Letting the compensation culture out of jail

In Flatman v Germany [2013] EWCA Civ 278 the Court of Appeal was given an opportunity to lock the door on the compensation culture and ambulance-chasing lawyers forever. Unfortunately, they instead allowed them to escape and live on for another day.

Flatman dealt with two conjoined cases which raised questions of when it would be appropriate to make a non-party costs order against solicitors who had funded unsuccessful litigation on behalf of impecunious claimants. At the time the law was in a confused state. On one hand was HHJ Davies' decision in Tinseltime [2012] EWHC 2628 which was strongly against imposing costs order on solicitors in these cases. On the other hand there was the Eady J's decision in the High Court in Flatman and two Court of Appeal judgments (Arkin v Borchard [2005] EWCA Civ 655 and Myatt v National Coal Board [2007] EWCA Civ 307) which were in favour of non-party orders.

Missed opportunity

Flatman has now clarified the law but by siding firmly against the imposition of non-party costs orders it missed a valuable opportunity. It has given additional life to the compensatory culture which could have been effectively choked had they followed Eady J's reasoning. Eady J reasoned that the funding by solicitors of disbursements which the client would not pay in the event of failure but the other side would pay if they were successful "should only be regarded as legitimate, if it carries with it at least the risk of having to pay the defendant's costs, or part of them".This reasoning is simple and logical. The client is impecunious. Unless the solicitor pays the disbursements there is no case. The solicitor pays in the hope that they win at trial and are entitled to their costs and the consequence profit. If the trial is fought and lost they make a loss. The trial is a gamble. The solicitor started the gamble by starting a case which would not have otherwise existed. He did so to make a profit. Therefore, if unsuccessful in his gamble he should pay the other sides costs. Simple.

This logic is used for other funders other than solicitors. For example, in road traffic cases generally it is the insurance companies who fight the case at their expense and take the benefit of success and the risk of paying the other side's costs if unsuccessful. Employment cases are often fought at the expense and for the benefit of the trade union and the trade union will be liable for the other side's costs if they lose.

At the end of the case the trade union or insurance company cannot say "We know the client has no money and cannot pay your costs and we admit the case would not have started without our financial support and that we provided all the legal costs and paid the disbursements and would have sought to reclaim these costs if we had won but we are still not liable for your costs". Such an argument would be rapidly shot down. Why should the result be any different for solicitors? Is it a question of the legal profession looking out for its own? I think the general public would see it this way.

Now imagine what a decision that a solicitor who initiated a claim on behalf of an impecunious client could be liable for the other side's costs would do for ambulance chasing lawyers and 'nuisance-value' claims. Meritless claims seeking nuisance-value settlement would disappear as no solicitor would take the large risk of being liable for the other side's costs if they lose. There would be no more blackmailing defendants into settlement on the basis that they will be put through an expensive trial and that even if they win they will not get any of their costs back. This would be the end of the compensation culture.

Such a decision would have incredible public support. Ask the general public who is to blame for the compensation culture and they will inevitable throw the blame on the 'dodgy solicitors' they see advertised on cigarette machines and daytime television promising big cash pay-outs for personal injury or accidents at work. Such firms prompt angry responses from people who believe they deliberately issue meritless claims but take no responsibility if things go wrong. Making those solicitors potentially liable for the other sides costs if the claim was totally meritless would not only reduce meritless claims but would also help restore confidence in the legal system.

One of the more frustrating things about Flatman is what actually occurred shows the benefit of Eady J's decision. In the two conjoined cases Eady J made orders requiring the clients to disclose how the claims had been funded and joining the solicitors as defendants on the basis that if the solicitor funds the case he should arguably have to pay the other side's costs if unsuccessful. The Court of Appeal held he was wrong to hold that this could even arguably make the solicitor liable in costs. However, the court held that documents disclosed after Eady J's disclosure order which related to the funding of one of the conjoined cases were, in fact, sufficient to justify the disclosure orders actually made and hence dismissed the appeal.

The court clearly disapproved of the conduct of the solicitors in question (who, if successful, would have claimed three times the sum claimed by the other side) and appeared glad to find against them. However, if Eady J had followed the Court of Appeal's guidance the solicitors' conduct would have gone totally unnoticed and unpunished and the other (successful) party would have ended up bearing all their own costs with no possible recompense from the solicitors as they would not even be able to see the funding documents which led to the Court of Appeal finding against the solicitors.

Unfortunately, the Court of Appeal's judgment allows solicitors to fund cases which would not have started without their financial assistance and to do so in the hope of making a profit and still face no liability for costs. The defending party is left with the costly and time-consuming prospect of defending a weak claim, started by the solicitors' money in the knowledge that even if he wins he has no prospect of recovering any of his costs because the claimant is impecunious and the solicitor is insulated from liability. Even ignoring the stress and worry that goes with court proceedings from a purely commercial point of view a nuisance settlement is often the best option.

The result is more nuisance-value claims and a continuation of the compensatory culture. The defendant pays to make the claim go away. The solicitors take their fees and associated profit and go away and look for another impecunious claimant to play the same game again.

Access to justice

The main argument in support of excluding solicitors from potential costs liability where they help fund the litigation of impecunious client is that it promotes access to justice. I disagree. It promotes access to the courts not access to justice. There is a big difference. The cases which are funded by the solicitors are ones where legal aid is unavailable because the claim is not important enough and where ATE insurance is unavailable due to the weakness of the case. There is little injustice in stopping weak unimportant cases going before the courts. On the other hand there is plenty of injustice in requiring defendants to pay substantial sums of money and incur time and effort in defending such weak cases with no prospect of recovering any of their costs. Allowing the possibility of costs orders against solicitors does not promote access to the courts, but it does promote access to justice and that is much more valuable.

The abolition of success fees under the Jackson reforms changes the environment but, as the Court of Appeal recognised, the issues in Flatman will still arise and, in the court's view, may become even more acute if the defendants seek to get around qualified one way costs shifting by pursuing the solicitors who funded the claim.

Flatman has now clarified the law in this area and those involved in bringing or defending cases involving impecunious claimants now know clearly where the stand. A solicitor is free to fund litigation expenses of an impecunious client with no ATE insurance in a weak case without any fear of a non-party costs order being made against him. A solicitor needs to do something wholly exceptional and conspicuously and obviously wrong (such as ignoring a client's specific instructions to abandon a claim and pursuing it solely so they can recover their costs) in order to be in danger of a non-party costs order. This is the current position and, sadly, it will remain the current position for the foreseeable future and probably until the legislature finally steps in and requires otherwise.