this court of Lord Justice Morritt in Stocznia Gdanska SA v Latreefers Inc 5 March 2000, unreported, where, again, the authorities on this jurisdiction were exhaustively reviewed. The judge said two further things about the present case. First of all, at the end of paragraph 41 of the judgment:

"Had the motives for the litigation been purely or mainly punitive then a costs order would be made. However it is now clear that Mr Flood and his family invested their own money (perhaps not all that could have been made available) in the litigation. In my judgment, whilst it is now apparent that Mr Flood intended to make the defendants pay dearly for not seeing sense"

(the judge quotes the fax)

"that was incidental to and a means of achieving the dominant purpose of the litigation, ie judgment for more than £350,000 and recovery of costs."

22. He also said this as to the bona fides of the claim, at paragraph 42:

"I cannot say that FOQ's claim was not a bona fide claim or without underlying merit ..... In March 1997 counsel gave advice that the claim was probably worth more than the amount paid in (even though it was given on material which was plainly too limited and which was partial). The real issues were about causation and quantum. The former was within Mr Flood's own knowledge and of that of Mr Riordan and required no further explanation. Mr Flood was satisfied that he had a good claim for more than enough of the payment in. That belief was genuine, if wrong, but it was not without bona fides."

23. Before passing on, it is worth mentioning that the judge not only had had Mr Flood's conduct of the action examined before him in the proceedings we are now concerned with, but also heard a considerable amount of evidence from Mr Flood and heard a very great deal about Mr Flood in the main proceedings. It was no doubt for that reason, and because of the view he had formed, that at the same time as making the observations I have just cited the judge also made comments which showed that he had formed a significantly unfavourable view of quite a number of aspects of Mr Flood's behaviour. He said at paragraph 40:

"It is not out of the ordinary for a controlling or dominant shareholders of a small family company to conduct litigation as if it were his own and it is not wrong to do so provided that it is pursued for the interests of the company and all the shareholders and potential creditors, as is the case here. Even the rancour generated by the proceedings and by the war of attrition are not uncommon. I can well understand the defendants' annoyance that Mr Flood and his advisers did not see reason and did not either accept the payment into court or otherwise bring the proceedings to an end. Similarly I can see why the defendants considered that this application, although launched a long time ago, ought still to be made once the outcome of the trial of the issues were known. On the other hand their own tactics have at times been apparently intended to maintain pressure and might not have been conducive to a rational view of the case (although I doubt if they had any great effect of Mr Flood and his legal advisers would take them in their stride). Mr Flood's unwillingness to give up and his reprehensible harassing attacks on the defendants must have grated on them."

24. At paragraph 41, speaking of Mr Flood's conviction of the righteousness of his cause and the difficulties that caused to him by coming up against SCL, the judge said:

" ..... Mr Flood was determined either to make an example of the defendants or not to allow FOQ to be another instance of a sub-contractor that went to the wall for not heeding a main contractor. The present proceedings have established that aspects of Mr Flood's conduct certainly fit the exceptions in Pace ..... "

25. I should have prefaced that sentence with the words "however by that time" to make clear the judge was passing comment on Mr Flood's behaviour in the course of litigation, and not upon his original reasons for starting it.
26. On the basis of those criticisms Mr Reese argues, and strongly argues, that Mr Flood's conduct, as found by the judge, fell within the exceptional cases envisaged both in Taylor v Pace and in Metalloy, and the judge was wrong not to draw the, so Mr Reese would say inevitable, conclusion from his findings of primary fact that this was a case where a Section 51 order should be made in the exercise of the judge's discretion.
27. Mr Reese, in paragraph 19 of his skeleton, was able to draw from the judgment a whole range of observations that appeared to back up his contention. It is only fair that they should be set out:

"(a) that aspects of Mr Flood's conduct in these proceedings certainly fit within the exceptions in Taylor v Pace;

(b) that Mr Flood did not see reason;

(c) that Mr Flood was unwilling to give up and made reprehensible harassing attacks on the defendants;

(d) that Mr Flood was determined to make an example of the defendants;

(e) that Mr Flood intended to make the defendants pay dearly for not seeing sense;

(f) that Mr Flood conducted a post contract spiteful and vindictive campaign against [SCL];

(g) that Mr Flood was able to keep [the] case going by a combination of cunning, evasion, slipperiness, lack of openness and prevarication;

(h) that Mr Flood's conduct in these proceedings was at times patently vindictive;

(i) that Mr Flood would not be sensible;

(j) [he behaved as if] obsessed with this case;

(k) that Mr Flood did not act as a rational director."

28. True it is that all those statements are to be found in verbal terms in the judge's judgment. As I have said, the judge was very well placed by the end of this seemingly endless litigation to form a very clear view of all the people involved in it. But there are two problems. First, I am unable to see how any of those criticisms, even made out, could off-set or render unreliable the judge's finding that the proceedings were bought bona fide. As my Lady the President pointed out in the course of argument, these criticisms were all criticisms of Mr Flood's conduct in the course of litigation. They were not criticisms of his reasons for bringing the case in the first place. It is not suggested - at least the judge could not find - that he brought the proceedings in order to be vindictive.
29. Secondly, the judge, being well aware of all the matters set against Mr Flood, made a specific finding that Mr Flood's conduct did not fall within the criteria set out by either Lord Justice Lloyd or Lord Justice Millett. That, in my judgement, is a conclusion with which this court cannot interfere. I am reinforced in that view by the reflection that this was a judgment of a judge with enormous experience, not only as a judge but also at the bar, of litigation in his court, and of the form that it sometimes takes and, regrettably, the attitudes sometimes adopted by those engaged in it.
30. The question of whether the conduct was sufficiently extraordinary to attract the sanction of a costs order was entirely for the judge. I would not interfere with it. I would go further and say that in view of the finding - the very specific and conscious finding - that litigation was brought bona fide and that, however mistakenly, Mr Flood continued to believe that he would recover the amounts sought, and also that he had been advised by distinguished leading counsel, albeit on limited instructions, that the matter should be pursued, advice that was relied on, albeit unsuccessfully, in an application for legal aid, I find it very difficult to say that other aspects of his conduct, although deeply annoying, could lead to a costs order against him.
31. I would therefore uphold the judge's judgment in respect of the claim against Mr Flood.
32. I turn to the case of the claim against WF. It is important in looking at this claim to keep in mind the principles already set out. That is because the inquiry in the case of WF took a different turn. That was largely because of the judge's application of the case in this court of Tolstoy Miloslavsky v Aldington [1996] 1 WLR 736. Put shortly, this court concluded that an application under Section 51 (3) would not be appropriate against solicitors save in very special circumstances. In other words, that, quite apart from the limitations on the Section 51 jurisdiction already set out, solicitors were in a particular position. Lord Justice Rose, in the leading judgment in this court, said this at page 745 H:

"In my judgment, counsel is correct in his submission that there are only three categories of conduct which can give rise to an order of costs against a solicitor: (i) if it is within the wasted costs jurisdiction of section 51 (6) and (7); (ii) if it is otherwise a breach of duty to the court such as, even before the Judicature Acts, could found an order, eg, if he acts, even unwittingly, without authority or in breach of an undertaking; (iii) if he acts outside the role of a solicitor, eg in a private capacity or as a true third party funder for someone else."

33. Mr Colin Reese accepts that he could not in this court challenge that general conclusion, although he indicated that he would wish to reserve the right, if he had the opportunity, to challenge it elsewhere. He said that because of the involvement of WF in this action, even in the face of severe financial difficulties on the part of FOQ, they had brought themselves into sub-category (3) of the exceptions outlined by Lord Justice Rose; that is to say, they had acted outside their relevant role, and effectively as a commercial funder of the litigation. The judge dealt with this at paragraph 44 of his judgment:

"44. It was suggested that WF supported the litigation prior to legal aid by funding it beyond any normal business terms. I disagree, for reasons that will become apparent. The terms were normal for a client with an apparently bona fide meritorious claim (a payment into court had been made). Once legal aid was no longer available WF endeavoured to agree terms which, if they had been accepted, would have been quite proper. They did not amount to a contingency arrangement but were a normal conditional fee agreement, the condition here being that liability would not arise until the conclusion of the case. Clearly WF, like the defendants, doubted whether Mr Flood would prove to be penniless as they sought a guarantee. Mr Flood was chary about providing one (which may tell its own story) but with typical diligence a solution was found in the form of Greystoke insurance. Again this provided WF with the basic security it needed in case the claim failed. I do not see how this could amount to funding or support of the action.

45. The reason why WF did not stop work is clear on the evidence: it thought that FOQ's claim would succeed and it would therefore be paid. It could therefore afford ultimately to offer to limit its fees to what it might get from legal aid and from the defendants. This is not an unusual claim on the part of solicitors. Deferring or limiting payment until the outcome of the case does not make the solicitor and funder, maintainer, or financier for the purposes of this issue ..... "

34. Mr Reese said, as he had to say, that the judge was simply wrong. One has to point out to start with that it is extremely difficult to disturb the jduge on a matter of that sort. Mr Reese made various criticisms of WF or, rather, relied on various criticisms, if criticisms they were, that had been put forward by the judge in his judgment. Again, in fairness, I will list them:

(a) no proper assessment of the risk had been carried out;

(b) there was no evidence that any consideration was given by WF to the realities of FOQ's case and in particular to what was required as to compensation;

(c) it was not easy to see how Mr Winward, the partner concerned with the conduct of the matter, could arrive at the view that regarding recovery and he had not tested the advice received; and

(d) they - WF - perhaps realised the claim was bound to fail.

35. I have to say the judge's criticisms, if criticisms they can be called, were that WF had acted rashly or perhaps incompetently or over generously as solicitors, and not that they were acting outside the role of solicitors when they made these decisions. Indeed, it would be very difficult to see how it could be otherwise. Everything that WF is said to have done wrong, everything it is said should have attracted a costs order, was a risk they took in their capacity as legal advisers to FOQ. I quite agree that one could have very extreme circumstances in which a solicitor was both acting as a solicitor and also acting as a commercial funder of the litigation. But the judge found, and I respectfully agree, that that was patently not this case.
36. Mr Reese said that determining, in the circumstance such as this, whether a solicitor has crossed the line stipulated by Lord Justice Rose between acting as a solicitor and acting effectively as a third party was a matter of delicate judgment. I would agree with that, with respect. It was a judgement that the judge exercised and, again, I would not interfere with it.
37. I am fortified in that conclusion by reference to what has been said in this court about the position of a solicitor acting under a conditional fee agreement. Of course it is the case that no formal conditional fee agreement was in place in this case, though, as the judge found, the relationship between solicitor and client was very similar to that. Where a conditional fee agreement exists this court has made some observations about the position of the lawyers. In Hodgson v Imperial Tobacco [1998] 1 WLR 1056 the court said (page 1067):

"Just as in the Tolstoy Miloslavsky case it was made clear that it is in the public interest and perfectly proper for counsel and solicitors to act without fee, and so it must now be taken to be in the public interest, and should be recognised as such, for counsel and solicitors to act under a CFA. There are no grounds for treating the party who is or has been represented under a CFA differently from any other party. The same is true of their lawyers."

38. In view of that I think it would have been difficult almost to the point of impossibility for the judge to have held that WF in this case acted in such a way as to put them in peril in Section 51. The judge's decision on that part of that appeal was, in my judgement, correct.
39. I turn to the second appeal, which concerns the destination of £200,000 already in court in the circumstances that I have already described. First of all, we must remind ourselves that absent intervention by the court the proceeds of that insurance policy were payable to FOQ and the fund is, in law - subject, as I say, to any order of this court - the money of FOQ. Secondly, in the events that have occurred, the fund was not in court because of any garnishee order. It was there because it was placed in court by Greystoke effectively as interpleader. I shall have to return to that aspect of the matter in due course.
40. Two competing questions arose in the course of that application in this appeal. First of all, it was claimed by WF that the fund in court was the subject of an assignment to FOQ acting by Mr Flood. If that was so, and WF had an equitable charge over the proceeds of the insurance policy, then the money should necessarily be paid out to them. The court should recognise that equitable interest. SCL said that was not right, there was no assignment. They, in their turn, claim, and persuaded the judge, that they - SCL - were entitled to the whole fund. The basis upon which that claim was made will have to be examined in due course.
41. I will deal first, because it is a separate question, with the matter of the alleged assignment. Again, a significant number of authorities were produced before the judge. We were taken by both sides to only two cases. The first is the decision of the Judicial Committee of the Privy Council in Palmer v Carey [1926] AC 703. In that case, by a written agreement, a trader was to purchase goods from time to time and the respondent was to advance money to pay for them. The trader was to sell the goods and pay the proceeds to the credit of the respondent at the bank. The respondent, after deducting the amount that he advanced and one-third of profits, was to pay the remaining two-thirds to the trader. The trader went bankrupt. At the time of the bankruptcy a large sum under the agreement had not been paid and the trader had in his hands goods purchased under the agreement and other proceeds of the sales.
42. It was claimed that the effect of the agreement between the parties was to create an equitable assignment or charge over the goods or their proceeds. It is relevant to quote from article 3 in the contract, that was said to create that assignment (page 706):

"To sell such goods or stock as soon as possible after the purchase thereof and to pay the proceeds of such sale forthwith into the credit of the lender at the head office of the Commonwealth Bank in Sydney."

43. That is to say, to transfer the proceeds of sale without intervention and immediately into the hands of the lender.
44. The advice of the Privy Council was given by Lord Wrenbury who said at page 706:

"The law as to equitable assignment, as stated by Lord Truro in Rodick v Gandell, is this:

`The extent of the principle to be deduced is that of agreement between a debtor and a creditor that the debt owing shall be paid out of a specific fund coming to the debtor, or an order given by a debtor to his creditor upon a person owing money or holding funds belonging to the giver of the order, directing such person to pay such funds to the creditor, will create a valid equitable charge upon such fund, in other words, will operate as an equitable assignment of the debts or fund to which the order refers.'"

45. Lord Wrenbury continued:

"An agreement for valuable consideration that a fund shall be applied in a particular way may found an injunction to restrain its application in another way. But if there be nothing more, such a stipulation will not amount to an equitable assignment. It is necessary to find, further, that an obligation has been imposed in favour of a creditor to pay the debt out of the fund. This is but an instance of a familiar doctrine of equity that a contract of valuable consideration to transfer or charge a subject matter passes a beneficial interest by way of property in that subject matter if the contract is one of which a Court of equity will decree specific performance."

46. On the particular facts of the case Lord Wrenbury said, referring to Article 3 which I have quoted:

"Under art. 3, however, the proceeds are to be paid to the lender's credit at his bank. That gives the lender a most efficient hold to prevent the misapplication of the proceeds,but there is nothing in that article to give him a property by way of security or otherwise in the moneys of the borrower before or after he, the lender, has them in his charge."

47. Then, and further down that same page, Lord Wrenbury quoted with approval the analysis of the case adopted by the Chief Justice of Australia as follows:

"`The words of the agreement on which the appellant relies are apt to express a contract by the bankrupt to apply the money in the purchase of goods, to sell those goods, and to pay the proceeds of the sale into the appellant's bank account, but I can see nothing in them to indicate that the intention was to assign any interest in goods purchased by the bankrupt or to create either a charge over or a trust of such goods in favour of the appellant.'"

48. The other authority which Mr Steinfeld QC, for WF, drew to our attention was an observation of Lord Justice Buckley in this court in Swiss Bank v Lloyds Bank [1982] AC 595. In the House of Lords the passage I have already cited from Palmer v Carey was quoted with approval by Lord Wilberforce. But Mr Steinfeld said that the observations of Lord Justice Buckley - which were not disapproved of in the House of Lords and, if I may be permitted to say so, carry enormous weight in any matter to do with the law of equity - were illuminating as to the further aspects of this jurisdiction. The Lord Justice said at page 595 F:

"It follows that whether a particular transaction gives rise to an equitable charge of this nature must depend upon the intention of the parties ascertained from what they have done in the then existing circumstances. The intention may be expressed or it may be inferred. If the debtor undertakes to segregate a particular fund or asset and to pay the debt out of that fund or asset, the inference may be drawn, in the absence of any contra indication, that the parties' intention is that the creditor should have such a proprietary interest in the segregated fund or asset as will enable him to realise out of it the amount owed to him by the debtor ..... "

49. The Lord Justice referred to various authorities and then continued in these terms:

" ..... notwithstanding that the matter depends upon the intention of the parties, if upon the true construction of the relevant documents in the light of any admissible evidence as to surrounding circumstances the parties have entered into a transaction the legal effect of which is to give rise to an equitable charge in favour of one of them over property of the other, the fact that they may not have realised this consequence will not mean that there is no charge. They must be presumed to intend the consequence of their acts."

50. In the light of that guidance it is necessary to look at the history and circumstances in which the legal expense insurance came into being. I say before doing that that it is well accepted that an insurance policy as such cannot be assigned; indeed, this policy is subject to a specific condition against assignment. What is sought to be charged is not the policy itself but the fund created by the payment of the claim by Greystoke, notionally to FOQ, but in the event into court.
51. As has been already said, there were, I will not say endless, but extensive exchanges between Mr Flood and his, or rather his company's, solicitors as to the funding of this action; interspersed with various attempts, unsuccessfully in the event, to obtain funding one way or another through the Legal Aid Board. Mr Winward, who was the partner dealing directly with Mr Flood, wrote him a number of letters drawing attention to the difficulties that firm perceived in the financial position, and setting out the terms upon which his firm was prepared to continue to act. The first of those letters relevant to this inquiry was written on 15th April 1997. It set out various conditions including - importantly, in this connection - condition 1:

"You will execute the personal guarantee in the form attached and will procure that Floods of Queensferry Ltd also executes the guarantee."

52. Mr Flood, as the judge observed in the passage already quoted, was not willing to execute a personal guarantee. At that stage WF received no satisfactory reply.
53. In circumstances that had not been fully explained - I do not suggest anything sinister about it, just that we do not have evidence about them - WF then put in hand on behalf of Mr Flood an application to Greystoke for the legal expenses policy. That application was first made, as far as we know, on 9th May. Greystoke replied on 29th May agreeing to go on risk and saying that cover would commence from 16th May 1997, that of course being contingent on the payment of the premium. However on 23rd June, that is to say some one month after the initial indication that the expenses insurance would be available, Mr Winward wrote to Mr Flood in, as far as I can see, almost the same terms as he had written to him on 15th April. That letter included, amongst the various terms on which WF would continue to represent FOQ, the previous requirement, as it appeared to be, that Mr Flood would execute a personal guarantee and would procure FOQ to do the same.
54. However on 1st July the situation changed. An almost identical letter was written by Mr Winward to Mr Flood save that this said in place of the requirement of guarantee the following (paragraph 1):

"There is in place legal costs indemnity in sums agreed between us which may be subject to enlargement if required. Accordingly the personal guarantee in the form attached is not required until such time as the legal costs indemnity is exhausted."

55. On that same day - or at least in a manuscript later dated that same day - Mr Flood wrote to Mr Winward a lengthy letter dealing with various other conditions that WF had indicated and by no means agreeing to them; but he said:

"You will also know that I sent a cheque to Greystoke Legal Services to put in place £50,000 of their Law-Assist cover to deal with legal costs incurred by Floods of Queensferry Ltd which fall to the company outside the scope of any Legal Aid coverage. The amount of this cover may need to be enlarged if and when the need arises. I believe that Greystoke draw the line at £100,000." -

and then going seriatim through the various conditions imposed and sought by WF. Later on in the letter he reverted to the fact that he had paid the premium for the legal insurance cover.

56. In reply to that Mr Winward wrote to Mr Flood on 4th July 1997:

"I also note that you have put in place £50,000 of the Law-Assist cover provided by Greystoke Legal Services with the option to enlarge this to the £100,000 we previously discussed. This will of course avoid the difficulties I had previously raised with you concerning contingency fee litigation and will enable the case to be pushed ahead. You will appreciate that if and at such time that the Law-Assist cover is exhausted then I will have to revert to you on my retainer."

57. The insurance itself - entered into on the assignment of 3rd July but back dated as the insurers had already indicated to WF on 16th May 1997 - granted indemnity both to Mr Flood and to FOQ in respect of legal costs and fees, disbursements and counsel's fees incurred by "the nominated representative" on behalf of the insurers, the nominated representative being Greystoke; and also such costs, fees, disbursements of counsel's fees payable by the insurer to the named opponent, the named opponent being SCL.
58. The contention of SCL is that none of these exchanges and none of the correspondence between Mr Flood and WF come anywhere near to creating an assignment of the proceeds. Although Mr Flood can be seen as making certain assurances or undertakings to WF, the offers that he made fell short, as he intended, of being a promise to pay his debts to WF out of the fund. Further, there was no direction to the insurance company; no notice to the insurance company of an assignment; and the letter of WF to Mr Flood dated 1st July 1997, which I have already quoted, although seeing the legal costs indemnity to have taken the place of the required guarantee, said nothing as to an assignment.
59. Those are, in my judgement, relevant observations because, as Mr Steinfeld stressed in his argument, once the fund was in Mr Flood's hands he could do with it what he wished so far as the terms of the insurance policy were concerned. In order to ensure that it reached the place where the solicitor wished it to be, that is to say in their own accounts, an equitable obligation had to be imposed on Mr Flood. One would expect, I venture to comment, that solicitors would be careful to ensure that that happened.
60. In a very powerful submission Mr Steinfeld said that was not the correct way of analysing this matter. The whole purpose of these exchanges was to create a fund out of which WF's costs would be paid, and that was obvious from Mr Winward's evidence. He said he was seeking security in respect of fees, and the insurance was to cover the fees and for no other purpose. Further, a sum had been agreed with WF and WF had borne the necessary negotiations with the insurers. It was never envisaged that any part of the monies was going to cover SCL's costs. From that it followed that WF was expecting and entitled to be paid out of the insurance monies.
61. In the light of those submissions it is relevant to look at how WF's deponent described the matter. In his first witness statement of 7th June 2000, Mr Winward, the gentleman we have seen dealing with this matter, said this at paragraph 5:

"Two principal terms of the Fee Agreement were the provision of personal guarantees by the Directors of Floods of Queensferry to pay our fees and also our right to deduct payment of our fees out of any monies received into our client account. Although Flood had agreed in principle to these terms at our meeting on 2nd April he did not provide the guarantees nor, in the event, was this necessary as some time between 23rd June 1997 and 1st July 1997 I was made aware by either Mr Barry Rideout or David Gwillim that David Flood had put in place on behalf of Floods of Queensferry a legal costs cover policy to pay our fees and disbursements issued by Greystoke Legal Services for the initial sum of £50,000 with an option to enlarge the cover to £100,000. I had originally instructed David Gwillim and Barry Rideout to apply to come off the record if the fee agreement had not been agreed by Flood by 27th June. However by reason of Flood taking out the legal costs policy I withdrew this instruction. I recall that I subsequently discussed with David Flood some time prior to 1st July that on the basis of there being a legal cost policy in being to pay Winward Fearon's costs to be enlarged if necessary we would continue to act. This was confirmed in my letters to him dated 1st and 4th July. The cover under this policy was subsequently enlarged to £200,000 and it was on that basis that Winward Fearon was prepared to have the conduct of the trial in the action. At all times it was my understanding that the proceeds of that policy would be available to pay WF's costs and had there been any doubt as to that position my partners and I would have ceased to act."

62. In a further statement of 25th July 2000 at paragraph 42 he said:

"I note that the policy was issued by Greystoke on 3rd July 1997. I did not see the policy or the schedule at the time and was unaware of the terms. I was not made aware that the policy covered both FOQ's costs and those of the defendants. Indeed, it was my understanding at all times (and, I believe, the understanding of David Flood and FOQ that the entire proceeds of the policy would be available to pay Winward Fearon's costs and disbursements, since it was only on this basis that I was prepared to allow Winward Fearon to continue acting."

63. The problem about that evidence is two-fold. First, although I do not place great weight on it, Mr Winward's belief that the whole of the proceeds of the policy would be available for the payment of his firm's costs may have been caused by the fact that he did not realise until a very late stage that the policy in fact had beneficiaries other than WF. However, the firm knew that, because they had negotiated the transaction and they must have taken account of the fact that the policy included obligations to SCL.
64. Secondly, the deponent of WF is able to go no further in relation to the oral agreement made with Mr Flood than to say what I have quoted, that WF agreed to continue to act on the basis of a legal costs policy being in position. There is no evidence that the solicitors demanded from Mr Flood a statement in terms of an assignment, no evidence that they demanded or, indeed, it was the case, that the fund was - to quote Lord Justice Buckley in Swiss Bank v Lloyds Bank - going to be segregated in their interest, or that it must be held in trust or in a separate bank account. And, even speaking of his own position, Mr Winward is not able to say more than it was his understanding that the proceeds of the policy would be available to him.
65. Of course, I accept what Lord Justice Buckley said in Swiss Bank v Lloyds Bank, that if, in fact, an equitable charge is created, the fact that the parties concerned do not realise what they are doing is nothing to the point. Mr Steinfeld said that the reason why there was no language of charge in this case was that the charge was so obvious that it did not need to be stated. I regret I am not able to agree with that analysis. The issue that has to be determined is whether there was an equitable interest in a chose, not simply whether there was an understanding, belief or assumption that the funds accruing from the policy would be available for WF, available in the sense of being paid over by Mr Flood to WF. In the light of their dealings with Mr Flood over the years, and bearing in mind that WF are a firm of solicitors, I fear that I would expect to see a requirement of a very much more specific undertaking and obligation from Mr Flood, as the assignor. It is his intention that is crucial in making an agreement to create a charge, as opposed to some sort of understanding or agreement that Mr Flood would secure payment. In other words, taking the analysis stated by Lord Wrenbury in Palmer v Carey, this may have been an agreement for valuable consideration that the fund should be acquired in a particular way; but that falls short of creating a charge.
66. Mr Steinfeld drew attention to, and strongly relied on, what the judge said in paragraph 44, in the passage I have already quoted setting out the history of this matter, that the Greystoke insurance provided WF with basic security in case the claim failed. He suggested that that was a finding by the judge that security in the form of an equitable charge or an assignment had been created. I fear I cannot agree with that either. I do not think for a moment that when the judge spoke that sentence he was finding that there had been creation of security in the legal or equitable sense, rather than some comfort, or something stronger than that, which enabled WF to continue with the case. In any event, it would not, in my view, have been open for the judge to find a legal security in the face of the basis of Mr Flood's position as recorded by Mr Winward; the level of perception of the solicitors; and also the fact that one would have expected the parties to have sought a more detailed and technical assurance. True it is that the insurance policy was in place of the demand for a guarantee, but that falls a good deal short of charging the fund which eventually accrued from the insurance policy.
67. The judge dealt with this matter in paragraph 56 of his judgment where he said:

"It is clear that so far as WF is concerned the policy came into existence for the purpose of securing WF's costs in the event that FOQ recovered less than the amount paid in court and became liable to pay SCL's costs so that there would be no means whereby SCL would be liable to pay WF's costs. However the terms of the policy cover both such a liability (clauses 1 (ii) and 2 (ii)). The policy either came to Mr Flood through WF or WF was aware of its terms before it decided in July 1997 to accept in lieu of a guarantee. Furthermore the insurance policy was taken out to meet one point in WF's proposed agreement which was not acceptable to Mr Flood. Mr Flood had still had to agree the remainder and never did so. There never was any agreement on the terms or on the lines proposed by WF. Accordingly in my judgment there was no right to be assigned. In any event if an assignment of the kind suggested by WF were to exist and to be effective there would have to berecognition and agreement about FOQ's right under clause 1 (ii) and 2 (ii) and there was none. It is therefore not necessary to deal further with the question of the effectiveness of the supposed assignment given that FOQ is now clearly insolvent."

68. Mr Steinfeld criticised a number of aspects of that passage. I would not wish to adopt its reasoning. The judge however was right to draw attention to two aspects of the matter. The first was the difficulty caused by the rights the policy gave to SCL. Mr Steinfeld is right in saying that once the money had been paid over to FOQ, and if FOQ had in fact assigned that fund to WF, then SCL's rights have nothing to do with it. That I entirely accept. But the existence of SCL's rights within the policy and the knowledge of the firm, if not of Mr Winward, of those rights, at the very least need to give one pause before one proceeds on the evidence we have that the solicitors sought, and Mr Flood gave, an assignment of the whole fund to them, without bearing in mind at all the possibility that Mr Flood might have to pay money to SCL. I say nothing whether it was the solicitor's duty to advise Mr Flood on that point. But I do think that is not plausible that Mr Flood would have ignored the possibility of liability to SCL before he assigned the whole of the proceeds to his solicitors.
69. Secondly, in my judgement, the judge was also right to draw attention to the general air of disagreement that still existed between Mr Flood and WF, even though WF, I accept, had agreed to go forward with the case on the basis of the existence of the insurance policy. True it is that one could construct, if the evidence were different, an agreement within the boundaries of that dispute in respect of the insurance monies. But the judge, in my view, was right to be sceptical of that possibility in the light of the atmosphere between the two parties even though WF had agreed to go forward; and also within the view he had formed of Mr Flood as a person who would not easily agree to do things that were not favourable to his own interest.
70. With respect, I would not put the matter quite in the way the judge does but I would put the matter in the way I have endeavoured to put it in the immediately preceding part of this judgment. I am not persuaded on the evidence (and the evidence is all before this court in written form of one sort or another) that Mr Flood made a sufficiently clear act of assignment of this fund to give WF a right to claim the whole of it now. I would therefore dismiss WF's appeal on that matter.
71. I come to what must be regarded as a respondents' notice in that appeal, SCL's claim that it should have all the money, the claim of which it successfully persuaded the judge. The judge said at paragraph 59 of his judgment:

"Nonetheless, if ultimately one has to consider whose claim on the company's funds is the more deserving in the context of this unfortunate litigation the answer cannot be that of WF, FOQ's principal adviser. In my judgment the course first suggested by Mr Davis, namely that the fund should be split equally between SCL and WF, should not be followed as SCL has a much better claim and is moreover entitled to recover from the company whatever assets are available. SCL is therefore entitled to the £200,000 plus the interest accrued."

72. Mr Davis, then representing WF, put before the judge, as an alternative to the assignment argument, an argument based on some observations in this court of Lord Justice Phillips in Murphy v Young's Brewery [1997] 1 WLR 1591. Those observations were made in the context of a Section 51 application, which is not the present context. I have no doubt that Lord Justice Phillips did not intend them to be deployed in the way they were deployed, with great skill and ingenuity, on behalf of WF. I do not think we have been addressed on them today; if we have been, I content myself at this stage by saying that that part of the application was entirely misconceived.
73. I turn to the matter we do have to decide, Mr Reese's application for the money in court. The first, and indeed the last, problem is to determine what jurisdiction the judge had to do what he did. First, the jurisdiction could not be based upon the mere fact that the money was in court. The presence of money in court on a conservatory basis, as this was, gives the court no jurisdiction at all to deal with it in any way that is not otherwise prescribed by law.
74. Secondly, the jurisdiction cannot be based - and Mr Reese urged that it should not be based - on the insolvency of FOQ. That is, first, because FOQ is not in fact in liquidation. If, second, FOQ is to be taken to be in notional liquidation, or if it is said that it would be fair to distribute the money on the basis that at least FOQ should not have it because it is insolvent, then as Mr Steinfeld powerfully pointed out, to distribute funds on the basis adopted by the judge would, if Mr Flood or FOQ had adopted that course, have been to create an unlawful preference in favour of SCL over the other potential creditors, who are WF, Mr Flood and Mr Jones, a gentleman who gave expert advice in this case and apparently has not been paid as he should have been.
75. The third aspect of this, which appears to have attracted the judge at least by analogy, are the conclusions to be drawn from the speech of Lord Hoffmann in Norglen v Reed Rains [1999] 2 AC 21. It was suggested on that basis that there would not be an unlawful preference if a costs order was made in favour of SCL because priority in respect of costs had been recognised in Norglen. I have to say, with respect, that that is quite misconceived, because the costs envisaged in Norglen were either costs incurred by the liquidator in an action in the liquidation; or when there was the adoption of a pre-liquidation action. That is made entirely clear by Lord Hoffmann at page 21 D of the report quoted. Once a liquidator has been appointed of course various technical rules come in, including the one that Lord Hoffmann set out in Norglen, but we are not in that position. The court cannot create itself, as it were, as a prospective liquidator in order to prefer one party over another. Quite apart from that, if the court were to act as an ad hoc liquidator in a case where there has been no liquidation, it does not follow at all that SCL should have priority because there are other claims that a liquidator would have to take into account. So that basis is, in my judgement,misconceived also.
76. Mr Reese advanced a very bold argument. He said that the court had jurisdiction in respect of costs generally; it had jurisdiction to order people to pay costs; it had ordered FOQ to pay costs, and FOQ could not. So, in pursuit of that jurisdiction, it could order payment of costs out of the fund created by the legal expenses insurance in order to cover the costs of the action. As Mr Steinfeld pointed out, the costs jurisdiction of the court is limited to the jurisdiction conferred by Section 51 (3) of the 1981 Act, that is to say, to determine by whom and to what extent costs should be paid. That jurisdiction does not create a separate enforcement jurisdiction over and above such important jurisdiction that the court already has. That is, at the end of the day, a short point. The court had no discretion to deal with this fund in the way the judge dealt with it, however much it might seem as a matter of normal justice - and I say no more than it might seem - that that was the fair way of dealing with it. This is a short point. In my judgement, it bears no further examination.
77. The upshot, unattractive though it may seem, is that the money should have remained in court awaiting the proper disposal of the funds of FOQ, whose money it is, which cannot be achieved until someone, as far as I can see, puts that company into liquidation. One regrets that there is no possible short cut; but in my judgement no such short cut is available. Since the money should have remained in court the order will need to be drawn with the assistance of the parties that the money paid out, as it was, under the order of His Honour Judge Lloyd, should be returned by the respective parties to the court fund to await further disposal.
78. I would therefore allow the appeal against the order of His Honour Judge Lloyd to that extent.
79. LADY JUSTICE HALE: I agree. I wish only to add a few words about the application under Section 51 of the Supreme Court Act because I was recently engaged in Hamilton v Al Fayed and Others [2002] EWCA Civ.665, to my mind a more difficult case. As I ventured to say at paragraph 18 in that case, having well in my mind the decisions of this court in Tolstoy Miloslavsky v Aldington and Hodgson v Imperial Tobacco, there is a distinction between those who provide money to pay for legal services and those who provide those legal services.
80. There are two good reasons for the distinction. First, such services are of enormous benefit to the proper administration of justice, including securing equality of arms in access to the courts. That was a particular feature in this case. Secondly, there are strict professional rules as to the way in which and the terms on which such services can be provided. Thus if solicitors offer normal legal services on terms which are not contrary to the rules governing the profession and do not act in ways that fall within the wasted costs jurisdiction under Section 51, one would not, as a general rule, expect them to be vulnerable to an order that they pay the other side's costs.
81. The services supplied by the solicitors in this case were not, as far as anything of which we have been made aware is concerned, anything other than those of an ordinary solicitors acting for, if I may say so, a challenging client in complicated litigation. Mr Reese could not establish any improper professional conduct on their part. They did not engage in an improper no win/no fee arrangement. They simply took a risk and extended credit to their client. It would be a sad day if solicitors could not extend credit, even to their litigation clients, without fear of vulnerability to a Section 51 order. These solicitors were just like a builder who rebuilds a fire damaged house expecting that the home owner will pay him out of the proceeds of his home insurance policy. That is why the application under Section 51 against them fails. It is also essentially why I agree, with respect, with my Lord's analysis of what should happen to the proceeds of the legal expenses insurance. There was an understanding that they would be paid out of those proceeds but nothing sufficient to create an equitable interest in that fund, once paid out, in favour of the solicitors.
82. I have nothing to add to what my Lord has said in relation to the non-existence of a discretion in the court to dispose of that money in whatever way seemed most just to the court. I agree with the orders he proposes.
83. THE PRESIDENT: I agree with both judgments, and that the first appeal should be dismissed.
84. Mr Reese, what do we do about the second appeal? Do we technically dismiss it in part or allow it in part? I would have thought that we probably allow the second appeal to the limited extent of requiring the money paid out from the legal expenses insurance policy to be repaid into court to await further decision of the court.
85. MR REESE: That was, in substance, one of the orders sought in the alternative on our appeal.
86. THE PRESIDENT: It is actually technically to allow the appeal, is it not?
87. MR REESE: In part, to that extent.
88. THE PRESIDENT: The first appeal is dismissed, the second appeal is allowed to the limited extent of directing Shand Construction Limited to repay into court the payment out.
Order: First appeal dismissed, second appeal allowed