General Of Berne Insurance Company v Jardine Reinsurance Management Ltd [1998] EWCA Civ 220 (12 February 1998)

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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> General Of Berne Insurance Company v Jardine Reinsurance Management Ltd [1998] EWCA Civ 220 (12 February 1998) URL: http://www.bailii.org/ew/cases/EWCA/Civ/1998/220.html Cite as: [1998] 1 WLR 1231, [1998] CLC 768, [1998] EWCA Civ 220, [1998] 2 All ER 301, [1998] WLR 1231, [1998] Lloyd's Rep IR 211, [1998] 1 Costs LR 1

This is an appeal from an interim decision upon a taxation of costs. By an interim certificate dated 7.4.97, Master Campbell held that the plaintiffs are entitled to claim from the defendants on taxation hourly expense rates including uplift which are greater than they themselves are obliged by contract to pay to their own solicitors. By order dated 25.7.97, Tuckey J., who sat with assessors, upheld Master Campbell's decision. He granted the defendants leave to appeal. The appeal turns on the construction of Section 60(3) of the Solicitors' Act 1974.

The Respondent is one of thirteen insurance companies which brought proceedings against the Appellants ("Jardines") in connection with the management of underwriting pools. The pools sustained losses and the thirteen insurance companies each started actions against Jardines. These actions which started in 1988 were conducted together. On 10.4.90, the actions against the third defendants were stayed. On 31.7.91, one action was discontinued with no order as to costs. In January 1994, 10 of the actions were settled by acceptance of payments into court. On 18.1.94, orders were made by consent in those 10 actions providing among other things for the payment by Jardines of the insurance companies' costs on a standard basis to be taxed if not agreed. The remaining two actions were settled by acceptance of payments into court on 3.2.94 and orders by consent in similar terms were made.

In February 1994, Jardines made a voluntary interim payment of £1.5m. towards the insurance companies' costs. In August 1995 a draft bill of costs was produced which claimed a total amount of £3,370,753.97 inclusive of disbursements. More than £3m. of this was solicitors' profit costs. The bill was lodged for taxation on 18.9.96. In October 1996, the claim for costs in one of the actions was settled. The claim for costs in the remaining actions remain unresolved. The taxation is due to continue in February 1998 after a decision of this court on the point raised in this appeal.

The insurance companies were represented in the litigation sequentially by two firms of solicitors, Freshfields and then Barlow Lyde & Gilbert. Their agreement with Freshfields did not stipulate identifiable charging rates. Their agreement with Barlow Lyde & Gilbert did so stipulate. This was a "contentious business agreement" within Section 59 of The Solicitors' Act 1974. Master Campbell was shown the relevant parts of the agreement confidentially. We are told that it provides for Barlow Lyde & Gilbert to charge their clients at various specific hourly rates for different classes of people working on the case. Whether it should remain confidential may be a matter for future consideration.

The method stipulated by Rules of Court for assessing solicitors' costs on a taxation is to assess appropriate hourly expense rates which may then be increased by various percentage uplifts for care and conduct to reflect the difficulty and complexity of the work - see Order 62 rule 12 and Appendix 2 to Order 62 at 62/A2/4 and 62/A2/17ff. These rates are then multiplied by the time taken by each person involved. This method has been used in the bill lodged on behalf of the insurance companies. Some of the rates thus claimed including the percentage uplift are greater than the equivalent rate which Barlow Lyde & Gilbert are entitled to recover from their clients. The question which this appeal raises is whether the difference must be disallowed on taxation. It is suggested that sums in excess of £700,000 turn on this question. But the total account of Barlow Lyde & Gilbert to their clients exceeds the amount claimed on taxation.

"(1) Subject to sub-section (2), a solicitor may make an agreement in writing with his client as to his remuneration in respect of any contentious business done, or to be done, by him (in this Act referred to as a "contentious business agreement") providing that he shall be remunerated by a gross sum or by reference to an hourly rate, or by a salary, or otherwise and whether at a higher or lower rate than that which he would otherwise have been entitled to be remunerated."

(2) Subject to sub-section (3), a contentious business agreement shall not affect the amount of, or any rights or remedies for the recovery of, any costs payable by the client to, or to the client by, any person other than the solicitor, and that person may, unless he has otherwise agreed, require any such costs to be taxed according to the rules for their taxation for the time being in force.

The appeal turns, as I say, on the construction of Section 60(3) of the 1974 Act. It is said to enshrine a common law principle to which the label "the indemnity principle" has been given. The principle is simply that costs are normally to be paid in compensation for what the receiving party has or is obliged himself to pay. They are not punitive and should not enable the receiving party to make a profit. Another guiding principle of taxation is that contained in Order 62 rule 12, which provides that on a taxation of costs on the standard basis there shall be allowed a reasonable amount in respect of all costs reasonably incurred and any doubts which the Taxing Officer may have as to whether the costs were reasonably incurred or were reasonable in amount shall be resolved in favour of the paying party. Thus amounts which the receiving party is obliged to pay his own solicitors may nevertheless not be recovered on a taxation on a standard basis if they were not reasonably incurred or not reasonable in amount.

Jardines contend that the indemnity principle as it appears in Section 60(3) of the 1974 Act is to be applied, where appropriate, on an item by item basis. The insurance companies contend that it only provides a global cap, so that the receiving party may recover on taxation uplifted hourly expense rates which are judged to be reasonable even if they exceed the rates which Barlow Lyde & Gilbert are entitled to receive from their client, provided that the total amount allowed on the taxation does not exceed the total amount which Barlow Lyde & Gilbert are entitled to recover from their client.

In Gundry v. Sainsbury [1910] 1K.B.645, a solicitor acted for a client in a county court action having agreed verbally with the client that the client should not pay the solicitor any costs. The client recovered damages in the action. But he recovered no costs. This was on the grounds that under the proviso to Section 5 of The Attorneys and Solicitors Act 1870, the client was not entitled to recover from the defendant more costs than were payable by him to his solicitor under the agreement. The proviso to Section 5 of the 1870 Act was in much the same terms as Section 60(3) of the 1974 Act but significantly did not include the words "in respect of those costs" which are now in section 60(3) of the 1974 Act. The Court of Appeal held that, apart from the 1870 Act, the plaintiff could not recover from the defendant more costs than he was liable to pay his solicitor, since party and party costs were awarded as an indemnity only. They also held on the construction of the 1870 Act that the county court judge had made the correct costs order. Cozens-Hardy M.R. said at page 649:

"I think that the common law point made by counsel for the respondent, which has not been dealt with by counsel for the appellant in his reply is a good point and is sufficient to dispose of this case. What are party and party costs? They are not a complete indemnity, but they are only given in the character of an indemnity. I cannot do better than read the opinion expressed of Bramwell B. in Harold v. Smith 5 H. & N. 381 at 385: "Costs as between party and party are given by the law as an indemnity to the person entitled to them; they are not imposed as a punishment on the party who pays them, nor given as a bonus to the party who receives them. Therefore, if the extent of the damnification can be found out the extent to which costs ought to be allowed is also ascertained." Now in the face of the evidence which the learned county court judge has accepted, and which he was perfectly justified in accepting, if he had ordered the defendant to pay these costs he could have been giving a bonus to the party receiving them. That is contrary to justice and to common sense and also to the law as laid down in Harold v. Smith . That is a decision which has remained undisturbed for 50 years and I am not prepared to depart from it. On that ground alone I think that this appeal must fail."

"The principle that party and party costs are only an indemnity - an imperfect indemnity it is true, but never more than an indemnity - is so deeply rooted in our law that the proviso is put in for the purpose of preventing the earlier part of s.5 from ever giving rise to a case in which costs could be made a profit. By this proviso it is enacted that the client who has entered into such an agreement shall not recover from the person liable to pay to him the costs a greater sum than he himself is under the agreement liable to pay to the solicitor. This proviso is only declaratory in a special instance of what is the general law as to awarding costs throughout our legal system."

In Re Eastwood [1975] Ch. 12, the costs of the Attorney General were ordered to be taxed. An item was included in the bill of costs to cover the care and conduct of the matter which was dealt with throughout by a senior solicitor in the Treasury Solicitor's office. The taxing master reduced the amount by disallowing "profit costs" on the grounds that the Crown was not represented by an independent solicitor but by the Treasury Solicitor and his department, and that a different method of assessment should be applied to a bill of costs of a party represented by a salaried solicitor. The taxing master's decision was upheld by Brightman J. sitting with assessors on review. The Court of Appeal allowed an appeal holding that the appropriate method of taxation of a bill of costs where a party was represented by a salaried solicitor was to treat it as though it were the bill of an independent solicitor, assessing the reasonable and fair amount of a discretionary item having regard to all the circumstances of the case and to the principle that the taxed costs should not be more than an indemnity to the party against the expense he had incurred in the litigation. There might be special cases where costs awarded on the conventional basis would exceed the principle of indemnity, but it would be wrong and impracticable in cases of a salaried solicitor to require a break down of the expenses of a department in order to insure that the principle was not infringed. Thus the case in essence concerned the means whereby the court could be satisfied that the indemnity principle was not infringed. It did not address questions central to the present appeal. But it was a case where the court was in fact considering an individual item in a larger bill.

In Universal Thermosensor v. Hibben (unreported 6.3.92), there was a costs order in favour of the plaintiffs down to the end of September 1990 and a costs order in favour of the defendants from 1.10.90 onwards for two-thirds of their costs. The defendants entered into a contentious business agreement with solicitors who acted for them from approximately March 1991 that the solicitor would not charge more than £80,000 plus VAT and disbursements. Sir Donald Nicholls V.-C. held that the £80,000 was a ceiling to be imposed at the end of taxation and not a ceiling which the bill lodged for taxation might not exceed. The starting point for taxation was such sum as the solicitors could justify on taxation regardless of the contentious business agreement. The £80,000 plus disbursements operated as a cap once the process of taxation had taken place. Sir Donald Nicholls described the plaintiff's approach as contrived and artificial. He did not address any question arising from the fact that the defendants were to recover only two-thirds of their costs. He also said at p. 8 of the transcript:

"The second question which arises regarding this costs arrangement concerns how this formula works if a disbursement which is allowable as between the solicitors and their own clients is disallowed on the inter partes taxation. I confess that my first impression was that the amount which the defendants could recover from the plaintiffs in respect of Herbert Smith's profit costs was £80,000 and in respect of disbursements was whatever disbursements were allowed on the party and party taxation, and that was all there was to it. On reflection, however, I am quite satisfied that what this arrangement did and does is to impose a cap on the total amount of the bill payable by the defendants to Herbert Smith. So long as the total amount sought to be recovered by the defendants from the plaintiffs does not exceed that sum which, having regard to this agreement, Herbert Smith can recover from their clients, then the cap does not preclude recovery."

On the face of it, this decision favours the insurance companies' submission. Mr Kentridge Q.C., who appeared before us for Jardines, submitted that this was a cryptic and "throw away" passage in an ex tempore judgment which did not refer explicitly to the indemnity principle nor to section 60(3) of the 1974 Act nor discuss its terms. He submitted that the decision relating to the £80,000 and the disbursements was wrong and should be overruled. If the disbursements had been disallowed, to include them nevertheless in the cap would be to allow the client to receive a bonus over that which he was liable to pay his solicitor for costs which were recoverable.

Jardines contended before Master Campbell that it would not be difficult in practice to apply a cap item by item. Master Campbell considered this question by reference to detailed examples and concluded that Jardines were incorrect. He considered that it would not be a simple arithmetical exercise for the taxing master, at the end of a taxation, merely to reduce the hourly rates to the level of the rates agreed between the solicitor and their client. It would on the contrary be a painstaking task. I am persuaded that examples could arise where complicated and painstaking reductions would be required. I do not, however, consider that difficulties of this kind are persuasive to any particular conclusion. Taxation of costs can be a laborious procedure in any event, and can be expensive in taxing fees.

Master Campbell noted that there was nothing in Section 60(3) of the 1974 Act which states that the receiving party cannot recover costs calculated by reference to hourly rates which exceed the hourly rates payable to them by their solicitors. He noted that this subsection had not been amended when Section 59(1) was amended by the Courts and Legal Services Act 1990 to include as a contentious business agreement an agreement providing that the solicitor shall be remunerated by reference to an hourly rate. He then said:

"I accept that Hibben is authority for the global approach and that there is no restriction on the amount the receiving party can claim by reference to hourly rates or globally provided the figure recoverable on taxation does not exceed the sum payable to his Solicitor. In the absence of any express reference to hourly rates in Section 60(3) following the amendment to the Act in 1990, the word "amount" means the global sum payable by the client to his own solicitor, no distinction being drawn between the hourly rates claimed inter partes and those charged as between solicitor and his own client. In short, provided he is liable to pay his own solicitor as much as he recovers from his opponent on taxation the client does not make a "bonus" or "profit", even if the hourly expense rates including uplift allowed by the Taxing Master are higher than the rates actually charged by his own Solicitor."

Master Ellis had decided the same point the other way in a taxation in Denny v. Gooda Walker (unreported). Bearing in mind that section 60(3) of the 1974 Act did no more than express the common law, Master Ellis could find nothing in section 60 to enable the receiving party to recover costs calculated by reference to hourly rates which exceeded the agreed hourly rates payable by them to their own solicitors. He said at p. 39 of his decision:

District Judge Brown in a Chancery case in the Bristol District Registry held on 21.1.97 that "the proper application of the indemnity principle demands that one looks at the detail of the work done rather than simply at the total. In particular, the hourly rate inter partes should never exceed that charged to the client." He said that "it would be an infringement of the indemnity principle to look at the overall total bill to the client including disbursements and VAT because such a comparison would distort what had been taxed off by me on taxation on the basis that those costs had not been "reasonably incurred" and therefore were irrecoverable on an indemnity. Individual items must be looked at, e.g. counsel's fee."

"In this context, I think use of the words "the amount" are apt to refer to a total. This is obviously so in the case of remuneration by gross sum or salary. I also think it is so in the case of remuneration "by reference to an hourly rate". What is being described is the total remuneration payable by reference to hourly rates but not the hourly rates themselves. ...

The subsection makes it clear that the comparison has to be made between costs payable under an order and the amount payable in respect of those costs under the CBA. So, section 60(3) does not in my judgment impose a simple overall cap. It imposes a cap in respect of the costs to which the order relates. Where a party is awarded all his costs of the action the comparison will be simple. If the Taxing Officer is only concerned with a discrete interlocutory order, or issues costs, it will be necessary to isolate the costs payable under the CBA in respect of those matters in order to make the comparison. In the instant case where Jardines and the third defendants have obtained discrete costs orders in their favour, it seems to me that the amounts payable by the plaintiffs under the CBA in respect of these matters fall to be deducted from the total paid under the CBA in order to make a proper comparison, since such costs simply do not come into the reckoning under Section 60(3)."

By their Respondent's Notice, the insurance companies seek to challenge this last part of Tuckey J's decision. They seek to persuade us that the total amount payable by the receiving party to his solicitor under the contentious business agreement is the only cap on the costs recoverable from the paying party even in a case where there were discrete costs orders made in favour of the paying party. They submit that the sub-section only provides that the client cannot recover more than the amount payable under the agreement as the costs of the relevant proceedings.

Each of the parties' cases has its problems. The problem with the insurance companies' case was that identified by Tuckey J. If costs orders have been made disallowing parts of the receiving party's costs or if they themselves have been ordered to pay some of the paying party's costs, they nevertheless submit that the costs which they themselves have to pay their solicitors for those parts of the litigation are available to contribute to the cap. That seems wrong and Tuckey J. held otherwise. You would at least expect that the cap should be limited to that part of what they were obliged under the contentious business agreement to pay their own solicitors which was referable to the part or parts of the litigation for which the paying party was obliged to pay them their costs. If this were not so, the receiving party would either make a profit on the costs to which they were entitled or would be recovering part of the costs to which they were not entitled. That would offend the indemnity principle.

A difficulty with Jardine's case was identified by both Master Campbell and Tuckey J. If the cap is not applied once only, but to individual items, the paying party could get what might appear to be a windfall where some costs are reduced below an individual cap because, for instance, they are held to be unreasonable, but other costs are capped at the agreed rate although, but for the cap, they would have been allowed in a greater amount. Examples may be given of agreements between a client and his solicitor which could readily produce such a result, as for instance if a single hourly rate was agreed for partners which was higher than that which would be allowed for attendance at interlocutory hearings but lower than that which would otherwise be allowed for preparation.

In the end, this is a very short point of construction. It is true that Hibben generally favours a global approach, but the agreement in that case was for a single gross sum plus disbursements and the specific question which arises in this appeal did not arise in that case. Sir Donald Nicholls' observations that disallowed disbursements might nevertheless contribute to the cap does however by analogy support the global approach in this appeal and is inconsistent with Jardine's case. In my view therefore, this court cannot avoid considering whether Sir Donald Nicholls was correct in Hibben on the subject of disbursements and we should not avoid considering how a decision in this case, where there is an agreement for hourly rates, would affect a case such as Hibben where there was an agreement for a single gross rate plus disbursements.

Mr Lockey on behalf of the insurance companies submits that "amount" in s. 60(2) and (3) is singular. The process of taxation results in a singular result - a certificate under Order 62 rule 22. The certificate is necessary to enforce the costs order. He submits that the starting point for comparison is the certificate, which you examine for the purpose of applying the indemnity principle. The comparison then is with the total amount payable to the receiving party's solicitor under the contentious business agreement. This is consistent with the language of the subsection and with Gundry v. Sainsbury . Mr Lockey submits that Hibben was correctly decided. It is also just, because the receiving party does not recover more than an objectively reasonable amount for the work done which is the product of the taxation before the contentious business agreement is considered. The receiving party does not receive a profit. Mr Lockey invited us to adopt what he referred to as a benevolent attitude to the construction of the words of Section 60(3), recognising, I think, that otherwise they present him with a problem. He stressed that taxation is an inexact science.

Mr Lockey accepted that, if there were a contentious business agreement for a solicitor to conduct several actions but the client obtained an order for costs in one action only, a breakdown of the costs payable under the agreement would have to be made. He did not accept that a similar process would be necessary if the receiving part obtained a costs order for only part of one action, e.g. if a defendant recovered the costs of Order 14 proceedings but otherwise recovered no costs in an action fought to judgment.

Mr Kentridge submits that the words of section 60(3) of the 1974 require a comparison between the costs which are the subject of the order and the comparable costs payable under the contentious business agreement - otherwise irrecoverable costs would be recovered by means of the excess on the recoverable items. He submits by reference to Order 62 that the process of taxation is such that costs are not taxed and fixed on a global basis. They are looked at item by item. He submitted, as I have said, that Hibben was wrongly decided. Not only would the client be able to recover sums by reference to a cap which included disbursements which had been disallowed. The client would also have the benefit of a cap of the full total of his costs when the order in Hibben only entitled him to recover two-thirds of his taxed costs. Mr Kentridge submits that in this case the taxing master must look at the individual rates in the agreement. In a case such as Hibben, where there is an agreement for a gross sum, the taxing master would have to make an apportionment of the gross sum to reach the part of it referable to the allowable costs under the order.

In my judgment, Tuckey J. was right to conclude that costs referable to parts of the litigation for which the receiving party did not have the benefit of an order for costs have to be taken out of account in determining the application of section 60(3). That in my view is the natural and necessary construction of the words "under an order for the payment of any costs" and "in respect of those costs". "Those costs" refers back to the costs payable under the order. If a contentious business agreement encompassed more than one action, it would obviously be necessary to exclude costs payable by the client to his solicitor for any action in which he had recovered no costs from another party. The same in my view applies where the order for costs is for part only - it may be a small part - of the total costs of a single action. A comparison is to be made between the costs to which the order relates and the amount payable by the receiving party to his solicitor "in respect of those costs". So much is, I think, clear. Mr Lockey's construction does not accord with what I consider to be the plain meaning of the words of the subsection. His construction also means that there could in many instances be a pointless comparison between, for example, costs recoverable under an order for a small part of the action and costs payable to the solicitor for the entire action. The meaning for which Mr Lockey contends would in my view have required this different wording of the subsection:

At this point, however, I respectfully disagree with Tuckey J. Once it is seen that the comparison is to be made between the costs to which the order relates and the amount payable by the receiving party to his solicitor "in respect of those costs", it must follow that costs which are irrecoverable have to be left out of both sides of the comparison. "Those costs" are the costs recoverable under the order after taxation but before consideration of the cap. I respectfully disagree here with Sir Donald Nicholls' decision in Hibben in relation to disbursements in that case. It also means that the comparison is not global and may require in appropriate circumstances an item by item comparison. In my view, the observation of District Judge Brown in the Bristol case which I have quoted are persuasive. The exact nature of the comparison will of course depend on the nature of the contentious business agreement. If the agreement itself is not itemised but for a gross sum and if the costs' order relates to the entire action with no items at all disallowed, there would be single comparison. This will perhaps rarely be the case, since in most litigation there will be items of work which are properly the subject of a charge to the client but which would be disallowed on taxation. If the agreement is itemised, there can be an itemised comparison and in my view there should be. Here again I consider that Mr Kentridge is correct in his submission that Hibben was wrongly decided. If the agreement is for a gross sum, there will in appropriate circumstances have to be an apportionment of that sum.

There is no proper distinction to be made between costs disallowed by an order made in the proceedings and costs disallowed on taxation. A party will not be entitled to recover costs which are disallowed on taxation, so that "any costs" and "those costs" must be taken to refer to costs which are allowable on taxation before consideration of the limitation imposed by section 60(3). This construction of section 60(3) does not, in my view, lead to the conclusion that paying parties may receive a windfall. The paying party receives nothing at all. It simply means that receiving parties will receive either what is reasonable or the relevant amount which they have agreed to pay their own solicitors, whichever is the less. If it were otherwise, they themselves would be receiving a windfall at least in the sense that they would be recovering costs which for one reason or another had been disallowed. Mr Lockey's oft repeated submission that his clients were not seeking to recover more than an objectively reasonable amount for the work done is only correct if you leave out of account in judging what is an objectively reasonable amount what the receiving party is obliged to pay to their own solicitors. The subsection requires this to be taken into account. It is not generally speaking reasonable objectively that a party should receive more than he is obliged to pay his own solicitor for the work for which he is recovering costs from another party.

It is suggested that this construction would discourage sensible, simple and efficient agreements between solicitors and their clients. I do not find this persuasive. On the contrary, I am inclined to think that market forces will continue to encourage economic agreements. Agreements to pay hourly rates have a clear advantage of definition, which perceptive clients are unlikely to discard in favour of an undefined possibility that they might recover rather more on taxation, and which solicitors are unlikely to discard in favour of uncertainty which could lead to disagreement with their client. A client's own solicitors' account will always have to be paid. Recovery of costs from another party is never assured, let alone in any amount which can be assessed in advance. There is no problem in a solicitor explaining to his client that agreed hourly rates will be the highest rates which may be recoverable on taxation. Clients should scarcely expect a greater recovery and there is always the likelihood that costs will be taxed at a lesser amount than the client has to pay his solicitor. That is the nature of taxation of costs.

I agree that this appeal should be allowed and that the respondents' notice should be dismissed for the reasons set out in the judgment of May L.J. I only add a very short judgment of my own because of the increasing frequency and importance of contentious business agreements and because such agreements have given rise to some differences of judicial opinion.

(3) The practice whereby on a party and party taxation the profit costs in a bill of costs are taxed by reference to chargeable items. The Taxing Master's certificate sets out a final amount but this amount represents the aggregate of the sums allowed in respect of the items of costs which have been found to have been reasonably incurred: see R.S.C. Order 62 App.2 Part II.

It is clear from Section 60(2) that a contentious business agreement does not affect the right of any party against whom an order for costs has been made to require those costs to be taxed according to the current taxation rules. Such a taxation will identify the items of costs and the amount in respect of each item which is recoverable against the paying party. One then looks at Section 60(3).

The words "any costs" in the phrase "an order for the payment of any costs" in Section 60(3) appear to me in the context to relate, not to costs at large or to the costs payable by the receiving party to his own solicitor, but to the costs and items of costs to be identified on the party and party taxation as the proper and recoverable costs. The words "those costs" clearly refer to the same costs.

England and Wales Court of Appeal (Civil Division) Decisions