The recent case of British Waterways Board v Norman [1993] The Times, 11 November, has thrown into disarray that part of the legal profession concerned with the provision of legal services to low income clients, when those clients take proceedings without the benefit of a legal aid certificate.There is a view that all solicitors are now obliged to make it clear to low income clients that they intend to enforce their entitlement to costs, even if the case is lost, otherwise a liability for costs cannot be indemnified by an order.

Those such as local authorities may be anxious to argue, especially in proceedings under s.82 of the Environmental Protection Act 1990, that private practice and law centre solicitors are not entitled to costs, following Norman.

This may have a deterrent effect on law centre lawyers contemplating taking on certain types of work.Norman has implications for the attempts of the Law Society and others to encourage solicitors to take on more pro bono work, and may constrain severely the ability of private practice to attract low income clients for work without the benefit of a legal aid certificate.

The position of employed solicitors at law centres follows r.7 of the Employed Solicitors Code 1990, which provides for this precise situation: law centre lawyers, and others in similar organisations, should proceed on the basis that they remain entitled to costs, notwithstanding the free nature of the legal services offered.It is clear that the Law Society drafted r.7 with great care.

The object was to reflect the requirements of the indemnity principle in a rule of practice in such a way that solicitors employed by law centres and similar organisations could recover legal costs from opponents in contentious cases.

The central feature is that r.7 envisages a residual liability with the client towards his or her solicitor's costs, against which he or she is indemnified by the organisation.

It is important to note that this feature is not present in Norman at all.Solicitors' costs are initially a charge against the client, who may, in his or her turn, be entitled by virtue of an order of the court to recover all or part of his or her costs from the party.

This right to do so is a right to a (partial) indemnity against the costs the client has incurred with his or her own solicitor.

The client is not entitled to recover any costs that he or she is not obliged to pay.

This is known as the 'indemnity principle' (see Harold v Smith [1860] 5 H & N 381; Gundry v Sainsbury [1910] 1 KB 645).The indemnity principle might appear to be infringed where, for example, a trade union member is represented by the union's solicitor who does not expect to charge the member.

He or she is, however, indemnified by the union.

The costs of such a solicitor are recoverable inter partes (see Adams v London Improved Motor Coach Builders Ltd [1921] 1 KB 495).The test is that a party is liable to a solicitor for costs unless it has been agreed that in no circumstances should the client be liable for costs.

In that event, inter partes costs are not recoverable (see R v Miller and Glennie [1983] 3 All ER 186).

This is where Norman can be distinguished for employed solicitors at law centres.The courts approve of solicitors acting for the poor, who in practical terms are unable to pay those solicitors' costs, provided the solicitor seeks no more than a normal fee in the event of victory, and providing the solicitor takes reasonable steps to satisfy him or herself that the client's case is not vexatious (see Ladd v London Road Car Company [1900] The Times, 24 March; approved by the Court of Appeal in Rich v Cooke [1990] TLR 94).R v Miller and Glennie [1983] 3 All ER 186 provides authority that a client is entitled to an order for inter partes costs when there remains a residual liability on the client, even though another party may be providing financial backing.

The case of Lewis v Averay (No.2) [1973] 1 WLR 510 is even more persuasive in this respect.

In that case, the evidence was that Mr Averay was indemnified in all respects by the Automobile Association so that no part of the cost of the appeal has or would have fallen on him.

The Court of Appeal held that:'It is clear that Mr Averay was in law the party to the appeal.

He was the person responsible for the costs.

If that appeal had failed, he would be the person ordered to pay the costs.

The truth is that the costs were incurred by Mr Averay but the Automobile Association indemnify him against the costs...Mr Averay is the person who is legally responsible vis-a-vis the other party; but he is indemnified by those standing behind him.

That is sufficient to satisfy the requirement that the costs were "incurred by him".'It is suggested that r.7 of the Employed Solicitors Code 1990 reflects Ladd, Miller and Averay, and that law centres and similar organisations, making arrangements with clients consistent with r.7, which are by their nature consistent with the indemnity principle, are entitled to inter partes costs.Norman can be distinguished in respect of law centre solicitors for various reasons.

First, this case involved private practice solicitors who, in a prosecution under s.82 of the Environmental Protection Act 1990, had failed to ensure that the client retained a liability for their costs.The court found that the relevant circumstances included: the solicitors knew that the respondent was on income support; they had advised her under the green form scheme without a contribution from her; in advising her to bring the prosecution, they never suggested to her that she would have to pay a penny towards the costs; they only expected to be paid by her if she was successful, and an order for costs made against the board; and it never occurred to her that she would have to pay any costs out of her own pocket.What these private practice solicitors should have done, but did not, was advise that the client had a very strong case which she was expected to win, but that nothing is certain in litigation and that if she lost the solicitors would look to her for costs.

Mr Justice Tuckey noted:'There can be no objection to the solicitor agreeing that such liability need not be discharged until the outcome of those proceedings, if any, is known.

At that stage, provided it has not formed the basis of the agreement with the client, it would be open to the solicitors...to decide not to enforce their right to be paid.' Secondly, law centre solicitors making arrangements in accordance with r.7 will ensure that a client retains a residual liability for costs.Besides the fact that r.7 has been put in place by the Law Society, and that there are a line of cases to suggest that this rule is entirely consistent with the indemnity principle, there are three further compelling reasons why the courts may be reluctant to rule that law centres operating in accordance with r.7 are not entitled to costs.First, this code has been made under s.31 of the Solicitors Act 1974 and r.4 of the Solicitors Practice Rules 1990 and has the concurrence of the Master of the Rolls.

The award of costs is a matter of discretion and it is clear that a court would be reluctant to exercise its discretion upon the basis that a provision of the code should be treated as a sham.Secondly, as a matter of public policy, it must be arguable that local authorities and others should not be able to escape legal challenge and scrutiny simply because there is no legal aid available in respect of certain proceedings.

This would be the effect if Norman were followed in respect of law centre solicitors and r.7 overridden.

It would signal the end of a great deal of public law cases on behalf of those who cannot afford the services of private practice solicitors.

This would not assist the rule of law.Thirdly, the r.7 arrangement accords with common practice for a considerable number of years.

Countless decisions have been made by central government, local authorities, the Law Society, the Legal Aid Board, citizens advice bureaux, law centres and similar institutions and, most importantly, the courts themselves on the understanding that compliance with r.7 reflects a legal entitlement to recover costs in the normal type of case in which law centres and similar organisations act.

That understanding has never been challenged.It remains to be seen what effect Norman will have on the pro bono initiative and on private practice solicitors in cases on behalf of clients in the circumstances of the client in Norman.

However, law centres remain entitled to inter partes costs provided that they make arrangements in accordance with r.7.

In appropriate cases the operation of r.7 should be explained to clients in the first interview and then confirmed immediately in a client care letter.

The client should also be told that the centre will indemnify the client against any cost order which may be made in favour of the other party, and that it will seek to recover costs if the case succeeds.In a community charge case against Wirral Borough Council recently the authority asked the magistrates to state a case on this precise point, but decided not to proceed to appeal when their own counsel advised against it.

At the same time in an s.82 of the EPA 1990 case, in which the Birkenhead Resource Unit was instructed, the same magistrates' court awarded inter partes costs of £14,471.

Wirral Borough Council had every opportunity to challenge r.7, but decided against when the legal position of r.7 was clarified.

RULE 7 OF THE EMPLOYED SOLICITORS CODE 1990"Law centres, charities and other non-commercial advice services(a) A solicitor who is the employee of a law centre or advice service operated by a charitable or similar non-commercial organisation may give advice to, and otherwise act for members of the public, provided:(i) No funding agent has majority representation on the body responsible for the management of the service, which body must remain independent of central and local government; and(ii) No fees are charged, save:A under the legal aid scheme; orB where the organisation indemnifies the client in relation to the solicitor's costs in so far as they are not recoverable from any other source."