The indemnity principle

The decisions of the Court of Appeal in Bailey v IBC Vehicles Ltd, March 25, 1998 (The Times, April 9, 1998) and Mr Justice Tucker in a Review of Taxation: Nederlandse Reassurantie Groep Holding NV v Bacon & Woodrow dated April 21, 1998 (unreported) have extended and applied the decision of the Court of Appeal in The General of Berne Insurance Company v Jardine Reinsurance Management Limited (General of Berne Insurance Company v Jardine Reinsurance Management Limited 1998, The Times, February 20.).THE INDEMNITY PRINCIPLELord Justice May in The General of Berne summed up the indemnity principle:"The principle is simply that costs are normally to be paid in compensation for what the receiving party has or is obliged himself to pay.

They are not punitive and should not enable the receiving party to make a profit."Sir Brian Neill summarised the principle:"That as between party and party an order for costs is not intended to provide more than an indemnity, the receiving party is not entitled to a bonus."WHERE THERE IS NO CONTENTIOUS BUSINESS AGREEMENTIn the review of taxation before Mr Justice Tucker, the court made a finding that no contentious business agreement was entered into.

On taxation, the Master had made a finding (prior to the decision in The General of Berne) that the bill of the defendants did not breach the indemnity principle.

The bill ran to several million pounds and the difference between the gross sum cap and the item by item approach would again have been significant.Although there was no contentious business agreement, there was a long standing relationship between the firm of solicitors and the defendants which the judge found might not exclude the possibility of the existence of some less formal arrangement as to remuneration.On the review, counsel for the receiving party sought to distinguish The General of Berne on the basis that s 60(3) of the Solicitors Act 1974 did not necessarily enact the common law.

Counsel also referred to the enormity of the task which would confront the defendants if they had to redraw their bill in accordance with The General of Berne.

Counsel submitted that the correct approach to the indemnity principle in such a case was to apply a global cap and that this should be done at the end of the taxation.

Tucker J found that this could give rise to p roblems if, for example, the final bill had not been rendered to the client, or, if rendered, had not been paid, or the solicitors' costs were, or could be, subject to taxation.

Furthermore a considerable time might elapse before the global sum cap could be identified.

Tucker J continued:"In my judgment there should be no distinction between those cases where a formal contentious business agreement is in place and which are governed by s 60(3) of the 1974 Act and other cases where there is an agreement partly evidenced in writing, an unwritten agreement, or no agreement at all but merely an understanding arising perhaps from a long standing relationship as in the present case.

It is desirable that there should be uniformity in approaches to taxation and highly undesirable and confusing for different approaches to be adopted according to whether any agreement can be brought within the statutory definition .

.

.

I take the view that if in a contentious business agreement case an item by item approach should be adopted .

.

.

then there is no warrant for the adoption of any different approach in other cases."Tucker J declined to decide what constitutes an "item" for the purposes of taxation.UNION BACKED LITIGATIONThe case of Bailey v IBC Vehicles Ltd involved a plaintiff employed by the defendants at their factory, where, in the course of his employment, he suffered personal injuries.

The plaintiff consulted his union, who in turn instructed solicitors who commenced proceedings.

The defendants agreed to pay damages to the plaintiff, together with costs to be taxed.

When the bill was presented for taxation the defendants objected to the hourly rate and mark-up and asked that the plaintiffs should provide evidence to show that it was not in breach of the indemnity principle.

Eventually a letter was produced to the District Judge from the union representative which stated that the Union's relationship with the solicitor was on the basis that the solicitors were entitled to make a full solicitor/client charge.

The defendants were not satisfied with this response and the District Judge supported the defendant's contention that they were entitled to discovery of the relevant material.The Court of Appeal found that it was clearly established that the indemnity principle is not undermined merely because the successful litigant is a member of a trade union whose claim is being pursued with financial support from his union.

(See Adams v London Improved Motor Coach Builders Ltd [1921] 1 KB 499 and R v Miller 1993 1 WLR 1057 at 1061 Lloyd J.) Although the plaintiff would not in practice have been called upon to pay the solicitors' fees if the action had failed, and the deliberate decision had been made not to inform him of the rate of fees lest this caused him undue alarm, the appeal was not argued by the defendants on the basis that the solicitors had agreed that the plaintiff's primary liability for their charges should be extinguished.

The argument was directed towards the figures actually agreed between the solicitors and the union.DISCOVERY AND DISCLOSURESDuring the hearing of the appeal it was accepted by the defendants that a taxing officer was entitled, if he saw fit, to be provided with the information which he needed.

The court stated:"The taxing officer is exercising a judicial function with substantial financial consequences for the parties.

To perform them he is trusted properly to consider material which would normally be protected from disclosure under the rules of legal professional privilege.

If, after reflecting on the material available to him, some feature of the case alerts him to the need to make further investigation or causes him to wonder if the information with which he is being provided is full and accurate, he may seek further information.

No doubt he would begin by asking for a letter or some form of written confirmation or reassurance as appropriate.

If this were to prove inadequate he might then make orders for discovery or require affidavit evidence .

.

.

It would theoretically be open to him to order interrogatories.

However if the stage has been reached where interrogatories might reasonably be ordered, the conclusion that the receiving party had not been able to satisfy the taxing officer about the bill or some particular aspect of it would seem inevitable .

.

.

An emphatic warning must be added against the over enthusiastic deployment of these powers, particularly at the behest of the party against whom the order for costs has been made .

.

.

The danger of satellite litigation is acute.

As far as possible, consistent with the need to arrive at a decision which does broad justice between the parties, it must be prevented or avoided and the additional effort required of the parties kept to the absolute minimum necessary for the taxing officer properly to perform his function." (Per Judge LJ Bailey v IBC Vehicles Ltd.)The court also turned its attention to the client care letter and the signing of the bill of costs.THE CLIENT CARE LETTER AND SIGNING THE BILLAs officers of the court, solicitors are trusted not to mislead or to allow the court to be misled.

This elementary principle applies to the submission of a bill of costs.

The court indicated that it would expect solicitors to have disclosed the existence of a cap or similar arrangement that applied in the case, and would have expected the solicitors to ensure that the information before the court represented a comprehensive, rather than a partial explanation of the facts, and, if it was not, to supplement it with information of their own."They would not have produced a signed bill of costs which included a claim for 'reasonable costs' which would have fallen foul of the indemnity principle."Judge LJ continued:".

.

.

in the ordinary case in which a 'client care letter' has been provided (and certainly if and when the client care letter becomes obligatory) the hourly rate claimed in the bill of costs should coincide with the terms of that letter.

In The General of Berne Insurance Co the same principle was applied to a contentious business agreement under s 60(3) of the Solicitors Act 1974, Sir Brian Neill observing:'Where applicable, the figures in the contentious business agreement provide both a measure and a ceiling for each recoverable item of costs.'Moreover, in view of the increasing interest taken in this issue by unsuccessful parties to litigation, coupled with the developing practice in relation to conditional fees, the extension of the 'client care' letter and contentious business agreements under s 60(3), in future copies of the relevant documents (where they exist) or a short written explanation .

.

.

should normally be attached to the bill of costs.

This will avoid skirmishes which add unnecessarily to the costs of litigation." (Per Judge LJ Bailey v IBC Vehicles Ltd.)Lord Justice Henry agreeing with the judgment of Judge LJ stated:"Order 62, r 29(7)(c)(iii) requires the solicitor who brings proceedings for taxation to sign the bill of costs.

In so signing he certifies that the contents of the bill are correct.

That signature is no empty formali ty.

The bill specifies the hourly rates applied and the care and attention uplift claimed.

If an agreement between the receiving solicitor and his client .

.

.

restricted (say) the hourly rate payable by the client that hourly rate is the most that can be claimed or recovered on taxation .

.

.

The signature of the bill of costs under the rules is effectively the certificate of 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 their client under a contentious business agreement."Henry LJ agreed that the client care letter, or any contentious business agreement, should be attached to the bill of costs.

He concluded:"For the avoidance of doubt I also agree that the Taxing Officer may and should seek further information where some feature of the case raises suspicions that the whole truth may not have been told.

On the other side of a presumption of trust afforded to the signature of an officer of the court must be that breach of that trust should be treated as a most serious disciplinary offence."CONCLUSIONSFollowing these decisions it is now clear that the inter partes bill of costs must reflect, as accurately as possible, whatever agreement or arrangement has been reached with the client as to the level and method of charging.

If there is a client care letter (which will eventually become compulsory) or a contentious business agreement, the letter or agreement must be attached to the bill of costs to be taxed.In the absence of a contentious business agreement or any client care letter, or indeed any correspondence relating to costs, the best evidence available is the rate at which the client has been charged during the course of the proceedings.

If the bills which have been delivered are purely seeking sums on account, not much help will be derived from that source, but if, as is more usual, bills are delivered which are complete self contained bills to date, it will be evident from them what the amount of costs is, for which the client is liable, up to any given date (which could then be translated into the inter partes bill), or indeed the actual hourly rate which the client is being charged.The question: What is an "item?" remains unanswered.

The item by item approach appears to be clear enough: the paying party should not pay more than the client for any particular item whether it be a single letter, time spent in attendance or in perusal of documents.

Since all solicitors' charges are ultimately time based this does not present a particular difficulty, certainly not where the same basis of charge is used in the inter partes bill as in the solicitor client bill.Since the indemnity principle must be applied on an item by item basis, it will follow that in many cases it will not be possible to draw the inter partes bill on the conventional A + B basis (that is hourly rate plus care and conduct).

It would seem, following the Court of Appeal decision, that realistically it may not be possible to comply with the provisions of RSC Ord 62, Appendix 2, Part II or Practice Direction No 2 of 1992.

It is suggested that it is within the discretion of a taxing officer to accept for taxation an inter partes bill, drawn in accordance with recent Court of Appeal decisions, without requiring the receiving party to break down the figures artificially to show them separately as an hourly expense rate and care and conduct.

It is expected that under the new Civil Procedure Rules any perceived difficulties of this type will disappear.The C ourt of Appeal was clearly of the view that the signature of the bill by the solicitor is intended to be a certificate that the receiving party's solicitors are not seeking to recover in relation to any item more than they have agreed to charge their client.In a case where some feature alerts the taxing officer to the need to make further investigation, or causes him to wonder if the information provided is full and accurate, there is now no doubt that the taxing officer may ultimately make orders for discovery or require affidavit evidence.

It is not expected that this power will be frequently exercised, in fact Judge LJ cautions against it, but both he and Henry LJ acknowledge that there might be cases in which the whole truth may not have been told.The Court of Appeal decision throws sharply into focus the duty upon solicitors, as officers of the court, to provide full and accurate information on matters which the court has to decide.

The discovery of any deliberate breach of duty by the solicitors would, in addition to the undoubtedly negative repercussions in the case itself, result in a referral to the Office for the Supervision of Solicitors of what will now be regarded as a most serious disciplinary offence.The whole process of taxation and the principles upon which it is based are in an unprecedented state of flux, a situation brought about by the fact that the principles, laid down originally in Victorian times, are not apt for the conditions at the beginning of the 21st century; and all the received wisdom in respect of costs is coming under penetrating scrutiny as a result of the Access to Justice reports and the new Civil Procedure Rules.