England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE CHANCERY DIVISION
Peter Leaver QC (Sitting as a Deputy High Court Judge)

		Royal Courts of Justice Strand, London, WC2A 2LL
		16th March 2004

Lord Justice May:

1. This is an appeal by the claimant, Peter Stacy, against a decision of Mr Peter Leaver QC, sitting as a Deputy High Court Judge, on 24^th January 2001. The deputy judge had earlier decided a preliminary issue in favour of Mr Stacy and against the first defendant Dr Player. In the normal way, he would have made a costs order of the preliminary issue in favour of Mr Stacy. But he was persuaded not to do so. Mr Stacy appeals against this decision.
2. In September 1988, Mr Stacy and Dr Player made an oral partnership agreement to operate Flimwell Bird Park. In November 1995, they agreed to dissolve the partnership. There was a dispute about the partnership's final accounts. On 27^th June 1996, Mr Stacy started proceedings against Dr Player. On 18^th June 1997, Mr Stacy made an application for the appointment of a receiver and manager of the Bird Park. On the hearing of the application, His Honour Judge Levy made a consent order designed to result in the sale of the Bird Park. On 17^th December 1997, Mr Stacy was granted a legal aid certificate in respect of the proceedings.
3. Between June 1997 and April 1999, a number of possible purchasers, including Mr Mauger, made offers to purchase the Bird Park, but no agreement for its sale eventuated. In late 1999, following discussions between Dr Player and his legal advisors, it was proposed to initiate a contract race. Mr Stacy was not told about this. On 14^th March 2000, the contract race was initiated. On the same day, Dr Player's solicitors exchanged a contract for the sale of the Bird Park with Mr Marshall, the second defendant. Only later were Mr Stacy's solicitors informed both of the contract race and of the exchange of contracts.
4. In March 2000, Mr Stacy was apparently advised by his then solicitors that his legal aid certificate did not cover a proposed application to challenge the purported contract of 14^th March 2000. In these circumstances, Mr Mauger, who had been interested in acquiring the Bird Park for some time, apparently indicated that he would be willing to help fund a challenge to the purported contract. On 16^th March 2000, an undertaking was given that the sale to Mr Marshall would not be completed before 11^th April 2000. On 5^th April 2000, Mr Marshall's solicitors were told that the purported contract had been signed and exchanged without Mr Stacy's notice. On the 11^th April 2000, Mr Stacy applied for a restraining order, which Rimer J granted on 17^th April 2000. Rimer J also ordered that there should be a trial of a preliminary issue, whether the solicitors who signed the contract on behalf of Mr Stacy had any authority to do so and whether Mr Stacy was bound by the contract. This was the preliminary issue which the deputy judge heard on 23^rd June 2000. Mr Marshall was joined as second defendant. On 25^th July 2000, the deputy judge decided the preliminary issue substantially in favour of Mr Stacy. He made his decision on costs on 24^th January 2001. The litigation has since then continued. We are told that the property has recently been sold.
5. From December 1997, Mr Stacy had the benefit of a civil legal aid certificate granted under the provisions of the Legal Aid Act 1988. There was a question whether this legal aid certificate extended to cover the costs of the preliminary issue. Mr Stacy or his lawyers had the benefit of some £16,000 separate funding from Mr Mauger in relation to the preliminary issue. A witness statement from Mr Stacy's solicitors stated that the Legal Aid Board had been aware of Mr Mauger's interest in the case and that, since it was not reasonable for public funds to be used to fund an application that other funds were available for, Mr Mauger was in fact paying for the application to be made. When it came to submissions on costs, leading counsel for Mr Stacy (whose engagement the Legal Aid Board had not authorised) submitted that the legal aid certificate did not cover the proceedings on the preliminary issue.
6. The deputy judge decided that the certificate did extend to the preliminary issue. The receipt of the £16,000 was therefore contrary to regulation 64 of the Civil Legal Aid (General) Regulations 1989, which provides:

"Where a certificate has been issued in connection with any proceedings, the assisted person's solicitor or counsel shall not receive or be party to the making of any payment for work done in those proceedings during the currency of that certificate (whether within the scope of the certificate or otherwise) except such payments as may be made out of the fund."

7. The deputy judge said that, if it were not for the complications of Mr Mauger's involvement, he would in the ordinary way order Dr Player to pay Mr Stacy's costs of the preliminary issue. Those costs would then be paid to Mr Stacy's solicitors, who would account to the Legal Services Commission for them, and they would be disbursed by the Commission in accordance with the regulations. However, because Mr Mauger had provided financial assistance to Mr Stacy, the Legal Services Commission had not incurred any liability to Mr Stacy's solicitors and counsel. It had been submitted on behalf of Dr Player that Mr Stacy had incurred no liability for costs or could not have been required to be liable for any costs. Consequently he could not seek a costs order against Dr Player.
8. The judge decided that regulation 64 was conclusive. It would be a breach of the regulation for Mr Stacy's solicitors and counsel to receive or be a party to the making of any payment for work done in respect of the trial of the preliminary issue, except such payments as might be made out of the legal aid fund. The deputy judge saw no reason why Dr Player should be ordered to pay Mr Stacy's costs, which would in turn be paid out to Mr Mauger, a third party voluntarily intervening in the proceedings. Even if Mr Mauger received no part of those costs, because they had been fully used in paying counsels' and solicitors' fees contrary to the regulation, nevertheless he would be entitled to an account in respect of those monies. The deputy judge saw a further problem in that any assessment of costs would not be subject to the special legal aid regime of assessment, unless he specifically so ordered. It would be both unfair and anomalous to order Dr Player to pay costs effectively to Mr Mauger which were not the subject to that regime. It would be difficult, if not impossible, to require assessment in accordance with that regime when no such order should be made.
9. Mr Stacy's Appellant's Notice was dated 16^th July 2003, some 2½ years after the deputy judge made his costs order. Mr Stacy was then acting in person. His written grounds of appeal included that the deputy judge was wrong not to award him his costs of the preliminary issue against the first defendant because:

i) he wrongly concluded that, because a third party had agreed to be responsible for Mr Stacy's costs, the Legal Services Commission did not incur any liability for those costs; and

ii) he wrongly concluded that, if he had made an award of costs in favour of Mr Stacy, this would have the effect of an order for costs in favour of the funding third party.

10. Mr Stacy submitted a written skeleton argument with his Notice of Appeal. This supported these grounds of appeal and made additional points. The Notice of Appeal also included evidence explaining the delay. He says that shortly after the hearing on 24^th January 2001, his legal aid was embargoed. The embargo was not removed until November 2001, but the new certificate was limited to obtaining a solicitor's report. It was not until February 2002 that the action could be revived. The certificate was again amended in July 2002 to cover obtaining counsel's advice on an appeal against the deputy judge's costs order. The advice was submitted to the Legal Services Commission. An extension of the certificate was refused in January 2003. Mr Stacy explained that, since January 2001, he has been unable to fund the appeal privately. Since January 2003, he has been in correspondence with various people and organisations with a view to obtaining their help.
11. Permission to appeal was granted by Simon Brown LJ on 17^th November 2003. He also granted the requested extension of time. There is a possibility from the terms of the first version of the order giving permission that Simon Brown LJ may have mistakenly thought that the deputy judge's order had been made on 25^th January 2003, when it was in fact two years earlier than that. However that may be, Simon Brown LJ noted that the judge had found, and all now in any event agree, that the preliminary issue was within the permitted scope of the legal aid certificate. It seemed to him that:

i) Mr Stacy's counsel and solicitors should return to him or Mr Mauger the money advanced for costs, which regulation 64 forbids lawyers from receiving; and

ii) a costs order could be made in the usual way in favour of Mr Stacy against Dr Player to be assessed under the legal aid regime.

Simon Brown LJ considered that this was properly arguable and he granted permission accordingly.

12. There is a Respondent's Notice which deals at some length with points made in the Notice of Appeal, and raises what counsel suggests are additional grounds, not relied on by the deputy judge, for upholding his order. Miss Hargreaves, counsel for Dr Player, explained that consideration had been given to making an application to set aside the extension of time which Simon Brown LJ granted, but that it had been decided not to do so.
13. A written skeleton argument recently prepared by counsel now instructed on behalf of Mr Stacy explains that he was acting in person when he filed his Notice of Appeal. It explains that the appeal has been brought to correct what is perceived to be an obvious injustice. An unsuccessful defendant, who could and should have been ordered to pay Mr Stacy's costs of the preliminary issue has, until now, managed to escape liability because the claimant's solicitors unwittingly acted in breach of the legal aid regulations by accepting money to fund the cost of the preliminary issue in circumstances where they did not think the matter was covered by legal aid. It is submitted that this should have had no bearing on whether the respondent should have been ordered to pay the claimant's costs in the usual way. It is submitted that the deputy judge was wrong to conclude that the legal aid fund were under no liability for Mr Stacy's costs because there had been an infringement of regulation 64. On the contrary, that should have been left out of account.
14. It is submitted that the fact that a third party agrees to fund or underwrite a litigant's costs is not relevant to any question of costs between the parties, provided that the successful litigant remains liable to pay those costs in due course. Reference is made to Davies v Taylor (No. 2) 1974 A.C. 225 at 234. This position is modified where a litigant has had the benefit of a legal aid certificate. By section 15(6) of the Legal Aid Act 1988, a legally assisted person is not required to make any payment in respect of representation under the Act, except insofar as he is required to make a contribution under section 16. It is for the Board to pay his legal representative. Section 15(7) relevantly provides that the Board's obligation is to make such payments as are authorised by regulations.
15. Regulation 92 of the 1989 Regulations provides:

"(1) The costs payable by the Board in respect of any work done under a certificate, after deduction of any sums paid under regulations 100 or 101 (payments on account), shall be –

(a) the legal aid only costs;

(b) any other costs determined under regulation 107A(2);

(c) where inter partes costs paid in favour of the assisted person are received by the Board, a sum equal to the amount by which the costs received exceed the costs referred to in sub-paragraph (b) above;

(d) where all the inter partes costs as agreed or determined in accordance with any direction or order given or made in the proceedings in favour of the assisted person are received by the Board together with interest, a sum equal to the balance of interest after deduction of interest on the costs to which sub-paragraph (b) refers."

16. Regulation 90 provides that an assisted person's solicitor shall forthwith pay all monies received by him under the terms of an order or agreement made in the assisted person's favour to the Board. It is evident from regulation 90(5) that money in this context may include sums which relate to costs.
17. Regulation 107(1) provides that the costs of proceedings to which an assisted person is a party shall be taxed in accordance with any direction or order given or made in the proceedings irrespective of any interest of the assisted person in the taxation. Regulation 107A provides:

"(1) This regulation applies to any assessment, review or taxation of the costs of an assisted person in proceedings where the costs are, or may be, paid out of the fund.

(2) Costs to which this regulation applies shall be determined on the standard basis subject to –

(a) the Legal Aid in Civil Proceedings (remuneration) Regulations 1994 in proceedings to which those Regulations apply; …"

18. Regulation 107B concerns recovery of costs from another party. It provides:

"(1) Where an agreement or order provides for costs to be paid by any other party … in favour of the assisted person, the assisted person's solicitor may recover a sum in respect of costs from the paying party subject to the provisions of this regulation and regulation 91(2B.)

(2) The costs which the assisted person's solicitor may recover by virtue of this regulation shall not exceed the total of the sums referred to in sub-paragraphs (c) and (d) of Regulation 92(1).

(3) The assisted person's legal representative shall not be prevented from recovering from the paying party the sums in respect of costs to which this regulation refers by

(a) any rule of law which limits the costs recoverable by a party to proceedings to the amount which he is liable to pay his legal representative; or

(b) regulation 64 (restriction on payment otherwise than from the fund)."

19. The relevant structure of the Act and regulations is therefore as follows. A legally assisted person is not required to make any payment to his legal representative. The Board is required to pay the legal representative in accordance with the regulations. The regulations provide the basis for the taxation of the costs of an assisted person which are to be paid out of the fund. As to costs which another party is ordered to pay in favour of the assisted person, these may be recovered by the assisted person's solicitor who then has to pay them to the Board. Since the deputy judge decided, contrary to submissions on behalf of Mr Stacy, that the legal aid certificate covered the proceedings with which he was concerned, it follows that these provisions would apply to any costs recovered from Dr Player under any order the court might make. The deputy judge was accordingly, in my judgment, wrong in saying that, if Dr Player were ordered to pay Mr Stacy's costs, these would in turn be paid on to Mr Mauger. On the contrary, they would have to be paid to the Board.
20. On a side issue, it will be recalled that Mr Stacy had been represented by leading counsel. Regulation 59 provides that an assisted person's solicitor may instruct counsel where it appears to him that the proper conduct of the proceedings so requires, but a Queen's Counsel shall not be instructed unless authority has been given in the certificate or by the Area Director. Regulation 63(3) provides that, where costs are incurred in instructing Queen's Counsel without authority to do so, no payment in respect of those costs shall be allowed on any taxation unless it is also allowed on an inter partes taxation. So it would be open to Mr Stacy to seek to recover on taxation the cost of instructing leading counsel, if an order for costs against Dr Player were made in his favour.
21. Mr Boardman, for Mr Stacy, submits that the incidence of legal aid and matters connected with it are not relevant to questions of costs as between Mr Stacy and other parties to the proceedings. He relies on section 31 of the Legal Aid Act 1988, which provides:

"(1) Except as expressly provided by this Act or regulations under it –

(a) the fact that the services of a legal representative are given under this Act shall not affect the relationship between or rights of the legal representative and client or any privilege arising out of such relationship; and

(b) the rights conferred by this Act on a person receiving advice, assistance or representation under it shall not affect the rights of liabilities of other parties to the proceedings or the principles on which the discretion of any court or tribunal is normally exercised.

(2) Without prejudice to the generality of sub-section (1)(b) above, for the purposes of determining the costs to the legal assisted person in pursuance of an order for costs or an agreement for costs in his favour (other than an order under Part II of the Prosecution of Offences Act 1985) the services of his legal representative shall be treated as having been provided otherwise than under this Act and his legal representative shall be treated as having paid the fees of any additional legal representative instructed by him."

22. Mr Boardman submits that possible breaches of regulation 64 were not relevant to any costs order which the deputy judge had to consider and should have been left out of account. He was inclined to submit that this is the effect of regulation 107B(3)(b). I do not however consider that this provision is concerned with possible breaches of regulation 64 by the assisted person's lawyers. The regulation is concerned with costs which may be recovered under an agreement or order for costs from a paying party. Sub-regulation (3)(a) disapplies the indemnity principle to enable costs to be recovered from the paying party even though the assisted person is not liable to pay those costs to his legal representative. Sub-regulation (3)(b) makes clear that the assisted person's legal representative is not prevented from recovering costs from the paying party by regulation 64. It might otherwise have been argued that receiving such costs from the paying party was such a breach. This part of the regulation does not provide that other breaches of regulation 64 are to be left out of account.
23. Regulation 64 is, however, odd in that there appears to be little or no sanction for its breach. Mr Boardman suggested that a sanction could be found in regulation 102, but this only applies where an assisted person's solicitor has failed to comply with any provision of the regulations and as a result the fund has incurred loss. It is not immediately obvious that a breach of regulation 64 would result in a loss to the fund. Even though there may be no specific sanction for breach, a solicitor or counsel who unwittingly receives money in breach of regulation 64 must, on discovering the fact of the breach, be under a professional obligation to return the money. In the present case, the breach has been evident since the deputy judge's decision that the legal aid certificate covered the proceedings, and it is surprising that, as we understand it, no repayment has been made.
24. Miss Hargreaves points to the written evidence before the judge from Mr Stacy's then solicitor to the effect that the Legal Aid Board had been made aware that Mr Mauger was funding the costs of the preliminary issue. She submits that the judge was therefore being told that the legal aid fund was not going to be liable for Mr Stacy's costs. In these circumstances, she submits that it was an entirely proper exercise of the deputy judge's discretion as to costs to conclude, first, that there was no enforceable liability on the Legal Aid Board to pay Mr Stacy's costs, and, second, that any costs which Dr Player was ordered to pay would be for the benefit of Mr Mauger. The deputy judge had to decide in his discretion whether Mr Mauger should recover his costs. It was a proper exercise of discretion to decide that he should not, when the funding which he had provided had been received by Mr Stacy's lawyers in breach of regulation 64. This court should not interfere with that discretionary decision, especially at this very late stage when the action has proceeded and other orders have been made.
25. I have already indicated my view that the deputy judge was wrong to decide that any costs which Dr Player was ordered to pay would be paid to Mr Mauger. The deputy judge had decided that the legal aid certificate covered the proceedings. This meant that Mr Stacy's solicitors would have to pay any costs they received from Dr Player to the Legal Aid Board. I also think that the deputy judge was wrong to decide that regulation 64 was conclusive. I am not persuaded by Mr Boardman that matters relating to regulation 64 were irrelevant, but I do not consider that a breach of regulation 64 should dictate conclusively a decision that Mr Stacy should not be awarded his costs. Miss Hargreaves is of course correct in submitting that decisions as to costs are discretionary and that appellate courts are slow to conclude that the exercise of such a discretion was erroneous. Where, however, the discretionary decision has been made, as I think here, upon erroneous considerations, the decision itself cannot stand and this court has to exercise the discretion afresh.
26. It is not suggested that the breach of regulation 64 was conscious or deliberate. Leading counsel on behalf of Mr Stacy made strong submissions to the effect that the legal aid certificate did not cover the preliminary issue. The breach of regulation 64 became apparent when the deputy judge decided that the certificate did extend to the preliminary issue. It was then, in my view, for the deputy judge to consider how the newly discovered breach should be dealt with. It was not, in my view, just or proportionate simply to refuse to award Mr Stacy the costs to which he was otherwise entitled. The breach of regulation 64 scarcely concerned Dr Player. Had the deputy judge then, with appropriate assistance from counsel, considered the complex regulatory scheme that applies to the costs of a legally aided party, he would have appreciated that the payment erroneously received from Mr Mauger did not impact on his jurisdiction to make the normal order that costs should follow the event nor would affect the basis upon which those costs would be assessed by the costs judge. I consider that he should have proceeded to make the normal order in anticipation that the end result would be that Mr Mauger would receive back the payment that he had made, that the costs judge would assess the costs in the normal way and that the costs so assessed would, via the Legal Services Commission, reach the lawyers who had provided the services to which they related.
27. For these reasons I would allow the appeal, set aside the deputy judge's order as to costs and substitute an order that Dr Player pays Mr Stacy's costs of the preliminary issue, such costs to be the subject of a legal aid taxation.

Jonathan Parker LJ: I agree.

Master of the Rolls: I also agree.

Order: Appeal allowed with costs. (Order does not form part of the approved judgment)