FLOODS OF QUEENSFERRY LTD v (1) SHAND CONSTRUCTION LTD (2) WINWARD FEARON

A non-party costs order under section 51 is exceptional. A director does not become personally liable merely by controlling, funding or pursuing unsuccessful company litigation. The court must consider whether the proceedings were pursued bona fide and whether the director’s conduct was sufficiently exceptional to make an order just and reasonable.

Solicitors who provide ordinary professional services and extend credit remain protected unless they incur wasted costs, breach a duty to the court or act outside the solicitor’s role.

An equitable charge over a specific fund requires a sufficiently clear intention and obligation that the debt be paid from that fund. An expectation or understanding that insurance proceeds will be available for payment does not suffice. Money paid into court for preservation cannot be distributed merely according to perceived fairness, and the costs jurisdiction supplies no additional enforcement power.

Floods of Queensferry Ltd pursued construction and misrepresentation claims against Shand Construction Ltd. Its recovery fell below an earlier payment into court, and Shand obtained a substantial costs order against the insolvent company. Shand then sought non-party costs orders under section 51 of the Supreme Court Act 1981 against the company’s controlling director, Mr Flood, and its solicitors, Winward Fearon.

A £200,000 legal expenses insurance fund had also been paid into court. Winward Fearon claimed an equitable charge over the fund, while Shand claimed entitlement as the successful costs creditor. His Honour Judge Lloyd QC refused the non-party costs orders but directed the fund to Shand.

The appeals concerned the proper limits of non-party costs jurisdiction, whether the solicitors had acquired an equitable interest in the insurance proceeds, and whether the court otherwise had power to distribute the preserved fund.

1. The court unanimously dismissed Shand’s appeal concerning non-party costs. Buxton LJ held that a section 51 decision was discretionary and attracted the usual appellate restraint. For a director, the court should consider particularly whether the company’s proceedings were pursued bona fide and whether the director’s conduct was so exceptional that an order was just and reasonable. Directorship, control, funding and responsibility for unsuccessful litigation did not themselves suffice.

   The trial judge had found that the company’s claim was genuine and possessed underlying merit, although Mr Flood’s belief in its value proved wrong. His vindictive, harassing or irrational conduct during the litigation did not invalidate the finding that the proceedings had been brought bona fide. Whether his conduct was sufficiently extraordinary remained a matter for the trial judge, whose conclusion disclosed no basis for appellate intervention.

2. Winward Fearon had acted as solicitors rather than commercial third-party funders. Deferring fees, limiting recovery or extending credit did not take solicitors outside their professional role. Hale LJ added that legal services benefit the administration of justice and access to the courts. Solicitors providing ordinary services on professionally proper terms should not generally face liability for their opponent’s costs unless the wasted-costs jurisdiction applies or another recognised exception is established.

3. Buxton LJ rejected Winward Fearon’s claim to an equitable charge over the insurance proceeds. Such a charge required a sufficiently clear intention to impose an obligation that the debt be paid from the identified fund. The parties’ expectation that the proceeds would be available for the solicitors’ fees, and the solicitors’ continuation of work in reliance on the policy, did not create a proprietary interest. There was no sufficiently clear assignment, segregation, trust or obligation concerning the fund.

4. The second appeal was allowed only to the extent that the insurance money had to be restored to court. Payment into court for preservation did not confer a free-standing power to distribute the fund according to perceived fairness. Section 51 authorised the court to determine by whom and to what extent costs should be paid; it did not create an additional enforcement jurisdiction. Nor could the court treat the company as notionally liquidated and prefer Shand over its other creditors. The money therefore had to remain in court pending lawful disposal of the company’s assets.

1. Court of Appeal (Civil Division): Shand’s appeal against the refusal of non-party costs orders was dismissed. The second appeal was allowed only to the extent that the insurance proceeds paid to Shand were ordered to be repaid into court. [2002] EWCA Civ 918.

2. County Court, His Honour Judge Lloyd QC: The judge refused to make non-party costs orders against Mr Flood or Winward Fearon. He rejected the solicitors’ claimed assignment of the insurance proceeds but ordered the entire £200,000 fund, with interest, to be paid to Shand. No citation is stated in the judgment.