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Court Rules on Non-Party Costs Orders Test Case

Following the Court of Appeal’s ruling in a case of vital importance to the legal profession, solicitors’ firms will have to exercise extreme caution in providing financial support to impecunious clients to enable them to engage in litigation. The court’s decision raises the spectre of lawyers who represent unsuccessful claimants themselves being ordered to pay costs bills run up by defendants.

In two personal injury cases, solicitors’ firms were alleged to have provided financial assistance to clients of limited means who did not have the benefit of after the event (ATE) insurance. The defendants won both cases and their insurers subsequently made applications under the Senior Courts Act 1981 for non-party costs orders against the law firms concerned. In the context of those applications, the law firms were ordered to disclose evidence of privileged solicitor/client communications.

In dismissing appeals against those disclosure orders, the Court of Appeal gave guidance on the extent to which it is legitimate for law firms to fund, or ‘prime pump’, litigation by impecunious clients under conditional fee arrangements in the absence of ATE insurance cover. The case was considered of such importance that the Law Society was permitted to intervene in the matter.

The court accepted the Law Society’s plea that a law firm that funds disbursements on behalf of an impecunious client on the basis that the 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. In such circumstances, it could not be said that a solicitors’ firm was either ‘the real party’ to the litigation, acting primarily for its own benefit or that it was the person ‘with the principal interest’ in the outcome.

Ruling that payment of disbursements, without more, does not incur any potential liability to adverse costs orders, the court noted that there is no bar on law firms acting on a normal fee, or a conditional fee, for an impecunious client whom they know or suspect will not be able to pay costs if unsuccessful.

However, on the particular facts of the two cases, the court ruled that the disclosure orders had been justified. The court noted that, in one of the cases, it was alleged by insurers that a solicitors’ firm pressed on with the litigation regardless of its client’s specific instructions not to do so without ATE insurance.

Flatman v Germany. Case Number: A2/2011/1168