Acting for corporate clients: the indemnity principle bites again

At the root of the Law of Costs lies the indemnity principle. If a solicitor acts for a client in a case and wins, the losing opponent’s liability to pay the winner’s costs cannot exceed the sum which the client is liable to pay the solicitor. This is a principle which goes back to the days of Queen Victoria (see Harold v Smith). Thus, if the solicitor says to the client, “Don’t worry, it won’t cost you a penny because we shall collect our costs from your opponent when you win”, there are no costs to indemnify and by operation of the indemnity principle, the loser’s liability is nil. On the other hand, if the solicitor says “Don’t worry, this will not cost you more than £10,000”, the client has an obligation to pay, which means that on a win, the loser will be liable to pay up to (but no more) than £10,000 in costs if the court makes a costs order in favour of the client.

So far so simple, but the law reports are littered with cases where solicitors have gone unpaid for failures to comply with the indemnity principle; a fact that is even more remarkable because in every case, it has been the solicitor, not the client, who has written the contract of retainer. Thus, in Cox v Woodlands Manor Care Home, where the solicitors had won the case with knobs on, but had failed to give their client cancellation notice under Cancellation of Contracts Regulations (then in force), the contract of retainer was unenforceable, so there were no costs for Woodlands to indemnify.

“Foul” cried Mrs Cox, “I want my solicitors to be paid”, but the Court of Appeal was having none of it, albeit with regret. It followed that the solicitors recovered nothing at all: for the legal services which they had rendered …and which had procured Mrs Cox very substantial damages (Underhill LJ).

Ouch! And tough on the solicitors, but it can get worse: where the firm fails to create a retainer which the solicitors can enforce against the client, not only does the firm work for nothing (as in Cox) but it can also find itself paying out the opponent’s costs in the action in which it thought it had been instructed.

Fancourt J’s decision in Griffith v Gourgey is one such case. Proceedings under section 994 of the Companies Act 2006 for unfair prejudicial conduct had been struck out on the grounds that the defendant company had never been notified of them and had no knowledge of the petition.

“Improbably (though it happened in fact, as the judge held), three successive law firms, Pinsent Masons LLP, Robert Davies Partnership LLP and King Wood Mallesons LLP (“the Law Firms”), wrongly believed that they had the authority of the directors of TTL to represent it in the proceedings….” (paragraph 4, judgment.)

“It is the duty of a solicitor to act in proceedings only with appropriate authority. If the solicitor is in breach of that duty, a summary remedy for losses clearly caused to the putative client by so acting should be available in just the same way as a remedy for losses caused to a third party by the same misconduct, provided only that it is clear that the costs incurred by the putative client would be recoverable as damages.” (Paragraph 27, judgment.)

Result. Having gone on the court record as acting on behalf of claimants, not only did the three firms go unpaid for their work, but they were also on the hook for a significant proportion of the costs which their putative clients would otherwise have had to pay to the innocent defendant. Double ouch!

After Griffiths, it might have been expected that firms would heed these warnings, but it is still the case that solicitors, with the best of intentions and ever eager to help potential clients out of tight spots, still overlook the indemnity principle and fail to ask themselves at the outset: is my contract of retainer with my client enforceable?

A sharp recent reminder about how not to answer that question has been given in Rushbrooke UK Ltd v 4 Designs Concept Ltd. The work which the solicitors thought they had been instructed to undertake, concerned a company’s application to restrain the presentation of a winding up petition. That application had been struck out on the basis that one of the only two directors had had no authority on his own to make or give instructions on its behalf. The court had also ordered the company to pay the petitioner’s costs which were summarily assessed in the sum of £7,920.

However, that was not the end of the matter. The company could not pay the costs and the court declined to join the director into the action in order to make him personally liable. That led the petitioner to turn its sights on the company’s solicitors. It was their case that under the wasted costs jurisdiction to be found in sections 51(6) and (7) of the Senior Courts Act 1981, CPR 46.8 and PD 46.5, the unpaid costs should be visited upon and paid by the solicitors. That was because they had been incurred as a result of an act (namely representing the company when it was not authorised to do so) which had been improper, unreasonable or negligent. Not only that: the solicitors had also breached the Solicitors Code of Conduct at paragraphs 3.1 and 4.1 that:

“You only act for clients on instructions from the client or from someone properly authorised to provide instructions on their behalf”.

These submissions found favour with the court which was satisfied that not only had there been evidence of a significant breach of the Solicitors Code, but also unreasonable conduct. In its view, it had been prima facie unreasonable for solicitors instructed by one director, at a time when the only two directors had fallen out and were unable to agree on anything, to take instructions on behalf of the company and thereafter to engage in legal proceedings without first satisfying themselves of the director’s authority to do so. A reasonably competent solicitor would have regarded it as fundamental to be clear at the outset on the authority of the person representing the client to instruct the solicitor.

It got worse. It was not a defence that the solicitor considered that he had sufficient authority to instruct the solicitors on behalf of the company because the deadlock of the board had made it impossible to pass a board resolution authorising the litigation. Nor had any evidence been advanced that solicitor had considered the articles of association to see what provision they made for the situation, still less had any textbooks been consulted to see what they said (paragraph 17, judgment).

Good faith on its own was not a defence either. It followed that there had been a significant breach of a substantial duty imposed by a relevant code of professional conduct and therefore the behaviour of the solicitor had been improper. It also had been unreasonable to have assumed that the director had authority on his own on behalf of the company. For all these reasons, it was just that the firm should pay personally, the costs of £7,290 which the court had summarily assessed.

As was the case in Cox, it might be thought that the decision, where the solicitor was clearly trying to do his best for his client, was harsh. After all, in the real world, it is realistic to expect a solicitor to undertake a trawl of the legal authorities and to read textbooks, before agreeing to take on a client where the matter is one of urgency and priority, just to be satisfied that the retainer is watertight? Apparently, it is according to the judge in Rushbrooke.

Whether that be right or wrong, the case is nonetheless a caution to solicitors that when firms are contemplating taking on a new corporate client, they will be well advised to ensure that instructions are being given by those authorised to do so. If the management of the company’s affairs is entrusted to the board of directors in an action in the name of the company, in the absence of valid delegation of authority to commence proceedings, the sanction of the board should be obtained. As the court observed in Rushbrooke, where no consideration had been made of the articles of association, it was not an answer to say that as the directors were deadlocked, there was no prospect of passing a board resolution authorising the action.

The lessons to be learnt are thus that before taking on a case for a company, a solicitor should ensure that the putative client is authorised to give instructions (for example, by board resolution) so that the retainer is enforceable. Fall at that first fence, and the solicitors may find that not only will they go unpaid for the work they do, but also that the firm will end up paying someone else’s costs as a punishment for suggesting that it had a warrant of authority to act, when the solicitors had no such thing.


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