England and Wales High Court (Technology and Construction Court) Decisions

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URL: http://www.bailii.org/ew/cases/EWHC/TCC/2012/2628.html
Cite as: [2012] TCLR 9, [2013] PNLR 4, [2012] 6 Costs LR 1094, [2012] EWHC 2628 (TCC)

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		Neutral Citation Number: [2012] EWHC 2628 (TCC)
		Case No: 9MA50096

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
MANCHESTER DISTRICT REGISTRY
TECHNOLOGY AND CONSTRUCTION COURT

Manchester Civil Justice Centre,
1 Bridge Street West, Manchester M60 9DJ

28 September 2012

B e f o r e :

HIS HONOUR JUDGE STEPHEN DAVIES
SITTING AS A JUDGE OF THE HIGH COURT
____________________

Between:

	TINSELTIME LIMITED	Claimant
	- and -
	(1) ERYL ROBERTS (2) M & JT DAVIES (3) DENBIGHSHIRE COUNTY COUNCIL (4) WELSH ASSEMBLY GOVERNMENT	Defendants / Applicants
	- and -
	GAVIN EDMONDSON	Respondent

____________________

Richard Coplin (instructed by GHP Legal, Wrexham) for the Defendants / Applicants
Simon Wilton (instructed by Berrymans, Manchester) for the Respondent
Hearing date: 7 September 2012
____________________

HTML VERSION OF JUDGMENT ON THE DEFENDANTS' APPLICATION FOR COSTS
____________________

AGAINST THE SOLICITOR FOR THE CLAIMANT

His Honour Judge Stephen Davies :

INTRODUCTION

In this case the defendants (respectively "Mr Roberts", "Davies", "DCC" and "WAG") have brought an application against the solicitor ("Mr Edmondson"), who acted for the claimant, Tinseltime Limited ("Tinseltime"), in the substantive action, for an order that he should pay their costs of the proceedings pursuant to s.51(3) Senior Courts Act 1981 and/or CPR 48.2 as a non-party "funder" of those proceedings ("a non-party costs order") and/or pursuant to s.51(6) Senior Court Act 1981 and/or CPR 48.7 as wasted costs ("a wasted costs order"). The matter was listed for an oral hearing on 7 September 2012 to decide whether or not the application should be permitted to proceed further. At the outset of the hearing I suggested, and the parties agreed, that the application for a non-party costs order could and should be determined substantively at that hearing. In contrast, the application for a wasted costs order proceeded on the permission-only basis as originally ordered, because it was not possible fairly to determine the wasted costs application on a substantive basis without first affording Mr Edmondson the opportunity to file further witness evidence in response following the service by the defendants of their statement of case in the application.

The application for a non-party costs order in this case raises an issue of some general importance and controversy, namely whether or not a solicitor who takes on a case for an impecunious claimant under a conditional fee agreement (CFA) where there is no after the event (ATE) insurance policy in place, and who also agrees to fund the disbursements necessary to allow the case to proceed, thereby constitutes himself a non-party funder and renders himself liable to a non-party costs order in the same way as if he was a commercial non-party litigation funder.

I will begin this judgment by referring to the history of the proceedings. I will then deal with the circumstances in which Mr Edmondson came to take on the case on behalf of Tinseltime, and address the specific criticisms made of his conduct of the action. I will then refer to the relevant legal principles in relation to non-party costs orders, and determine that application. Finally, I will determine the question as to whether or not the application for a wasted costs order should be permitted to proceed further.

THE HISTORY OF THE PROCEEDINGS

These proceedings were issued on 23 February 2009, initially against Mr Roberts alone. In short, the claim arose out of events which occurred in February 2007 when Mr Roberts, a self-employed building contractor, was engaged as subcontractor to Davies, a building firm, to undertake works as part of a road-building scheme known as the A5 Pont Melin Rhug Bridge project in Clwyd. These works included the demolition of part of a building known as the "Old Creamery". That part of the building which was not to be demolished was occupied by a tinsel manufacturing business. The essential complaint was that when Mr Roberts was engaged in cutting concrete blocks on adjacent land, to be used to infill existing openings in the dividing wall between the two parts of the building, dust was produced by the cutting operation, which was carried into the premises and settled on machinery situated on those premises, that machinery being used for the purposes of the tinsel business. It was said that this dust had caused significant damage to the machinery, which had to be repaired and, until repairs could be completed, there was a loss of production resulting in a loss of sales and, hence, profit.

The claim which was advanced in the particulars of claim in its original version was that it was Tinseltime which occupied the premises, pursuant to a lease dated January 2007, and which undertook the tinsel manufacturing business from the premises at the relevant time. On that basis there was no difficulty about Tinseltime as an entity advancing the claim, which was advanced in negligence and in nuisance. However in Mr Roberts' lengthy and detailed Defence, dated 8 May 2009 and drafted by his solicitor, Mr Peter Butler of GHP Legal, these assertions were contested. It was asserted that the lease relied upon was in fact a licence made between the owner of the property and the licensee, who was stated to be "Peter Ridgway of Fountain of Youth Ltd" ("Mr Ridgway" and "FOY" respectively). No admissions were made as to the occupation of the premises, and the point was taken that the license contained a prohibition against assignment. No admissions were made as to the loss and damage alleged and, in particular, it was observed that invoices relating to machinery repairs were addressed to FOY and not to Tinseltime. However Tinseltime maintained its position in its Reply to the Defence, contending that it occupied the premises under the licence referred to with the permission of Mr Ridgway, who it said was the licensee.

The claim was then transferred to the Technology and Construction Court and an order was made in March 2010, giving directions with a view to there being a mediation later that year. In the light of the points being taken by Mr Roberts Tinseltime was ordered to provide a formal statement setting out the relationship between FOY and Tinseltime and to provide specific disclosure of financial and accounting records relating to both companies.

7. There was a further hearing on 15 October 2010. Unfortunately the case had got nowhere near mediation. Instead, each party had made what were to be heavily contested applications. Tinseltime had issued an application seeking permission to amend the Particulars of Claim to join in Davies as second defendant, DCC as third defendant and WAG as fourth defendants. In effect, Tinseltime was seeking to hold one or more of these additional parties liable for Mr Roberts' alleged conduct on the basis that they were responsible as a matter of law for the work he undertook. At the same time Tinseltime was seeking substantially to increase its claim for loss of profit. At around the same time Mr Roberts had issued an application seeking to strike out or to obtain summary judgement on the claim, alternatively seeking specific disclosure and/or security for costs. The principal basis for the application to strike out / for summary judgement was, as set out in great detail in the witness statement made by Mr Butler in support of the application, that on a thorough review of the available evidence, including the documentation disclosed by Tinseltime, it was apparent that "during the period when the defendant carried out the work in question … Tinseltime was dormant and was not carrying on business and was not in occupation of the premises and did not own … any of the equipment in respect of which the claim has been made" [paragraph 34].

So far as the application for security for costs was concerned, that was made on the basis that the financial information provided by Tinseltime showed quite clearly that it was insolvent. It is worth noting that in his witness statement dealing with this part of the application Mr Butler said:

"64. The claimant is pursuing the claim under a conditional fee agreement dated 21st of June 2008 made with Gavin Edmondson solicitors. I put the claimant to strict proof whether the CFA has been made with FOY or whether it has been made with Tinseltime. If the CFA was made with FOY, Gavin Edmondson solicitors are funding this litigation. …

65. The claimant does not have legal expenses insurance."

The draft amended Particulars of Claim dated 24 August 2010, produced in support of the application to amend, did not seek to revise the basis on which Tinseltime claimed to be entitled to bring the claim. Remarkably however, when he came to respond to Mr Roberts' application to strike out / for summary judgment, Mr Edmondson admitted on behalf of his client, in a witness statement made on 17 September 2010, that what Mr Butler was saying about Tinseltime's position in February 2007 was correct, and that it would be necessary further to amend the Particulars of Claim to reflect this. Even more remarkably still, at the hearing itself counsel for the claimant said, on express instructions from Mr Ridgway, that the admissions made by Mr Edmondson had been wrongly made and reflected a misunderstanding of the position, and that the claimant's case continued to be that Tinseltime was entitled to advance the claim on the basis already pleaded.

It was in those extremely unsatisfactory circumstances that I made an order that the question as to whether or not Tinseltime had a valid cause of action in nuisance or in negligence, and if so on what basis, should be tried as a preliminary issue. The intention was to seek to achieve a final resolution of the issue of Tinseltime's entitlement to bring these proceedings in the most speedy and cost-effective manner available. I ordered Tinseltime to serve a further amended Particulars of Claim, which fully particularised its case as to the preliminary issue, and gave further directions leading to a trial of the preliminary issue which was listed to take place in March 2011. I adjourned the respective applications generally, and I ordered that the costs of the hearing, including the costs of the applications, should be the defendants' costs in the case of the preliminary issue.

Even after the order of 15 October 2010 the basis for the claims being advanced by Tinseltime continued to change. Thus:

(1) The further draft amended Particulars of Claim asserted the claim on the primary basis that at the relevant time Tinseltime was the licensee of the premises, the operator of the tinsel making business, and that it held the machinery on loan from FOY. It was in this pleading that the claimant first referred to and relied upon an assignment made 1 December 2007 between FOY and Tinseltime, in order to entitle Tinseltime to pursue the claim for damage to the machinery. It also sought to rely on it as a fallback "if the defendants contend and prove that [FOY] was still in occupation of the premises and/or still trading" at the relevant time.

(2) However in the Replies to the Defences, served on 21 January 2011, there was a fundamental shift in the case being advanced, so that paragraph 1 of the Reply to Robert's Defence pleaded as follows:

"… The claimant accepts that it was not operating from the premises at the material time. The handover of business from [FOY] to the claimant did not take place until approximately August 2007. The claimant's claim is pursued under the assignment dated 1 December 2007. For the avoidance of doubt, at the time of the damage [FOY] was the owner of and in possession of the machines, was the licensee in exclusive occupation/possession (the licensee was stated as Peter Ridgway of [FOY]) and was trading in the tinsel-making business. Its cause of action in respect of the matters complained of was assigned to the claimant who thereby steps into its shoes."

(3) On the first day of trial counsel for the claimant produced a revised draft re-amended Particulars of Claim which was broadly consistent with the case pleaded in the Replies to Defences. Following some further objection from the defendants to the detail of that draft, a further version was produced, verified by statement of truth signed by Peter Ridgway, which set out the case as finally being advanced by the claimant. Paragraph 3.1 is in the following terms:

"For the avoidance of doubt, at the time of the damage, [FOY] was:

(1) the owner of and in possession of the machines,

(2) as a matter of construction of the License agreement and as a matter of fact the licensee in exclusive occupation and possession of the premises (notwithstanding the reference to 'Peter Ridgway of [FOY]' the licensee was not Mr Ridgway personally) and was trading in the tinsel making business."

Having heard evidence and received submissions I produced a judgment [2011] EWHC 1199 (TCC), reported at [2011] BLR 515 in which, in summary, I held that: (i) in February 2007 FOY was the licensee, the owner of the machinery and the operator of the business; (ii) the assignment was genuine and effective to assign the benefit of any claims enjoyed by FOY in respect of the damage to the machinery and the consequences thereon on the business to Tinseltime; (iii) whilst Tinseltime could in principle pursuant to the assignment maintain actions for nuisance and/or negligence against Mr Roberts and Davies in respect of the matters complained of, it could not maintain actions against DCC or WAG in respect of such matters; (iv) whilst Tinseltime could in principle pursuant to the assignment maintain actions for the cost of machinery repairs and for loss of profits and wasted management time against Mr Roberts and Davies, on the evidence and on a proper application of the law the claims for loss of profits and wasted management time had no real prospect of success. I was extremely unimpressed by Mr Ridgway as a witness, finding his evidence to be confused and contradictory and him to be an unreliable witness.

The end result was to bring the claims against DCC and WAG to an immediate end, and to strike out the most substantial and significant of the financial claims advanced by Tinseltime. The claim for machinery repairs and wasted management time were always modest, whereas the claim for loss of profits as amended was said to be in the region of £1.4 million.

I also ordered Tinseltime to pay the costs of all of the defendants down to that date, reflecting not only the fact that it had failed against DCC and WAG and that its most substantial and significant claim had been struck out as against Mr Roberts and Davies, but my dim view of the extremely unsatisfactory way in which Tinseltime had approached this litigation and, in particular, the question of its entitlement to sue. I ordered Tinseltime to make interim payments on account of such costs, and ordered that the remaining claims against Mr Roberts and Davies should be dismissed if Tinseltime failed to comply within a specified time.

In the event Tinseltime did not pay, nor was an intimated appeal launched, so that the action was struck out as against Mr Roberts and Davies as well. An application was made for a non-party costs order against Mr Ridgway, on the basis that the evidence showed that the claim, although nominally brought by Tinseltime, was in fact brought for his benefit, as the sole director and shareholder of that company. Mr Ridgway failed to respond to that application. I was satisfied that I should make such an order in relation to the whole of the costs for which Tinseltime was liable, and duly made such an order. However Mr Ridgway has disappeared leaving no apparent assets, and it is quite clear that there is no prospect of securing any recovery against Tinseltime, which is now in insolvent liquidation.

MR EDMONDSON'S ROLE IN THE PROCEEDINGS

More is known about the relationship between Tinseltime and Mr Edmondson than might normally be known in the context of an application of this kind, because the defendants have been able to obtain Tinseltime's liquidator's consent to the release of Mr Edmondson's file to the defendants.

It is clear that Mr Ridgway first approached Mr Edmondson in June 2008. At this point in time he was pursuing, with the assistance of a firm of planning consultants known as Barlow Associates, a statutory disturbance claim against WAG. However WAG had refused in correspondence to accept any responsibility for what was referred to as "avoidable damage", which in their view included all of the consequences of the dust damage resulting from Mr Robert's alleged negligence and, hence, all of the items the subject of this claim. It appears that Mr Ridgway had approached other solicitors but had been unable to persuade them to take on the case on a CFA. Mr Edmondson says that he was aware from the outset that Tinseltime was impecunious. He agreed to take the case on under a CFA. He explains that he was prepared to pay on Tinseltime's behalf the disbursements incurred in connection with the proceedings, on the basis that he would be indemnified for any expenditure only in the event of the claim succeeding.

At the time Mr Edmondson was the sole proprietor of the solicitors practice named Gavin Edmondson Solicitors, which practised from premises in Northwich, Cheshire. There is no indication that Mr Edmondson had significant experience of litigation of this nature. The terms of the CFA which was entered into on 21 June 2008 provided for a success fee of 100% if the claim concluded at trial, but only 12.5% if it concluded before trial. As I observed in the course of the hearing, that arrangement appears more apposite to a straightforward road traffic accident case than to this case, a relatively substantial and complex nuisance claim. It appears however that this is not how Mr Edmondson perceived the case at this time. Thus in the client care letter which Mr Edmondson sent to Mr Ridgway on 22 June 2008 he referred to his estimate of his costs for the case as being in the region of £20,000, and his estimate of disbursements as being in the region of £10,000. These estimates are consistent with his expectation, referred to in his letter to Mr Ridgway of 6 January 2009, that so long as the case was approached reasonably by the defendants it ought to be capable of being resolved reasonably quickly. It is clear that all that Mr Edmondson was anticipating in terms of disbursements was instructing the company accountant to prepare a report on the claim for loss of profits, instructing counsel to advise and to produce particulars of claim, and paying the necessary court issue fee.

Further information in relation to funding issues appears from a file note of an attendance by Mr Edmondson upon Mr Ridgway on 6 January 2009, shortly prior to the issue of proceedings. Mr Edmondson notes that Tinseltime is "already virtually bankrupt and has no funds hence the need for CFA. The company has been crippled by the defendant tortfeasors and needs assistance." Mr Edmondson records that he has advised about ATE insurance funding, but Mr Ridgway is not interested because Tinseltime is, as he put it, "knackered" due to the building works. Mr Edmondson notes that an ATE policy would not benefit Tinseltime because it is "on its last legs". He also notes that this would have to be considered further if a security for costs application is made, but records his belief, subsequently proved in the light of events to have been unduly optimistic, that "this case should be straightforward regarding liability". The file note also records that consideration was given to the risk of Mr Ridgway being held personally liable for the costs but again, unduly optimistically in the light of subsequent events, Mr Edmondson recorded his belief that "he [Mr Ridgway] should be okay".

So far as the CFA itself is concerned, it is in a standard form. It is clear, particularly when read with the contemporaneous client care letter, that Mr Edmondson was prepared to fund the legal costs, including disbursements, under the CFA on the basis that whilst Tinseltime would be liable for those costs, including the success fee, if it won its claim, it would have no liability for those costs if it was unsuccessful. It is also clear that Mr Edmondson was fully aware that if Tinseltime lost the claim it would be unable to meet any liability for costs because it was effectively insolvent, and that Mr Ridgway was not prepared to expend monies to procure an ATE insurance policy unless or until there came a time when he might be forced to do so in the context of facing an application for security for costs.

In the event, it appears that the total sum expended by Mr Edmondson in relation to disbursements amounted to £22,270. This includes counsel's costs incurred in contesting the preliminary issue, which must have been substantial. It appears that Mr Edmondson did not render any invoices to Tinseltime in relation to those disbursements, or seek any payment on account, which is not surprising given the terms of the CFA. I have not been provided with any information as to the amount of the time costs incurred by Mr Edmondson in relation to this claim.

At paragraph 5.2 of the statement of case served by the defendants in respect of this application various criticisms are made of Mr Edmondson's conduct of the case in the context of the defendants' contention that Mr Edmondson "controlled or had material control over the litigation". In summary, it is said that Mr Edmondson failed to undertake any sufficient investigation at an early stage into the issues relating to the fact that there were two separate companies, with question marks over which one of them, if either of them, was the licensee, which one of them occupied the premises at the time of the damage (and on what basis), which one of them owned the machinery, which one of them carried on the business, which one of them had paid for machinery repairs, and which one of them had suffered the loss of profits claim. In short, it is said that the need fully and properly to investigate these issues at an early stage ought to have been apparent to any competent solicitor, particularly given the information available from such sources as Companies House, including the filed accounts. These are clearly allegations that Mr Edmondson acted improperly, unreasonably or negligently and, in that context, are also relied upon in support of the application for a wasted costs order.

I should say straight away that I am not satisfied on the basis of the evidence before me that these criticisms have been clearly established, even if they are relevant in the context of the non-party costs application which, for reasons I will give, I do not consider they are. I must guard against the temptation of judging Mr Edmondson with the benefit of hindsight, particularly when a full investigation has been conducted at the trial of the preliminary issues into these matters, after which things inevitably appear far clearer than they did before. I must acknowledge that a solicitor is in a very difficult position if he is seeking to take instructions from a client who is constantly changing his story, as Mr Ridgway obviously was. I must also bear in mind that it is not the function of a solicitor to undertake a hostile cross-examination of his clients in relation to instructions given by him. What is all too apparent from the history of this case, and what emerged very clearly under cross-examination of Mr Ridgway at the trial of the preliminary issue, is that he was a thoroughly unreliable witness, who either did not understand the issues relevant to the differences between the two companies or was deliberately seeking to obfuscate the issues to avoid prejudicing his case. A good example of that has already been given, where at the hearing on 15 October 2010 he gave instructions to counsel which directly contradicted the instructions he had given to Mr Edmondson only weeks previously on this very point. In the circumstances of this case, I have no doubt that whatever queries were raised by Mr Edmondson about the position so far as the two companies were concerned and the inter-relationship between them, the instructions given by Mr Ridgway from time to time were thoroughly confused and confusing. It was only at the later stages, when he was pressed in the context of the imminent trial of the preliminary issue, that he provided instructions which enabled counsel to advance the case in the way which it was finally advanced at that hearing.

In the circumstances, whilst I accept that some solicitors might have adopted a more robust approach to their client, testing the instructions they were receiving more forcefully against the documentation reasonably available to them, I do not consider that the evidence clearly establishes that Mr Edmondson acted improperly, unreasonably or negligently, or otherwise in a way which fell significantly below the standard which one would reasonably be entitled to expect from a solicitor in his position. Insofar as it is alleged that he deliberately or recklessly closed his eyes to these difficulties with a view simply to pushing the case forwards for his own financial interests, I have no hesitation in rejecting that argument. My assessment of the position with the benefit of hindsight is that he was overly trusting in Mr Ridgway as a client, and too willing to accept Mr Ridgway's own belief in the strength of Tinseltime's case. But that is very far from establishing that his conduct was unreasonable, let alone that it was self-interested. I must not lose sight of the fact that counsel, whom Mr Edmondson involved throughout, fared little better in obtaining clear and consistent instructions from Mr Ridgway. Whilst I appreciate that there is some criticism made of Mr Edmondson for not providing full documentation to counsel, I have no doubt that whatever had been provided Mr Ridgway would have found some way of seeking to explain matters in a way which suited him and which served only to obscure. It must be borne in mind that none of the documentation which Mr Edmondson had, or which it is said he could have obtained, answered the questions which arose unequivocally.

Moreover, in so far as it is suggested that Mr Edmondson pursued litigation on behalf of Tinseltime which was speculative and unmeritorious, it must be remembered that the outcome of the preliminary issue was not that the claim lacked merit in its entirety. There has never been any adjudication on the merits of the claim in relation to liability as against Mr Roberts or Davies, and in the event I held that Tinseltime was in principle entitled to advance a claim for machinery repairs and, had it been viable, a claim for loss of profit, under the assignment. Again, my assessment of the position is that Mr Edmondson was if anything over optimistic and not sufficiently alert to the potential complications of the case. But again that is very far from establishing impropriety, unreasonableness or negligence in taking on a case which was plainly hopeless. There is no suggestion that Mr Edmondson was pursuing this litigation in the face of clear advice from counsel that it was hopeless, or clear information from the accountants undermining the claims.

Other than these criticisms of Mr Edmondson's conduct of the case, there is no other basis advanced for suggesting that Mr Edmondson "controlled" the litigation any differently from any other solicitor conducting litigation on behalf of his client. There was some suggestion that something could be made of the fact that when, in February 2011, an offer of settlement was made which was inclusive of costs, it was made clear by Mr Edmondson that he would want to recover his costs, including the disbursements he had incurred, out of the settlement sum. However I fail to see what that establishes, other than that Mr Edmondson quite properly obtained his client's instructions on the offer, quite clearly explained to his client that if it was accepted he would be entitled to recover his costs from the proceeds, and made no attempt to exert any improper influence on his client when Mr Ridgway rejected that offer in emphatic terms.

THE LAW IN RELATION TO NON-PARTY COSTS ORDERS AGAINST SOLICITORS

The starting point, and the first case to which I was referred by both counsel, is the decision of the Court of Appeal in Tolstoy v Aldington [1996] 1 WLR 736. In that case the judge at first instance had made a non-party costs order against the firm of solicitors who had acted for the claimant on a pro bono basis on his unsuccessful application to set aside an earlier judgment for fraud. The Court of Appeal held that there was no jurisdiction to make such an order against legal representatives acting as such, although they upheld the actual decision under the wasted costs jurisdiction. Rose LJ held (at p745H-746A) that there were only three categories of conduct which could give rise to an order for costs against a solicitor, namely: (i) under the wasted costs jurisdiction; (ii) through breach of duty to the court; and (iii) "if he acts outside the role of solicitor, e.g. in a private capacity or as a true third party funder for someone else". Relevant to this case, Rose LJ continued his judgment as follows:

"There is, in my judgement, no jurisdiction to make an order for costs against a solicitor solely on the ground that he acted without a fee. It is in the public interest, and it has always been recognised that it is proper, for counsel and solicitors to act without fee. The access to justice which this can provide, for example in cases outwith the scope of legal aid, confers a benefit on the public. Section 58 of the Act of 1990, which legitimises conditional fees, inferentially demonstrates Parliament's recognition of this principle. For it would be very curious if a legal representative on a contingent fee and, therefore, with a financial interest in the outcome of litigation, could resist an order for costs against himself but one acting for no fee could not. Whether a solicitor is acting for remuneration or not does not alter the existence or nature of his duty to his client and the court, or affect the absence of any duty to protect the opposing party in the litigation from exposure to the expense of a hopeless claim."

As Mr Wilton submits, Rose LJ was clearly of the view that a solicitor who acted under a CFA would not fall within exception (iii), absent some other feature. Ward LJ agreed with the reasons given by Rose LJ on this aspect of the case, and Roch LJ gave a concurring judgment in the same terms, saying:

"On the question whether a costs order could be made against the solicitors under section 51(1) and (3) of the Act, in my judgment, on the facts in this case such an order could not be made. A person who is not a party to proceedings can be ordered to pay costs in those proceedings if he has made himself a quasi party, for example, by … funding the proceedings or by initiating them for some purpose of his own and it is reasonable and just to make the order. The legal representative who acts as a legal representative does not make himself a quasi party and no jurisdiction to make an order for costs against him under section 51(1) and (3) arises. However, a legal representative who goes beyond conducting proceedings as a legal representative and behaves as a quasi party will not be immune from a costs order under section 51(1) and (3) merely because he is a barrister or a solicitor.

… Acting pro bono is not, of itself, sufficient to make a legal representative a quasi party. More is required"

I was referred by Mr Wilton to the decision of the House of Lords in Callery v Gray [2002] 1 WLR 2000. Lord Bingham in paragraph 2 of his judgment identified the aims behind the introduction of the CFA regime as including: (i) improving access to the courts for members of the public with meritorious claims; (ii) discouraging weak claims and enabling successful defendants to recover their costs in actions brought against them by indigent claimants. He said that the main instruments to be relied upon in achieving those aims were the introduction of CFAs and ATE insurance policies respectively.

Mr Wilton referred me to the decision of the Court of Appeal in Hamilton v Al Fayed (No 2) [2003] QB 1175. That was a case about the potential liability of "pure funders", however Mr Wilton submitted that there were passages in the judgments of some relevance to the present case.

Mr Wilton referred me to paragraph 38 of the judgment of Simon Brown LJ, where he referred to the earlier decision of the Court of Appeal in Hodgson v Imperial Tobacco [1998] 1 WLR 1056. In that case the court made it plain that no adverse order as to costs could be made against the solicitors by reference to their having entered into a lawful CFA. The court said "Just as in the Tolstoy case it was made clear that it is in the public interest and perfectly proper for counsel and solicitors to act without fee, 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". In paragraph 45 he explained the reasoning underlying the principle, which he considered established by the authorities, that lawyers acting under a CFA should not be liable for the other party's costs. He concluded that "the law's policy with regard to CFAs is plainly to favour access to justice".

In the same case at paragraph 63 Chadwick LJ said that "The starting point, as it seems to me, is to recognise that, where there is tension between the principle that a party who is successful in defending a claim made against him ought not to be required to bear the costs of his defence and the principle that a claimant should not be denied access to the courts on the grounds of impecuniosity, that tension has to be resolved in favour of the second of those principles". Paragraphs 67 and 68 of this judgment echoed the statements in those paragraphs of the judgment of Simon Brown LJ to which I have just referred.

I accept Mr Wilton's submission that these passages, although clearly obiter, provide powerful support for the proposition that solicitors acting under a CFA, even where there is no ATE insurance to cover the other party's costs, should not on that ground alone be made liable as a non-party funder for the other party's costs.

I was referred by both parties to the decision of the Privy Council in Dymocks Franchise Systems v Todd [2004] 1 WLR 2807. That was a case about a commercial funder who was not a solicitor. However at paragraph 25 Lord Brown, as he had then become, in delivering the judgment of the whole court summarised the relevant principles applicable to non-party costs orders in the following terms, which are I consider of great significance to the instant case:

"A number of the decided cases have sought to catalogue the main principles governing the proper exercise of this discretion, but their Lordships, rather than undertake an exhaustive further survey of the many relevant cases, would seek to summarise the position as follows:

1. Although cost 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 and that there will often be a number of different considerations in play; some militating in favour of an order, some against.

2. Generally speaking, the discretion will not be exercised against 'pure funders' described in paragraph 40 of Hamilton v Al Fayed (No 2) [2003] QB 1175-1194 as 'those with no personal interest in a 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.' In their case the court's usual approach is to give priority to the public interest in the funded party getting access to justice over that of the successful unfunded party recovering his costs and so not having to bear the expense of vindicating his rights.

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 would 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, a concept repeatedly invoked throughout the jurisprudence (see, for example, the High Court of Australia in the Knight Case 174 CLR 178 and Millet LJ's judgment in Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613). Consistently with this approach Philips LJ described the non-party underwriters in T G A Chapman Ltd v Christopher [1998] 1 WLR 12, 22 as 'the defendants in all but name'. 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, provided that he is 'a real party in … very important and critical respects.'"

Mr Coplin also referred me to paragraph 33 of the judgment in that case, where Lord Brown accepted that the authorities established that there was no necessity to prove that the non-party had acted improperly or had promoted the pursuit of speculative litigation, although he noted that the presence of such factors might support the making of such an order.

Mr Wilton also referred me to paragraph 35 of the judgment where Lord Brown addressed an argument by the commercial funder that it would be unfair to make it pay the costs of the proceedings in question because of the separate and substantial part played by the solicitors in enabling the appeals to proceed. (Although not specified, it appears from the affidavit evidence referred to in paragraph 6 of the judgment that the solicitors were prepared to carry some of the risk of the proceedings by means of the fee arrangements negotiated.) Lord Brown said "It was one thing for the solicitors to be prepared to risk not recovering part of their fees were the appeals to fail; quite another for a secured creditor to provide the necessary funding. Whereas [the secured creditor] can sensibly be characterised as "the real party" to these appeals – or at least "a real party in very important and critical respects" that cannot be said of [the solicitors]". Mr Wilton submitted that this illustrated the essential difference between a funder and a solicitor, even where the latter was acting under some form of conditional fee arrangement. However it seems to me that this was really no more than an observation directed to the particular facts of that case.

I was referred by Mr Coplin to the decision of the Court of Appeal in Arkin v Borchard Lines [2005] 1 WLR 3055, another case of a claim for a non-party costs order against a commercial funder, where the Court was concerned to arrive at a solution in such cases which it considered just, and practicable, and catered for some of the policy considerations which they considered applicable. In short, they were of the view that in circumstances where there was nothing objectionable about the funding arrangement, and where the claimant remained the party primarily interested and the party in control of the litigation, then the funder should be potentially liable for the costs of the opposing party to the extent of the funding provided. Mr Coplin submits that the essential reasoning in this case, namely that where funding is provided in return for financial reward, then even though there is nothing objectionable about that arrangement the funder should still in principle be liable for at least some of the other party's costs, is equally applicable to a solicitor acting under a CFA who funds the costs and the disbursements of the litigation. He submitted however that it would be a decision for the court on the facts of the individual case as to whether to impose a limit on liability equal to the extent of the funding provided, and in that regard referred me to the view expressed by Jackson LJ, in his final report on his review of civil justice litigation, that there was no good reason for so limiting the liability of a litigation funder, and that the amount of the liability should be a matter for the discretion of the court in the individual case.

With great respect I do not consider that it is open to me to depart from a decision of the Court of Appeal, binding on me sitting as a first instance judge, on the basis that it has been the subject of extra-judicial criticism, no matter how eminent the source. I will return to this point later in this judgment.

The most recent Court of Appeal authority to which I was referred was the decision in Myatt v National Coal Board (No 2) [2007] EWCA Civ 307. In that case there had been an unsuccessful appeal to the Court of Appeal against a decision holding that a CFA entered into by a particular firm of solicitors in 4 test cases was unenforceable. This had two consequences. The first was that the claimants themselves would have to bear the cost of the ATE insurance premium from the damages recovered by them. The second was that the solicitors would be unable to recover their profit costs in those cases and in other similar cases; the total sum at stake so far as the solicitors were concerned was in the region of £200,000. The solicitors had apparently agreed to fund the appeals at their own expense, and the successful respondent sought an order that they should pay the costs of the appeal as a non-party funder. The Court of Appeal made the order sought. They held that the court had jurisdiction to do so where litigation was pursued by the client for the benefit, or to a substantial degree, for the benefit of the solicitor, because in such circumstances the solicitor was a real party to the litigation. However, because the respondents had failed to give prior notice of their intention to make such an application, which they held was normally incumbent on a party seeking such an order so as to give the solicitor the opportunity to consider whether or not to continue in the light of the risk of such an order being made, and because the appeal had been pursued in part for the client's own interests, the fair order was that the solicitors should pay 50% of the costs.

Dyson LJ, having referred to the 3 categories of case identified by Rose LJ in Tolstoy, said this:

"8. In my judgment, the third category described by Rose LJ in Tolstoy's case should be understood as including a solicitor who, to use the words of Lord Brown in Dymocks 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 section 51(1) and (3) of the Supreme Court Act 1981, that the solicitor should pay some or all of the costs.

...

11. Rose LJ did not have in mind the kind of hybrid situation that has arisen in the present cases. He did not have to consider the position of an appeal in whose success the solicitor has the principal interest but in which the client has his own lesser interest, too. It is at this point salutary to recall that Lord Brown said that the non-party need not be the only real party to the litigation, provided that he is "a real party… in very important and critical respects". I can think of no good reason why those observations should not apply with equal force to solicitors and non-solicitors. I have no doubt that there is jurisdiction to make an order under section 51(3) against a solicitor where litigation is pursued by the client for the benefit or to a substantial degree for the benefit of the solicitor."

Lloyd LJ also referred to the observations of Rose LJ and said that:

"19. Those observations do not, and did not purport to, set out in definitive terms exactly what is the borderline between the case where a solicitor acts purely as such in the ordinary way on behalf of a client and is therefore immune from the jurisdiction of the court under sections 51(1) and (3), and on the other hand a case where the solicitor's acts are such that he is within the scope of that jurisdiction. Although the court in Count Tolstoy noted the enactment of the conditional fee provisions of the Courts and Legal Services Act 1990, it did not have occasion to consider the implications of those provisions in detail."

Lloyd LJ emphasised the importance of having a clear understanding of and having regard to the economic realities of the case:

"24. At any given stage in the course of the appeal, if one had asked in what role the solicitors were acting, even looking beyond their necessary role of conducting the litigation, [counsel for the solicitors] said the answer would have to be that they were representing the claimants and their interests, even if they were also furthering their own interests. Like my Lord, I do not consider that this is a sufficient answer to the arguments of Mr Morgan for the respondents. In the very different context of CFA funded litigation, which was not at issue in Tolstoy, it seems to me that the criteria indicated in that case must be considered and applied with as clear an understanding as the court can have of the reality of the issues at stake in the litigation and their economic context and also, of course, with the benefit of later developments in the law as regards the circumstances in which it is possible, and if so proper, to make an order under subsections (1) or (3) of section 51."

He did however suggest that the relevance of this appeal to other cases was likely to be limited:

"23. Accordingly, although I would accept that a decision in favour of the respondents and against the solicitors in the present case is of wider relevance, it seems to me that its relevance is limited to cases where the litigation is funded by a CFA and where the issue is as to the enforceability of the CFA. ...

27. In those circumstances, which could be common in relation to cases where the enforceability of a CFA is at stake but would be most unusual in any situation, it seems to me proper to regard the solicitors as having acted in respect of the appeal in a dual capacity; acting for their clients, certainly and with a real interest of those clients to protect, but primarily acting for their own sake. In terms of what Lord Brown said later in paragraph 25 in Dymocks, I agree with my Lord in saying that Ollerenshaws were a real party to the litigation at the stage of the appeal, albeit that the claimants were also. On that basis it seems to me that the case is materially different from the Count Tolstoy case and the court has jurisdiction to make an order under subsection (1) and (3) of section 51 against the solicitors."

The final authority to which I was referred is the decision of Eady J on conjoined appeals from two decisions of HH Judge Moloney QC in Flatman v Germany and others [2011] EWHC 2945 (QB). In those cases Judge Moloney had declined to make orders for disclosure of documents relating to the funding arrangements between the unsuccessful claimants and their solicitors, on the basis that he did not consider there was any reasonable prospect of the applicants, the successful defendants in the actions, obtaining a non-party costs order against the solicitors on the grounds that they were to be regarded as funders by having taken on the cases on a CFA and funded the disbursements. On appeal to Eady J it was argued that Judge Moloney was wrong in reaching that conclusion, and that there was a sufficient prospect of a successful outcome to justify making the preliminary order for disclosure. Eady J allowed the appeals on that basis. He considered the authorities, including Tolstoy, Callery, Dymocks and Myatt, as well as authorities from New Zealand and Australia referred to by Lord Brown in Dymocks.

Having referred to the public policy aims behind the introduction of CFAs and ATE policies identified by Lord Bingham in Callery, Eady J continued in what appear to be the key sections of his judgment for present purposes:

"23. It is thus necessary for me not to lose sight of the public policy aim of discouraging weak claims and, in particular, enabling successful defendants to recover their costs in actions brought against them by indigent claimants. This is a factor which has relevance to the present appeals.

24. The CFA regime offers solicitors the opportunity sometimes to profit significantly from a piece of litigation. In these two cases, [the solicitors] plainly stood to gain if the litigation could be sustained. In such cases, where the proposed claimant is impecunious, it may take only a limited sum of money to launch the litigation and thus provide those opportunities. Yet the litigant himself may not be in a position to prime the pump with the necessary disbursements. That is the kind of situation where there is scope for ambiguity.

25. If the solicitor pays for the court fees (say) or expert reports at the beginning of a personal injury claim, on the basis that the client will reimburse him later, there is nothing inherently improper about that: see e.g. the observations of Lord Brown in Dymocks, cited above, at [35]. On the other hand, if the sums are paid out by the solicitor, whether from client account or office account, on the basis that they will be recovered from the other side, in the event of success, or not at all in the event of failure, that would be a different matter. The solicitor would indeed then have become a funder, albeit sometimes in only a small way. He may have the capacity to make the difference between the defendant in question being sued, with all the cost and vexation involved, and his being left in peace. What is more, in such a hypothetical situation the solicitor would clearly be providing the funds "in the way of business" – in effect laying out a modest investment with a view to significant gains for himself or his firm if the claimant succeeds (perhaps greater gains than those actually accruing to the client). For reasons of public policy, it may well be thought that any such funding role, on the part of a solicitor, should only be countenanced, and regarded as legitimate, if it carries with it at least the risk of having to pay the defendant's costs, or part of them, if he is ultimately successful."

He then, having referred to the concern expressed by Judge Moloney that the effect of the substantive application if successful "could be to undermine or perhaps even to destroy the workings of the CFA system as it currently runs", said this:

"32. I believe that there may be a degree of misunderstanding here as to the effect of the submissions made on behalf of the Appellants. They are not concerned to establish that an order for third party costs should, in any sense, become the norm in CFA cases. They confine themselves to applying the test approved in the appellate authorities from which I have made citations above; that is to say, they would only make an application for third party costs if the evidence revealed to them discloses that the solicitors in question have stepped outside the "normal role" of a solicitor (including, of course, the normal role of a solicitor involved in CFA litigation). In other words, they would only seek to make the application if the solicitor is shown to have become a funder of litigation "in the way of business".

...

36. The learned Judge concluded his judgment with these words:

"If such an application of the present sort can properly be made in this case it could properly be made in every such case and it would add a further turn to what has been referred to in another context as the artificial saraband of the litigation."

As I have already indicated, I do not believe it is entirely fair to attribute to the Appellants' arguments the "floodgate" consequences apprehended by the Judge. Such applications tend to be, as Lord Brown commented in Dymocks, "fact-sensitive". Where there are reasonable, albeit slender, grounds to suspect that a solicitor has stepped outside the ordinary role of a litigation solicitor, it may be appropriate to make an order. That is unlikely to be a situation that arises in every piece of CFA funded litigation. I understand, for example, that it is nowadays unusual not to take out ATE insurance. The point is unlikely, for this reason alone, to arise in the majority of cases."

It was on that basis that he considered that Judge Moloney had misdirected himself by overestimating the consequences of the applications, if successful. Exercising the discretion afresh, he made the orders for disclosure sought.

I have been made aware that the claimants in those cases have sought and obtained permission to appeal. I have been shown a transcript of an interlocutory hearing before Rix LJ on 16 May 2012 in which he gave the Law Society permission to intervene. At paragraphs 13 and 14 he said this:

"13. In the meantime, the Law Society, quite understandably, had become interested in Eady J's judgment, the judgment under appeal, which proceeds upon the basis that in a case such as this, by reason only of having funded disbursements, a solicitor may have stepped pro tanto, or perhaps entirely, outside the role of solicitor. Although it is possible that the matter of Section 58 of the Courts and Legal Services Act 1990 may have been mentioned before the learned judge, there is no reference to it in his judgment, and an important branch of the submissions made in the solicitors' skeleton argument before the court, and now in the skeleton argument from the Law Society before the court, makes the point that reference to expenses in Section 58 of the 1990 Act must, properly interpreted, include disbursements, which would suggest, it is submitted, that a solicitor making a CFA does not step beyond his role of solicitor by reason only of the funding of such disbursements.

14. That is the point which has excited the interest of the Law Society, because if the learned judge is right it is plainly a point of general application, or may well be a point of general application, in the context of solicitors entering into CFAs. So the Law Society has asked to intervene. That has not been opposed by the parties; I have given permission to the Law Society to intervene. It has been represented this morning by Mr David Holland QC and I have been grateful for his helpful submissions."

He also made certain orders requiring the solicitors to disclose various documents which may have had the effect of enlarging the scope of the application in respect of which disclosure was sought, in particular so as to include an argument that the solicitors had agreed to indemnify the claimants against any adverse costs order and an argument that the solicitors may have been acting without instructions in pursuing the case without an ATE policy in force. That latter argument was accepted on the facts by HHJ Waksman QC, sitting as a Judge of the High Court, in the case of Adris v Royal Bank of Scotland [2010] EWHC 941 (QB), to which I have been referred, for making a non-party costs order against the solicitors in that case. It is therefore at least possible that the appeal may not proceed in December 2012 on precisely the same grounds as advanced before Eady J. Moreover, the decision of Eady J was made in the context of considering whether or not the substantive application was at least arguable. In those circumstances there did not seem to me or to the parties to be any compelling reason to await the decision of the Court of Appeal in that case before proceeding to determine the current application.

DISCUSSION

Mr Coplin submitted that the decision of Eady J in Flatman was correct and consistent with previous authority. He submitted that it was appropriate to hold a solicitor liable to pay the costs of the successful party in the following circumstances:

(i) The solicitor was conducting litigation on behalf of a client who he knew did not have the means to pay the other side's costs, if unsuccessful, and who he knew did not have before the event ("BTE") or ATE insurance cover or other means of meeting the other side's costs if successful.

(ii) The solicitor was conducting the litigation under a CFA, so that he had a real and a substantial financial interest in the outcome of the litigation, both in the recovery of his profit costs and also his success fee.

(iii) The solicitor was funding the disbursements necessary to pursue the litigation from his own pocket, whether under the CFA or otherwise, in circumstances where otherwise the litigation could not be pursued so that the solicitor could not recover his profit costs or success fee.

He submitted that in those circumstances the solicitor was in substance funding the litigation as a business venture for his own financial benefit as well as that of his client, so that he should be treated in the same way as any other commercial funder. He submitted that this would serve to promote the aims, identified by Lord Bingham, of discouraging weak claims and enabling successful defendants to recover their costs even where sued by an impecunious claimant without an ATE insurance policy. He sought to derive support from the opinions to the same effect expressed by the editor of Cook on Costs 2012 edition at paragraph 34.20.

He submitted that in those circumstances there was no need to demonstrate that the solicitor also controlled the litigation, or that the solicitor had acted in any way improperly, whether in promoting the pursuit of speculative litigation or otherwise. Insofar as that was wrong then he contended that the solicitor had promoted the pursuit of speculative litigation in this case, in that Mr Edmondson had failed properly to grapple until a late stage with the fundamental issue of how Tinseltime could pursue the litigation in its own name which is what, in the end, caused the litigation to fail. He contended that it was this which also demonstrated that Mr Edmondson had substantially controlled the litigation.

Mr Wilton submitted that the authorities properly analysed demonstrated that there was simply no basis for making a non-party costs order against a solicitor who acted, perfectly properly, in taking on a case under a CFA, including the funding of disbursements. He submitted that any other conclusion would be contrary to the public policy of promoting access to justice by permitting cases to be pursued by clients represented by solicitors acting under CFAs, even where there was no ATE policy in place and even where the solicitors were funding the disbursements. He submitted that there was nothing in these arrangements which took the solicitor outside the role of solicitor. He submitted that since CFAs had been recognised not only as lawful but as a means of promoting the aim of improving access to justice, the fact that the solicitor stood to gain financially from the success of the litigation under a CFA could not mean that he could be treated as if he was a commercial funder of the litigation as well as being the solicitor on the record for, and conducting the litigation on behalf of, his client.

As foreshadowed by Rix LJ, he submitted that insofar as Eady J may have decided to the contrary in Flatman, the correctness of his conclusion was undermined by his failure to have regard to the fact that s.58(1) of the Courts and Legal Services Act 1990 makes it plain that an enforceable CFA may include provision for the solicitor's fees and expenses to be payable only in specified circumstances. He submitted that it was recognised by the Court of Appeal in Jones v Wrexham BC [2008] 1 WLR 1590 that the word "expenses" included disbursements (see paragraphs 28-29 in the judgment of Waller LJ). It follows he submitted that the public policy behind CFAs must extend to the solicitor funding disbursements on the basis that they will only be recoverable from the client in the event of the claim succeeding. He submitted that the way in which Eady J referred to this arrangement in paragraph 25 implicitly indicated that Eady J considered, incorrectly, that there was something "inherently improper" in such an arrangement. He suggested that Eady J was right to accept, as he appears to have done, the appellants' submission in paragraph 32 that a non-party costs order would only be justified if the solicitors had stepped outside the normal role of a solicitor (including where acting under a CFA) and had become a funder of litigation in a business sense.

He submitted that there was no basis for contending that Mr Edmondson had in any way controlled the litigation, and submitted that there was no justification for seeking to conflate the question of funding or control with the question of conduct, as Mr Coplin was seeking to do. He submitted that questions of conduct where the complaint was in relation to the conduct of the solicitor acting in that capacity fell within the wasted costs jurisdiction, and were not to be used as justification for making a non-party costs order.

In my judgment the authorities establish the following principles:

(1) The starting point in any case must be the first principle stated by Lord Brown in Dymocks, namely that the ultimate question is whether in all the circumstances it is just to make a non-party costs order, that this is a fact-specific enquiry, and that it must be recognised that in a particular case the court may have to balance a number of different considerations, some of them conflicting.

(2) The starting point when considering the position of a solicitor is that it must be shown that he has in some way acted beyond or outside his role as a solicitor conducting litigation for his client to make him liable for a non-party costs order.

(3) The starting point when considering the position of a solicitor acting under a CFA is that the fact that he stands to benefit financially from the success of the litigation, in that otherwise he will not be able to recover his profit costs or his success fee, does not of itself mean that he has acted in some way beyond or outside his role as a solicitor conducting litigation for his client.

(4) The starting point when considering the position of a solicitor acting under a CFA who has agreed to fund disbursements under the CFA should be no different from the case of a solicitor who has not, since both arrangements are permitted and are regarded as meeting a recognised legitimate public policy aim. The position is no different where the solicitor knows that the client is impecunious and that there is no ATE policy in place; that is because acting for clients who are impecunious does not take the solicitor outside his role as such and, indeed, it is consistent with the recognised public policy aim of promoting access to justice, and because there is no obligation on a solicitor acting under a CFA to ensure that ATE insurance cover is in place when his client is impecunious.