Solicitors who simply pay a client’s disbursements to help progress their case cannot be liable for a third-party costs order, the Court of Appeal ruled yesterday.
At the same time, successful defendants should be able to invite the claimant to reveal the extent to which their litigation had been supported by a third party.
The conjoined cases of Germany v Flatman and Barchester Healthcare v Weddall  EWCA Civ 278 were both run by Norwich-based Godfrey Morgan Solicitors (GMS) under conditional fee agreements (CFAs) without after-the-event insurance.
In the High Court in late 2011, the defendants’ common insurer – which suspected that the claims were funded to some extent by the solicitors – successfully appealed a refusal to grant disclosure of documents outlining the funding arrangements.
Mr Justice Eady said that where solicitors pay out sums 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, the solicitor would then become a funder. On the facts, he ordered disclosure.
The Law Society intervened at the Court of Appeal stage. Giving the lead judgment yesterday, Lord Justice Leveson said the Courts and Legal Services Act 1990 (as amended) “does visualise the possibility that a solicitor might fund disbursements and, in that event, it would not be right to conclude that such a solicitor was ‘the real party’ or even ‘a real party’ to the litigation”.
He rejected the suggestion that after-the-event insurance is a pre-requisite of bringing a claim on a CFA.
“The fact that a litigant can (or cannot) afford an expert report or the court fee says nothing about his or her ability to fund the costs incurred by opponents in an unsuccessful claim and, indeed, Eady J… recognised that the solicitor could advance disbursements with a technical (albeit improbable) obligation for repayment.
“That much is also clear from the fact that 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.”
Thus he agreed with the “issue of principle” advanced by the claimant and the Law Society “that payment of disbursements, without more, does not incur any potential liability to an adverse costs order”.
Going on to consider the disclosure of information, he dismissed the appeals in both cases, albeit for different reasons than Eady J. In Weddall, discovery had already been provided and a costs application was underway, while in the “unusual circumstances” of Flatman – where there was ‘similar fact’ evidence from Weddall – there was no reason why disclosure should not be provided.
Lord Justice Leveson acknowledged that Weddall was also unusual (the claimant himself had written to the defendant’s solicitors about the funding arrangements), and equally that “insurers will not wish to go to the expense of a costs assessment and enforcement exercise against an impecunious litigant simply in the hope that some detail will emerge which might alert them to the prospect that costs might be recovered against the solicitor”.
He said: “It is, however, a comparatively straightforward matter to deal with. The Law Society makes it clear that if solicitors have agreed to indemnify their client (as is entirely lawful: see Sibthorpe), the solicitors could not then seek to deny the existence of that indemnity or prevent their client from relying upon it.
“For my part, without seeking disclosure of documents, I see no reason why a successful insurer should not obtain an order for costs in principle against the claimant, together with an interim payment on account 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.
“I appreciate that it will not assist in many cases: examples such as Weddall, however, stand a prospect of being exposed thereby permitting the insurer to decide what, if any, further steps need to be taken.”