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A Revolution By Degrees: From Costs to Financing and the End of the Indemnity
Principle.
Professor John Peysner
Centre for Legal Research, Nottingham Law School
Nottingham Trent University
“Mark Twain ...., when tweaked by a lawyer on the after-dinner speaking
circuit at the end of the last century, was able to retort that he was interested
to hear Joe Hinkenlubber III addressing the audience with his hands in his
pockets because that was the first time he had seen a lawyer with his hands
in his own pockets” Edward Garnier MP (1999)
© Copyright 2001 Professor John Peynser
First Published in Web Journal of Current Legal Issues in association with
Blackstone Press Ltd.
Summary
This article examines a reform programme which has produced, in a not altogether
predictable way, a revolutionary shift in the economic base of that substantial
proportion of the legal profession that earns its living from litigation
and resolving disputes. It examines a change in which the lawyer-client
relationship, which was predicated on professional and objective advice,
paid for by clients, is increasingly being transformed into an investment
model where lawyers put their own money and time into their clients’ cases,
with profound implications for the organisation, ethics and future of the
profession.
In economic terms, most litigation lawyers are changing from being a service
profession, charging clients for that service (part of which was to recover
costs from the loser and account for these to the
client
[1]as a discount against
fees charged to the client) to being venture capitalists investing in a chose
in action offered by clients who do not expect to pay legal fees
in any
event.
[2] These new lawyers
live on recoverable fees: they eat what they kill and recovery of costs takes
its place in a matrix of considerations about how to finance litigation.
These changes are having dramatic effects on the economic and professional
organisation of the legal profession and its ethics and standards. Whilst
being aware of the overall social and economic context (Peysner, 2001) this
article will concentrate on the narrower issue of the historical and policy
development behind these changes and the way in which the indemnity principle
- central to the English Rule on costs recovery - is breathing its last
gasp.
Contents
Introduction
Why is the subject of costs and the financing of litigation in England and
Wales of so little interest to civil proceduralists? Scholarly articles on
general cost issues are extraordinarily rare (Goodhart, 1929). Part of the
reason is that the basic costs and financing matrix – the
‘English’ rule of fee recovery and its necessary concomitants – has
been essentially fixed for over a hundred years. Thus, the examination of
costs has largely been restricted to devotees of its more arithmetic and
arcane aspects. Solicitors, and to a greater extent, barristers and, to an
even greater extent, judges, have been surprisingly ignorant of the underlying
financial basis of civil litigation. Scholars, with some notable
exceptions
[3], have regarded it
as a no-go zone. Not any more: costs are no longer boring. Changes in the
economic and procedural background to dispute resolution have re-engineered
the dry study of costs into the vital science of financing litigation and
the study of the way in which policy and procedural objectives can be mirrored
by the money. In this change the indemnity principle has been the lightning
rod.
Back to Basics
In 1929, Arthur Goodhart delineated for an American audience the basic principles
of costs. He described the rising tide of cases on the assessment of costs
and how the English rule began to develop (see Walters and Peysner, 1999)
in the early Middle Ages. By the time the Supreme Court was created in the
1870’s, the cost rule was recognisably in its modern form:
“Rule 1. Subject to the provisions of the Act, the costs of and incidental
to all proceedings in the High Court shall be in the discretion of the court...;
Provided, that where any action or issue is tried by a
jury
[4], the costs shall follow
the event, unless upon application made at the trial for good cause shown,
the Judge before whom such action or issue is tried, or the Court, shall
otherwise
order”
[5].
What is surprising about Goodhart’s article is that amongst the wealth of
detail presented about the way in which costs are recovered (the taxation
process, now called assessment) and the limits of cost recovery (the discretion
retained by the court), it entirely ignores the underlying principle behind
the English rule – the indemnity principle.
Top | Contents |
Bibliography
The Indemnity Principle[6]
The indemnity principle is normally simply described as a rule that says:
“if you lose, you will be responsible not merely for your own legal costs
but you must pay the other side’s too. This is the so-called costs indemnity
rule” (see Andrews, 1994). In the context of what follows, the principle
is split into two aspects, the first of which has been relatively
unproblematical, the second the source of great difficulty.
The Indemnity Rule and Costs Recovery
This rule, based on statute, section 51(1) of the Supreme Court Act 1981,
states that ‘the costs of and incidental to all proceedings in the court
of Appeal (Civil Division), the High Court and any County Court ‘shall be
in the discretion of the court’ and that the court shall have ‘full power
to determine by whom and to what extent costs are to be paid’ (Section 51(3)).
This general discretion is particularly fettered by Part 44.3 of the Civil
Procedural Rules which confirms the previous practice that costs should follow
the event; the loser pays the winner; the English rule.
As Scott describes it (Scott, 1995) “...the ‘loser’ in legal proceedings
is obliged to indemnify the ‘winner’ in relation to the costs occurred (sic)
by the winner in, as the case may be, bringing or defending proceedings.
It is for this reason that the rule may be described as the ‘indemnity rule
or principle’.
[7] The principle
justification for the indemnity rule is that it makes the winning party
whole.
[8]
The Indemnity Rule in Financing Litigation
The second, and considerably more difficult, aspect of the indemnity rule
is its influence on the funding of litigation. To understand this aspect
it is necessary to revisit the trite observation that lawyers, under their
professional cloak, have immediate and pressing financial objectives. Whilst
judges are paid by the state as a public service and not yet wholly or mainly
by court fees or renting the court for a
trial
[9] and barristers are paid
by solicitors
[10], solicitors
are paid by clients.
Whilst individuals and corporate entities can litigate in
person
[11], most litigation is
conducted by solicitors on behalf of clients on terms of engagement reduced
to a contract and policed by rules of practice. This has two important
implications. Firstly, inability to pay one’s solicitor before, during or
at the conclusion of the case (as appropriate) will mean that the solicitor
will decline the instructions. Thus, payment, or promise of payment, to the
solicitor becomes part of the price of entering into the litigation
battle.
[12] Secondly, in what,
for this discussion, is now the most important aspect of the indemnity principle,
the costs cannot be recovered under the normal ‘loser pays’ principle
unless there was an initial obligation to pay the client’s own
solicitor
[13]: ‘Because of the
‘indemnity’ principle the successful party is not entitled to recover more
inter partes than he is liable to pay his own solicitor - his right is to
be indemnified wholly or partly against the costs actually incurred in bringing
or defending the proceedings and no more’ (Greenslade, 1999). Without such
an obligation there is no indemnity to be
satisfied.
[14] This is then a
mirror image of the first aspect of the rule, ‘the loser pays’ principle.
By the nineteenth century this principle was well developed.
Harold
v
Smith [1860] 5 H & N 381 (English Reports 157 Exchequer at p.
1231) established that “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...the
principle is this - find out the damnification and then you find out the
costs that should be
allowed”.
[15]
This case was followed in what is now the leading case of
Gundry v
Sainsbury [1910] 1 KB 645. The facts of the case are instructive and
may well illustrate a dilemma of contemporary relevance. The plaintiff was
a labourer who was bitten by a dog. He was successful at trial and costs
would normally follow the event. However, during cross examination he asserted
that he could not afford to pay costs and accordingly his solicitor had agreed
to act for no fee. It follows that there appeared to be no damnification
to be indemnified against and no costs could be recovered. An application
by the solicitor to give oral evidence about the terms of the engagement
(which had not been reduced into writing) was refused on the basis that under
section 4 of the Attorneys and Solicitors Act 1870 such terms had to be written
to be enforceable. The effect of this technical approach was that it is not
possible to tell from the law report what the true circumstances were. The
client may have simply misunderstood the basis of the arrangement. Alternatively,
the case may be an example of pro bono instructions with the lawyer acting
for charitable motives
[16]: never
intending to charge the client and indifferent to costs recovery. (This begs
the question as to who paid the court fee and any other disbursements.) However,
it may well be that, bearing in mind the lowly economic status of the plaintiff
and the likely non-commercial practice of the solicitor, the defendant made
the assumption that this was a speculative arrangement - no win no fee -
and this explains the thrust of the cross examination. (As discussed below
even if the solicitor was able to explain such an arrangement to the court
it would not have assisted as the arrangement would probably have been unlawful).
The indemnity rule is wide enough to cover the situation where a solicitor,
absent an agreement not to charge a client, appreciates that for practical
financial reasons there is no prospect of the solicitor ever being paid by
the client.
[17]
Top | Contents |
Bibliography
The Indemnity Principle Comes Under Attack
The flowering of the indemnity principle was completely in sympathy with
a nineteenth century liberal economics which contemplated equal economic
actors who freely contract and then resolve disputes by deploying lawyers
for whom they pay. In reality, as the above analysis of
Gundry suggests,
there were always poor clients looking for lawyers who would represent them
without charge or at reduced
fees.
[18] The increasing
democratisation and complexity of society, together with the growth of rights,
added to the ranks of individuals with claims to bring. For the purposes
of the argument in this article the influence of the demand side is entirely
matched by the supply side: a growing number of lawyers keen to earn their
living by acting for the enfranchised population. This influences the central
theme of the Janus-like nature of litigation costs: they are designed to
offer a disincentive to launching
litigation
[19] but also offer
a financing system of a potential source of funds for the victorious party
to use to pay his lawyer.
On this economic analysis, solicitors need clients as much as clients need
solicitors. Thus, solicitors will seek out and act for clients if they can
and if they are paid so to do. Solicitors are not, in principle, concerned
about the source of funding as long as it is adequate and acceptably secure.
All depends on how risk averse the solicitor is. Thus, a solicitor might
act for a company on a fee-paying basis but harbouring some doubts that the
company will pay the bill when it is presented. (This could be regarded as
an investment if the assistance secures the long-term survival of a grateful
client or some of the bill is paid). But what if the solicitor knows that,
for all practical reasons, the client will never pay his bill?
Such clients can be generated by the market (the assertive citizen wanting
to defend rights), economic development, collective action or by statutory
intervention. This century has seen a series of inroads into the indemnity
principle as the classical model of the paying client comes under attack.
The Employed Lawyer
What about the lawyer who works for and is employed by the organisation that
is litigating: the in-house lawyer? In
Re Eastwood (deceased) Lloyds
Bank Ltd v
Eastwood and others [1975] CL 112 an opportunity
arose to address this issue when considering what, if anything, could be
recovered by a successful party in respect of the costs of an in-house lawyer.
In principle the lawyer was employed in any event and irrespective of his
deployment in the particular case. The Taxing Master took the view that it
would be wrong to charge the losing party for any element above the basic
overheads as this would represent profit appropriate to solicitors in private
practice running businesses but not to the in-house lawyer. It might have
been possible to extend this argument further by stating that as the in-house
lawyer was deployed anyway it was theoretically difficult to demonstrate
that there was any cost to be indemnified at all. The Court of Appeal sidestepped
this argument. It stated that the indemnity principle was effective in this
situation but should, in effect, be modified by an approach that pointed
out the difficulties of disentangling the overhead and ‘profit’ element of
an in-house legal department and making the presumption that, in the absence
of special circumstances, payment of costs assessed by the court as reasonable
would not infringe the indemnity
principle.
[20] It is tempting
to conclude that, henceforth, for good practical reasons the indemnity principle
has no real meaning in this situation.
The Organisation Lawyer
The assertive citizen might assert his rights most efficiently by banding
together with others in a variety of organisations including clubs and trade
unions. What if a claim arose for that member which came within the aims
and objectives of the organisation? A member of a motoring club or a trade
union might wish to prosecute a claim utilising the services of a lawyer
retained by the organisation. Who instructs the lawyer so as to establish
the indemnity? Again, the courts sidestepped this problem in
Adams
v
London Improved Motor Coach Builders Ltd [1920] All ER 340.
In an action for wrongful dismissal the successful litigant was a member
of a trade union which had referred the member to the firm of solicitors
whose bill of costs was at issue. The losing defendant argued that the solicitors
would look to the trade union rather than the client for their
fees
[21] but as the union was
not a party to the litigation it could not recover. Bankes LJ at page 343
stated: “When once it was established that the solicitors were acting for
the plaintiff with knowledge and assent, it seems to me that he becomes liable
to the solicitors for costs, and that liability would not be excluded merely
because the Union also undertook to pay costs. It is necessary to go a step
further and prove that there was a bargain, either between the Union and
the solicitors, or between the plaintiff and the solicitors, that under no
circumstances was the plaintiff to be liable for costs”.
Adams was
followed in
R v
Miller and Glennie [1983] 3 All ER 186. Thus,
the fiction is that the client instructs the lawyer and establishes the indemnity
but standing behind him is a supporter who will intervene to cover any shortfall.
In reality, the member would never expect to pay but, absent any indiscretion
on this point being reduced to writing, the fiction, again for good pragmatic
reasons, has survived.
The Legal Aid Lawyer
Until recently much litigation for impecunious clients was conducted under
civil legal aid. The state was prepared to go as far as supporting the legally
aided client by securing the services of a solicitor but did not require
the client to pay, and, indeed, debarred the client from paying the solicitor
directly
[22]. A strict operation
of the indemnity principle would prevent the client from recovering costs,
and it would be hard to stretch the trade union fiction to cover such situations,
but the Legal Aid Acts gave statutory power to the Legal Aid Fund to recover
costs. This concession was not balanced – the losing legally aided client
did not normally have to pay the winner’s
costs
[23]. A further amendment
to the indemnity rule was that the legally aided lawyer’s charges to the
Legal Aid Fund were statutorily capped at a lower level than costs recoverable
from the non-legally aided losing party.
The Indemnity Principle Retreats
This somewhat messy compromise - preserving the indemnity principle by a
range of fictions established in case law and statute - suffered from two
major difficulties as government policy in the 1980s moved towards market
solutions. Firstly, how could demand-led legal aid be kept under control
as the population became more assertive and emphasis switched from collective
to individual rights in employment, health and the public arena? Secondly,
how could lawyers be exposed to increased competition in a market setting?
These preoccupations have remained remarkably consistent as administrations
have changed so that it is often hard to tell from policy documents which
Lord Chancellor is in command.
Top | Contents |
Bibliography
Conditional Fees
The Civil Justice Review (1988), The Marre Report (1988), and the Royal
Commission on Legal Services (1979) all considered whether a form of contingency
fees might increase competition and widen access to lawyers. The most striking
model available remains the USA which offers a contingency fee arrangement
whereby the client pays no fee if the case is lost (and applies little or
no contribution to the winner’s costs) and the damages are shared with the
lawyer.
This issue was discussed in detail in the consultation paper ‘Contingency
Fees’ (White Paper, 1989). The great difficulty in introducing such a scheme
was perceived to be the danger of over-rewarding the lawyer and encouraging
unnecessary litigation. This view reflected the common law pre-occupation
with the prospect of rapacious lawyers instigating actions rather than merely
being an objective and reactive service profession. The high spot of this
approach was represented by Lord Denning MR who, in
Wallersteiner
v
Moir (No 2) [1975] Q.B. 373, rejected the argument that a lawyer
could be “remunerated on the basis of a ‘contingency fee’ that is, that he
gets paid the fee if he wins, but not if he loses. Such an agreement was
illegal on the ground that it was the offence of
champerty”.
[24] Champerty’s twin
is maintenance; supporting the litigation of others. The allegations against
these twin evils (posed in similar terms in the Middle Ages as in current
concern about the “litigation crisis”) is that lawyers, if given a chance,
will stir up litigation in order to share in its fruits. This does not sit
easily with a modern approach to rights and access to justice. However, it
was felt that whilst the English rule was retained and judges, rather than
juries, determined damages awards, a modest relaxation in the rules was
appropriate.
The result of these deliberations was the Courts and Legal Services Act 1990
and the creation of a hybrid mechanism: the conditional fee. In outline this
had three elements.
-
Normal costs not to be recovered from the client if the case was lost.
-
Normal costs to be recovered from the loser if the case was won.
-
A reward – the success fee – to be recovered from the client’s
damages if the case was won. This reward was to be calculated by applying
a multiplier of normal costs and not as a split of damages, thus avoiding
the alleged worst aspects of a USA style contingency fee.
On the face of it this created a huge breach in the indemnity principle –
and inroads into the bars on maintenance and champerty: recovery of costs
from the loser was not linked to an obligation by the winner to pay costs
in any event. However, both in practice and in policy statements it was not
suggested that the conditional fee system would be a revolutionary step.
It was regarded as a useful adjunct to existing arrangements because legal
aid was to continue. Further, and as has been demonstrated in Scotland, a
speculative system solves only part of a claimant’s problem - paying for
his own lawyer - whilst leaving him vulnerable to paying the other side’s
costs.
[25] Additionally, there
was a disincentive for a litigant who had a choice between legal aid and
a conditional fee arrangement: under the former damages would, normally,
be recovered intact, under the latter they would be reduced by the lawyer’s
success fee.
The response of the Common Law: Marching Up to the Top of the Hill and Marching
Down Again
During the period following the introduction of the Access to Justice Act
1999, but before the relevant sections were brought into force by way of
regulation (Walters and Peysner, 1999) the continued survival of the indemnity
principle
[26] appeared to be
in doubt following two landmark decisions:
Thai Trading v
Taylor
[1998] QB 781 and
Bevan Ashford v
Geoff Yeandle (Contractors) Ltd
[1998] 3 WLR 172.
Thai Trading concerned a speculative agreement with
no success fee in litigation, which at that time, did not come within the
statutory scheme of conditional fee agreements. After winning the case the
claimant applied for her lawyer’s costs. The Court of Appeal followed the
zeitgeist and held, by analogy with the statute, that the evil of
champerty had lost its power to shock and the common law could reflect these
new conditions: the indemnity principle did not apply to litigation. This
was followed in an amazing display of judicial activism by Scott VC in
Bevan
Ashford. The case concerned a conditional fee type arrangement with a
barrister. The decision went further than
Thai Trading in legitimising
not only a ‘no win, no fee’ arrangement with a success fee but also one that
applied in arbitration proceedings.
This happy conjunction of common law and legislation did not last long. The
common law having advanced, it retreated in
Hughes v
Kingston-Upon-Hull
[1999] 2 All ER 49 and, in particular,
Awwad v
Geraghty
[2000] 1 All ER 608. The Court of Appeal in
Awwad found that
Thai
Trading was wrongly decided
per incuriam the House of Lords’ decision
in
Swain v
Law Society [1983] 1 All ER 598 which decided that
a solicitor cannot act on a contingency fee basis as this would be unlawful
under the solicitor’s practice rules which have statutory force and cannot
be disregarded by the court. However, the second limb of the argument in
the case is of more relevance to this article. The court made it clear that
contingency arrangements will be allowed only so far as parliament will allow:
in an area of legislative advance it is not appropriate for the courts to
be
avant garde. The implicit effect of these decisions is to strengthen
the indemnity principle in those areas not affected by
statute.
[27]
Top | Contents |
Bibliography
Conditional Fees and the Access to Justice Act: from Gradual Change to a
Big Bang
Conditional fees ticked along without creating a major change in the way
in which lawyers did their work because they operated in parallel with legal
aid. Faced with the choice between certain, if limited, fees through legal
aid and the greater but uncertain reward of conditional fees with a success
fee, lawyers, the paradigm of a conservative profession, largely stayed with
what they knew. This left the Government in a policy dilemma as it was determined
to cap and limit legal aid, first of all for personal injury cases which
were seen to be the most appropriate for conditional fees as the assessment
of risk was the simplest in these cases. This left the difficulty of ensuring
that claimants did not lose the bulk of their damages in costs, insurance
premiums and the success fee. The answer, promoted by groups representing
personal injury lawyers and accident victims, was to allow both premium and
success fee to be recovered from the loser as additional costs. The regime
then introduced by the Access to Justice Act 1999 presented a revolution
in costs and funding creating a comprehensive breach in the indemnity principle
and a battering down of both maintenance and champerty. The new arrangements
have five elements.
-
Conditional fees are available in virtually all
cases[28]with or without success
fees. Thus, purely speculative or discounted hourly rate arrangements in
the commercial field, which offer lawyers their normal fee if they win but
less or nothing at all if they lose, are
lawful.[29]
-
Legal expenses insurance is widely available. More importantly, ‘after the
event’ insurance (‘AEI’) can be purchased after the cause of action emerges
to protect against the insurable event of losing a case based on that cause
of action[30]. There are myriad
products at varying costs and offering different cover but broadly they ensure
that for payment of a premium the risk of paying the loser’s costs is removed
or capped[31]
[32]
-
The success fee is recoverable from the loser, as is the premium. Arrangements
are in place to allow the loser to challenge the success fee but not, in
practice, the premium, which is regarded as a market-priced disbursement
-
The proceeds of an AEI policy can collateralise a bank loan to cover
disbursements and stage payments to the lawyer.
-
Counsel, but not experts, may act on conditional fee agreements
These changes were matched by the effective abolition of legal aid for personal
injury cases and severe limits on other types of claims. For the vast majority
of individuals the conditional fee now represents their first port of call
when instructing a lawyer.
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Bibliography
Can and Should the Indemnity Principle Survive?
It might seem that the ship of litigation financing has now reached a safe
haven and no more reforms are required. In fact, the conditional fee scheme
is appallingly complex and in this author’s view could be modified by contingency
fee arrangements along US lines (see Peysner, 2001). In the meantime the
vexed question of the indemnity principle remains across the whole field
of litigation costs.
Section 31 of the Access to Justice Act allows for rules of court to limit
or abolish the common law
principle.
[33] At the date of
writing no comprehensive changes have been made to the rule nor any proposal
made by the Rules Committee or Government to abolish it. Does this matter?
After all, litigation has bifurcated into a growing stream of conditional
fee cases where clients do not pay, or pay less than the normal rate, if
they lose, under the statutory scheme, and ‘ordinary’ litigation where clients
agree to pay their own lawyers’ costs, pray to win and, further, pray that
if they win they can recover a substantial part of their costs. Regrettably,
the survival of the indemnity principle creates three areas of acute difficulty
- the successful conditional fee client, the block conditional fee client
and the prospect of fixed fees - and in these situations, as well as in the
general nature of the relationship between client and lawyer, the indemnity
principle exists merely as an irritant: a beached whale after the tide has
rolled out.
i) The problem of winners
Does the indemnity principle continue in a conditional fee agreement? One
argument is that the indemnity principle has no place in a conditional fee
agreement, which is a creature of statute. This works well if the client
loses but what if the client wins but does not recover all the
costs?
[34] Conventionally, the
client would then have to pay the difference to the solicitor under the indemnity
principle (although many solicitors did not collect because it was bad
marketing). Now the situation is more complicated.
-
The unrecoverable success fee can be enforced against a client but only following
a court order. The client can challenge enforcement using the same, presumably
successful, arguments that the loser used.
-
Are recoverable normal fees recoverable from the client? Presumably, if there
is a contract (terms of engagement) between client and lawyer as the practice
rules require, they are. What about an agreement between lawyer and client
that, in the event of a win, un-recovered cost will not be charged? The
importance of this is that clients want, and many law firms wish to provide,
a genuine no win, no fee arrangement in any event. Explaining to a
client that there is a theoretical possibility of charging them un-recovered
costs simply introduces an off-putting and incomprehensible element into
what should be a simple and straightforward exercise. The difficulty is that
the straightforward approach of ‘no win, no fee’ may be good marketing but
is a breach of the indemnity principle and, if spotted by the loser, on
assessment (when the privilege against disclosure of terms of engagement
is waived[35]) could mean that
the successful lawyer fails to recover any costs. This becomes a double
blind – the lawyer cannot recover from either client or opponent –
and represents a risk that could damage the business strategy of firms wishing
to enter into this type of work and, in due course, access to justice for
individuals.
ii) The Block Conditional Fee Client
Trade unions, motoring organisations and such like have continued to expand
their legal services to members despite occasional sniping at the underlying
basis of the arrangement between the member and the
lawyer.
[36] In a post-legal aid
world such arrangements have become central to government policy on access
to justice. The result was the introduction of the block collective fee
arrangements that allow individual members to be referred to solicitors who
will act on a conditional fee basis without the elaborate contractual
arrangements and incomprehensible explanations necessary before a valid agreement
can be entered into between lawyer and client. However, whilst the indemnity
principle remains it bedevils this arrangement just as much as non-collective
engagements.
iii) The Prospect For Fixed Fees
The ‘Access to Justice’ Enquiry offered strong support for the introduction
of a system of fixed fees (on the German model) or capped fees as a means
introducing certainty into Fast Track costs. The Lord Chancellor has postponed
a decision on this whilst gathering information about costs
levels.
[37] If, as the author
believes, fixed costs could be a valuable tool in reducing overall litigation
costs then they would immediately conflict with the indemnity principle as
it is possible that the client’s liability might be less than the fixed amount
recoverable. Whilst, no doubt, legislation could cure this, the continued
existence of the indemnity principle does constitute a bar to progress in
this area and, if abolished piecemeal to underpin fixed costs, it would appear
to remain as a flag with more holes in it than material.
It appears that the remaining case against abolishing the indemnity principle
is that it is necessary to preserve it as a brake on
overcharging.
[38] The argument
is that assessing judges will not be able to determine a fair rate for
recoverable costs
between the parties unless they are able to take
into account what the recovering client agreed in advance to pay to his own
solicitor. This has been described as similar to medieval arguments about
‘angels dancing on the heads of pins’ (Litigation Letter 2000). In reality
assessments have increasingly taken into account surveys of average costs
on a regional basis - to reflect different cost bases - to which are added
arguments about reasonableness and proportionality, the importance of the
case to the client or public and its difficulty, all derived from the overriding
objectives of the Civil Procedural Rules, which act as discounting or escalating
factors.
Top | Contents |
Bibliography
Conclusion
Reform of the indemnity principle has been a continuous refrain from the
consultation paper ‘Controlling Costs’ (1999) to the Conclusion Paper on
Collective Conditional Fees (2000). It is time that the long and baffling
existence of the indemnity principle, which has no place in the modern world
of litigation based on risk management and sound business principles, was
brought to a humane end by comprehensive abolition.
Bibliography.
Andrews, N (1994) Principles of Civil Procedure (London: Sweet &
Maxwell) p 393.
Burns, S (forthcoming) Managing Civil Litigation, Peysner (ed.) (London:
The Law Society).
Civil Justice Review White Paper (1988) Report of the Review Body on Civil
Justice (London: HMSO) Cmd 394.
Controlling Costs Consultation Paper (1999) Lord Chancellor’s Department
website (archived) Conclusion Paper on Collective Conditional Fees (2000)
at para 29 to 37.
Fleming, J (1989) ‘The Contingent Fee and its Effect on American Tort Law’
Butterworths Lectures 1988, (London: Butterworths).
Garnier, Edward MP, Opposition Spokesman, Standing Committee on the Access
to Justice Bill, 5th May 1999.
General Council of the Bar and The Law Society (1988) Joint Report “Time
for a Change”.
Goodhart, A (May 1929) ‘Costs’ Yale LJ Vol.XXXVIII No.7 p 849.
Greenslade, R (1999 update) Greenslade on Costs (London: Sweet &
Maxwell) para A2015.
Main, B and Peacock A (2000) ‘What Price Civil Justice?’ Hobart Paper 139
IEA.
Marre Report (July 1988) Joint General Council of the Bar and The Law Society
report on the future of the legal profession “Time for a Change”.
Peysner, J (2001) ‘What’s Wrong With Contingency Fees?’ 10(1) Nott.L.J.
(forthcoming).
Posner, R (1998) Overcoming Law (Harvard) p 61.
Royal Commission on Legal Services (1979) The Benson Report (London: HMSO)
Cmnd 7648.
Scott, I.R. (1995) ‘Towards Understanding the Maintainer’s Liability for
Costs’ CJQ p 271.
Walters, A and Peysner, J (1999) ‘Event-triggered Financing of Civil Claims:
Lawyers, Insurers and the Common Law’ 8(1) Nott.L.J.
White Paper (1989) Contingency Fees (London HMSO) Cmnd 571.
Zuckerman, A.A.S (1995) ‘Reform in the Shadow of Lawyer’s Interests’ in Zuckerman
and Cranston, Essays on Access to Justice (Oxford: Oxford University
Press).
Zuckerman, A.A.S (2000) Civil Justice in Crisis (Oxford: Oxford University
Press).
This area is beset by complex and changeable terms of art. Confusingly, many
terms have contrary meanings in the USA. The following constitute broad
definitions of English terms for the purpose of this article.
“Costs”: Lawyers’ fees. These may be owed to the client’s own lawyer (“own
side costs” or “solicitor and own client costs”) or transferred costs paid
to the winner by the loser (“party and party” or “both sides costs”). Fees
are paid to the court to issue a case or to take a specific step.
“The English Rule”: the loser pays the winner’s costs. (cf the American rule:
each side bears its own costs)
“The Indemnity Rule”: English rule costs are paid by the loser to the winner
up to, but no more than, the amount the winner would have to pay his own
lawyer in any event. If the winner has agreed not to pay his own lawyer win
or lose then there is a possible breach of the indemnity principle. Historically,
although both sides’ costs could match “both sides costs” they were,
normally, no more than two thirds (presumably, to give a client with a good
prospect of success a continuing interest in keeping fees down).
“Disbursements”: outpayments made by a lawyer on behalf of a client for medical
reports, court fees etc.
“Litigation”: Case law in this area is largely predicated on the recovery
of costs in litigation. Any matter in which proceedings are not issued,
or which are issued in a tribunal, are not litigated and so the indemnity
principle does not apply, although “costs” might be paid by the loser to
avoid the issue of court proceedings or the continuation of the other
proceedings. The concept of litigation is highly technical and illogical
and is currently under attack. (See comments by Matt Kelly QC in the Blackwell
Committee Report, 2000.)
[2] There are firms, particularly
in the City of London, who primarily look to their own clients to pay their
fees rather than relying on recovery strategies. These firms are expensive,
largely acting for corporate clients, where price is less sensitive than
in “run of the mill” litigation - commodity litigation - for insurance companies,
public bodies, individuals and small and medium size enterprises.
[3] There has been considerable
work on comparative costs issues (see Fleming, 1989) and on specific areas,
such as fixed costs (see Zuckerman, 1995). There is, of course, the vast
law and economics literature which is sometimes marred by an understandable
failure to take into account important but technical aspects of cost rules.
[4] Jury trial being the only mode
of civil trial in the High Court at this time.
[5] Order LV Rule 1 The Practice
of the Supreme Court of Judicature (1877) Webb, at page 305. Butterworths,
London. Compare the modern rule in Part 44 Rule 3(2) of the Civil Procedural
Rules: “If the court decides to make an order about costs - (a) the general
rule is that the unsuccessful party will be ordered to pay the costs of the
successful party; but (b) the court may make a different order”.
[6] Differentiate from the indemnity
basis for taxation, which is a technical rule of assessment – see Walters
and Peysner, 1999.
[7] Of course 98% of all issued
cases do not reach trial. Many of these are settled with the receiving
party’s costs being paid as well as any damages. Under the Civil Procedural
Rules a party can apply for a costs only order.
[8] Being made whole by the loser
includes compensation and the costs of getting that compensation. (In fact
an equally valid theoretical position would be that the loser has no interest
in the arrangements between the winner and his lawyer
unless and
until the winner wins (or settles on a basis that includes costs)).
[9] But see Main and Peacock, 2000,
who suggest that court fees should be responsive to demand and, thus, potentially
increase the supply of judicial effort.
[10] Solicitors have a personal
liability for barristers’ fees, which they recover from clients. Whilst not
contractually liable, solicitors can be adequately sanctioned by the withdrawal
of their general credit facilities with all barristers.
[11] A growing trend. See Burns
(forthcoming).
[12] The other parts of the price
are court fees, outpayments (disbursements) to barristers and experts, and
the risk of paying the other side’s costs. Of course, what should never be
forgotten is the opportunity cost as well as the general stress and strain
and wear and tear of the litigation process. This can be exploited by one
party against another either by delay, obstruction or, formerly, in the world
of defamation proceedings by the mere threat of instructing the late George
Carman QC to cross-examine one’s opponent. ‘One victim Jani Allan, whose
sex life was held up to universal derision, told him that “whatever award
is given for libel, being cross-examined by you would not make it enough
money”. Carman reported no regrets “That’s a matter for judgment for people
who decide to involve themselves in the luxury of litigation”’ (Obituaries,
The Guardian newspaper 3 January 2001).
[13] “Own side” or “Solicitor
and own client” costs.
[14] This aspect of the rule
also explains why recoverable costs have normally only been less than or
equal to, but not more than, “solicitor and own client” costs. Beyond this,
there would be no indemnity to satisfy.
[15] There is a less than clear
cut differentiation between the classic English rule as explained here and
the situation in the USA. Whilst, the winner normally receives only a fraction
of his lawyer’s fees from the loser by court order there are cases where
the winner does, indeed, get a bonus. In a range of cases including actions
to mitigate anti-competitive practices, a party may receive double or treble
costs as a reward and an incentive for acting as a private
attorney-general.
[16] Acting
pro bono
publico, for no charge, has always been an aspect of litigation practice.
It is widely encouraged and plays a part in reinforcing the legitimacy of
the profession and the professional “rent” but it is irrelevant to the basic
business of litigation (see Posner, 1998).
[17] British Waterways Board
v
Norman (1993) 26 HCR 232, QBD. This can be differentiated from the
position of a solicitor who chooses
ex post facto not to charge a
client who has means and with whom a valid charging arrangement is in
place.
[18] The definition of
“poor” is, of course relative. With lawyer’s fees escalating to heights of
£300 or more per hour for City of London litigation practices few if
any individuals can contemplate instructing a solicitor with any degree of
equanimity.
[19] For the historical development
of the English Rule see Walters and Peysner, 1999.
[20] per Russell LJ at page 608
at g “It is a sensible and reasonable presumption that the figure arrived
at on this basis will not infringe the principle that the taxed costs should
not be more than an indemnity to the party against the expense to which he
has been put to in the litigation”. See also
Cole v
British
Telecommunications plc (2000) 2 Costs L.R. 310.
[21] Either when losing or winning
but failing to recover all.
[22] One model of legal aid could
have involved giving clients a line of credit to pay a lawyer and some aspects
of the legal aid scheme resemble this (the operation of the statutory charge
securing repayment to the Legal Aid Fund). However, the basic arrangement
involved the client making contributions, if any, to the state and not the
lawyer.
[23] S18 Legal Aid Act 1988.
Nor, indeed, was the legal aid fund normally liable. Recent legislation gives
the losing non-legally-aided party more cost protection against the legally
aided party but, of course, the volume of legally aided litigation in the
civil courts has been sharply reduced.
[24] Differentiate from the US
style contingency fee, which involves sharing recovered damages according
to a contractual agreement.
[25] The result was that speculative
arrangements were little used in Scotland.
[26] This has been reinforced
in the
General of Berne Insurance Company v
Jardine Reinsurance
Management Ltd [1998] 1W.L.R., 1231, C.A. and
Nederlands Reassurantie
Groep Holding NV v
Bacon & Woodrow April 21, 1998, unreported,
C.A. The impact of these highly technical cases is further to muddy the waters
by requiring not simply that the global liability of the client matches the
costs to be recovered from the loser but also that each item must match.
[27] Intriguingly, Rule 48.4
of the CPR provides that a client cannot be charged more than recoverable
costs unless he has signed up to this. This demonstrates the continued existence
of, and need to consider, the indemnity principle.
[28] Except criminal and family
cases.
[29] Winning or losing are more
complex in this field than in personal injury cases. They will depend on
a contractual target whereby targets such as settling at a specific figure,
within a set period of time or on other terms will trigger a certain level
of payment.
[30] Loser includes claimant
and defendant. A successful defendant, absent a counterclaim, was inhibited
from buying AEI because there was no prospect of damages to bite on. The
Access to Justice Act 1999, Section 29, solves the problem by allowing for
recovery of the premium.
[31] Some products incorporate
a “magic bullet”: the premium becomes a disbursement, payable out of the
policy proceeds if unsuccessful and, as we shall see, by the loser if successful.
The client never pays it.
[32] AEI is also available to
support ordinary non-conditional fee agreement litigation, but at a higher
cost because the risk to the insurer is higher.
[33] The section amends section
51 of the Supreme Court Act 1981, which deals with costs by adding the words
“or for securing that the amount awarded to a party in respect of costs to
be paid by him to such representatives is not limited to what would have
been payable by him to them if he had not been awarded costs”.
[34] The English rule is now
amended by the need to take into account proportionality and issues under
the CPR; the effect is that full cost recovery, or even a conventional
2/3
rds, is far from inevitable; nor will the “winner” always receive
costs.
[35] This might be widened to
include a firm’s advertisements, brochures and scripts for its staff when
taking on cases as illustrative of the firm’s marketing approach to “no win,
no fee”.
[36] See page 9 above. Insurers
have never entirely accepted the argument of “double indemnity” and low level
conflict has continued in this area.
[37] Fixed costs have been introduced
for Fast Track trials only.
[38] This argument was raised
at consultation exercises into the proposed collective fee agreements chaired
by the author on behalf of the Lord Chancellor’s Department. These discussions,
which reviewed the indemnity principle “problem” as a crucial aspect of the
new arrangements, were held under “Chatham House Rules” allowing for reporting
of comments but no attribution to speakers.
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