David Michael John Picton Manley v The Law Society and Marconi International Marine Company Limited

Transcription

1 Page1 David Michael John Picton Manley v The Law Society and Marconi International Marine Company Limited 1979 M. No In the Supreme Court of Judicature Court of Appeal (Civil Division) On Appeal from the High Court of Justice Queen's Bench Division 16 December WL The Master of The Rolls (Lord Denning ) Lord Justice Ormrod and Lord Justice O'Connor Representation Tuesday, 16th December, MR. J. HAMES, Q.C. and MR. P. FLINT (instructed by Messrs. Kennedys) appeared on behalf of the Plaintiff (Respondent). MR. D. MATHESON (instructed by Messrs. Collyer-Bristow) appeared on behalf of the First Defendant (Appellant). JUDGMENT THE MASTER OF THE ROLLS: Some ten years ago David Manley invented an echo sounder by which large ships could tell if they were getting into shallow water. He got the Marconi International Marine Company interested in it. They agreed to exploit it if it came up to their requirements. But it failed to come up to their requirements. So they refused to go on with it. He alleged that they were guilty of a breach of contract. He claimed damages huge damages because of the loss of profit that he said he would have made. He also claimed to be reimbursed the money he had spent in developing his echo sounder. It came to 30,000 or more. He borrowed it from the banks and had charged his house as security for it. David Manley had no money of his own to bring an action. So he applied for legal aid and got it. His contribution to the costs was only 100 payable by eleven monthly instalments of He started an action in 1972 against Marconis. The interlocutory stage took six years. Marconis paid 8,000 into court. I do not suppose for one moment that they considered themselves under any liability to David Manley: but they wanted to get rid of a case in which they would get no costs even if they won because David Manley was legally-aided. David Manley refused to take out the 8,000. So the proceedings went on until the case was ready for trial. It was fixed to start on Tuesday, 3rd October, 1978, and was estimated to last for 30 days. The action was, however, settled. Marconis were ready to pay 40,000 to get rid of it altogether rather than incur that expense in fighting the case over 30 days against a legally-aided plaintiff. But here is the crux of the case. David Manley was not agreeable to settle for 40,000 if that money was to be paid straight to his solicitors. David Manley was himself already insolvent. He had bankruptcy notices outstanding against him, but they were being held over pending the action. He owed at least 30,000 or more to his creditors. In addition, his own solicitors estimated their own costs on his behalf to be in the region of 25,000 for which the legal aid fund would have a charge on the 40,000 if paid over to him or his solicitors. The legal aid fund would have to insist on their charge and take it out of the 40,000, see Hanlon v. The Law Society (1980) 2 Weekly Law Reports at page 802. So there would be only 15,000 left for David Manley and he would remain as he says in

2 Page2 his affidavit in a bankrupt situation. THE PRESSURE BROUGHT BY DAVID MANLEY So David Manley (with the backing of his solicitors and counsel) said to himself: I will only settle for 40,000 if that money is used first to pay off my creditors (of 30,000 or more), and then any balance (of 10,000 or less) can go to my solicitors as a contribution to their costs and they can get the rest of their costs from the legal aid fund. Marconis said: We don't mind how you deal with the 40,000 as long as you accept that sum in settlement of the action. David Manley brought this pressure to bear on all concerned. He said to them in effect: Unless things can be settled on these lines, I insist on the action going on for trial for the 30 days and that will put Marconis and the legal aid fund to enormous expense in costs. Faced with this problem, David Manley's legal advisers put their thinking caps on and brought forward a solution which was eventually agreed between the counsel and solicitors for both sides. TERMS SIMPLIFIED 1. Marconis to pay 40,000 into a joint account in the names of Kennedys (the solicitors for David Manley) and Coward Chance (the solicitors for Marconis). Then those two firms were to hold the 40,000 as agents for Marconis. 2. Kennedys (as agents for Marconis) were to negotiate with the creditors of David Manley and to pay them off out of the 40,000 in the joint account belonging to Marconis. But in those negotiations Kennedys were not to disclose to the creditors that the money was coming from the account of Marconis. The creditors might then be induced to accept less than their full amount. 3. The payment off of the creditors should be made in the form of a purchase by Marconis of the debts which David Manley owed to the creditors. The creditors were to assign to Kennedys (as undisclosed agents for Marconis) the benefit of the debts. But Marconis undertook not to enforce the debts against David Manley. 4. After the payment off of the creditors, then if there was any balance left of the 40,000 it was to be paid to Kennedys (as David Manley's solicitors) as a contribution to his costs. On that being done, all claims of David Manley against Marconis were to be extinguished. THE INFORMATION TO THE LAW SOCIETY The legal advisers thought that those terms would deprive the legal aid fund of their charge. They thought that Kennedys would not have recovered the 40,000 for David Manley. They would only have recovered for David Manley the right to have the terms enforced. That was only a chose in action which was worth little or nothing in money. It only sufficed to keep him out of bankruptcy. The legal advisers thought that Kennedys could still recover their costs from the legal aid fund despite having deprived it of the charge. Their justification for this advice was that, by settling on these terms, they would save the legal aid fund all the expense of a 30-day trial. But the legal advisers felt that they ought to tell the Law Society about the terms of settlement and get their opinion on it. I must say that it was a very rushed affair. The case was due to start on the morning of Tuesday, 3rd October, It was only the day before, at 9.30 a.m. on Monday, 2nd October, 1978, that Mr. Hames, Q.C., counsel for David Manley, telephoned the offices of the Area Secretary of the Law Society. He out-lined the proposed terms of settlement and said he thought that the charge would not apply to the 40,000. The reply was that, in the opinion of the legal aid fund, the charge would apply. Later that day there were further discussions. In the result the legal aid fund felt itself unable to commit itself on such short notice to any firm view: and that Mr. Hames must

3 Page3 exercise his own judgment on the right course to follow. I must say that I think the Law Society acted with complete propriety. They could not possibly be expected at such short notice and on such meagre information to look into this complicated matter and express any view upon it. THE SETTLEMENT IS ANNOUNCED On the morning of Tuesday, 3rd October, 1971 the case of Manley v. Marconi was in the list for hearing. As soon as it was called on Mr. Hames rose and made a short explanation. He asked for a consent order in the Tomlin form. The judge did not approve or disapprove. The terms were set out in a schedule to the order. It was all over in 19 minutes. THE FOLLOW-UP On the 17th October, 1978 Marconis paid the 40,000 into the joint account. David Manley's debts have been found to be not 30,000 but 48,000. So if the terms of settlement were implemented, the whole of the 40,000 would be used up in purchasing David Manley's debts. But the terms of settlement have been held up. The reason is because the legal aid fund are liable to pay Kennedys their costs of the action against Marconis, when taxed on a legal aid taxation. Kennedys put their costs at 25,000, but they have agreed to limit them to 17,000. The legal aid fund say that they have a charge on the 40,000 for that 17,000. Kennedys dispute it. They say that the legal aid fund have no such charge. These proceedings have been brought to resolve the issue. Pending the decision, the 17,000 has been retained in the joint account. The remaining 23,000 has been used or will be used to pay off some of David Manley's debts. In particular 20,000 of it has been used to pay a debt to a bank and release some land which was given by David Manley to the bank as security. THE ISSUE Kennedys say that the 40,000 is not subject to the statutory charge. They say that the whole of the 40,000 should be used to clear off David Manley's debts as far as possible and that Kennedys themselves should be paid their own costs (fixed at 17,000) by the legal aid fund. The legal aid fund admit that they are liable to pay Kennedys the 17,000, but claim to recoup themselves out of the 40,000, because they have a statutory charge on it or alternatively they have an equitable claim to it. THE STATUTORY PROVISIONS The clause which gives Kennedys their right to have their costs paid is section 10(1) of the Legal Aid Act 1974, which says: A solicitor who has acted for a person receiving legal aid shall be paid for so acting out of the legal aid fund, and any fees paid to counsel for so acting shall be paid out of that fund. The clause which gives the statutory charge is section 9(6) which says (omitting unnecessary words) that the net liability of the fund to the solicitor shall be a first charge for the benefit of the legal aid fund on any property (wherever situate) which is recovered or preserved for him in the proceedings. But when there is a compromise (as happened here) there comes into play section 9(7) which says: The reference in subsection (6) above to property recovered or preserved for any person shall include his rights under any compromise arrived at to avoid or

4 Page4 bring to an end the proceedings. THE JUDGE'S RULING The judge pinned his faith on section 9(7). There was here a compromise arrived at so as to bring to an end the proceedings. The charge was on his rights under the compromise. The judge said that David Manley acquired the right to have his debts discharged by the machinery which the compromise provided and the right to be paid any balance remaining It is that right, and not the 40,000, to which, for better or for worse, the right attaches. GOOD FAITH Everyone accepted that, in making this compromise, all the legal advisers acted honestly and in good faith and with the desire to act fairly by the legal aid fund. That is why they told the Area Committee about it before they concluded it. They say that, if they had not settled the case on these terms, it would have gone on for 30 days at a great expense to the legal aid fund. So it was, they say, to the advantage of the legal aid fund to do this. They were entitled, they say, to draw up the terms of settlement so as to express the rights of David Manley under the compromise as being (a right to have his debts discharged) a chose in action and not the 40,000. They say that the written terms should be given their legal effect just as were the terms of the covenants in the Duke of Westminster's case (1936) Appeal Cases 1. THE TRUTH OF THE TRANSACTION I can see the force of that argument. The judge accepted it. But I think it is erroneous. This case comes under another and better principle which I stated simply in Customs and Excise Commissioners v. Pools Finance (1952) 1 Times Law Reports at page 797: The parties cannot assert that black is white and expect the Court to believe it. It is the same as that which Lord Reid and I applied in Griffiths v. Harrison (1963) Appeal Cases 1. The court should always look for the truth of the transaction. It should not let itself be deceived by the stratagens of lawyers, or accountants. It should not allow them to pull the wool over its eyes. It should not allow them to dress up a transaction in clothes that do not belong to it. Now the plain truth of this transaction is that the 40,000 was to be used to pay off David Manley's debts. Kennedys were to supply particulars of his debts. They were to negotiate the payment without disclosing that they were acting for anyone else but David Manley. The payment off was to be described as a purchase of David Manley's debts, but the purchaser (Marconis) undertook not to enforce his purchase against David Manley. So, although it was in form a purchase, it was in fact a payment-off of the creditors by David Manley's solicitor on the best terms that he could arrange on the appearance that he was acting for David Manley. To my mind once we pull aside the curtain of words and the supposed rights the truth is that this 40,000 was to be used to pay off David Manley's debts at his request. It is, therefore, the subject of the statutory charge in favour of the legal aid fund. When money is paid to a party, or at his request to his creditors, it is plainly recovered for him within section 9(6). The legal aid fund has, therefore, a charge for the costs 17,000 on the money in the joint account. It should be paid out to the fund. The fund should pay it to the solicitors. But the fund should pay nothing out of its own pocket. OTHER PROVISIONS If I am wrong, however, in looking behind the curtain if the transaction is to be taken at

5 Page5 its face value then I doubt whether it would be defeated by the other provisions which were put before us. Regulation 19(4) may not help. If the charge is only on the chose in action, the settlement does not defeat it. Regulation 18(3)(b) may not help. The 40,000 was not received by David Manley's solicitor as his solicitor, but as agent for Marconis. Regulation 18(4)(c) may not help because the first charge would be on the chose in action and not on the 40,000. EQUITY Mr. Matheson referred us to a very interesting line of cases on a solicitor's lien. A typical instance is when a man is owed 100 by another. He goes to a solicitor who issues proceedings. If the defendant settles the action by paying 75 to the plaintiff's solicitor, then the solicitor has a lien on the 75 for his costs. These amount to 25. So that the plaintiff only receives 50 clear. Now, suppose the plaintiff behind the back of his solicitor goes to the defendant and agrees to take 70 in settlement: and spends it all in riotous living. The settlement is binding. The solicitor has been deprived of his lien for costs. Has he any recourse against the defendant? It is clear that if the defendant had notice of the solicitor's lien and made the agreement with the plaintiff collusively so as to deprive the solicitor of his lien then the solicitor can recover from the defendant his costs of 25. That is clear from a series of cases from Welsh v. Hole (1779) 1 Davy 238 to Margetson v. Jones (1897) 2 Chancery 314. But there is a question as to what constitutes collusion for this purpose. On this point I am content to go by the observation of Sir Baliol Brett, M.R. in The Hope (1883) 8 Probate Division 44 at page 145: The plaintiffs' solicitors must show that both the plaintiffs and the defendants entered into the compromise with the intention of depriving them of their lien. Those cases do not apply directly to our present case. David Manley's solicitors had no lien for their costs. They looked to the legal aid fund for payment of them. The legal aid fund had no lien for costs. They had only a charge on any property when it was recovered. Marconis had no intention to defeat the legal aid fund. They left everything to Kennedys to arrange. Now, although those cases do not directly apply, I am of opinion that the principle of them does. It is clear beyond doubt that the object of David Manley and his solicitors was to deprive the legal aid fund of any charge on the 40,000. That was the be-all and end-all of this elaborate transaction. The solicitors wanted to make the legal aid fund pay all their costs and at the same time deprive the legal aid fund of any charge in respect of those costs. I do not think they should be permitted to succeed in this. I do not think the settlement itself can be set aside. It has gone too far to do that. But I think that equity can intervene so as to hold that, if and in so far as the solicitors have intentionally deprived the legal aid fund of a charge on their costs, they are themselves precluded from making any claim on the legal aid fund for those costs. It is a very old principle laid down by Lord Coke that a man shall not be allowed to take advantage of a condition that he himself has brought about, see the New Zealand case (1919) Appeal Cases at page 8 by Lord Finlay, L.C. CONCLUSION My conclusion is that the 17,000 now in the joint account should be released to the legal aid fund: because the fund has a charge on it to secure the costs of 17,000 which the legal aid fund has to pay to the solicitor for David Manley. Alternatively, if the 17,000 is released to the solicitors, they are precluded in equity from recovering anything from the legal aid fund. In short, the solicitors get the 17,000, but the legal aid fund pay nothing. In parting from this case I cannot forbear from saying that I think the legal advisers of

6 Page6 Manley were ill-advised to try and circumvent the statutory charge. Either the settlement at 40,000 was good or it was bad on the merits of the action itself. If it was good, it should have been accepted without any manipulation of the destination of the 40,000. If it was bad, it should have been rejected. It was quite wrong for Manley to say: You must go ahead with the action unless my creditors are paid off. That was a quite inadmissible threat by a legally-aided person who was not paying the costs of going on. It was most unfair to put the defendants to all the great expense of contesting the case. If the 40,000 was reasonable on the merits of the case and Manley refused to accept it his refusal should have been reported to the Area Committee for them to decide whether his certificate should be continued or not. This case brings out vividly the responsibility which attaches to legal advisers who conduct an action for a legallyaided person. They must remember that they are funded at the expense of the State and that they are putting the defendant (who is not legally-aided) to a great deal of worry and expense in contesting the case defendants who will not recover any of their costs even if they win. This puts the legal advisers for the plaintiff in an extremely strong bargaining position. There is inequality of bargaining power. They should not abuse it at the expense of the defendants. Nor should they abuse it at the expense of the legal aid fund. Whenever the question of a settlement comes up, the legal advisers for the plaintiff should consider any offer on the merits of the case itself just as if they were acting for a private client of moderate means not one who is wealthy enough to go to any expense nor one who is very much in debt already against a defendant who is also of moderate means and will get an order for costs against the plaintiff if he wins. Once a figure is reached which is reasonable, they should settle the case at that figure. They should not try and manipulate its destination so as to avoid the statutory charge. In particular they should not make the sum payable to the creditors of the plaintiff or to anyone else than the plaintiff. If they should do so, they will find, as in this case, they will incur the displeasure of the court which will see that their manipulations do not succeed. I would allow the appeal accordingly. LORD JUSTICE ORMROD: It is right to say at the outset of this judgment that I accept unreservedly that Mr. Hames, Q.C. and those who helped him to draw up the terms of the compromise agreement believed that they were acting in the best interests of all concerned, including that of the Law Society as administrators of the legal aid fund. On the other hand, I think that they misapprehended the position of the Law Society. The situation as they saw it was that Dr. Manley had reasonable grounds for pursuing his claim for very substantial damages against Marconi International Marine Co. Ltd. ( Marconis ), the defendants, but that the action, which was estimated to last for six weeks, and which would involve heavy costs, particularly in respect of expert witnesses, might very well fail in the end. The consequences would be that Dr. Manley recovered nothing and a very heavy liability in respect of his costs would fall on the legal aid fund. Marconis were prepared to offer 40,000 in full settlement of all Dr. Manley's claims and costs, but Dr. Manley, who was under a threat of bankruptcy, insisted upon his outstanding debts being paid out of this sum, which would not be enough to meet both his debts and his costs to date. It was assumed, erroneously in my opinion, that Dr. Manley was in a position, vis a vis the Law Society, to insist upon going on with his action unless he received a sufficient proportion of the sum of 40,000 to clear his debts. Consequently, it would be to the advantage of the Law Society in the long run if terms of compromise could be so arranged that no effective charge in favour of the Law Society under section 9 (6) and (7) of the Legal Aid Act 1974 fell upon the sum of 40,000. The Law Society would be compensated by the substantial savings in costs if the action did not proceed to judgment. This assumes that Dr. Manley was in control of the situation. In my opinion he was not. Under the Legal Aid (General) Regulations 1971, regulation 12 (3) and (6), the Area Committtee could have discharged Dr. Manley's legal aid certificate from such date as they considered appropriate if they considered:

7 Page7 (i) the assisted person no longer had reasonable grounds for asserting or disputing the claim or for taking, defending or being a party to the proceedings; or (ii) the assisted person had required the claim to be asserted or disputed or the proceedings to be conducted unreasonably so as to incur an unjustifiable expense to the fund; or (iii) it was unreasonable in the particular circumstances that the assisted person should continue to receive legal aid. This, and many other provisions of the legal aid scheme, show that, although the scheme is designed to interfere as little as possible with the traditional relationship between counsel and solicitors and client, and is administered in such a way as to keep interference to a minimum, nonetheless it has altered these relationships in important, and sometimes subtle, ways. The existence of the legal aid fund has introduced a third party into what was formerly a one to one relationship, and this new relationship is governed by the Legal Aid Act 1974 and the regulations made under it. It was, in my opinion, the duty of Dr. Manley's solicitors to inform and consult the Area Committee of the Law Society before entering, on Dr. Manley's behalf, into the compromise agreement of the 3rd October, Some attempt was made on the 2nd October by Mr. Hames, Q.C. to consult the officers of the Area Committee, but they were given a wholly inadequate time in which to consider the complex and difficult issues involved. In retrospect at least, it is difficult to appreciate the reasons for the apparent urgency. The extent to which the position of solicitors and counsel has been changed by the introduction of legal aid is shown by the facts of this case. Had Dr. Manley not been an assisted person, the terms of compromise would have been inconceivable unless his solicitors were prepared to forgo their lien or charge on the 40,000. Had they refused to do so they would have declined to continue to act for Dr. Manley until he had put them in funds. Mr. Hames, Q.C. submitted that all rights and obligations relating to the legal aid fund are statutory in origin and must be found in the Legal Aid Act 1974 or in the regulations made under it. They are, therefore, dependent upon the construction of the relevant statutory provisions. I accept that submission, from which it follows that the rules of common law or equity affecting the rights of solicitors are relevant only in so far as they may throw light on the true construction of the relevant provisions in the Act or in the regulations. The answer to the question raised in the originating summons in this case, therefore, depends firstly upon the construction of section 9 (6) and (7) of the 1974 Act, which create the Law Society's statutory charge on the proceeds of the litigation as security for the costs of the assisted person which ultimately fall on the fund and, secondly, upon the true construction of the written agreement of compromise dated the 3rd October, Subsections (6) and (7) of section 9 are in these terms: (6) Except so far as regulations otherwise provide, any sums remaining unpaid on account of a person's contribution to the legal aid fund in respect of any proceedings and, if the total contribution is less than the net liability of that fund on his account, a sum equal to the deficiency shall be a first charge for the benefit of the legal aid fund on any property (wherever situate) which is recovered or preserved for him in the proceedings. (7) The reference in subsection (6) above to property recovered or preserved for any person shall include his rights under any compromise arrived at to avoid or bring to an end the proceedings and any sums recovered by virtue of an order for costs made in his favour in the proceedings (not being sums payable into the legal aid fund under section 8 above). The crucial words for present purposes in subsection (6) are any property (wherever situate) which is recovered or preserved for him in the proceedings. Subsection (7)

8 Page8 extends subsection (6) to rights under a compromise, but does not restrict the charge to such rights. This is made clear by the use of the word include in subsection (7). Mr. Hames, Q.C. submitted that the property recovered for Dr. Manley under the compromise was limited to the bundle of rights or choses in action which he acquired, i.e. a right to compel Marconis to pay 40,000 to their agents, the respective firms of solicitors for the parties; a right to require Marconis to purchase such of his debts for up to 40,000 as he chose; a right to insist on Marconis not enforcing such debts against him, and so on. This is property in one sense, but it is valueless to support the Law Society's charge as security for the costs paid on Dr. Manley's behalf. Mr. Matheson for the Law Society argued that the statutory charge attached to so much of the 40,000 as was required to meet the net liability of the legal aid fund, after deducting any contribution paid by Dr. Manley as a term of his legal aid certificate. Mr. Hames's submission requires that the word property be construed in the sense in which lawyers use it as a term of art; Mr. Matheson urged that it should be given its ordinary meaning in the English language. This question was fully considered (though in a different context) by the House of Lords in Hanlon v. The Law Society (1980) 2 Weekly Law Reports 756. Lord Scarman and Lord Lowry favoured the broader construction. At page 806 A-C Lord Scarman said: The subsection must be construed so that in matrimonial as in other proceedings the legal aid fund has the security of its charge. The words recovered or preserved are apt to cover ordinary civil litigation in which a plaintiff recovers or a defendant preserves an asset: but they are not so apt to cover a transfer of property ordered by a court in the exercise of its discretion under sections 24 and 25 of the Matrimonial Causes Act Nevertheless, they can be read as covering such an order without any very great distortion of their ordinary meaning. A woman who obtains an order transferring to her the matrimonial home will be seen, by herself and by others, to have got the house: and it is not difficult to construe property recovered as property obtained. Lord Lowry at page 809 D-E said: The purpose, after all, of creating a charge on property is to give the legal aid fund or the solicitor, as the case may be, a security, if the assisted person or the client has gained financially as a result of the proceedings; the way in which that result has been achieved should not matter. Lord Simon of Glaisdale, however, thought a liberal approach to construction was not appropriate in a measure imposing a charge for a social service (page 796 D-E). It is, however, clear on the facts of that case that the House did not adopt the strict legal meaning of the word property or of recovered, but instead came to the conclusion that Mrs. Hanlon had substantially recovered the whole of the former matrimonial home to which, accordingly, the statutory charge attached. In reaching their conclusion, the House held that it was permissible to look at the regulations made under the Legal Aid Act 1974 as an aid to the construction of the Act itself. (See in particular per Lord Lowry at page 811 et seq). There is one regulation which is useful in the present case, namely regulation 18(4) (a) of the Legal Aid (General) Regulations 1971, which reads: 4. Where in any proceedings to which an assisted person is a party (a) an order or agreement is made providing for the recovery or preservation of property for the benefit of the assisted person and, by virtue of the Act, there is a first charge on the property for the benefit of the fund.

9 Page9 This is a clear indication that the statutory charge is not limited to property recovered by the assisted person, but extends to property recovered for his benefit. In my judgment, therefore, the court should adopt the broader approach and construe the phrase property recovered or preserved for the assisted person as including property recovered for his benefit, looking at the reality of the matter rather than concentrating exclusively on the form of the transaction, particularly when the court is concerned with a compromise. Judgments deal in realities: compromises provide scope for an infinite variety of forms, limited only by the ingenuity of the draftsman. It would be wrong, in my view, to extend the formalistic approach adopted in Revenue cases, e.g. C.I.R. v. Duke of Westminster (1936) Appeal Cases 1, to other branches of the law. I now turn to consider the terms of the compromise as finally agreed. The concept underlying it is in the last degree artificial. There could be no conceivable reason, or at least there is no evidence at all of any reason, why Marconis should wish to purchase unspecified debts from unspecified creditors of Dr. Manley at his option. Still less when they undertake not to enforce them against Dr. Manley. There can equally be no sensible reason why Dr. Manley's solicitors should be involved in the purchase of such debts, or why they should be made joint agents of Marconis with Marconis' solicitors except to avoid receipt of the 40,000 by Dr. Manley's solicitors which would have instantly brought regulation 18(3)(b) of the 1971 regulations into force, and require them to pay over to the Law Society any sum so received. In my view the compromise was expressed in this form solely for the benefit of Dr. Manley, in order that the whole sum of 40,000 would be available to him to pay his debts and nothing would be available to the Law Society as security for their costs. In truth and in fact, Dr. Manley was clearly in effective control of the distribution of this fund and was the sole beneficiary of it. I would, therefore, hold that the statutory charge attached to the fund of 40,000 to the extent necessary to cover the net liability of the Law Society for Dr. Manley's costs. On this view of the case the only remaining question is that of enforcement of the statutory charge, but fortunately a sum of 17,500 has been retained by the solicitors at the insistence of the Law Society, pending the outcome of this appeal, which is sufficient to cover the net liability of the legal aid fund. So this problem does not arise. Had it been necessary to consider it, as the learned judge in the court below felt obliged to do, the line of cases cited to us by Mr. Matheson dealing with solicitors' liens and charges might have been helpful. They show the lengths to which the court has been prepared to go in its equitable jurisdiction to protect solicitors who have been deprived of their lien or charge under the Solicitors Acts. An analogous situation might have arisen in this case if the whole of the 40,000 had been put out of reach of the statutory charge, e.g. by a simple agreement that Marconis would pay Dr. Manley's debts direct to the creditors up to a total of 40,000. It is unnecessary to say more than this. There is no case in the books in which a solicitor who has been a party to such an arrangement which deprives himself of his own lien or charge has recovered his costs from a third party. That is not, however, to say that a solicitor for an assisted party puts his costs at risk if he is a party to a compromise in which the other party, for reasons of his own, offers terms which do not include the payment of money or the transfer of property, but some other less tangible form of benefit to the assisted person. I too would allow this appeal. LORD JUSTICE O'CONNOR: This case is concerned with legal aid in civil proceedings. Where a person qualifies for legal aid, solicitors and counsel act for him but are paid by the legal aid fund. The Act gives to the fund a first charge on all property recovered or preserved for the assisted person in the proceedings. These provisions cause no difficulty in any case where the assisted person loses the case. They can be troublesome where the assisted person wins his case and very often raise serious problems when a compromise is under discussion. The present case is a classic example of the compromise difficulty. The plaintiff is an inventor who alleged that the defendants were in breach of a contract to exploit his

10 Page10 invention. The matter was highly technical and the damages claimed for loss of royalties on world-wide sales of very expensive equipment were large. The case was due to start on the 3rd October, 1978 and the parties estimated that the hearing would take thirty days. This is very expensive litigation. The defendants knew that, if they succeeded, they would have to pay their own costs and, if they lost, in addition they would have to pay to the plaintiff both damages and costs. That was a situation which was ripe for compromise. The plaintiff gave firm instructions. He had incurred debts in producing a working prototype of his invention of the order of 30,000 although no accurate figure was known on the 3rd October, His creditors were threatening to make him bankrupt. He said that so long as Marconi paid enough to pay his debts he was content; if not, the case must go on. Negotiations took place and Marconi made a final offer of 40,000 inclusive of costs to be rid of the litigation at that time. Mr. Hames, Q.C. leading for the plaintiff asked his solicitors for an estimate of their costs to date and got the answer 25,000. It was obvious that if the legal aid charge attached to this money there would not be enough to discharge the plaintiff's debts. Mr. Hames certainly, and possibly others of the plaintiff's legal advisers, did not take a rosy view of the plaintiff's chances of success in this litigation. They calculated that if the trial ran for the estimated 30 days the plaintiff's costs would rise to 60,000. Marconi would pay no more. So it was that they decided to devise a scheme so as to avoid the charge to the legal aid fund. The scheme proposed would leave any balance of 40,000 after payment of the plaintiff's debts available for the legal aid fund, and as at the 3rd October this was thought to be of the order of 10,000. The legal aid fund was being asked to buy a potential liability of 60,000 for 15,000. The scheme devised was simple. Marconi was to pay 40,000 into an account in the joint names of the plaintiff's and defendants' solicitors who were declared to be agents for Marconi for this purpose. The plaintiff's solicitors as undisclosed agents for Marconi were to buy the plaintiff's debts for Marconi. Marconi undertook not to have recourse to the plaintiff for such debts. The solicitors were to recover their own charges for this work from the 40,000. Thereafter if there was any money left it would be paid to the plaintiff's solicitors who would hold it for the legal aid fund. On the 2nd October the Law Society were told of the scheme on the telephoned and asked to approve it and to agree not to claim the legal aid fund charge against the 40,000. This the Law Society would not and did not do. On the 3rd October, 1978 the case was settled on the terms of the scheme now embodied in a Tomlin order. It was fully mentioned in open court to the judge. It is not and never has been suggested that the plaintiff's legal advisers acted other than openly and in good faith believing that they were acting in the best interests of their client and the legal aid fund. The Law Society claimed the charge on the fund of 40,000. The plaintiff's solicitors quantified their costs and agreed to limit their claim against the fund to 17,000. That sum is held pending the outcome of these proceedings; the balance was released for the purposes of this scheme. The plaintiff commenced these proceedings against the Law Society by originating summons asking for a declaration that the fund of 40,000 does not stand and never has stood charged for the benefit of the legal aid fund under and by virtue of the provisions and for the purposes of the Legal Aid Act The case was heard by Mr. Justice Bristow who gave judgment on the 10th October, 1980 in favour of the plaintiff and made the declaration prayed for. The Law Society appeal to this court. The Law Society contend that upon the true construction of the compromise agreement the fund of 40,000 was property recovered or preserved for the plaintiff in the proceedings within the meaning of section 9(6) of the Legal Aid Act The crucial words are property recovered or preserved for him. That the 40,000 was a fruit of this litigation is beyond doubt, but not all fruits of litigation are property recovered. Mr. Hames, Q.C. on behalf of the plaintiff submits that the property recovered in this case was the right to force Marconi to carry out the terms of compromise which included a contingent right to any balance of the 40,000 that might remain, and he submitted that that was the property to which the charge attached. I cannot agree. Under the terms of the compromise the

11 Page11 plaintiff had the right to specify which of his debts were to be discharged out of the 40,000, see paragraph 3 of the Tomlin order. Marconi had no interest in what debts the plaintiff chose to have paid off. The provision in the compromise making the plaintiff's solicitors the undisclosed agents of Marconi was solely for the benefit of the plaintiff in the hope that his debts could be bought for less than their book value. I do not think that there can be any doubt that the 40,000 was property recovered for the benefit of the plaintiff. Can it be said that nevertheless it is not recovered for him? I think not and I am fortified in that view when I look at regulation 18(4)(a) of the Legal Aid (General) Regulations 1971 : (4) Where in any proceedings to which an assisted person is a party (a) an order or agreement is made providing for the recovery or preservation of property for the benefit of the assisted person and, by virtue of the Act, there is a first charge on the property for the benefit of the fund; the Law Society may take such proceedings in its own name as may be necessary to enforce or give effect to such an order or agreement. For these reasons I hold that the 40,000 was property recovered for the plaintiff and the charge in favour of the legal aid fund attaches. In the present case no problem of enforcement arises and Id o not wish to add anything of my own to what my Lords have said were the position to be that the money had all gone save that I agree with them. I too would allow the appeal. (Order: Appeal allowed with costs here and below not to be enforced except on application to judge in chambers. Legal aid taxation of plaintiff's costs. Declaration made in terms sought). THE MASTER OF THE ROLLS: Mr. Matheson, so the appeal is allowed. MR. MATHESON: My Lord, I ask for an order that the appeal is allowed. I ask your Lordships to substitute for the order made by the learned judge a declaration in the terms which are set out at page 21(c) in the bundle. My Lord the Master of the Rolls' judgment postulated two alternatives. One was simply that 17,000 should go to the Law Society. Alternatively that Kennedys should be left to recover their own costs. THE MASTER OF THE ROLLS: How does your declaration frame it? MR. MATHESON: My Lord, the declaration frames it that the Law Society have a charge over 17,000. In view of your Lordships' judgment, what I would ask in this particular case because the money is there is simply for a direction that the money is to be paid to the legal aid fund in accordance with THE MASTER OF THE ROLLS: It is to be paid to the legal aid fund, and then I suppose that Kennedys will get their money from the legal aid fund, will they not? MR. MATHESON: My Lord, yes. Your Lordship's alternative approach would be extremely valuable, with respect, in a case where the money has been dissipated, but here it has been preserved. So, subject to your Lordships' direction, the Law Society would be content to pay Kennedys their taxed costs provided we get 17,000 in advance. THE MASTER OF THE ROLLS: What do we do about the costs of this hearing? MR. MATHESON: I am going to ask your Lordships to make an order for costs against the plaintiff here and below, subject to one thing. I am content that your Lordships should assess THE MASTER OF THE ROLLS: I do not suppose there is much left of the 40,000; it has all been paid off to the creditors. He is not legally-aided in these proceedings, is he? MR. MATHESON: Yes, he has been. THE MASTER OF THE ROLLS: He has been legally-aided in this contest here? MR. MATHESON: Yes, my Lord.

12 Page12 THE MASTER OF THE ROLLS: What do we do about that? MR. MATHESON: I ask your Lordships to make an order for costs. Because he is legally-aided, the question of his actual liability under that order arises and your Lordships have to consider section 8(1)(e) of the Act, which is on page 14 of the Blue Book: Where a person receives legal aid in connection with any proceedings (e) his liability by virtue of an order for costs made against him with respect to the proceedings shall not exceed the amount (if any) which is a reasonable one for him to pay having regard to all the circumstances, including the means of all the parties and their conduct in connection with the dispute. THE MASTER OF THE ROLLS: You say that under that general discretion we could order him to pay the lot? MR. MATHESON: Your Lordships could theoretically, but I do not ask that. THE MASTER OF THE ROLLS: You will not get anything because of the bankruptcy, will you? MR. MATHESON: I ask your Lordships to make the order. I am content that your Lordships should assess his liability at present at nil. My reasons are these LORD JUSTICE O'CONNOR: It is the ordinary order you are asking for, is it not, Mr. Matheson an order that you recover your costs not to be enforced without the leave of the court? MR. MATHESON: If your Lordship pleases. LORD JUSTICE O'CONNOR: If the man wins the football pools, you come and get leave. THE MASTER OF THE ROLLS: Do we not do that? MR. MATHESON: My Lord, constantly. Football pools were exactly what I had in mind, but perhaps there is a rather more real prospect here because, if Dr. Manley has invented a really successful device, it is always possible that some other person will take it up. THE MASTER OF THE ROLLS: Why should we not make our ordinary order, that he is to pay the costs but not until there is an application to the court? MR. MATHESON: I should be content if your Lordships made that order. THE MASTER OF THE ROLLS: That is what we usually do in these cases. MR. MATHESON: Certainly. I was going to refer your Lordships to regulation 20 of the general regulations. THE MASTER OF THE ROLLS: What page is that? MR. MATHESON: My Lord, it is on page 122. This deals with costs awarded against an assisted person. Paragraph (1) provides: Where proceedings have been concluded no costs attributable to the period during which his certificate was in force shall be recoverable from him until the court has determined the amount of his liability in accordance with section 2(2)(e) of the Act. Then paragraph (2): The court may, if it thinks fit (a) postpone or adjourn the determination for such time and to such place, and so on. Then there are other provisions. Your Lordships will see at paragraph (5): The party in whose favour the order is made may, within six years from the date thereof, apply to the court for the order to be varied on the ground that (a) material additional information as to the assisted person's means is available; or (b) there has been a change in the assisted person's circumstances since the date of the order. THE MASTER OF THE ROLLS: How does that affect it? MR. MATHESON: If your Lordships say they are not to be enforced without the leave of the court, if circumstances arise we shall have to come back and ask your Lordships to give leave to enforce the order. If your Lordships assess the liability at nil, we can come back any time in six years in order to ask your Lordships to vary that order in the changed circumstances. LORD JUSTICE O'CONNOR: He will not sell the invention until six years and one day have gone by.

13 Page13 THE MASTER OF THE ROLLS: That will not do. As Lord Justice O'Connor says, he will wait until the six years are up. LORD JUSTICE ORMROD: Would it not be better to make the order in the form which my Lord has said, but with this modification, that you do not want to come back to this court, the constitution of which might be very difficult to fix. What you really want to say is that it is subject to any application to a judge of the Queen's Bench Division. MR. MATHESON: My Lord, I am obliged; I am grateful you have suggested that. There is one other thing, and it is this. If your Lordships make the order for which I ask, that 17,000 should now be paid to the legal aid fund, then the next stage ---- THE MASTER OF THE ROLLS: Out of the joint account to the legal aid fund. MR. MATHESON: My Lord, yes. Then the next stage would be that Kennedys would have to tax their costs in accordance with the provisions of schedule 2 to the Act. THE MASTER OF THE ROLLS: Kennedys will have to tax their costs, and they will probably come to more than the 17,000. MR. MATHESON: It may or may not. If and in so far as it comes to less than 17,000, then there would be a surplus which would normally be returned to the plaintiff, but that is money, subject to your Lordships' decision, which the legal aid fund might obtain as a contribution towards the cost of these proceedings. LORD JUSTICE ORMROD: Would you not then have to apply? THE MASTER OF THE ROLLS: Supposing it comes to 14,000 or 15,000 and there is 2,000 or 3,000 left. You say that ought to come to the legal aid fund? MR. MATHESON: My Lord, it may be we would have to apply in those circumstances. LORD JUSTICE ORMROD: If we start making hypothetical orders, Mr. Matheson, you will be back in this court on another appeal. THE MASTER OF THE ROLLS: How would you claim out of that? At the moment we have said that the legal aid fund is to have a charge on the 17,000. But that is only for their costs. Supposing it is only 15,000, what happens to the other 2,000? MR. MATHESON: My Lord, the other 2,000 would normally then be repaid to the plaintiff. THE MASTER OF THE ROLLS: Are you asking something different? MR. MATHESON: My Lord, I was proposing THE MASTER OF THE ROLLS: Because of these costs here? MR. MATHESON: Yes, my Lord; but I think what my Lord Lord Justice Ormrod is saying is that the best thing to do is to wait and see whether that arises, and then we can make an application to the judge if necessary if we cannot agree. LORD JUSTICE O'CONNOR: You have to see the justice of the case always in this question of legal aid taxation recovered from an unsuccessful assisted party; you have to look at the whole of his means. 2,000 is only a drop in the ocean at this date. THE MASTER OF THE ROLLS: It might be said that that ought to go to his general creditors. LORD JUSTICE O'CONNOR: I do not think it would be right to make that order. THE MASTER OF THE ROLLS: I am not sure that you ought not to have the ordinary order; you have your costs here and below on these present proceedings not to be enforced except on application to a judge in chambers. MR. MATHESON: If I may say so with respect, I would be content with that. THE MASTER OF THE ROLLS: So the appeal will be allowed with costs here and below but, as he is legally-aided, not to be enforced except on further application to a judge in chambers. On the other handy we will declare that the legal aid fund have a charge on 17,000 in this joint account. MR. MATHESON: And an order for payment to the Law Society. THE MASTER OF THE ROLLS: Well, Mr. Hames, what about it?

14 Page14 MR. HAMES: My Lord, in the ordinary way the order for costs which your Lordships are considering would be the usual order which would flow, but there is this unusual circumstance in this case: When I succeeded before Mr. Justice Bristow, I asked that the Law Society pay our costs. We were the successful party. We were entitled in the ordinary way to have our costs paid; and the Law Society through Mr. Matheson pointed out and of course there was a lot of commonsense in that that this was really an exercise in merely shifting the pounds around, because when I asked for the payment of my costs all that was going to happen was that one fund of the Law Society was going to be paying the other fund, and therefore no order for costs should be made. We say that, having persuaded Mr. Justice Bristow on those lines, the comparable lines apply today. LORD JUSTICE ORMROD: But they do not. MR. HAMES: My Lord, could I just put it this way. The matter has come here of course so that the Law Society can get the 17,000, but the 17,000 is a relatively small matter. What was important to the Law Society was the principle, and that was the general matter which brought them to this court. To the extent that the principle has been resolved, I would invite your Lordships to bear that in mind and say that in this case the plaintiff should not have to bear the costs of these two ---- THE MASTER OF THE ROLLS: In a way it is almost academic. He is going to go bankrupt. MR. HAMES: My Lord, he is going to go bankrupt, but supposing the circumstances were to arise that his invention was successful and, as my friend suggests, was ultimately to be found profitable. It would be very harsh to have this hanging over him. In a way it is not very much of his own doing. Your Lordships of course have taken different views about it; and I must say and I do say that, with great deference to my Lord the Master of the Rolls, Manley never said, This must go on. I do not want to go back on this, but it would be hard ---- LORD JUSTICE ORMROD: Is your proposition that the taxpayer should pay for these proceedings in the event that Mr. Manley becomes affluent? Enough money has been spent on this litigation in all conscience. MR. HAMES: My Lord, I dare say, but in my submission your Lordships have a wide discretion, and in the exercise of that discretion I would ask your Lordships to treat him kindly. THE MASTER OF THE ROLLS: As I say, Mr. Matheson, we will allow the appeal with costs here and below. As he is legally-aided, those costs are not to be enforced except on further application to the judge in chambers. There will be a declaration for a charge to the legal aid fund for the 17,000. MR. MATHESON: And for the payment of that sum to the Law Society. THE MASTER OF THE ROLLS: Yes. MR. HAMES: Would your Lordships direct a legal aid taxation of the respondent's costs? THE MASTER OF THE ROLLS: We will do that. Unless you get a legal aid taxation, you cannot do anything, can you? MR. HAMES: My Lord, there is one other matter with which I have to deal. I realise THE MASTER OF THE ROLLS: You are not going to ask for leave to appeal? MR. HAMES: My Lord, I realise the circumstances---- THE MASTER OF THE ROLLS: More legal aid costs to go to the House of Lords? MR. HAMES: My Lord, could I just put it this way THE MASTER OF THE ROLLS: If we give leave, you will get legal aid to go to the Lords, will you not? I should have thought the legal aid fund have supported this case well enough up to now, Mr. Hames. MR. HAMES: May I just put this principle which I would invite your Lordships to consider? If you reject it, then I will say no more. Certainly so far as the Law Society are concerned, they made it clear that they were minded to go to the House of Lords if your Lordships were