The purpose of this article is to avert Costs War II. If the Ministry of Justice takes no notice of it and a costs war ensues, it will not be able to say that it was not warned.

Costs War I, as is well known, followed the Access to Justice Act 1999, which amended the former conditional fee agreement regime. Chief among the provisions having this effect was the new section 58(1) inserted into the Courts and Legal Services Act 1990. This used the formula, ‘a CFA which satisfies’ the statutory requirements shall be enforceable ‘but… any other CFA shall be unenforceable’. Black and white - either you are with us or you are against us - no middle ground and no room for the court to exercise a discretion to allow a CFA to be enforceable despite a minor breach which had caused no harm.

The effect of this provision was traced in chapter 3, section 5 of Lord Justice Jackson’s preliminary report entitled The Costs War. Jackson LJ said of section 58(1): ‘No discretion was conferred on the courts to avoid this conclusion (unenforceability) or to make the penalty for minor non-compliance proportionate to the "crime" - it was all or nothing.’

Had the beneficiaries of this legislation been the clients of defaulting solicitors, there might have been something to say for so draconian a provision. But as we all know they were not. With one exception in the many reported cases (Silvera v Bray Walker [2010] 4 Costs LR 584) the nominal beneficiaries were unsuccessful defendants - almost invariably in personal injuries litigation. The true beneficiaries were, of course, the defendants’ insurers. The fact that they were insurance companies is neither here nor there. What is important is that the benefit they obtained was pure windfall - they had done nothing to earn it and had suffered no prejudice which merited compensation by the benefit.

Jackson LJ’s preliminary report charted the case law on section 58(1), including, of course, Hollins v Russell [2003] 1 WLR 2487, which brought a purposive construction to the section with a view to limiting the damage, and Garrett v Halton BC [2007] 1 WLR 554, which in turn limited the effect of Hollins. He showed how the main factors which took some of the heat out of the Costs War were the revocation of the 2000 CFA Regulations and the introduction, following mediations sponsored by the Civil Justice Council, of fixed recoverable costs in part 45 of the Civil Procedure Rules.

This section of the preliminary report concluded with three observations of continuing relevance. The first was: ‘Both in the field of personal injury and in other areas, the Costs War is still being fought with some vigour.’ The second: ‘While decisions of the Court of Appeal seeking to reduce pointless satellite litigation had some effect, notably Hollins, the language of the legislation itself precluded the possibility of the courts ruling such litigation out altogether.’ The third was to note that one suggested means of reducing satellite litigation was by abolishing the indemnity principle. Indeed, the final report went on to make precisely that recommendation - see recommendation 4. The ministry was not persuaded ‘and is therefore not proposing any further work on it at this stage’ - paragraph 276 of the November 2010 consultation paper on Implementation of Lord Justice Jackson’s recommendations.

Given that the ministry had ruled out abolition of the indemnity principle, which would have prevented satellite litigation of this sort across the board, one would be forgiven for thinking that it might have done something about ‘the language of the legislation’ which had caused the problem in the first place. Far from it. Not only does the Legal Aid, Sentencing and Punishment of Offenders Bill (LASPO) build on section 58(1) by amending other subsections to accommodate its changes to the CFA regime, it continues to use exactly the same all-or-nothing formula for the newly extended contingency fee regime, quaintly known as damages-based agreements (DBAs) - see section 58AA of the Courts and Legal Services Act, as to be amended by clause 44 of LASPO.

Moreover, although, as Jackson LJ noted, the intensity of Costs War I was reduced by the revocation of the highly prescriptive CFA Regulations 2000, the amendments to the CFA regime which LASPO proposes will leave the statutory provisions in a more complex state than they are at present. At the same time the proposed extension of the DBA regime beyond the employment tribunal will create both the incentive and the opportunity for challenges to the enforceability of DBAs by opposing parties.

A valid CFA with a success fee will have to comply with the proposed section 58(4B) which provides: ‘The additional conditions are that - (a) the agreement must provide that the success fee is subject to a maximum limit,(b) the maximum limit must be expressed as a percentage of the descriptions of damages awarded in the proceedings that are specified in the agreement,(c) that percentage must not exceed the percentage specified by order made by the lord chancellor in relation to the proceedings or calculated in a manner so specified, and(d) those descriptions of damages may only include descriptions of damages specified by order made by the lord chancellor in relation to the proceedings.’

A valid DBA will need to comply with the proposed section 58AA(4)(d), which reads, ‘must be made only after the person providing services under the agreement has complied with such requirements (if any) as may be prescribed as to the provision of information’. Whether any such requirements will be prescribed remains to be seen. The ministry’s initial reaction to Jackson was that further regulation was unnecessary, but the response to its Jackson consultation showed that 76% of respondents thought specific regulation was necessary, though an unspecified number of these thought the existing regulation of lawyers would suffice for that purpose. However, the present DBA regime, which is confined to employment cases, provides for the giving of extensive information and prescribes certain terms and conditions for any enforceable agreement - see the DBA Regulations 2010. Indeed, to any veteran of Costs War I, the 2010 regulations bear a remarkable resemblance to the CFA Regulations 2000, which had to be revoked because of the problems they caused.

It may be said that the existing, prescriptive provisions for DBAs in employment cases have not caused any particular problems. However, such an objection would miss the indemnity principle point. The existing DBA scheme is confined to matters which are or would proceed in an employment tribunal. Inter partes costs awards are a rarity in the employment tribunal. As has been demonstrated, the attacks on the enforceability of agreements in Costs War I came not, largely, from clients but from opponents who were liable to pay inter partes costs. Without the indemnity principle these attacks would not have been possible, and without inter partes costs liability the opponent has neither the interest in nor the possibility of attacking the retainer of the victor’s solicitor.

There are at least three ways of avoiding another Costs War arising from these provisions. The first is to use section 31 of the Access to Justice Act 1999 to disapply the indemnity principle in cases in which the receiving party’s retainer is a CFA or DBA. The second is to rephrase the statutory provisions by providing a sanction other than unenforceability for a failure to comply.

The third is to give the court assessing inter partes costs a discretion in the matter, by providing that a court has the power to grant either total or partial relief from the sanction of unenforceability (in effect, to grant relief from the application of the indemnity principle). Indeed, as I shall show, there is much to be said for extending such a discretion to solicitor/client disputes over CFAs and DBAs.

My own view is that the first of these is preferable, as the benefits obtained from retaining the indemnity principle in these cases are outweighed by the satellite litigation which it causes. I shall say no more about the second of these means, as quite a range of policy options is open. There is, however, a lot to be said for the third course, giving the court a discretion, and in any event such provision should be available in solicitor/client disputes.

There is a very good precedent in the field of consumer credit for giving the court a discretion. The 1974 act contains a lot of regulatory requirements, breach of some of which can lead to the agreement in question being in practice unenforceable.

Under the act as originally drafted, the requirements were divided into two groups: under one breach led inexorably to unenforceability, while under the other the court had a discretion. An example of the first was to be seen in Wilson v First County Trust [2004] 1 AC 816 where the effect of section 127(3) of the 1974 act was considered. The potential for injustice of the sort illustrated by that case was removed when the Consumer Credit Act 2006 repealed the subsections of section 127 which had made it mandatory for the court to refuse to enforce a non-compliant agreement.

The timing of the amendment to the Consumer Credit Act is illuminating. By 2006, two trends had become apparent which highlighted the need for reform. The first was that more often than not the person taking the enforceability point was not the borrower but an insurance company indemnifying a defendant. Facing an exponential growth in credit hire claims, insurers used the damages equivalent of the indemnity principle to attack the credit agreements upon which the claims were based. As with the Costs War, the wrong person was getting a windfall benefit from the legislation. The second trend was the widespread promotion of technical challenges to consumer credit agreements by claims farmers. Accordingly, problems with the 1974 act which had lain relatively dormant for 30 years came into the open in the first decade of the new century.

This precedent shows the department responsible for consumer credit realising, albeit only after 30-odd years, that black-and-white provisions often cause injustice. Do solicitors have to wait 30 years for the ministry to come to the same conclusion, or will it take the opportunity, even at this late stage in the LASPO bill, of ensuring some flexibility? As Jackson LJ said in his third lecture on the implementation programme, on a different topic: ‘There is a whole Costs Bar out there (established a few years ago in order to fight the Costs War), just waiting to sink its teeth into the new provisions.’

Finally, while I advocate disapplication of the indemnity principle as a solution to the problem of defendants’ insurers being the prime beneficiaries of legislation designed to protect claimants, even if that is done, I believe that the court should also be given a discretion in disputes between solicitor and client.

A black-and-white sanction of unenforceability undoubtedly causes hardship in many cases - consider the facts of Wilson or of Myatt v NCB, the appeal case heard with Garrett. Although there have been very few challenges by clients to the enforceability of their CFAs, this is because clients have hitherto had no reason to mount a challenge. In the great majority of cases they pay nothing. This will all change with the twin Jacksonian proposals of abolition of the recoverability of success fees and the extension of DBAs under which the client pays the contingency fee out of damages.

Clients will now have an incentive to mount enforceability challenges to their CFA or DBA and it is right that they should be able to do so. What is not right, however, is that they should be able to take advantage of a black-and-white rule of unenforceability to overturn an agreement which has brought them great benefits but which contained a technical defect which caused them no detriment whatsoever.

Jeremy Morgan QC, of 39 Essex Street, London, was one of the assessors to Lord Justice Jackson’s costs review