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Wasted costs applications: a Kafkaesque conundrum

To start, let me introduce some familiar characters. First, an impecunious claimant who has the benefit of after the event (ATE) insurance, but the disadvantage of an incompetent solicitor. Second, a successful defendant with the benefit of a costs order and a final costs certificate, but the disadvantage of a slippery ATE insurer who has avoided the claimant’s ATE policy because of failures by the aforesaid incompetent solicitor. Different ways around this problem have been tried, and generally failed. Applications for non-party costs orders against the insurer tend to founder on the requirement to establish that the insurer was the “real party” to the litigation (Heron v TNT (UK) Ltd), and reliance on the Third Parties (Rights against Insurers) Acts is only available where the costs have been quantified and the unsuccessful claimant bankrupted first. Even then, the successful party is in no better position than the insured claimant, and therefore bound by the very negligence of which they complain (IHC v Amtrust Europe Ltd). The purpose of this article is to examine whether the wasted costs jurisdiction can come to the aid of the receiving party, allowing them to enforce the otherwise irrecoverable costs against the claimant’s negligent solicitor.

Section 51(7) of the Senior Courts Act 1981 defines wasted costs as, “any costs incurred by a party as a result of any improper, unreasonable or negligent act or omission on the part of any legal or other representative”, and provides power to order the relevant legal representative to meet those costs. The relevant procedure is contained in CPR 46.8, the practice direction (PD) to which requires that the court be satisfied that:

“… the legal representative’s conduct has caused a party to incur unnecessary costs, or has meant that costs incurred by a party prior to the unreasonable or negligent act or omission have been wasted…”

The court should also be satisfied that:

“… it is just in all the circumstances to order the legal representative to compensate that party”.

Of course the authorities on wasted costs abound with stern warnings about avoiding satellite litigation, and the message is always that a party should think twice before invoking the jurisdiction. But the situation described above is infuriatingly common, and any prospect of addressing it ought not to be dismissed out of hand. The requirement of negligence is, after all, a non-technical one which does not require proof of a breach of duty on the part of the solicitor to their client. There is, of course, no such duty owed to an opposing party. It is necessary only to prove negligence on the part of the solicitor in a non-technical sense (Ridehalgh v Horsefield). Provided some act or omission which can be characterised in that way can be shown to have caused loss on the part of the applicant, the jurisdiction is engaged. So is it possible to establish loss in circumstances where the negligence of the solicitor can be shown to have led to the policy being avoided?

Wasted costs are ordinarily associated with the pursuit of hopelessly misconceived litigation. In such cases, it is straightforward to demonstrate that costs have been unnecessarily incurred in the defence of an unmeritorious claim. The successful defendant’s complaint here is somewhat different; they have been unable to recover costs which were necessarily incurred in the defence of the action. Such costs are not self-evidently “wasted”. However, they might arguably be so if the defendant can show that he or she would have acted differently in relation to the defence of the claim if they had not been led to believe that valid ATE insurance was in place to satisfy any costs order which they may obtain.

Further analysis of this requires consideration of the extent to which a defendant is entitled to rely on an understanding that ATE is in place, and indeed that the cover is adequate to meet any costs order which the defendant might obtain. The authorities on this point tend to arise in the context of applications for security for costs, and they are less than wholly consistent. The existence of ATE insurance is prima facie a good reason to refuse security for costs, provided there is no particular reason to doubt its efficacy (Geophysical Service Centre Co v Dowell Schlumberger (ME) Ltd). However, where there are legitimate concerns about its being honoured, security might well be appropriate (Harlequin Property (SVG) Ltd v Wilkins Kennedy). None of this quite establishes the principle that a defendant is entitled to rely on notification that ATE insurance is in place as any sort of warranty that it will not be invalidated by negligent failures on the part of either the insured or their solicitor, but, once again, the point must be arguable.

But perhaps the most daunting obstacle to the use of the wasted costs jurisdiction in these circumstances is also the most infuriating. PD 46 helpfully explains (at paragraph 5.2) that:

“Rule 46.8 deals with wasted costs orders against legal representatives. Such orders can be made at any stage of the proceedings up to and including the detailed assessment proceedings. In general, applications for wasted costs are best left until after the trial”.

Casually, almost as an afterthought, the PD seems to impose what amounts to a limitation provision on the seeking of wasted costs – one which expires with the issuing of a final costs certificate. However, it is almost always after this point in time, when the successful party is enforcing their costs award, that they discover that the ATE policy has been rendered voidable by the negligent conduct of their opponent’s solicitor, something of which they could not possibly have been aware at the time. So if, as authority seems to suggest (Melchior v Vettivel), PD 46 paragraph 5.2 does indeed amount to a limitation period for wasted costs applications, there is no equivalent of the Latent Damage Act 1986 to alleviate the problem faced by an applicant who cannot possibly know of their right to seek such an order before it is too late to do so. A Kafkaesque result.

So although the prospect of using the wasted costs jurisdiction in the above circumstances might present a tantalising possibility, it is the unintended consequence of a casually drafted limitation provision which is likely to prove its undoing.

Hardwicke Rupert Higgins

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