The impact of potential non-part costs orders

Will a solicitor who pays for the disbursements of an impecunious client under a CFA be liable under a non-party costs order if they lose? The answer is an unsatisfactory 'maybe' as recent contradictory decisions mean that both those in favour of imposing liability on the solicitor and those against it can claim the law is in their favour.

After two Court of Appeal cases (Arkin v Borchard [2005] EWCA Civ 655 and Myatt v National Coal Board [2007] EWCA Civ 307) and the recent judgment (November 2011) in Germany v Flatman [2011] EWHC 2945 favoured the imposition of non-party orders the pendulum has swung back the other way with the very recent judgment (28 September 2012) in Tinseltime v Roberts [2012] EWHC 2628 leaving the law in a state of confusion.

Critical distinction

In Flatman the defendants believed the claimants' solicitors had funded the disbursements and they sought disclosure orders to confirm this. In making the orders sought Eady J was clearly of the view that a solicitor could be liable for a non-party order if he funded the disbursements of an impecunious client. Eady J drew a critical distinction between a solicitor who paid disbursements on the basis that the client would reimburse him and a solicitor who paid disbursements on the basis that they would not be recovered in the event of failure. Eady J held that the latter 'would indeed then have become a funder', as they may have made the difference between the defendant being sued or left in peace. Furthermore, these funds would have been provided 'in the way of business' as the solicitor laid out a modest sum hoping to obtain a much greater sum. The underlying theme throughout Eady J's judgment is that it is generally wrong for somebody to fund litigation in the hope of obtaining a benefit without a corresponding risk that they will be liable for costs if they fail.

Tinseltime was decided just ten months after Flatman but it adopted a very different approach. In Tinseltime the claimant's solicitor was aware of the claimant's impecuniosity and aware there was no ATE insurance but nevertheless funded the disbursements. The claim was struck out and the defendants sought a costs order against the solicitor. ?HHJ Davies dismissed the application stating that a solicitor who has funded disbursements under a CFA should be no different from a solicitor who has not and this is not affected by the fact the solicitor knows the client is impecunious and that there is no ATE insurance.
HHJ Davies took the view that, regardless of the fact that the case may not have proceeded unless the solicitor had provided the money and the fact that if successful the solicitor would have received profit costs and a success fee, the solicitor still should not be considered to have provided the money or taken the case as a 'business proposition'.

The two most recent High Court ?decisions on this issue are therefore in clear conflict. However, it is still possible to distil the following uncontroversial principles from a combination of these and other ?related cases.

1) The area is very fact-specific and 'there are no hard and fast rules' (Flatman). This fits in with the broad discretion already conferred on judges as regards costs.

2) Public policy plays an important role in this area. In particular the court must try and balance the public policy aims of providing access to justice to impecunious claimants and the desirability that successful parties should recover their costs (Arkin).

3) A solicitor will not be liable for non-party costs unless he steps outside the 'normal role' of a solicitor including a solicitor involved in CFA litigation (Flatman). If the solicitor becomes a funder 'in the way of business' they are likely to have stepped outside this role.

4)The mere fact a solicitor is on the record prosecuting proceedings for his client and his client has a genuine interest and is a real party in the proceedings does not prevent a non-party costs order being made against the solicitor (Myatt).

5) The absence of impropriety on the behalf of a non-party does not prevent the imposition of a non-party costs order (Dymocks [2004] UKPC 39).

While it is relatively easy to distil these broad principles from the cases it is much harder to apply them to accurately predict how they will be applied. To this end it is helpful to record some key factors which a court will consider:

i) Solicitor's control '“ The higher the solicitor's control of the conduct of the proceedings the more likely that the solicitor will be deemed to be a true 'party' to the proceedings and hence liable for costs.

ii) Potential profit '“ The higher the profit margins of the solicitor the more likely that he will be held to have been funding the litigation as a business proposition and therefore the increased chances of being subject to a non-party costs order.

iii) Relative interests in the proceedings '“ If the solicitor's interest (through recoverability of costs and success fee) is disproportionate to the client's interest this will point to a non-party costs order.

iv) Solicitor's motivation '“ HHJ Davies in Tinseltime found it 'extremely significant' in his decision not to impose a costs order against the solicitor that the solicitor was not motivated solely by financial self-interest but by the 'laudable aim of providing access to justice'.

v) Reason for no ATE policy '“ HHJ Davies stated that if the solicitor was aware the case was so obviously weak that no ATE insurance could be obtained this would favour the solicitor being liable for costs.

vi) Other sources of funding '“ HHJ Davies also indicated that the fact that potential alternative funding existed and the case might have been prosecuted even if the solicitor had not funded the disbursements was a reason for not imposing a costs order against the solicitor.

vii) Manner of funding disbursements '“ if the solicitor funded the disbursements on the basis that the client will be liable to pay such sums at the end of the case regardless of the result the solicitor is unlikely to be considered a funder and unlikely to have a non-party costs order made against him.

viii) Notice of application '“ If the solicitor against whom an order has been sought is only given limited or reduced notice of the intention to seek an order any costs order made is likely to be reduced to reflect this (Myatt). Therefore, anyone seeking such an order should inform the other side of this intention as soon as possible.

The future

The current uncertainty in this area of law is deeply unsatisfactory but it is hoped that it will be resolved in the near future. The appeal in Flatman (in which the Law Society has intervened) is due to be heard before the Court of Appeal in December. The Court of Appeal may favour the Tinseltime approach which assists with access to justice or it may favour Eady J's approach which would arguably help prevent the onslaught of the compensatory culture. The third option is to formally adopt the approach it itself adopted in Arkin where it decided that a funder (in this case a professional funder) should be liable for the costs of the opposing party up to the extent of the funding provided. Thus, if a solicitor provided £10,000 in terms of funding of disbursements the solicitor would potentially be liable for costs of ?up to £10,000.

In Arkin the members of the Court of Appeal (who all contributed to the judgment) took the view that this approach would find a practical balance between the competing policy claims of providing access to justice and that the winning party should recover their costs, and would also have the effect of keeping costs proportionate. It would also arguably reduce the number of meritless claims being issued attempting to bully a settlement out of the other side.

There are cogent arguments in support of each approach but more important than which approach is adopted is that a decision is made because the current uncertainty provides comfort to nobody. Hopefully, the upcoming appeal will resolve the issue but until then those funding disbursements or seeking non-party orders against the other side do so at their peril.