The funding of legal costs for defendants subject to freezing orders, particularly proprietary injunctions, concerns clients and solicitors alike. AB v CD  EWHC 2419 (Ch) demonstrates how the courts balance and determine the competing interests.
The first defendant (D1) applied to vary a proprietary freezing order (PFO) to permit D1 to realise assets subject to the PFO to pay for legal representation. D1 was also subject to a worldwide freezing order (WFO). D1 had no property other than traceable proceeds. D1 proposed entering a CFA subject to a fixed fee to cover representation at trial. If successful, D1’s application would have reduced the potentially available funds to the claimants by over 90%.
The PFO contained the standard exception that ‘this order does not prohibit [D1] from spending £8,531.28 a month towards his ordinary living expenses and also a reasonable sum on legal advice and representation. But before spending any money [D1] must tell… [Cs’] solicitors where the money is to come from’.
Determination of D1’s application involved consideration of the legal principles applicable to PFOs, interpretation of court orders and the approach to legal expenses under non-proprietary freezing orders.
The applicable four-stage test for determining whether funds caught by a PFO should be released is set out in Marino v FM Capital Partners Ltd  EWCA1301. This cites: ‘Lewison J (as he then was) in Independent Trustee Services Ltd v GP Noble Trustees Ltd  EWHC 161 (Ch)… setting out the four questions which should be addressed: (1) does the claimant have an arguable proprietary claim to the funds in issue? (2) If yes, does the defendant have arguable grounds for denying that claim? (3) If yes, has the defendant demonstrated that without the release of the funds in issue he cannot effectively defend the proceedings (or, it may be added, meet his legitimate living expenses)? (4) If yes, where does the balance of justice lie as between, on the one hand, permitting the defendant to expend funds which might belong to the claimant and, on the other hand, refusing to allow the defendant to expend funds which might belong to it?’
Case law has long established that a ‘careful and anxious judgment has to be made… as to whether the injustice of permitting the use of the funds by the defendant is outweighed by the possible injustice to the defendant if he is denied the opportunity of advancing what may of course turn out to be a successful defence’, based on all relevant circumstances (Skatteforvaltningen v Edo Barac  EWHC 377 (Comm)). Skatteforvaltningen also identified (inter alia) that:
‘4) There are less strong reasons to permit the payment of incurred legal fees rather than future legal expenses…
5) The court will “act cautiously so as to ensure that the funds are not wasted”, which may be achieved by “limiting the amount…”
6) It is not conclusive that the defendant will have to act as litigant in person…
7) A key factor… is the court’s interest in having parties professionally represented.’
Interpretation of court orders
The most recent, succinct guidance is LLC Eurochem North-West-2 v Tecnimont  EWCA Civ 688. This refers to the need to consider the terms of an injunction strictly: ‘The question is simply what the order means. If it is desirable to give it a broader or narrower meaning, the solution is to vary it for the future not to give it a different interpretation.’
Legal expenses under non-proprietary freezing orders
- The lead authority is HMRC v Begum  EWHC 2186 (Ch). This summarises the earlier cases of Anglo-Eastern Trust v Kermanshahchi  EWHC 2938 (Ch) and  EWHC 3152 (Ch). The key points in Begum are:
- neither the claimant nor the court is entitled to control the defendant’s choice of legal advisers, the payment of their proper costs or the way in which they conduct the case;
- the court will not:
- give the claimant the right to require an assessment of the defendant’s cost or provisionally assess those costs; or
- impose a cap on the defendant’s costs albeit in an appropriate case, on special facts, it may be right to do so.
- the protection to which the claimant is entitled is that provided in the standard form of freezing order, i.e. costs must be ‘reasonable’.
There could, however, be exceptional or special cases where the court must take a more interventionist approach. In AB the court held that the exceptions clause was unambiguous. It was the same as that in the WFO and permitted expenditure. Thus stage four of Marino was not engaged; the court was not required to determine what amount was just and reasonable in the circumstances.
However, given that D1 sought to realise assets to fund his legal expenses requiring variation of the PFO which would, if successful, result in C’s claims being ‘snuffed out’, the judge held that the case was exceptional under Begum. He was not prepared to exercise his discretion to allow the proposed orders because there was insufficient evidence before him that the proposals and costs were reasonable.
At D1’s request the judge ruled on the amount that he would have allowed under Marino principles. In doing so he identified some points he considered to have particular significance, including: potential prejudice to C; the size and complexity of the litigation; the fact that other defendants were legally represented and D1 could rely to an extent on their submissions, albeit that it would be a rare case where it could be argued that there was no need for D1 to be represented on this basis; the ability and fairness of D1 representing himself to do justice to his defence; the seriousness of the allegations; the assistance which representation could be to the court; the possibility of imposing safeguards and limits on funding.
AB demonstrates the need to ensure unambiguous wording of orders and detailed consideration of funding and options at an early stage.
Sophia Purkis is a partner at Fladgate and committee member of the London Solicitors Litigation Association