Farrell & Anor v Direct Accident Management Services Ltd & Anor

This is the appeal of the second defendant, Direct Accident Management Services Ltd (“DAMS”), which is brought with the permission of Toulson LJ from the third-party costs order made on 17 November 2008 by HHJ McKenna, sitting in the Birmingham County Court. He ordered that DAMS pay 80% of the costs of Birmingham City Council of defending the claims brought against it by Mr Farrell and Mr Short.

The facts leading up to it are as follows. On 21 January 2005, Mr Farrell and Mr Short were travelling in an Audi car when it was struck from behind by a bin lorry owned and driven by an employee, Mr Queenan, of Birmingham City Council. They alleged that this accident occurred at 0700 at Kingsmead, Birmingham. The same day, Mr Farrell contacted DAMS by telephone and arranged to rent a car from DAMS on credit terms. The period of hire came to an end on 7 February 2005 and the total hire charge amounted to ₤1,978. The car was delivered to Mr Farrell the same day and he was required to sign two forms. The first was a hire agreement and the second an authority to the insurers of Mr Queenan to pay any money recoverable by him, Mr Farrell, to his solicitors, Coyne Learmonth. The hire agreement contained a material provision in clause 5:

“Where the hire is consequent upon the Hirer’s own vehicle being unroadworthy as a result of a road accident:-

A week later, on 28 January 2005, an after-the-event insurance policy was effected with IGI Insurance of Nottingham. Countrywide Insurance Assessors Ltd assessed the Audi to be a total write-off, with a pre-accident value of ₤10,900. On 31 January 2005 Coyne Learmonth sent letters of claim on behalf of Mr Farrell and Mr Short to the Birmingham City Council. As I have already indicated, the hire period came to an end on 17 February 2005, with a total hire charge of ₤1,978.

On 8 February 2005, a conditional fee agreement was concluded between Mr Farrell and Mr Short and Coyne Learmonth. That agreement was never produced, but two collective conditional fee agreements dated 1 December 2005 and 16 August 2006 between DAMS and Coyne Learmonth and its successor firm, Armstrongs, were. The agreements described DAMS as “the funder”, and provided in terms that DAMS had been appointed by the claimants to manage and process the claim. In addition, DAMS was to be jointly and severally liable, with the client, for the costs and disbursements of the solicitors, and could have been called on to pay them if the claim were unsuccessful and the after-the-event insurance avoided for whatever reason.

In early February 2005, the Birmingham City Council paid ₤9,300 to Coyne Learmonth, being the written-down value of the Audi motor car as assessed. Thus, that part of the possible claim of Mr Farrell and Mr Short was paid in full before the proceedings were commenced. But the preparation for the proceedings continued with medical reports from Dr Dakin indicating minor injuries having been sustained by Mr Farrell and Mr Short dated 15 March 2005. The claim form was issued on 25 April 2005 in the Liverpool County Court on behalf of Mr Farrell and Mr Short by Coyne Learmonth, claiming damages for negligence. The Particulars of Claim sought special damage of ₤2,592-odd: consisting of ₤1,978 for hire charges, ₤505 for repairs, of which of course there had been none, and ₤50 each for Mr Farrell and Mr Short for miscellaneous expenditure.

Following an inquiry made by the Birmingham City Council, on 26 September 2006 their solicitors applied for permission to amend the defence of the City Council to allege fraud on the part of Mr Farrell and Mr Short. In due course, a re-amended defence and counterclaim was served on 14 June 2007 seeking the return of ₤9,300 which had been paid as the write-off value of the Audi in February 2005. There was a reply and defence to the counterclaim served by Mr Farrell and Mr Short in July 2007 and the claim and the counterclaim were due to come on for hearing on 4 February 2008 before HHJ MacDuff. On the morning of the hearing, Mr Farrell and Mr Short discontinued their claim. The trial of the counterclaim continued, and HHJ MacDuff found that Birmingham City Council had paid ₤9,300 to Mr Farrell in reliance on his fraudulent misrepresentations. The judge ordered Mr Farrell and Mr Short to pay the costs of the Birmingham City Council to be assessed on the indemnity basis, with an interim payment of ₤10,000.

That, of course, was not paid, and, on 27 March 2008, DAMS was added as an additional defendant on the application of the Birmingham City Council, in order that the Birmingham City Council might apply for an order against DAMS, under section 51 of the Supreme Court Act, to pay the costs for which Mr Farrell and Mr Short were liable of the claim, but not of the counterclaim. That application was due to come on on 17 June 2008 but the hearing was vacated at the request of DAMS on the grounds that the application could have far-reaching implications for its business and it needed to consider whether to obtain managerial witness statements. In due course, a witness statement was obtained from a Mr Bailey of DAMS on 10 September 2008, but he was an administrator, not a manager, and though he referred to a substantial file of correspondence in relation to the case brought by Mr Farrell and Mr Short; he did not produce it.

The application for the third-party costs order came before HHJ McKenna on 1 October 2008. Oral evidence was given by Mr Harvey, a solicitor, on behalf of the Birmingham City Council and by Mr Bailey for DAMS. The judge, recognising the importance of the case and perhaps the lack of time, reserved his judgment. He gave judgment on 17 November 2008. The salient parts are as follows. First, he concluded that the evidence of Mr Bailey could not be accepted as entirely accurate, as Mr Bailey had shown himself to be a committed advocate for DAMS. Secondly, DAMS’ business was directed to pursuing the hire costs by proceedings and DAMS was “in a real sense the instigator of the litigation”. He found that DAMS had controlled the litigation and that DAMS stood to benefit from it. He considered that the case was one in which the judge should in the exercise of his discretion make some order for costs, and that the order which he considered to be appropriate, was that DAMS should pay 80% of Birmingham City Council’s costs of defending the claim, but not, be it noted, of the counterclaim.

The Appellant’s Notice was duly issued by DAMS on 17 December 2008. Permission to appeal was given by Toulson LJ. DAMS accepts that the judge’s conclusion that there was a sufficient nexus between the claimants and the appellants to render the latter amenable to a third-party costs order was correct. But DAMS contends that the judge failed properly, or at all, to exercise his discretion as to what if any order should be made. DAMS claims that the judge failed to take proper account of a number of factors. They are, first, that DAMS was not a party to the fraud; second, DAMS’ commercial interest in the case did not exceed 20% of the value of the fraud; third, the commercial interest of the claimants was greater, amounting to 80%, and the fact that it had been paid out before the action was commenced was irrelevant; fourth, DAMS did not either fund or control the litigation; since that was done by Coyne Learmonth, the solicitors; fifth, DAMS did not cause costs to be incurred, that was the fraud of the claimants; sixth, DAMS had not been warned of the purpose of the application, that is to say for the third-party costs; and seventh, that if DAMS is to be made liable for third-party costs, why not also the solicitors and/or the after-the-event insurers? DAMS submits that the order the judge made should not have been made at all; alternatively, the liability under it should be reduced to 10%.

In his oral submissions, counsel for DAMS emphasises the recognition in the authorities of the need to give notice to the person sought to be made liable at an early stage, so that he may consider his position and take such steps as he may be advised, both in relation to the substantive proceedings and later, of course, the application for third-party costs. The authorities are in chronological order: Myatt v NCB (No 2) [2007] 1 WLR 1559; Oriakhel v Vickers [2008] EWCA Civ 748; Equitas Limited v Horace Holman Ltd [2008] EWHC 2287. In the NCB case, the court had concluded that the conditional fee agreements under which the solicitors had conducted several personal injury claims were lawful. The claimants appealed, but lost. At that stage the defendants applied for an order that the solicitors pay the costs of the appeal. At paragraph 14 of his judgment, Dyson LJ, with whom the other members of the court agreed, said this:

“I think it important to emphasise the need for parties who think that they may apply for an order for costs against solicitors in circumstances such as obtain in the present case to warn the solicitors at an early stage, so as to give them a reasonable opportunity for deciding whether or not to continue with the proceedings.”

Similar statements were made by Jacob LJ in Oriakhel at paragraph 31(c), and by Andrew Smith J in Equitas at paragraph 38.

These citations show that the giving of prompt notice of a possible claim for a third-party costs order is not a condition of an order under section 51, but is a material consideration in determining whether to make one and, if so, to what extent. The point was dealt with by the judge at paragraph 64 in his judgment in this action in these terms:

“For the sake of completeness, I should add that it is perhaps unfortunate that the second defendant was not warned of this application. But to my mind, in the particular circumstances of this case there is no significance in that criticism, which is made by the second defendant of the first defendant’s conduct. The application has been vigorously opposed on jurisdiction rather than proportion grounds. Nor am I persuaded by the second defendant’s criticism of the first defendant’s failure to approach the after-the-event insurers. It does not seem to me that the first defendant should be required to pursue a claim against the after-the-event insurers.”

Counsel for DAMS criticised both the relative unimportance attributed by the judge to the need for notice, and the irrelevance of the ground for rejecting the objection. I am satisfied by the arguments of counsel for Birmingham City Council that, on the facts of this case, there is nothing in either point. At the hearing before the judge, counsel then acting for DAMS did not complain of any lack of notice. Nor did DAMS suggest that it had been prejudiced by any such lack. Had it done so, it would have had to disclose all communications in relation to the Farrell claim between DAMS on the one hand and Coyne Learmonth or Armstrongs on the other. The point emerged from the authorities to which counsel for the Birmingham City Council had referred the judge. As the judge observed, the application for costs was vigorously opposed on jurisdictional rather than discretionary grounds and, for whatever reason, DAMS did not adduce the managerial evidence which it had indicated it wished when obtaining the adjournment of the hearing fixed for 17 June 2008. There is no ground for concluding that, had DAMS received notice any earlier than it did, it would have acted differently in respect of either the Farrell claim or its defence of the third-party costs application made against it. It follows that, in my view, the judge was entirely correct to observe that the absence of any earlier warning was, in the particular circumstances of this case, of no significance.

Counsel for DAMS pointed out that DAMS was neither a participant in the fraud, nor the alter ego of anyone who was. Why, he asked, was no similar application made against either the solicitors or the after-the-event insurers? He accepted that DAMS had some commercial interest in the claim, but denied that it extended to 80%. He maintained that DAMS neither funded nor controlled the litigation, and should not have been ordered to pay any proportion of the costs of Birmingham City Council defending the claim, let alone 80% of them.

It is common ground that DAMS was not a participant in the fraud, nor the alter ego of any participant. That much I accept. But I do not accept any of the other submissions of counsel for DAMS. First, the documents signed by Mr Farrell and Mr Short on 21 January 2005, in particular clause 5 of the hire agreement, demonstrate that the initiation and prosecution of the claim were the direct consequences of the hire of the Nissan Primera by DAMS to Mr Farrell. The judge concluded, at paragraph 53 of his judgment, that DAMS was in a real sense the instigator of the litigation. That conclusion was amply justified. Second, the claim was prosecuted by the solicitors in the names of Mr Farrell and Mr Short at the behest of DAMS, because that is what clause 5 of the hiring agreement provided. If and insofar as DAMS left it to the solicitors to get on with the claim, that is not inconsistent with the control of the litigation by DAMS, for which the hiring agreement provided. Although the collective conditional fee agreements came later, it was not suggested that they did not reflect the position from the time of the commencement of the claim on 25 April 2005 down to the commencement of the first of them on 1 December 2005. Thereafter they governed the relationship between, at least, the solicitors and DAMS. They provided in terms that DAMS had been appointed to manage and pursue the claims on behalf of Mr Farrell and Mr Short. In the absence of any evidence to the contrary from DAMS, a natural inference is that the proceedings were pursued, and later discontinued, with the knowledge and approval of DAMS. In paragraphs 54 to 56 of his judgment, the judge concluded that DAMS was in control of the litigation, and that was a conclusion fully justified on the evidence before him.

Then there is the question of funding. It is true that DAMS did not pay the solicitors from time to time as the case proceeded; they did not need to because of the conditional fee agreements which they were plainly instrumental in Mr Farrell and Mr Short concluding. Under those agreements, DAMS undertook jointly and severally with Mr Farrell and Mr Short liability for the fees and disbursements of the solicitors. In the normal way they would not be called on to pay because payment would be made by the unsuccessful defendant or the after-the-event insurers. But they could have been if, for example, the after-the-event insurers had repudiated liability. In addition, DAMS hired the Nissan on credit terms to Mr Farrell. The hire was the essential catalyst, and that was funded by DAMS. It is true that Birmingham City Council has not sought to recover its costs from either the solicitors or the after-the-event insurers. If DAMS consider that they ought to contribute, then, as their counsel accepted, they might have brought them in by way of a Part 28 claim. They have not done so, and I see no reason why Birmingham City Council should.

Finally, there is the question of quantum. Counsel for DAMS submitted that the extent of liability should match the extent to which DAMS was commercially interested in the litigation. For that purpose, he relied on Arkin v Borchard LineLtd [2005] 1 WLR 3055, paragraphs 38 to 44. He submitted that such interest was either nothing, or at most 10%. That, with respect, cannot be right. The costs sought are those of the claim instituted on 25 April 2005. The write-off value of the Audi had been paid and its recovery was the subject of the counterclaim, the costs of which were not sought from DAMS. The special damages of the claim quantify the £2,600, of which £500 was for repairs which had never been carried out, and the balance of £100 for miscellaneous expenditure divided equally between Mr Farrell and Mr Short. But almost £2,000 of the special damage was the hire cost, and the balance, as I have indicated, was wholly unspecified.

In those circumstances, it seems to me that the judge might have awarded 100% of the costs of the claim, but his actual award of 80% was well within the range of the permissible exercise of his discretion. For all these reasons, I would dismiss this appeal.

I agree.

I also agree.