Danger signs – Costs Lawyer magazine
Matthew Harman considers the implications of a High Court ruling on disclosing funding arrangements, which the first instance judge said could destroy the whole CFA regime:
Just when everybody is concentrating on the biggest costs case in years in Motto v Trafigura another important case sneaks in under the radar. The cases in question are the linked cases of Germany v Flatman and Barchester Healthcare Ltd v Weddall (2011 EWHC 2945 (QB).
Whilst the cases deal specifically with an application for disclosure of funding information against a firm of solicitors only it has a potential impact in terms of where it might lead in respect of applications for costs of unsuccessful actions against firms of solicitors.
Both cases were conducted by the Claimants by a firm of solicitors in Norwich, Godfrey Morgan (GMS). Flatman was a personal injury action arising out of a motorcycle accident which had been dismissed with costs as it had been held that the Claimant had ‘fallen short of discharging the burden of proof’. The second case arose of an alleged assault on Mr Weddall by a fellow employee of Barchester Healthcare. This case was also dismissed but is subject to an appeal to the Court of Appeal. Both cases were heard in Norwich County Court before His Honour Judge Moloney QC.
The Defendants in the two cases had insurers in common and, on being advised that there was no after the event insurance in place, sought further information as to the basis that the disbursements had been funded in the absence of any apparent form of insurance policy. In the absence of such information and based on the facts pleaded within the case that Mr Flatman was unemployed at the time of the accident and made a claim for three years loss of earnings, the Defendants concluded that GMS must have funded the disbursements incurred.. The defendant’s advisers came to the same conclusion in respect of the Barchester Healthcare case. The Defendants issued applications in respect of both claims for further information as to the funding arrangements in place.
Both applications were dismissed by Judge Moloney on 20 and 25 January 2011. There were a number of reasons that Judge Moloney dismissed the applications amongst which was the following:
The effect of the application … ‘could be to undermine or perhaps even to destroy the workings of the CFA system as it currently runs’. It seems clear that the Judge had concerns that a positive decision could have had wider implications in terms of policy.
The Defendants duly appealed and the matter came before Mr Justice Eady. Having looked at the case law and principles involved he noted that costs orders against non parties should be regarded as ‘exceptional’. In this set of circumstances he referred to the Privy Council matter of Dymocks Franchise Systems (NSW) Pty Ltd v Todd (2004) 1 WLR 2807 to define exceptional as ‘outside the ordinary rum of cases where parties pursue or defend claims for their own benefit and at their own expense’. Hence, any application involving potential funding by a third party would fall to be ‘exceptional’.
Eady J also examined the various definitions of funders to draw a distinction between those who are ‘pure funders’ i.e. funders who have altruistic intentions with no expectation of personal gain and those who assist funding as a business decision. He also looked at the impact of the CFA regime on the mater particularly in terms of public policy as highlighted by Judge Moloney.
As part of his analysis Eady J did look at circumstances where a solicitor paying for disbursements could deemed to be a funder of litigation and makes an important distinction at paragraph 25 of his judgment.
‘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. On the other hand, if the sums are paid out by the solicitor, whether from the 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.’
Whilst the above passage is not specifically relevant to the matter in hand it does make it clear where Eady J thinks that a solicitor may have problems if funding disbursements. Indeed, later in that passage of the judgment he spells out that even if the outlay is modest the solicitor would be providing funds ‘in the way of business’ and not for any pure funding reasons. That being the case it could only be a legitimate approach if it carried a risk of being liable for the other side’s costs in an unsuccessful case.
During argument the Defendants argued that they were not seeking to establish that an order for third party costs should become the norm in CFA cases but that if the evidence showed that the solicitors had stepped outside their normal role and could be shown to be funders of litigation ‘in the way of business’ then such an application would be appropriate.
The obvious difficulty in all this is that the Defendant is not in a position to know for a fact that the opposing solicitor is funding the litigation in the way of business. Hence the need to make an application for disclosure of the relevant information in a situation where a reasonable assumption to make is that in some way shape or form the solicitors may be funding the disbursements.
Having decided that Judge Moloney had misdirected himself in what was an ex tempore judgment by over estimating the consequences of the applications for the day to day workings of the CFA regime he allowed the appeals with the comment that: ‘either GMS were funders of these cases or they were not’.
Eady J concluded that there was sufficient concern about the issue such that it was appropriate to make an order for disclosure as requested by the Defendants. He also repeated the rather obvious dictat that openness is the best policy.
Whether or not the disclosure documents will show that GMS are funders I simply do not know. Similarly, if they do prove to have been funding the disbursements, I do not know whether the Defendants will then issue an application for an order that GMS pay the Defendants costs arising from the two unsuccessful claims.
What are the implications of all this? Privilege is likely to be a complicating factor, a fact acknowledged by Eady J in his judgment. Having said that, I am not sure that a solicitor refusing to waive privilege is going to do them a great deal of good as such a refusal could be construed as a negative inference that there is something that needs to be explored. This is the argument that if you have nothing to hide why bother putting up the barriers.
The problem area will be for firms who advertise absolute no win no fee arrangements for their client but then fail to arrange ATE insurance if there is no BTE fall back. In such circumstances the solicitors cannot make an arrangement that the disbursements will be paid for by the client at the end of the case if they lose for then it would not be a no win no fee agreement at all.
This decision also puts the beleaguered legal profession in yet more of a bind post Jackson. The fact is that many firms have concluded that the only way to be able to deal with certain clients is to fund the disbursements. I believe that in many ways this is altruistic despite the fact that the solicitors potentially gain from pursuing the case on behalf of the client. The alternative in some instances will be to say that they will not act unless they can find a way of funding their own disbursements. The reality is that they will not be able so to do. As a result the potential client may be barred from gaining access to Justice.
Under the CFA system the solicitor is at risk of not recovering for their own work where the matter is downed. To enhance that risk by adding the possibility that they may also be found liable for the opponent’s costs may be a step too far. Nor can any comfort be gained from the introduction of qualified one way costs shifting.
So what is the solution? This decision appears to make it advisable to obtain supporting insurance in every single CFA case no matter how certain the solicitor may be of winning. As things stand these premiums still fall to be paid by the Defendants which means that this could be seen as a hollow victory by the Defendants who may end paying for more premiums than they are at present at least until the Jackson reforms come in and restrict access to Justice yet further but that is a different story….