What is the Indemnity Principle?
A long-established principle which effectively means that a successful party cannot recover more in legal costs then they are liable to pay their solicitor under the terms of the contract with their solicitors.
Why does it exist?
To indemnify the winner for the reasonable legal costs incurred on the matter. In practice, the loser contributes to those costs.
If the indemnity principle did not exist, then a losing party could face a costs liability higher than the winner is liable to pay his solicitor. This would mean that a client would make a profit from the costs of the litigation which is not the intention of costs awards. The intention is to reasonably compensate the winner for the legal costs they have incurred.
Please note that there are some exceptions to the indemnity principle, for example, inter-partes claims for costs where the matter was funded by way of a Legal Aid Certificate, and fixed costs claims i.e. where the costs incurred are lower than the costs that can be claimed inter parties.
Key Case Law
Harold v Smith  5 H & N 381
Costs orders inter-partes are awarded as an indemnity to the receiving party. They are not awarded to impose a punishment on the party who pays them.
Gundry v Sainsbury 
The Court of Appeal confirmed the underlying principle set out in Harold v Smith. The solicitor had acted for no charge and tried (unsuccessfully) to seek costs from the opponent. The court held that the solicitor was not entitled to recover costs as there was no agreement from the client to pay.
J H Milner & Son v Percy Bilton Limited  1 WLR 1985
Retainer (contract for services by the solicitor) is fundamental to the right to recover costs. No retainer equals no entitlement to recover costs from clients (and therefore no entitlement to costs inter-partes).
Is the Indemnity Principle important?
Taking into account the above cases (which remain good authorities) the indemnity principle is clearly very important and something which every contentious lawyer should have a sound knowledge and understanding of. Failure to do so can lead to serious professional consequences.
The importance of the indemnity principle is best illustrated by the case of Bailey v IBC Vehicles Limited  3 All ER 570 where the Court said that the signature of a Bill of Costs is that of an officer of the Court and that mis-certification of the Bill is a serious (disciplinary) offence.
In that case Lord Justice Henry said:
“the signature of the Bill of Costs under the rules is effectively a certificate by an officer of the Court that the receiving party’s solicitors are not seeking to recover in relation to any item more than they have agreed to charge under a contentious business agreement. The Court can (and should unless there is evidence to the contrary) assume that his signature to the Bill of Costs shows that the indemnity principle has not been offended”.
When lawyers sign costs budgets, statements of costs for summary assessment and Bills of Costs it is therefore fundamentally important to ensure that there is no breach of the indemnity principle.
I am now going to consider two recent cases regarding the indemnity principle:
Gempride v Jagjit Bamrah & Law Lords of London Limited  EWCA CIV 1367
In this matter, the receiving party’s bill of costs claimed hourly rates higher than those which the client had agreed to pay their solicitor within the retainer. Furthermore, misleading information was provided in Replies to Points of Dispute in respect of the availability of before the event insurance.
The matter proceeded to the Court of Appeal where the Court imposed a penalty for the mis-certification of the Bill of 50% (Part 1 of the Bill of Costs only). Whilst the penalty in the end was not too severe, the real damage for the law firm was to its reputation.
HMRC v Gardiner and Others  EWHC 1716 (QB)
This matter related to an appeal by HMRC in respect of an order for them to pay the Respondents’ costs in tax appeal proceedings. The Respondents were amongst several tax payers challenging penalties imposed by HMRC for incorrect tax returns.
The Respondent’s tax advisors were at the forefront of the work carried out. Counsel was instructed to represent the Respondents and the fees were paid by their tax advisors. HMRC alleged a breach of the indemnity principle (no direct retainer). That argument failed and the key points were as:
- There was never an agreement that the Respondents would never pay Counsel’s fees;
- Counsel was there to represent the Respondents, not their advisors;
- No difference to a trade union funding arrangement; and
- The key is a liability to pay (the Respondents were liable to pay the fees that were incurred, but the tax advisors paid them).This is a useful case to rely on where costs have been paid by a third party and a challenge is raised that there has been a breach of the indemnity principle as a result.
As you can see from the authorities, the indemnity principle has been with us for some time. Lord Justice Jackson recommended the abolition of the indemnity principle in his Final Report in 2010. He was of the opinion that the indemnity principle caused more problems than it solved. However, in my view the indemnity principle should always be in place whilst we have a cost shifting environment in England and Wales. Otherwise, it could encourage inflated claims for costs and allow clients to profit on the costs of litigation and therefore increase claims for costs – which would be contrary to the whole purpose of the Jackson Reforms!
Do you have any views? – please feel free to share them.
This blog was prepared by Andrew McAulay who is a Partner at Clarion and the Head of the Costs and Litigation Funding team. Andrew can be contacted at email@example.com or on 0113 336 3334 or 07764 501252.
CPR 38.3 provides that a Claimant may discontinue a claim by filing and serving a Notice of Discontinuance on the other parties. Under CPR 38.6(1) it states the following:
“Unless the court orders otherwise, a Claimant who discontinues is liable for the costs which a Defendant against whom the Claimant discontinues incurred on or before the date on which the Notice of Discontinuance was served…”.
Under CPR 44.9(1), such an order is a deemed order for costs and the basis of assessment is the standard basis.
The case of Two Right Feet Limited (in liquidation) -v- National Westminster Bank PLC and others is a case where the Claimant discontinued proceedings against the Defendants and the Defendants made an application for costs to be awarded on the indemnity basis due to the following issues:
- failure to engage pre-action;
- improper and unjustified allegations;
- an exaggerated claim;
- a case which was speculative (both in facts and law);
- a claim which was brought without proper investigation;
- concerns as to the approach to disclosure; and
- delayed discontinuance, other delays and more minor points.
On 3 March 2015, the Claimant commenced proceedings against the Defendants. In the claim form, the Claimant alleged that the Defendants were liable for deceit and conspiracy. The claim was first notified to the First and Second Defendants on 9 June 2015 and the claim form was served on 3 July 2015. The amounts claimed amounted to £20 million. The claims were strenuously denied by the Defendants. On 7 October 2016 there was a case management conference where directions were set and the case was transferred into the Mercantile Court. Disclosure followed in January 2017, but on 22 February 2017 the Claimant discontinued its claim.
Indemnity Basis Costs Order
The Judgment provides very useful information for any party considering an application for an indemnity basis costs order as it cites the leading authorities (paragraph 36 is very useful to read in this regard).
The Judge concluded that an order for indemnity costs was appropriate and determined that the way in which the case had been advanced by the Claimant (and conducted) carried the case out of the norm, which is of course an important consideration for any court when deciding whether to award indemnity costs.
The case also highlights the importance of the receiving party (Defendants in this case) making an application. Notice of Discontinuance creates a deemed order for costs on the standard basis. Should a receiving party feel that they are entitled to indemnity basis costs then they should seek agreement with the paying party (Claimant in this case) or make an application to Court. A receiving party should not leave the matter for detailed assessment – the detailed assessment hearing is a forum to determine the quantum of costs, not to determine the basis of assessment.
This blog was prepared by Andrew McAulay who is a Partner at Clarion and the Head of the Costs and Litigation Funding team. He can be contacted on 0113 336 3334 or at firstname.lastname@example.org
The recent case of Choudhury -v- Markerstudy could have serious repercussions for receiving parties in Detailed Assessments. Here is a brief summary of the case:
- Rohan Choudhury (a child) suffered an accident on 12 March 2013. Rohan was a minor and was therefore represented by her Mother, Mrs Choudhury.
- An Infant Approval hearing took place in January 2015, where the Court approved a settlement figure of £1,050.00.
- The Claimant was represented by Irwin Mitchell solicitors, who at the time of instruction, were acting under a Collective Conditional Fee Agreement (CCFA) with Aviva.
- Following the accident Aviva wrote to the Claimant, and thereafter, Irwin Mitchell wrote to the Claimant explaining the terms in which they would be retained. Those letters were sent before 1 April 2013, but no other work was carried out.
- Mrs Choudhury instructed Irwin Mitchell by signing a document on 1 April 2013 and returning it. The document that she signed was the pre 1 April 2013 CCFA.
- The Defendant argued that the retainer was invalid because it was signed and entered into on 1 April 2013, but was based on a regime which on 1 April 2013, was no longer available to litigants (and therefore invalid).
- The Claimant stated that this was incorrect because ‘Advocacy or litigation Services were provided to the Claimant under the agreement in connection with that matter before the commencement day’ (Section 44.6, 6b of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 – ‘LASPO’).
- The Court ruled that ‘Advocacy or litigation services’ had not been provided and therefore the retainer was invalid. As a consequence, no costs were payable by the Defendant to the Claimant as there was no indemnity between the Claimant and the Claimants Solicitors.
The District Judge clearly adopted a strict interpretation of LASPO and what amounts to ‘Advocacy and litigation services’. The paying party did not dispute that if litigation services had been provided then the retainer would have been valid.
This Judgment will no doubt cause concern to receiving parties. Whilst the Judgment is only at County Court level, it will encourage paying parties to raise such arguments. There will still be plenty of cases left in the system where the additional liabilities were entered into very close to 1 April 2013. In fact, it was widely reported in many legal publications (at the time) that law firms had signed up clients to Conditional Fee Agreements, and in particular ATE insurance, very close to the deadline of 1 April 2013.
Many believe that a black and white approach should be adopted in relation to the inception i.e. if the additional liability was incepted pre 1 April 2013 then it is valid and the associated additional liability recoverable, however, if it is entered into post 1 April 2013 then the additional liability is not recoverable. The issue over ‘Advocacy or litigation services’ will create some interesting arguments!
In my opinion, what law firms should have done is sent a “holding” Letter of Claim to the Opponent (or likely Opponent) prior to 1 April 2013. Surely, this would have provided protection from the ‘Advocacy or litigation services’ point?
The key practical point from the Judgment is that the work which was done before 1 April 2013 was effectively ‘client care’ work. In reality, the case will only have an impact on clients who were signed up to CFA’s and/or ATE insurance premiums close to 1 April 2013. For example, if a client was on a private fee paying retainer from say January 2013, but switched to a CFA retainer in late March 2013, then ‘Advocacy or litigation services’ would have most likely been provided by the time the CFA was entered. This scenario would therefore be safe from the argument.
It is widely reported that fixed costs for all fast track work and low level multi-track work will be introduced in October 2018. Those who draft the rules as to implementation need to do so carefully as otherwise arguments and satellite litigation will take place.
This blog was prepared by Andrew McAulay who is a Partner at Clarion and the Head of the Costs and Litigation Funding. He can be contacted on 0113 336 3334 or at email@example.com.
John Hyde of the Law Society Gazette recently gave a useful update on the issue of statutory regulation in relation to third party litigation funding. You can access his short article by following this link.
I personally think that this is a very interesting topic/debate. As I understand the position, the government is wary of imposing statutory regulation at this moment in time as it is concerned that it could stifle the funders who are currently in the litigation funding marketplace and deter any new entrants. In light of the substantial funding changes post LASPO, it is important not to make any changes which could impact on access to justice. There is currently a voluntary code of conduct in place and optional membership of the Association of Litigation Funders (http://associationoflitigationfunders.com/), but is this enough?
Third party funders can earn substantial amounts from successful cases and therefore surely some form of regulation should be introduced to ensure that both individual and corporate purchasers of third party funding are protected.
What are your thoughts in relation to this topic? Would you regulate the area now or would you give the area time to develop and then look to regulate in due course? My view is the latter.
I await your comments with interest.
This blog was prepared by Andrew McAulay is who a Partner and the Head of the Costs and Litigation Funding Team at Clarion. Andrew can be contacted on 0113 336 3334 or at firstname.lastname@example.org