» Summary
» Part One - rules to assist judges in
assessing costs
» Part Two - the indemnity principle
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Copies of this paper are available from Melissa Rippin at the above address (tel: 0171-210 8774).
Part One - Rules to assist judges in assessing costs
On 26 April 1999 the civil justice system underwent significant change, with the aim of making civil cases cheaper, quicker and simpler. As part of that change a degree of restriction on recoverable costs will be introduced by fixing fast track trial costs. It was originally anticipated that a fixed regime for pre-trial costs would be introduced to coincide with those changes. However, after wide consultation, the Lord Chancellor decided to defer the introduction of a pre-trial costs regime until the fast track system had bedded down and it was possible to collect information on costs from fast track cases to enable a suitable regime to be designed. The Lord Chancellor intends to monitor costs in fast track cases with a view to introducing a fixed costs regime when sufficient information is available to ensure that the regime is fair and workable.
However, the Lord Chancellor remains concerned to ensure that the problem of disproportionate costs is addressed and is keen to introduce interim measures to help control costs until a fixed costs system is developed. He has considered a number of proposals whose aims are intended at improving certainty as to costs and making the rates charged by lawyers more transparent. Those proposals inform the contents of this paper.
It is proposed that:
In all cases
Solicitors will be required to provide evidence to the court (at allocation stage) that they have informed the client of the basis on which they propose to charge and, where relevant, their hourly rate.
Solicitors will be required to provide an inclusive charging basis, thereby abolishing the uplift for care and conduct element claimed in a bill of costs.
Solicitors will be required to file a final estimate of costs at the listing stage, which will set the maximum recoverable costs both for between the parties costs and solicitor and own client costs.
Given the likely impact of the proposals on the lawyer and client relationship, the Lord Chancellor will be eager to consider all relevant issues before coming to a conclusion on their implementation.
Part Two - The indemnity principle
The paper also addresses the question of whether the indemnity principle for costs should be retained, given the increasing marginalisation of the principle in recent years. In setting out the case, the paper recognises that the principle continues to have a central position in costs law and is inextricably linked to the general principle that costs follow the event. The principle operates to place some limit on the sums which can be recovered, and generally acts to keep the costs no greater than the liability of the client to his solicitor.
Comments are therefore particularly requested on:
the extent to which the Indemnity principle has any continuing relevance;
the extent (if any) to which the Indemnity principle acts as an overall suppresser of costs;
those elements of the Indemnity principle which could be usefully retained;
the provisions which should apply in the absence of the principle.
The liability for meeting the costs of a solicitor in an action rests with the solicitor’s client, and a client and his solicitor may agree whatever terms they consider appropriate. The giving of instructions by a client to a solicitor constitutes the creation of a contract between that client and solicitor, and creates the solicitor’s right to be paid his costs for pursuing a case, together with any disbursements incurred.
However, where a party is successful in an action, the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party. The level of those costs, and the extent to which all or part of the costs are to be met by the unsuccessful party, will be assessed by the court. This is known as the assessment of costs between the parties. In such an assessment it is the costs of the successful party, and not of his solicitor, which are being assessed and the costs recovered may not be more than those the party would pay his own solicitor. In assessing the costs payable the court will allow a reasonable amount in respect of all costs reasonably incurred and any doubts about those costs will be resolved in the favour of the paying party. However, where the court considers it appropriate, costs may be assessed in favour of the receiving party. From 26 April, the court will also have to consider whether the costs being claimed are proportionate, amongst other things, to the issues at stake and the complexity of the case. (see Rule 1.1(2)(c) Civil Procedure Rules 1998)
The courts have the discretion to disallow all or part of the costs incurred by the successful party, dependent on the circumstances of the case and its conduct. This may occur where a client has required his solicitor to undertake additional steps in proceedings or commission second and third expert reports. In such circumstance the court may judge that it is not reasonable for the unsuccessful party to meet those costs and the costs allowed between the parties will be lower than the amount for which the successful party is liable to his solicitor. As no party is entitled to recover any of the costs from another party to the proceedings except under an order of the court, the difference of between the parties costs order and the liability to the solicitor will be a matter for the successful party and his solicitor.
It has been argued that, a system of validating the reasonable and proportionate amount of costs after they have been incurred does not exert sufficient control over the level of costs incurred in a case. There can be a tendency for parties to incur disproportionate costs in the expectation that the costs incurred will be recovered from the unsuccessful party.
In his keynote address to the Solicitors’ Annual Conference on 18 October 1997, the Lord Chancellor announced his proposals to reform the civil justice system, making it cheaper, quicker and simpler. Those reforms were developed from the proposals made by Lord Woolf in his 1996 report Access to Justice Final Report. As part of his reforms, the Lord Chancellor proposed a ‘fast track’ procedure through the courts for claims above the relevant small claim limit and below £15,000 - the bulk of all cases.
The fast track would represent a fundamental change to way in which the vast majority of cases will proceed through the civil courts. In defended cases there would be a shift in where the responsibility for the control of litigation lay, with the emphasis moving from the parties to the court. Whilst many of the elements of the fast track would be familiar, there would be much which was innovative. Fast track cases would have a strict timetable, with cases being heard within 30 weeks of allocation to the track, and with greater control over the conduct of litigation by the courts. In addition, pre-action protocols would be developed for as many categories of cases as possible. Taken together, the fast track proposals would provide a distinct and timely route from the issue of proceedings to resolution and should contribute to making costs more predictable and affordable.
That said, the Lord Chancellor believed that the continuing problem of disproportionate legal costs needed to be addressed directly by placing a degree of restriction on recoverable costs. He believes that there is no better spur to parties to take a proportionate view of what is called for in proceedings than the prospect that they will have to bear themselves any costs unnecessarily incurred. A consultation paper on a possible costs regime for the fast track was issued in June 1998 ( Justice at the Right Price). Responses to the consultation paper indicated considerable support for fixed trial costs in the fast track and these have been introduced with effect from 26 April 1999.
However, the consultation produced mixed reaction to the question of a regime for pre-trial costs. This informed the Lord Chancellor’s decision that it was desirable to postpone the introduction of a pre-trial costs regime until the fast track system had bedded down, thus allowing a proper assessment of the type of costs regime which would be required and consideration of the level at which any restriction on costs should be set. That said, the Lord Chancellor remains committed to controlling costs and intends to monitor costs in fast track cases with a view to introducing a fixed costs regime when sufficient information is available to ensure that the regime is fair and workable.
Fixed trial costs in the fast track have been introduced with effect from 26 April 1999. The essence of the fast track is that it provides a fairly streamlined process from allocation to trial, which involves the parties in limited preparatory work. As a general principle the fixed trial costs scheme recognises that the most appropriate way to achieve greater proportionality on costs is to provide a cap on recoverable costs, but with the precise determination of the amount left to assessment, since the principle remains that the award of costs is in the discretion of the court.
Part 46 of the Civil Procedure rules sets out the amount of costs which the court may award as ‘the costs of an advocate preparing for and appearing at the trial of claim in the fast track’. The fixed costs levels are set in attempt to fix a sum which is both proportionate and certain.
Fast track fixed trial costs include the costs charged by a party’s solicitor for preparing for and appearing at the trial and counsel’s fees for the same, but does not include any vat payable on those fees, or disbursement costs. The recoverable costs for the day of the trial are dependent on the value of the claim and are set according to the following scale:
Where the award:
| does not exceed £3,000 | £350 |
| exceeds £3,000 but not £10,000 | £500 |
| exceeds £10,000 | £750 |
The Trial costs include work done by the advocate (whether counsel or solicitor) in preparing for advocacy. Where a solicitor attends with counsel, a fixed recoverable sum of £250 is set. The work required for trial costs in the fast track is more easily definable and, with hearings not exceeding one day, it should be possible for lawyers to work with in the fixed costs allowed. The amounts are recoverable regardless of the length of the trial on the day.
A court may not award more or less than the amount shown above other than in circumstances specified in part 46.3 of the Civil Procedure Rules. Amongst other matters, the court can reduce the costs payable to a successful party where it considers that their conduct (including their conduct before proceedings had commenced) has been unreasonable or it may award an additional amount for the successful party where the losing party’s conduct has been unreasonable.
The decision whether costs are payable, at what amount and in which manner remains with the court. The general principle remains that the unsuccessful party will pay the costs of the successful party and, in making an order, the court will have regard to the circumstances of the case.
Whilst the Civil Procedure Rules and Practice directions have been published which will assist judges in determining the liability for and amount of costs generally (part 44) the fast track (part 46), the Lord Chancellor is keen to consider additional interim measures which will help control costs until a full fixed costs system is introduced. He has considered a number of proposals, the aims of which are to improve certainty as to costs and make the rates charged by lawyers more transparent, and is broadly in favour of their introduction. The proposals would apply to cases in both the fast-track and the multi- track with one exception, which would apply to the fast track only. The proposals, on which comments are invited, are:
Although generally covered by Solicitors’ Practice Rule 15 this relates to client and solicitor relationship rather than costs specifically. Whilst rule 44.2 of the Costs rules imposes a duty on solicitors to notify a client of an adverse costs order, it is silent on any duty to notify a client of the own client charging basis. The requirement that a solicitor may be asked to show the court that he has informed his client relates solely to an adverse costs order. Similarly, the explicit need for a solicitor to satisfy the court that he has informed a client in advance of the likely costs applies solely where those costs are of an unusual nature.
Ideally clients should be informed of their liability for their solicitor’s costs from the outset, thus ensuring that clients who are unfamiliar with the operation of the law receive the information they need on their likely financial liability. It is also desirable that this information is given in writing. However, whilst it is desirable that solicitors provide their clients with an indication of their charging basis when they are first given instructions to act, it is recognised that the level and basis of the charges will depend on the facts of the case, which are not necessarily apparent on instruction. It is therefore questionable whether there is any merit in placing a requirement in the rules that a client should be informed of the full extent of the charging basis at instruction. However, there appears to be no reason why there should not be a requirement to have informed a client of the charging basis by the time the case reaches the allocation stage and to provide, to the court, evidence of having provided such information along with the allocation questionnaire. Where cases do not reach the allocation stage, it is questionable whether there is a need for the court to have a role.
Q.1 At what point should a solicitor be required to provide his client with details of his charging basis?
Q.2 Should that information be provided in writing?
Q.3 Should the solicitor be required to provide evidence to the court of having informed his client of his charging basis?
Q.4 Should that requirement be limited to those cases which have reached the allocation stage?
Solicitors will be required to file a final estimate of costs at the listing stage, which will set the maximum recoverable costs both for between the parties costs and solicitor and own client costs. Applicable to the Fast Track only.
Paragraph 4.5(2) of the Practice Direction to Part 43 requires a party to a fast or multi- track claim to file an estimate of likely costs at the same time as the filing of the listing questionnaire and serve a copy of it on every other party, unless the court otherwise directs.
It is proposed to provide by Rule that, for fast track cases, the final estimate of likely costs will become the maximum figure recoverable and would be binding both for between the parties costs and solicitor and own client costs. The final estimate would include all lawyers’ fees, disbursements and courts fees but not VAT. It would also include the fixed costs of the trial. The final estimate would be the upper limit of what could be recovered from the other party if full costs were awarded, with any adjustments for the operation of a conditional fee. The solicitor would be expected to adhere to this final estimate - or face not recovering costs incurred above it.
It is proposed that, prior to the introduction of the recovery of the success fee, consultation will take place on the way in which that recovery will operate, including whether the solicitor would be required to indicate the level at which he would seek to recover from the losing party, including any uplift.
In fast track cases:
Q.5 Should the final estimate be binding for costs?
Q.6 Should the final estimate be given at the listing stage via the listing questionnaire?
Q.7 Should the final estimate be restricted to between the parties costs?
However, whilst all likely costs should be known by the listing stage, it is recognised that, in a minority of cases, unforeseeable and unavoidable work can be required between listing and trial. The requirement to adhere to the final estimate could have an adverse impact in those cases. In the circumstance:
Q.8 Should provision be made to allow the court discretion to exceed the final estimate where additional, unexpected work was necessary?
Solicitors will be required to provide an inclusive charging basis, thereby abolishing the uplift for care and conduct element claimed in a bill of costs.
The paying party in a case, whether client or opponent, expects clarity in the way in which a solicitor charges for his services. Currently, solicitors may charge for their services on the basis of what is known as the A and B factors. The former is an assessment of the direct cost of running a case and is generally charged on an hourly basis. The B factor covers matters which cannot be calculated on an hourly rate: supervision, the profit element and other indirect expenses which reflect the complexity of the case and the degree of skill and responsibility required in pursuing the case. The B factor is expressed as a percentage of the A figure in the case and is often referred to as the ‘care and conduct’ element. Taken together a client will be charged a given hourly rate for the actual running of the case, together with a rate for the care and conduct required to run the case based on a percentage of the hourly rate. Both the hourly rate and the percentage uplift can be variable depending on the nature of the case.
Practice Rule 13 of the Written Professional Standards requires that, on taking instructions, a solicitor should give his client the best information possible on likely costs, including whether his costs will be on the basis of an hourly rate plus mark-up for care and conduct. The client should also be informed if such charges are subject to periodic review. However, it is not clear that the current system of charging an hourly rate plus a percentage increase for care and conduct, provides sufficient clarity for the paying party, either for the client on own solicitor costs or for the losing opponent on taxation of between the parties costs.
Although it is recognised that the flexibility introduced by Supreme Court Taxing Office Practice Note 2/98, which clarified the position on the use of inclusive rates, has led to an increasing number of solicitors using inclusive rates as a basis for charging, there is a residual reluctance to depart from the uplift for care and conduct.
It is proposed that the rate quoted by the solicitor should be the full rate they will apply. If the case is complex, the added complexity will be reflected in the time taken to complete it and the hourly charging rate.
Unlike the Rules and Practice directions which they replace, the new Civil Procedure Rules are silent as to those items which are allowable on a claim for costs and no reference is made to such items as care and conduct. The discretion as to which elements are claimable, will be with the court, subject to the satisfaction of reasonableness and proportionality.
Q.9 To what extent is it desirable that the concept of care and conduct is abolished and replaced by an inclusive charging rate?
If Rules and Practice directions require solicitors to provide estimates of costs at set points in a case then it follows, if they are to have any impact, that there should be sanctions for non-observance of those Rules.
Rule 44.14 of the Civil Procedure Rules provides the court with the power to disallow all or part of the costs, or order the party (or his legal representative) at fault to pay costs which he has caused the other party to incur as a result of unreasonable or improper behaviour. Part 3.1(5) of the Rules provide that a court “may order a party to pay a sum of money into court if that party has, without good reason, failed to comply with a rule, practice direction or a relevant pre action protocol”. Before making an order the court must give the party or legal representative a reasonable opportunity to provide reasons why such an order should not be made. In addition, Rule 3(4) provides that a court may strike out a statement of case in similar circumstances.
It is questionable whether these sanctions are appropriate for ensuring compliance with the requirement to provide estimates, particularly since the sanctions set out above impact more upon the client than the solicitor, who may have caused the non-observance to occur. The following list of options have been identified which could provide a range of sanctions for non-compliance:
The case will not be listed until the estimates are provided
The court should be able to strike out the action.
The provision of sanctions in line with the sanctions under Rule 44.14 of the Civil Procedure Rules
A discretion to disallow an element of the between the parties costs where an estimate has not been supplied.
Solicitors should be debarred from recovering those costs from their own clients.
A fixed percentage should be provided where disallowing an element of costs.
However, this list is not inclusive and comments are invited both on the feasibility of introducing all or any of the options above and on the retention of the status quo. Comments are also invited on any additional sanctions which consultees consider desirable.
During the Report Stage in the House of Lords of the Access to Justice Bill Lord Clinton-Davis moved an amendment which would have effectively abolished the indemnity principle for costs. In responding the Lord Chancellor stated that, while he recognised that recent case law had clouded the operation of the principle, its central role in the taxation of costs was such that outright abolition may have undesirable consequences in terms of costs inflation. With this in mind he indicated that:
The following paragraphs constitute that consultation exercise.
At the time of writing it is proposed to ask Parliament to include an enabling power, which would give the Lord Chancellor powers to abolish the indemnity principle from a day to be appointed, and subject to the Rule Committee making any rules of court which are considered necessary. In coming to a decision on the bringing into force of that power, and the extent of any necessary rules, the Lord Chancellor will have regard to the responses received to this consultation.
In any action, the responsibility for meeting the costs of the solicitor in the action rests with the solicitor’s client. Where a party is successful in an action and costs are awarded against the opponent, the level of those costs are taxed, or assessed, by the court. This is known as the assessment of between the parties costs. In such an assessment it is the costs of the successful party, and not of his solicitor, which are being assessed and the costs recovered may not be more than those the party would pay his own solicitor. The right is to be indemnified wholly or partly against the costs actually incurred in bringing or defending the proceedings, and no more (Gundry v Sainsbury [1910] 1KB 645). This is the indemnity principle. If no actual costs are agreed for payment by the client, then no costs are to be paid by losing party.
For many years it was a long established principle that agreements where the payment of some or all of a solicitor’s costs were contingent on the success of the case were unlawful. Such contingency agreements were unenforceable in common law under laws of champerty and maintenance and were at one time both criminal and tortious. The Criminal Law Act 1967 abolished both the offences and the torts of champerty and maintenance but expressly preserved the invalidity of champertous agreements.
Since that time there has been an increasing narrowing of the application of the indemnity principle. The principle has been particularly tested in cases where the successful party has been supported by a third party solicitor and in practice would not have been called upon to pay the costs of that support. Both Lloyds Bank Ltd v Eastwood [1974] 3 All ER 603 and R v Miller and Glennie [1983] 3 All ER 186 rejected the arguments that no costs should be recovered by the successful party as they had been supported in their action, by an in-house solicitor and Trades Union respectively.
The accumulation of case law has made the operation and application of the indemnity principle increasingly difficult. The Courts and Legal Services Act 1990 made provision for conditional fee agreements in which it was explicit that part or all of the solicitor’s fees were payable only in the event of success. Section 58 of the Act, allowed the Lord Chancellor to specify by Order the proceedings which could be taken under a conditional fee agreements (subject to any specific requirements).
The first Order was brought into force on 5 July 1995. This limited conditional fee agreements to personal injury cases; insolvency cases and cases before the European Court of Human Rights. From that date, it was lawful in those limited cases for a solicitor to enter into an agreement with his client whereby costs would be recoverable from the client only in certain circumstances and where the normal costs could be increased by a percentage uplift of not more than 100% should the circumstances occur. In July 1998 the range of proceedings was extended as far as possible under the 1990 Act to all civil proceedings other than family cases.
The application of the indemnity principle was further limited by the Civil Legal Aid (General) (Amendment) Regulations 1994. Prior to 1994, solicitors acting for legally aided clients charged at commercial rates. In 1994, the Legal Aid in Civil Proceedings (Remuneration) Regulations 1994 introduced fixed rates for legally aided solicitors. From that date, where the legal aid fund was responsible for paying the Bill, the legal representatives would be paid in accordance with prescribed rates. In tandem, Regulation 107b of Civil Legal Aid (General) (Amendment) Regulations 1994 allowed solicitors for successful legally aided clients to recover their costs at the hourly private rate where these were higher than the prescribed rates, from the party against whom the costs order is made.
Since the introduction of conditional fees, the indemnity principle has been tested by two recent decision - Thai Trading Co. (A Firm) v Taylor (1998) 3 All ER 65 and Bevan Ashford v Geoff Yeandle (Contractors) Ltd (1998) 3 All ER 238. In the former case the Court of Appeal held that there were no longer public policy grounds to prevent lawyers agreeing to work for less than their normal fees in the event that they were unsuccessful, provided they did not seek to recover more than their normal fees if they were successful. In Bevan Ashford the Vice Chancellor held that where a person uses an alternative remedy to court proceedings in a class of proceedings where conditional fee agreements are lawful in the courts, and that all the relevant provisions relating to the form and content of the agreement as prescribed by the relevant regulations (the Conditional Fees Regulations 1995) were complied with, there were no public policy grounds for holding the agreement unlawful. On the contrary, it would be of benefit for clients to have access to these agreements to enable them to use alternative dispute mechanisms.
The Lord Chancellor considered that it was in the public interest that the position regarding Thai Trading and Bevan Ashford type agreements should be clear. He has therefore taken the opportunity of the Access to Justice Bill to take these judgements into statute law rather than leaving the matter to the common law. This will be done by making all agreements to work for less than normal fees subject to the provision of the new sections.
It is clear that the application of the indemnity principle has become increasingly marginalised by the changes which have taken place in recent years and the question therefore arises whether there is any merit in its retention.
However, whilst the principle is being observed as much in the breach, it does continue to have a central position in costs law and is inextricably linked to the general presumption that the successful party is entitled to be indemnified by his opponent for his legal costs. It is argued that the indemnity principle operates to place some limit on the sums which can be recovered, and generally acts to keep the costs no greater than the liability of the client to his solicitor. Whilst minded to accept the thrust of the argument for the abolition of the remaining vestiges of the principle, the Lord Chancellor is concerned that its removal should not lead to an increase in legal costs being awarded by the courts over time. The indemnity principle provides a cap on the costs which can be recovered from the losing party. Without it solicitors will be technically free to claim costs without bounds, subject to assessment by the court.
The Lord Chancellor therefore seeks comments on:
Q.9 To what extent has the Indemnity principle any continuing relevance?
Q.10 To what extent does the Indemnity principle act as an overall suppresser of costs?
Q.11 If the Indemnity principle was abolished, are there any elements which could be usefully retained?
Q.12 What provisions in Rules of Court should apply in the absence of the principle?
Comments are requested on:
Q.1 At what point should a solicitor be required to provide his client with details of his charging basis?
Q.2 Should that information be provided in writing?
Q.3 Should the solicitor be required to provide evidence to the court of having informed his client of his charging basis?
Q.4 Should that requirement be limited to those cases which have reached the allocation stage?
Q.5 In fast track cases, should the final estimate be binding for costs?
Q.6 In fast track cases should the final estimate be given at the listing stage via the listing questionnaire?
Q.7 In fast track cases should the final estimate be restricted to between the parties costs?
Q.8 In fast track cases should provision be made to allow the court discretion to exceed the final estimate where additional, unexpected work was necessary?
Q.9 To what extent is it desirable that the concept of care and conduct is abolished and replaced by an inclusive charging rate?
Q.10 To what extent has the Indemnity principle any continuing relevance?
Q.11 To what extent does the Indemnity principle act as an overall suppresser of costs?
Q.12 If the Indemnity principle was abolished, are there any elements which could be usefully retained?
Q.13 What provisions in Rules of Court should apply in the absence of the principle?
The Lord Chancellor believes that the approach canvassed above would offer great benefits in making prospective charges more transparent to clients and the courts, and bringing certainty of each sides’ total exposure to costs. The abolition of the indemnity principle would remove the final vestiges of a principle which has become increasingly marginalised.
However, the Lord Chancellor is aware that the approach canvassed may bring with it difficult issues which will requires resolution, but welcomes comments on the issues outlined in this paper. He recognises that issues raised may have consequences for the practitioner in the field and therefore welcomes comments on the costs issues raised in this paper or the indemnity principle.