England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM GUILDFORD COUNTY COURT
His Honour Judge Reid Q.C.
6GU02487

		Royal Courts of Justice Strand, London, WC2A 2LL
		02/05/2013

Lord Justice Leveson:

1. This satellite litigation concerns an attempt by employers' insurers to recover the costs of defending personal injury litigation from the solicitors who, until they withdrew from the case, were acting for the employee. The application was made in the alternative either on the basis that the solicitors ought to be made the subject of a wasted costs order or, alternatively, a non-party costs order. It was later conceded that, in the context of this case, the application for wasted costs added nothing to that for a non-party costs order and the former was not pursued. After a hearing lasting some two days (which itself rather flies in the face of the summary nature of this jurisdiction), in a detailed and comprehensive reserved judgment, His Honour Judge Reid Q.C., dismissed the application and refused permission to appeal (later granted by Sir Stanley Burnton).
2. In short, the employers' insurers argue that the case demonstrates a lamentable failure on the part of the employee's solicitors which caused the employee to be liable for adverse costs in circumstances where the solicitors knew full well that without 'after the event' insurance, their client could not afford them; this failure was compounded by a further failure to admit to their client the conflict that had been created. It is said that the solicitor who had conduct of the case promoted and controlled the pursuit of the litigation against that background with a direct financial interest in both concealing his own negligence and driving the case forward all in an attempt to secure the solicitors' own costs while at the same time causing the insurers to incur irrecoverable costs.
3. The solicitors argue that the application is no more than an attempt to shoehorn what may be a claim for damages by the employee for professional negligence into the summary procedure of non-party costs by alleging, without evidence, that the solicitor stepped outside his role as a solicitor and conducted the proceedings in a manner to avoid any costs order against the employee. Rather, the insurers should await the conclusion of the professional negligence claim that the employee may commence against his solicitors based on their failure to obtain after the event insurance and then attempt to enforce their order for costs against him.

The Facts

4. On 5 November 2005, in the course of his employment with TNT (UK) Ltd, Manuel Heron had an accident when a trailer onto which he was loading goods using a forklift truck overturned and trapped his arm while he was restrained by his seat belt. The immediately observed injury was to his right arm and elbow. Although there is no record of back or leg pain noted in the A&E records at the hospital, five days later he complained of such symptoms later diagnosed as caused by a disc prolapsed at L5/S1: the causation of this damage lay at the heart of the subsequent litigation. Although playing little part in the events that followed, on 20 April 2008, he suffered a further accident at work.
5. After his accident, Mr Heron quickly instructed Mackrell Turner Garrett ('MTG') to act as his solicitors and he entered into a conditional fee agreement ('CFA'). Although not the subject of a disclosed attendance note, Mr Scott (the solicitor who had conduct of the case at MTG) provided evidence that he told Mr Heron that "it would be worth obtaining a quote for ATE insurance to cover his liability against adverse costs" but Mr Heron has no recollection of such a discussion and no quotation was obtained. In any event, by 6 March 2006, liability for the accident and any injury was admitted.
6. Two days later, on 8 March 2006, notice of funding was first served on the employers' insurers, it then being made clear that there was no after the event ('ATE') insurance in place. On 22 November 2006, for reasons that are unexplained, MTG drafted a proposal for ATE addressed to Temple Legal Protection Ltd but did not either submit it or, apparently, seek instructions from Mr Heron as to whether it should be submitted. The absence of ATE insurance was confirmed to the employers' insurers on 14 August 2008 after a further enquiry.
7. The employers' insurers sought to settle the claim. After an initial Part 36 offer of £14,000 (in November 2006), increased to £18,000 (20 March 2007), then £22,500 (27 February 2008) and, finally, £44,500 (8 May 2009), medical evidence became available to the effect that the injury had, at its highest, only accelerated the prolapse and had neither caused it nor the consequential back pain. Thus, the final offer was withdrawn on 15 March 2010 and the offer of £22,500 withdrawn on 25 March 2010.
8. In the meantime, the proposed trial date listed for 13-14 May 2010 was adjourned. Mr Heron was given permission to instruct a new orthopaedic surgeon (because of apparent inconsistencies in the answers provided by the first expert) and the insurers were given permission to instruct their own orthopaedic expert. Mr Heron was ordered to pay £1,500 costs (which he did).
9. On 1 June 2010, based on counsel's advice, MTG made a Part 36 offer of £46,000 plus costs. Solicitors acting for the employers' insurers rejected that offer making the point that the Mr Heron was unlikely to recover more than £44,000 even on the basis of successful amendments to the claim: it was asserted that they were aware that Mr Heron was placing himself at significant financial risk given that he had no insurance. In August, MTG made a reduced Part 36 offer expressing a willingness to settle both claims for £27,000 and costs.
10. Mr Dyson, the medical expert then relied on by Mr Heron, was of the opinion that the accident had accelerated his condition by 5 years. Professor Dickson, relied on by the insurers, was of the opinion that the disc hernias had nothing to do with the injury suffered in the accident. On 14 October 2010, shortly after service of Professor Dickson's report, the insurers offered to allow Mr Heron to retain the £17,700 paid by way of interim payments and 'drop hands' on costs. MTG wrote to their client making it clear that on one view of the medical evidence (with the risk of that prevailing being 'at least 50%'), the award would be less than the offer made. The writer expressed the view that he "does not imagine" that Mr Heron would want to accept: if he did, he would not recover disbursements paid to date and MTG "would not recover any costs for over five years' work". The letter points out that Mr Heron would have to pay outstanding and future disbursements (particularly the costs of counsel attending the trial). The offer was rejected.
11. On 3 November 2010, Counsel advised on quantum: she took the view that Mr Heron was likely to obtain damages of "around £25,000 so should beat the £18,000 payment in". Thereafter, contrary to the advice of counsel and MTG, Mr Heron asked his solicitor to withdraw the Part 36 offer of £27,000. He was then awaiting the report of a third orthopaedic surgeon (whom he had instructed independently) intended to assist the second surgeon.
12. In late January, Mr Heron paid an invoice for disbursements amounting to £11,765.52 plus VAT sent by MTG: at least in part, these disbursements had been advanced by MTG without being in funds. Mr Heron raised this money partly from the proceeds of an unrelated road traffic accident and partly by obtaining a loan.
13. On 7 February 2011, solicitors for the employers' insurers put MTG on notice that a non-party or wasted costs order might be sought against them. In response, MTG suggested that it was inconceivable that the payment in of £18,000 would not be beaten and that its costs could "reach at least £250,000"; they offered to settle for a further £65,000 (exclusive of the interim payments) in settlement of all damages and costs.
14. That did not revive negotiations and, on 21 February 2011, Mr Scott for MTG wrote to Mr Heron in these terms:

"As discussed at conference, I am as a gesture of goodwill prepared to write off all my firm's costs if it will facilitate settlement. I will try and agree settlement so that you recover all your disbursements and also so that you can keep the damages you have already received. ... They have refused to negotiate from their position last year which was that both parties bear their own costs and you will keep all your interim payments to date. I am afraid, as discussed with you and your father at conference, I am unable to instruct counsel to represent you at trial and attend trial unless I have monies on account to cover all outstanding disbursements..."

15. Worse was to come. On 24 February 2011, during a conference call, the orthopaedic surgeon instructed on behalf of Mr Heron expressed the view that the disc prolapse was an accident waiting to happen and would have occurred within 5 years, even without the accident. Counsel then advised that, at best, Mr Heron would recover £10,000 and, probably, much less. Counsel's instructions were then withdrawn. On 28 February, without formally applying to come off the record, MTG informed the court that they would not attend the trial the following day. The insurer's solicitors indicated that an application would be made for a wasted or non-party costs order.
16. On 1 March 2011, at Guildford County Court, the action came on for trial. Mr Heron represented himself and, having failed in an application to adjourn the hearing, disavowed reliance on the orthopaedic surgeon who had, at least, supported acceleration of the prolapse. The result was that there was no evidence linking his back problems to the accident. As a result, Judge Reid awarded him the sum of £3,000 by way of general damages based on the minor injuries to the right arm and elbow. That award was, of course, less than the first of three Part 36 offers that had been made to compromise the claim and far less than the £17,700 paid by way of interim payments. The result was that Mr Heron was ordered to meet the employers' costs from 22 November 2006, the date of the first offer. Needless to say, even putting the repayment of interim payments to one side, these costs greatly exceeded the damages and costs (prior to 22 November)which he had been awarded.
17. The employer's solicitors then applied under CPR 48.2 to join MTG for the purposes of costs and later made application for a wasted or non-party costs order pursuant to s. 51 of the Senior Courts Act 1981. Mr Heron changed solicitors and waived privilege; he was later joined as a party to the costs application and has since written a letter before claim alleging professional negligence against MTG.
18. At the costs hearing, ATE insurers provided statements to both parties to the effect that a policy would have been issued up as far as 15 March 2010 if MTG had applied for it but that inconsistencies in the evidence of the first orthopaedic surgeon would have led to a conclusion that the risks were too fluid thereafter. Judge Reid did not find this evidence of much assistance. As he observed, the dynamics of the case would have changed had ATE insurance been available and the ATE insurers would have been guided by counsel; if advice to accept an offer was rejected, cover would have been withdrawn in its entirety.

The Judgment

19. In an extremely thorough judgment covering 128 paragraphs, Judge Reid comprehensively analysed the facts and the authorities. He reached the following conclusions of fact:

"119. The suggestion that MTG's failure to obtain ATE insurance for Mr Heron meant that there was an undeclared conflict of interest between them and their client and that this motivated MTG to continue with the case in an effort to obtain a conclusion by which Mr Heron did not have a liability for TNT's costs is not made out. There is no evidence that Mr Scott appreciated the supposed conflict of interests, still less that any such appreciation led to him conducting the litigation in the way in which he did. If a result had been obtained under which TNT paid Mr Heron's costs, that would have removed the possibility of a claim by Mr Heron against MTG for failing to advise on and obtain ATE, but there is no evidence to suggest any conscious impropriety, as opposed to ineptitude, on Mr Scott's part.

120. As to the suggestion MTG stood to gain a substantial financial benefit from the case (both in terms of profit costs and a success fee), this is undoubtedly true in the sense that any solicitor engaged on a CFA has an interest in the outcome of the case. If the submission that this of itself will render a solicitor liable to a [wasted costs order] or [non party costs order], it is simply contrary to the public policy that parties, and in particular, impecunious parties, should have access to justice when they do not have the means to fund litigation themselves. There must be additional factors before an order can be appropriate."

20. The judge recognised that, as Mr Heron's solicitors, they had substantial control over the way the case developed but, save for the ATE insurance, did not consider anything untoward occurred in its management: offers were communicated and "in general, the advice to reject them was based on counsel's advice". He then goes on to deal with failures on the part of MTG in communications with Mr Heron and, in particular, as to the prospective withdrawal of Part 36 offers which he did not consider to be evidence "of MTG acting beyond the ordinary remit of a solicitor". Neither did he conclude that the delay in communicating the 'drop hands' offer of 14 October demonstrated "substantial control over the litigation".
21. The payment of some (modest) disbursements was not pump priming: it was not suggested that Mr Heron did not acknowledge his obligation to meet disbursements or that he did not pay as and when he could. On the subject of ATE insurance, he concluded (at para. 124):

"As to the suggestion that MTG's negligent failure to obtain ATE insurance unfairly inhibited Mr Heron from settling the case in an appropriate way once it became apparent on the medical evidence that it was not reasonably likely he would do better than the Part 36 offers it is not established on the material available on this application. Again, it may be the subject of evidence in negligence proceedings, when the question of whether Mr Heron's beliefs as to the value of the claim would in any event have prevented any settlement may be debated, but it does not form a sound basis for a [non-party costs order] or [wasted costs order]."

22. He rejected what he understood to be the submission that MTG owed a duty to TNT and, concluding that there was no evidence that MTG had caused TNT to incur costs which it would not otherwise have incurred, he said:

"The question, in broad terms, is whether in this case, which with its various vicissitudes was outside the ordinary run of cases, it is just to make the order sought. In my judgment it is not and the application must fail."

The Factual Appeal

23. Mr Nicholas Bacon Q.C. (who did not appear before Judge Reid) argues that the judge made a fundamental error of fact which vitiated his decision when, in place of finding that there was a conflict of interest between MTG and Mr Heron, he referred only to "the supposed conflict of interest". He points to the applicable guidance given by the Law Society in Rule 3 of the Code of Conduct which is in these terms:

"Where you discover an act or omission which would justify a claim against you, you must inform the client, and recommend that they seek independent legal advice … If the client refuses to seek independent advice, you should not continue to act unless you are satisfied that there is no conflict of interest."

24. In this case, Mr Bacon submits that there was an obvious conflict because, following the negligent failure to obtain (or at least seek) ATE insurance, there was a deliberate concealment by MTG of its own failure. In particular, he pointed to examples of such concealment in March 2007 (when there was a Part 36 offer and a warning of personal liability to costs should the offer not be beaten at trial), in August 2008 (when the issue of ATE insurance arose in correspondence) and again on 9 April 2010 (when the absence of ATE insurance arose during a conference with counsel). On each occasion save for the last, ATE insurance would still have been available.
25. As a result, he contends that the judge's finding that there was no evidence that the solicitor appreciated the supposed conflict of interest was also wrong, as was the judge's failure to appreciate the force of the submission that the solicitor would have been motivated to suppress or ignore the conflict of interest in order to avoid the financial consequence of an action for professional negligence. Given these failures, bearing in mind that the conclusions had been reached on the papers without oral evidence, Mr Bacon contended that this court should consider the merits afresh. To that end, he took us at length through the correspondence and made reference to parts of the evidence.
26. Mr Vikram Sachdeva, for MTG, argued that by describing the conflict of interests as "supposed", the judge was doing no more than assuming (for the sake of argument) that there was a conflict of interest. What he went on to decide was that there was no evidence that the solicitor appreciated the existence of any conflict of interest, let alone that it had, in fact, influenced him in the conduct of Mr Heron's case.
27. For my part, I accept the proposition that the judge was not rejecting the allegation that there was, in fact, a conflict: had he reached that conclusion, I have no doubt that he would have said so in terms. Further, such a conclusion does not fit with his later use of the word 'ineptitude': it does not appear to have been challenged before him that the failure to pursue ATE insurance for Mr Heron fell below the standard to be expected of MTG. Neither has it been challenged that such failure could potentially justify a claim from the moment that the error could not have been remedied by arranging such insurance: at that stage, on that premise, in the terms of the Code of Conduct, a conflict of interest arises and it became necessary for the firm to advise him to take independent legal advice.
28. It is worth adding that such a situation arises in every single case where a solicitor's conduct leading to the continuation of a claim which might otherwise have been discontinued or compromised can be characterised as negligent. From that moment on, there is a continuing duty to advise and, if Mr Bacon is right, in every such case, the other side (if it has been successful and is out of pocket on costs) has a potential claim against the defaulting solicitor personally. I shall return to this example below.
29. The judge rejected the claim of conscious impropriety and, in my judgment, it is not difficult to see why he did so. If MTG had its collective eye on the ball, in 2008, when the employers' insurers asked about ATE, the position could have been rectified. An equally plausible (if not much more probable) inference is that the solicitors were working with the utterly mistaken belief that there was some reason why ATE insurance had not been sought or obtained and failed to challenge that internal assumption or check the position.
30. Although I do not accept Mr Sachdeva's submission that it would be wrong ever to make a finding of conscious impropriety when the relevant solicitor has not given evidence (because of the potential disciplinary consequences and the solicitor's Article 6 rights as was identified as common ground in R v. Securities and Futures Authority ex parte Fleurose [2002] IRLR 297, [2001] EWCA Civ 2015 at para. 14), neither am I prepared to reject the finding of fact made by the judge in this case as being against the weight of the evidence as a whole (see per Nourse LJ in BCCI (Overseas) Ltd v Akindele [2001] Ch 41 at para. 32). Put simply, I do not consider that it was: rather, it was a conclusion entirely open to him on the evidence taken as a whole.

Analysis

31. There is no doubt that a non-party costs order can be made against legal representatives but that, in every case, such an order is exceptional (see per Balcombe LJ in Symphony Group Plc v Hodgson [1994] 1 QB 179 at 192). The principles were then subject to elaboration by Lord Brown in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39 [2004] 1 WLR 2807 (at para. 25) in these terms:

"(1) Although costs orders against non-parties are to be regarded as 'exceptional', exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question in any such 'exceptional' case is whether in all the circumstances it is just to make the order. It must be recognised that this is inevitably to some extent a fact-specific jurisdiction ….

(2) Generally speaking the discretion will not be exercised against 'pure funders', described in para 40 of Hamilton v Al Fayed (No 2) [2003] QB 1175, 1194 as "those with no personal interest in the litigation, who do not stand to benefit from it, are not funding it as a matter of business, and in no way seek to control its course". …

(3) Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party's costs. The non party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is 'the real party' to the litigation… Nor, indeed, is it necessary that the non-party be 'the only real party' to the litigation in the sense explained in the Knight case [Knight v FP Special Assets Ltd (1992) 174 CLR 178] provided that he is 'a real party in … very important and critical respects'."

32. Mr Bacon also relied on the observations of Dyson LJ (as he then was) in Myatt v National Coal Board (No 2) [2007] 1 WLR 1559 when he said (at para. 8):

"In my judgment, the third category described by Rose LJ in the Tolstoy-Miloslavsky case [acting outside the role of solicitor] should be understood as including a solicitor who, to use the words of Lord Brown in Dymocks Franchise Systems (NSW) Pty Ltd v Todd, is 'a real party … in very important and critical respects' and who 'not merely funds the proceedings but substantially also controls or at any rate is to benefit from them'. I do not accept that the mere fact that a solicitor is on the record prosecuting proceedings for his or her client is fatal to an application by the successful opposing party, under s.51(1) and (3) of [the Senior Courts Act 1981], that the solicitor should pay some or all of the costs. Suppose that the claimants had no financial interest in the outcome of the appeal at all because the solicitors had assumed liability for all the disbursements with no right of recourse against the clients. In that event, the only party with an interest in the appeal would be the solicitors. In my judgment, they would undoubtedly be acting outside the role of solicitor, to use the language of Rose LJ."

33. The context of that decision is, however, important. It concerned the enforceability of a specific type of CFA agreements and had the potential to impact on the solicitors' ability to claim profit costs in some 60 cases. Dyson LJ made the point that although the decision had wider relevance, its relevance "was limited to cases where the litigation is funded by a CFA and where the issue is as to the enforceability of the CFA" (para. 23).
34. Mr Bacon also relied on two first instance decisions which he said were illustrative examples of cases in which judges had made non-party costs orders against solicitors in circumstances very similar to those which obtain here. In Adris v The Royal Bank of Scotland plc [2010] 4 Costs LR 598, [2010] EWHC 941, Judge Waksman QC (sitting as a judge of the High Court) was concerned with discontinued county court cases in relation to s.78 of the Consumer Credit Act 1974 and made an order against a solicitor whose literature had represented that "your solicitor will purchase, at their cost, a legal expenses insurance policy [ie. ATE insurance]" but had failed to do so and failed to explain the costs consequences. He also considered it "obvious" that the clients would not have proceeded with this litigation without ATE insurance so that they would not have been issued or progressed (see para. 43). That is clearly not this case and in this fact-sensitive jurisdiction is entirely distinguishable.
35. The second case to which Mr Bacon directed our attention was an unreported county court decision. In my judgment, that decision does not take the analysis further even if (about which, with respect, I have real reservations) it was correctly decided. On the wider issue and in any event, I deprecate an ever-widening reference to judgments which have no authoritative value and may be no more than examples of the exercise of judicial discretion.
36. Based on the facts as found by the judge and with which I would not interfere, the application has to be put on the basis that the failure by MTG to obtain ATE insurance (and the subsequent failure to admit that fact to Mr Heron) is itself sufficient not only to give rise to a breach of duty to him but, in addition, to demonstrate that MTG had become a 'real party' to the litigation, the person 'with the principal interest' in its outcome, or that it was acting 'primarily for his own sake'. If that was so, as I have said, every act of negligence by a solicitor in the conduct of litigation (thereby giving rise to a conflict) which means that an opposing party incurs costs which might not otherwise have been incurred would be sufficient. When pressed by Beatson LJ during the course of argument, Mr Bacon was unable to identify a principled way of drawing the line so as to avoid this consequence.
37. I do not accept that the law goes anything like that far. A solicitor is entitled to act on a CFA for an impecunious client who they know or suspect will not be able to pay own (or other side's costs) if unsuccessful (see Sibthorpe v Southwark BL [2011] 1 WLR 2111 at para. 50; Awwad v Geraghty [2001] QB 570 at 588; Dophin Key v Mills [2008] 1 WLR 1829 at para. 75). As far as the other side is concerned, whether the solicitor has negligently failed to obtain ATE insurance to protect his client (as opposed to not being able to obtain such insurance) does not impact on the costs they will incur unless it is demonstrably provable that the costs would not have been incurred (as in Adris). That is not the case here.
38. Mr Sachdeva argued that the appeal was an attempt to short circuit threatened professional negligence proceedings by Mr Heron to which MTG would be able to put in issue questions of breach, causation, contributory negligence and quantum all of which could be challenged by cross examination. Speaking for myself, I doubt how live some of those issues will be but that arguments can be deployed with the benefit of tested evidence is beyond question. It is certainly appropriate for that forum to determine the extent to which MTG may be liable to compensate Mr Heron for any costs that he will have to pay to his employers' insurers; this summary procedure is not.
39. The second ground upon which this appeal was launched concerns only whether MTG should earlier have been notified that an application for a non-party costs order would be made. In the circumstances, it does not arise. For the reasons I have given, I would dismiss the appeal.

Lord Justice Beatson:

40. I agree.

Lady Justice Gloster:

41. I also agree.