The Court of Appeal focused on applications for discovery as to funding arrangements made by the unsuccessful Claimants and the potential liability of solicitors for a third party costs order.

In a first appeal at Norwich County Court, Eady J ordered disclosure on how the claims were funded. In both cases, the same firm of solicitors had acted under a CFA and the Claimant had no ATE insurance.

In each case, the Claimants had lost their claim and the Defendants were entitled to recover the costs incurred in defending the action. However, when the Defendants claimed their costs of the action against the Claimants they became suspicious that the Claimant’s solicitor was funding the litigation themselves.

Therefore, in 2010, applications were made for an order that the solicitors firm be joined as a party, for an order revealing how the claim had been funded and order that the solicitors pay the Defendant’s costs. In the first instance Judge Maloney dismissed the application but an appeal was subsequently allowed by Eady J.

Evidence came to light in the matter of Weddall that the original barrister gave only a 20-25% chance of winning and that the Claimant only wished to proceed if the relevant insurance was in place. However, despite several attempts there were no insurance companies prepared to offer terms. The Claimant was advised by the solicitor that he had a substantial liability for the solicitor’s costs and those of the Defendant and he felt he was left with little or no alternative but to continue.

Subsequently, the Defendant’s solicitors made a Part 36 offer allowing the Claimant to discontinue with no order for costs. This was followed by further Counsel’s advice that the Claimant’s prospects were now 51 to 60% if there were further evidence. However, it appeared the Claimant was not advised of accepting the Defendant’s Part 36 offer or referred back to the terms of the ‘no win no fee’ agreement.

The evidence opened the window for clarity about the circumstances in which it is appropriate to consider third party costs orders against the instructed solicitors. In a second appeal by the Claimants, Leveson LJ considered first the principles whereby an order for costs can be made against a third party, secondly, the impact of the Conditional Fee Agreement regime upon those principles, thirdly, the approach to orders for disclosure and finally the Orders of Eady J and whether it was or is appropriate to order disclosure in these particular cases.

The starting point was s.51 of the Senior Courts Act 1981 and Tolstoy-Miloslavsky v Adlington (1996) 1 WLR 736 regarding the circumstances in which an order could be made against a solicitor. The discretion to make costs orders against non –parties would not be exercised however against ‘pure funders’ described 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”. However, where 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 by funding the litigation is gaining access to justice for his own purposes.

Those acting for the Defendant’s insurer argued that those who encourage litigation by committing their funds to it for substantial financial gain should have a corresponding liability for the consequences. The Law Society, as interveners in this case, submitted that a solicitor who funds disbursements on behalf of the client on the basis that costs will be recovered from the other side in the event of success is not acting in circumstances which are outside the ordinary run of cases. Furthermore, the solicitor was not ‘the real party’ to the litigation and without more should not be made liable for a third party costs order.

The test identified in Tolstoy-Miloslavsky v Adlington argued that solicitors could not be acting ‘outside the role of a solicitor’ if they were doing no more than the legislation which set up CFAs. In the Judgment of Leveson LJ, the legislation visualises the possibility that a solicitor might fund disbursements and that it would not be right to conclude that the solicitor was ‘the real party’ to the litigation. Furthermore, Leveson LJ informed that after the event insurance is not a pre-requisite of bringing a claim on a CFA. Importantly, solicitors are entitled to act on a normal fee or conditional fee for an impecunious client whom they know or suspect will not be able to pay own (or other side’s costs) if unsuccessful.

Leveson LJ agreed with the principle that payment of disbursements does not incur any potential liability to an adverse costs order. Following that decision, Leveson LJ turned to the issue of disclosure. He considered the test set out by Blake J in Thomas v Berkhamstead Collegiate School (2009) EWHC 2374 QB, fundamentally noting that the mere fact that someone has funded proceedings would generally be insufficient to support an application that they pay the costs of the successful party. The strength of the application would be a relevant factor to determine disclosure and the court must ensure that the application does not turn into satellite litigation that resulted in prolonged arguments about costs. It is implicit from the Judgment that Leveson LJ considered that an order for disclosure may be justified if the application is based on stronger grounds than mere speculation.

However, turning on the facts of this matter, substantial discovery had already been provided in the case of Weddall and therefore Leveson LJ agreed it was justified for Eady J to order disclosure of information and it was equally sufficient to require disclosure in the matter of Flatman because of conduct by the same solicitor. The appeals were therefore dismissed.

This case highlights a couple of important issues for solicitors. Firstly, it fortifies what has already been said numerous times regarding disclosure, most notably in Hollins v Russell [2003] EWCA Civ 718 and the application of the Pamplin procedure. Namely that a genuine reason must be demonstrated before a Court will require disclosure of funding agreements or other information subject to right of election and arguments about privilege.

In this instant matter, Leveson LJ was keen to point out that any application for disclosure must have a stronger basis than speculation over the Claimant’s funding arrangements. However, Leveson LJ saw no reason why a successful insurer should not obtain an order for costs in principle against the Claimant and invite the Claimant to reveal the extent to which the litigation had been supported by any third party and to provide any reason why the costs order should not be enforced. Once again this matter demonstrates why a solicitor should harbour evidence of accurate funding advice and document the reasoning behind key litigation decisions.

Secondly, now that Part 2 of LASPO has taken effect, many solicitors may be tempted to run cases without ATE insurance where the claim is subject to the new rules of Qualified One-Way Costs Shifting. There is a cautionary note with this Judgment that Defendant insurers may find a way to undermine the principle of QOCS by pursuing the solicitors acting for the Claimant who fails. Presumably by evoking CPR 44.15 (c)(ii): a person acting on the claimant’s behalf and with the claimant’s knowledge of such conduct, is likely to obstruct the just disposal of the proceedings. A solicitors firm found to have funded and conducted the claim for their own benefit could be distinguished as ‘acting outside the role of a solicitor’ and may face a costs order against them.

Full judgment:

Relevant case: Heron v TNT (UK) Limited