Abolition a matter of principle

The indemnity rule is living on borrowed time, reports Fiona Bawdon

It was a classic David and Goliath-type battle.

A group of ordinary people taking on a big, rich corporate body which they alleged was trampling on their rights.Anxious for some positive PR for his firm, the group's solicitor said his firm had reassured its clients that it would waive its fees if the case was lost.

'These aren't wealthy people - one of them is a police officer, another a schoolteacher - so we've told them we won't charge them anything if we don't win.'What about the indemnity principle? He replied: 'What's that, then?'Perhaps he might like to check with someone more senior at the firm before being quoted saying it had agreed to waive its bill? A few minutes later, no doubt having had a crash course in the mysteries of the indemnity principle, the solicitor responded, saying that the firm would rather its generous gesture were not made public, after all.The response of many in the profession to reports (see [2001] Gazette, 6 December, 1) that the indemnity principle may finally be laid to rest will also be: what indemnity principle?The indemnity principle - broadly, that a firm cannot reclaim any costs from the losing party that its own client would not have been liable to pay had the case been lost - is deeply enshrined in our legal system.

However, it is also widely ignored - either deliberately or through lack of awareness - and utterly loathed by those on both sides of the litigation divide.Long a bugbear of claimants, in recent years defendants too have come to see it as an artificial and straight-jacketing device that prevents them coming to the kind of fee arrangements their clients want to see.Both claimants and defendants routinely ignore it, sometimes resorting to elaborate sleight of hand tactics - sham retainers and other equally complicated devices - to try to get around its provisions.

(Under its terms, a solicitor cannot agree in advance not to charge a client, but there is nothing to stop the law firm deciding at the end of a losing case not to send a bill.)Solicitor Kerry Underwood, an expert on conditional fees, says: 'In personal injury work, you risk being in breach of the indemnity principle with almost every funding method you use.'Firms like Mr Underwood's own - Hertfordshire-based Underwoods - which offer personal injury clients a cast-iron guarantee that they will walk away with all their damages with no deductions, are potentially in breach.That also applies to trade unions, liability insurers and other bulk buyers of litigation services which invariably do not pay their solicitors if the case loses - and do not meet any shortfall if they recover less than set out in the retainer from the other side in winning cases.

Claims management companies that pay firms only a nominal sum, say of a couple of hundred pounds, if the case loses may also transgress the principle.Even deferred, only-if-you-win, after-the-event insurance premiums are said by some commentators to breach the indemnity principle.In fact, says Mr Underwood, just about all the fee arrangements that clients like or which mean people can actually bring cases in the first place, may violate the principle.He adds that it is only because both sides - defendants and claimants - are equally guilty of breaching the principle that nobody ever bothers to challenge these arrangements.In recent years, the list of exceptions to the principle has also grown.

For practical reasons, the principle is now disapplied in areas ranging from legal aid, to litigants in person, to conditional fees (collective and otherwise), Civil Procedure Rule 45 fixed costs, and work done by law centres.Despite all of this, until recently the most senior judges were wedded to the retention of what is left of the indemnity principle, seeing it as a useful brake on inflated costs.

The judges' opposition to its abolition seemed to be insurmountable.At the Solicitors Annual Conference earlier this year, former Law Society President Tony Girling, an expert on costs, said one senior judge's commitment to the indemnity principle was akin to 'John Wayne defending the Alamo'.Conference delegates were told that - despite moves by the Lord Chancellor towards abolition - there was virtually no realistic prospect of it being scrapped in the foreseeable future.However, since then it seems that The Duke and the rest of the posse have got off their horses, put down their Colt 45s, and had a Damascene conversion.The turnaround came at an innovative costs forum organised by the Civil Justice Council.

One attendee reports: 'I was impressed at how quickly we got away from posturing and down to real discussion.'The forum was attended by representatives of all those involved in the litigation process - claimants, defendants, judges, liability insurers, and after-the-event insurers, among others.

After hearing from all sides, by the end, delegates were almost unanimous that the indemnity principle should be scrapped, rather than modified as some judges had been suggesting.Among the converts was the Master of the Rolls, Lord Phillips of Worth Matravers, who pledged to press the Lord Chancellor to find parliamentary time for primary legislation, if this turns out to be needed.Despite the unanimity of view that the principle should be laid to rest, there is as yet no consensus between senior judges and the Lord Chancellor as to what it will take to kill it off - primary legislation, as the judges maintain, or whether its demise can be brought about through a rule change, as the government insists.When it goes, Mr Girling - who describes himself as a 'long-standing, total abolitionist' - will be among the first to dance on its grave.

'Firms will be able openly to enter into the kind of creative fee arrangements that a modern litigation system demands, and which clients want to see,' he says.Firms will be able to do pro bono work, knowing that, if they win, they will be able to recover costs from the losing party.

It will also end the nonsense of 'sham retainers' - where firms have written agreements with clients insisting that the client will be billed X an hour if the case loses, despite having verbally assured the client in terms that, if the case really does lose, the firm will waive its bill, says Mr Girling.Commercial firms will be able, openly, to offer discount arrangements to big clients once a certain threshold of work has been reached, without worrying about breaches of the principle.

Abolition will also make collective conditional fee agreements (CFAs) far more straightforward to use.Mr Underwood maintains that as well as legitimising fee arrangements which are currently a grey area, it will also encourage innovation - to the huge benefit of clients and solicitors alike.'Firms will be able to say to clients: "We'll do this personal injury case for you and we promise that, win or lose, our fee will be no more than 500 - or, say, 2,000 for a clinical negligence case", 'he says.

He describes this kind of potential arrangement as 'a conditional fee agreement with strings'.However, Mr Girling warns that just as the principle itself is widely misunderstood, so may be its abolition.

Some personal injury solicitors maintain that once the indemnity principle goes, they will be freed from having to comply with all the long-winded costs explanations that currently accompany CFAs.

Not so, he warns.Nor will abolition herald a return to old-fashioned 'speccing' of personal injury cases - where firms informally reassured clients with strong cases they would not be billed if the case lost.

Most of these cases will continue to fall within the auspices of the CFA regulations, with all the paraphernalia that goes with them.Fiona Bawdon is freelance journalist