Anecdotal evidence suggests that Defendants in failed personal injury claims are increasingly making use of the Court’s wasted costs powers in an attempt to recover costs from Claimants’ legal representatives. Often this is in cases where the Defence is either explicitly or implicitly one of fraud. In such cases the terms of the ATE insurance (if indeed any is held by the Claimant) are often such that the policy does not pay out. Thus, Defendants are sometimes left in the position of holding a costs order against a ‘man of straw’. To circumvent this problem it seems some Defendants are making costs applications against legal representatives directly, using the wasted costs jurisdiction. The recent case of Kagalovsky v Balmore Invest Ltd  EWHC 1337 (QB) provides a salutary reminder of the difficulties a party faces when seeking to persuade a Court to make a wasted costs order.
In Kagalovsky the original proceedings concerned a committal application arising from breach of an injunction made by the Commercial Court. Whilst the Applicant secured a committal order, and costs, the Defendant had successfully remained outside the jurisdiction and thus neither order could be enforced. Various allegations were made as to the conduct of the Defendant’s solicitors and counsel in the course of the committal proceedings, and it was claimed that the Applicant had incurred wasted costs in excess of £400,000 as a result.
Practice Direction 46 provides guidance as to the procedure to be adopted by a Court when considering a wasted costs application against a legal representative, including:
“5.6 The court will give directions about the procedure to be followed in each case in order to ensure that the issues are dealt with in a way which is fair and as simple and summary as the circumstances permit.
5.7 As a general rule the court will consider whether to make a wasted costs order in two stages-
(a) at the first stage the court must be satisfied –
(i) that it has before it evidence or other material which, if unanswered, would be likely to lead to a wasted costs order being made; and
(ii) the wasted costs proceedings are justified notwithstanding the likely costs involved;
(b) at the second stage, the court will consider, after giving the legal representative an opportunity to make representations in writing or at a hearing, whether it is appropriate to make a wasted costs order in accordance with paragraph 5.5 above.”
In Kagalovsky the Court also noted:
(a) The judgment of Millet LJ in Re: Freudiana Holdings Ltd (Times, Dec 4, 1995) in which he said that such applications would only be appropriate in “a plain and simple case”; and
(b) The judgment of Lord Bingham in Medcalf v Mardell  1 AC 120, in which he said: “Save in the clearest case, applications against the lawyers acting for an opposing party are unlikely to be apt for summary determination, since any hearing to investigate the conduct of a complex action is itself likely to be expensive and time-consuming.”
In Kagalovsky the Court dismissed the application at the first stage of the two stage process on the basis the application was demonstrably not suitable for what was supposed to be a summary procedure. In particular, it noted that the second stage hearing might last two or three days, that the number and variety of allegations made were such that it could not be described as a ‘plain and simple’ case, that the allegations called into question the professional integrity of practitioners who had an unblemished reputation and that the nature of the allegations were such that it would involve determination of issues concerning matters which had not occurred in the face of the Court in the course of the original proceedings. It seems clear that the Court also had in mind that the estimated costs incurred by both Respondents alone by the end of the first stage were approaching £200,000, in relation to a wasted costs order sought of perhaps £400,000.
The case is a useful reminder that in an appropriate case it may be worthwhile vigorously defending any wasted costs application at the first stage, and not simply allowing the application to proceed to a second stage on the wider merits. Most cases will not involve either the scale of costs, or the likely length of a second stage hearing, as in Kagalovsky. However, similar issues of proportionality, complexity, privilege, and whether the proceedings would involve investigation into matters which occurred other than in the face of the Court, will often be present. It is important to remind the Court of the applicable guidance, both in the Practice Direction and reported caselaw.
As to those making such applications, it is a cautionary tale in carefully choosing whether the case is an appropriate one. One imagines that the Applicant in Kagalovsky itself will have ended up with a costs bill (their own costs and those of the Respondents) at or approaching the figure they were seeking in wasted costs themselves.
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