England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION, PATENTS COURT)
(Mr Justice Laddie)

		Royal Courts of Justice Strand, London, WC2A 2LL
		21st October 2002

Lord Justice Longmore:

1. We gave judgment on 8th May 2002 on the question whether Laddie J had erred in deciding that the defendants should pay the costs of the action brought by Mr Brawley in respect of money owed to him by the defendants in relation to his invention of the “Checkpoint” device; we upheld that judgment [2002] EWCA Civ 756. Mr Brawley was a legally aided claimant.

2. We left over the question whether the judge was also correct to have decided that the costs which the defendants had to pay should be assessed on an indemnity basis. When that part of the appeal was opened, the court referred counsel to Willis v Redbridge Health Authority [1996] 1 WLR 1228 which had decided, on the wording of the relevant legal aid regulations then in force, that it was not appropriate that a legally aided litigant should be awarded indemnity costs. This was because the costs of a legally-aided litigant’s solicitor were always taxed on a standard basis, the litigant himself could not be liable to the Legal Aid Fund for any sum recovered by way of costs other than costs assessed on a standard basis and he could not, therefore, recover costs on a basis which awarded him any greater sum by way of costs. As Lord Justice Aldous said, at page 1238E:-

   “. . . an award to an assisted person of costs upon an indemnity basis would mean that he could recover more than his maximum liability. That is not lawful.”

   A party’s inability to recover more by way of costs than the amount for which he is himself liable by way of costs is known in the profession as the indemnity principle, see Gundry v Sainsbury [1910] 1 KB 99 and Civil Procedure 2002 note at 47.14.15.

3. Mr Shipley for the appellant defendants intimated that he would wish to rely on Willis but the wording of the regulations had changed and we accordingly adjourned the part of the appeal which related to the order for indemnity costs so as to enable the parties to consider their positions and to enable the Legal Services Commission to make any submissions they might wish to make about the regulations presently in force.

4. We have now had the benefit of a detailed skeleton argument from Mr Jeremy Morgan of counsel for the Legal Services Commission. He has explained that the Civil Legal Aid (General) (Amendment) Regulations 1994 introduced Regulation 107B into the Civil Legal Aid (General) Regulations 1989, which were the regulations the subject of consideration in Willis v Redbridge. The effect of this new Regulation 107B is to disapply both the indemnity principle and also the rule that a lawyer for a legally-aided party can only be paid out of the Legal Aid Fund. The reason for this was that the 1994 Regulations for the first time introduced the concept of a prescribed fee (lower than the fees recoverable previously, which were normally those that were allowable on an inter partes standard basis taxation). The new regulations also permitted, however, an uplift provided that costs were actually recoverable from the legally-aided litigant’s opponent. This was thus an early example of a success fee, a concept with which, since the Access to Justice Act 1999, both the profession and the courts are now becoming familiar. Mr Morgan further confirmed our initial impression that the effect of the new regulations was that it was not the claimant but his solicitor who was entitled and, indeed, could sue for the uplift in costs over and above the prescribed basis.

5. In these circumstances Mr Shipley for the appellants accepted that there was no legal impediment to an award of indemnity costs based on Willis v Redbridge on the wording of the legal aid regulations. He did, however, repeat the submissions made in his original skeleton that the judge wrongly exercised his discretion to award indemnity costs at all and submitted further:-

   (1) that the rationale for awarding indemnity costs was that the actual litigant should not be out of pocket or should be less out of pocket than he would be if an order was made on a standard basis; this had no application in legal aid cases because the litigant does not have himself to pay anything by way of costs or at least only has to make a contribution based on his means;

   (2) that since an order of indemnity costs in a legally aided case only benefits the lawyers, it should only be made after examination of the question whether the claimant’s lawyers actually deserved to receive more than they would receive on a standard basis;

   (3) that the potential conflicts of interest that could arise between a lawyer and his client if a lawyer were to make applications for indemnity costs (which would, ex hypothesi, be only in his own interest) made it undesirable to make orders for indemnity costs at all. Was it, for example, the duty of the lawyer to pass on any offer of settlement, however derisory it might be and thus forfeit the personal benefit of an award of indemnity costs?

   It is appropriate to deal first with the submission that an award of indemnity costs should not have been made even if the claimant had not been legally aided.

   Indemnity costs apart from legal aid considerations

6. Mr Shipley’s criticism of the judge’s award of indemnity costs focussed on (1) the fact that the new Civil Procedure Rules did not come into effect until 26th April 1999, well after proceedings had been instituted in September 1997, and (2) the possible influence on the judge of the defendants’ attempts to have the claimant’s legal aid withdrawn. In fact, the reason why the judge decided to award indemnity costs was that he thought the defendants’ conduct of the litigation had been unreasonable in general; a judge who so concludes, was entitled to award indemnity costs before the Civil Procedure Rules came into force and remains, of course, entitled to do so after they have come into force. There is nothing, therefore, in Mr Shipley’s first point.

7. The judge, in fact, relied primarily on two factors: (1) the defendants’ persistent refusal to supply the documents needed by the claimant to establish and quantify his claims; (2) the fact that the defendants made “woefully” inadequate offers to settle the proceedings but the inadequacy was not apparent to the claimant because the relevant documents had not been disclosed.

8. He did add to this that the defendants had apparently intervened to seek withdrawal of the claimant’s legal aid certificate. He then said this:-

   “In my view, in the circumstances of this case, and in particular in circumstances where there is no dispute that Mr Brawley was entitled to 50% of the profits, it was wholly contrary to the proper way of conducting litigation for the defendants to refuse to hand over the necessary documents to enable him to assess his claim, or, more importantly, to allow him to assess the offers which were made from time to time by the defendants. The result was that Mr Brawley was forced to engage Mr Green to help him come to an estimate of what he had lost as a result of failure to hand over 50% of the profits.

   In my view, in the peculiar circumstances of this case, the making of offers by the defendants, which were woefully below what appears to be now accepted as Mr Brawley’s entitlement, helped in large part by the failure to hand over documents for which no excuse or defence has been proffered, amount to a wrongful manner of conducting this litigation. It is quite clear, in my view, that Mr Brawley was anxious to settle this case as soon as possible. It has been kept going far too long as a result of the way in which the defendants have conducted this litigation. I shall order costs on an indemnity basis”

9. In my view it was plainly within the discretion of the judge in the circumstances of this case to award indemnity costs, if the fact that the claimant was legally aided is disregarded. Once it is accepted (as the defendants had to accept) that they did indeed have an obligation to pay over 50% of the profits made from the Checkpoint device, their conduct in seeking to obstruct the claimant’s attempt to have that percentage properly assessed was quite rightly categorised as a wrongful manner of conducting litigation. The judge’s reference to the defendants’ attempts to have legal aid withdrawn was not, in my view, essential to his decision. Even if it was, it was a matter he was entitled to have in mind in the light of the fact that the continued legal assistance to the claimant was entirely justifiable.

10. If, therefore, the claimant had been financing the litigation himself, an award of indemnity costs could not be criticised.

    Impact of legal aid

11. For his proposition that the rationale for awarding indemnity costs was that the actual litigant should, in an appropriate case, not be out of pocket or, at least, less out of pocket than if costs were awarded on a standard basis, Mr Shipley relied on Petrotrade v Texaco [2002] 1 WLR 947 paras. 63-4 (where Lord Woolf MR observed that the power to award indemnity costs is a means of achieving a fairer result for a claimant) and McPhilemy v Times Newspapers [2002] 1 WLR 934 para. 20 where Chadwick LJ explained the unfairness of an award of standard costs as follows:-

    “. . . an award of costs on a standard basis will, almost invariably, lead to the successful claimant recovering less than the costs which he has to pay to his solicitor. So, although he has been successful, he is out of pocket. Costs on an indemnity basis should avoid that element of unfairness.”

    Although in a sense one can say that one of the reasons for awarding costs is to avoid the inherent unfairness of an order for costs on a standard basis, that is not the rationale of indemnity costs as such. If it were, indemnity costs would be awarded more often than they are.

12. In fact the rationale for an award of indemnity costs is rather different. Since the introduction of the C.P.R., indemnity costs have been described as both compensatory and penal; but these concepts are not antitheses. All costs awards are intended to be compensatory in the sense that the litigant is compensated for the liability he has incurred to his own lawyers. The “indemnity principle” ensures that an award of costs (whether on a standard or an indemnity basis) does not enable the litigant to profit from any costs order. But an order for indemnity costs is often intended to operate penally on the losing party in the sense that the court disapproves of that party’s conduct in relation to the litigation. That is what Laddie J intended in the present case.

13. Recent authority has shown that it may also be appropriate to make an award of indemnity costs where there is little or no stigma to be attached to the manner in which the losing party has conducted the litigation, see eg Excelsior Commercial & Industrial Holdings Ltd v Salisbury Hammer 12 June 2002, [2002] EWCA Civ 879 para. 31 and Lord Woolf CJ’s re-emphasis in para. 32 of:

    “the point . . . that, before an indemnity order can be made, there must be some conduct or some circumstance which takes the case out of the norm.”

    He gives the example of a test case which benefits other litigants. Indemnity costs may, specifically, be also awarded where a claimant makes a Part 36 offer which the defendant should, but does not, accept, see CPR 36.21 and McPhilemy. But despite these examples indemnity costs are, more usually, awarded when, as here, the judge disapproves of a party’s conduct in the litigation.

14. The important thing in non-assisted litigation, however, is that whatever the circumstances may be in which indemnity costs are awarded, such award must not offend the indemnity principle that a litigant cannot recover more by way of costs than the costs for which he is liable. Since his liability to his own solicitor cannot, apart from some special agreement, be greater (or, indeed, less) than a sum assessed on an indemnity basis, the indemnity principle will not be infringed.

15. If (as I believe to be the case) there are many different reasons why a judge makes an award of indemnity costs, it is impossible to say that the rationale of an award of indemnity costs is that the successful party should not be out of pocket. It may be the desired consequence but it is not the rationale; in the present case, the rationale is that the unsuccessful party has misconducted himself in the course of the litigation for the purposes of Part 44 of C.P.R., and in other cases that he has eg failed to beat a claimant’s offer to settle pursuant to Part 36 or (to take Lord Woolf MR’s example) has conducted a test case for the benefit of other litigants as well as himself.

16. From this it can be seen that it is not a principled objection to an award of indemnity costs for the losing party to say that a legally aided litigant will not himself recover the difference between a standard costs and an indemnity costs order and that, therefore, an indemnity costs order cannot be made in favour of a legally aided litigant. There may be practical objections but that is a different matter.

17. Mr Mellor (with Mr Morgan’s support) submitted that Mr Shipley’s whole argument was misconceived because it was a breach of the principle, set out in section 31 of the Legal Aid Act 1988, that the rights conferred by the Legal Aid Act are not to affect the rights or liabilities of other parties to the proceedings or the principle on which the discretion of the court is normally exercised. The relevant provisions of section 31 are:-

    “(1) Except as expressly provided by this Act or regulations under it – (a) the fact that the services of the legal representative are given under this Act shall not affect the relationship between or rights of a legal representative and client or any privilege arising out of such relationship; and (b) the rights conferred by this Act on a person receiving advice, assistance or representation under it shall not affect the rights or liabilities of other parties to the proceedings or the principles on which the discretion of any court or tribunal is normally exercised. (2) Without prejudice to the generality of subsection (1)(b) above, for the purpose of determining the costs of a legally assisted person in pursuance of an order for costs or an agreement for costs in his favour . . . the services of his legal representative shall be treated as having been provided otherwise than under this Act and his legal representative shall be treated as having paid the fees of any additional legal representative instructed by him.”

    Carried to its logical conclusion this submission would mean that Willis was wrongly decided but we cannot so hold since section 31 was drawn to the attention of the court and actually set out in the judgment. The court must in Willis have decided that if an application for indemnity costs is made in a legally aided case, the court must be informed (if it does not already know) that the applicant for the order is a legally aided litigant. If there is then a danger that the indemnity principle may be infringed, an order could not (under the Regulations then in force) be made. The court presumably considered that it cannot have been Parliament’s intention to allow section 31 to override what was then thought to be the salutory principle that no litigant should make a profit out of an order requiring a defeated party to pay costs any more than it intended section 31 to be a charter for forum-shopping by defendants trying to have cases decided in jurisdictions where there was no legal aid, see Connelly v RTZ [1998] AC 854.

    Practical considerations

18. Mr Shipley’s other arguments can be considered under this head but it is first worth observing that, now that Parliament has permitted the indemnity principle to be infringed in legal aid cases, it would be odd that the weapon of indemnity costs should be withdrawn from the litigant’s armoury. The rationale for making an order (whether one takes, by way of example, test cases, Part 36 offers or cases where a party has acted unreasonably in the litigation) is equally strong, where a party is legally aided as where he is not. One view might be that it is even more undesirable that litigation taking place at public expense should be conducted unreasonably than when it is taking place at the expense of the parties.

19. For these reasons I do not think that the fact that the case for a claimant has been conducted with the benefit of legal aid so that any order for indemnity costs will benefit the claimant’s lawyers not the claimant should encourage the court to consider whether the lawyers deserve any increase in their usual or prescribed fee. Usually, if the defendant has been unreasonable, the claimant’s lawyers will, in fact, deserve some extra remuneration even if only to compensate for the exasperation of acting against an unreasonable opponent. To look at the matter in detail would be counter-productive, and unnecessarily expensive; it would probably require also an undesirable investigation into privileged matters.

20. As for the teasing conundrums as to conflict of interest posed by Mr Shipley (with some assistance from the court), they will, in my view, have to be worked out in practice. As Mr Morgan helpfully pointed out, much more awkward problems with regard to offers of settlement than the ones posed are liable to arise daily as part of the ordinary course of conducting litigation pursuant to conditional fee agreements (“CFAs”). To make some special provision with regard to the award of indemnity costs when the receiving party is legally aided would be straining at a gnat at a time when both the profession and the court have to swallow the camel of CFAs. Since applications for indemnity costs are moreover usually made at the same time as, and are dependent on, applications for ordinary costs, conflict problems are not likely to loom large in any practical sense.

21. For these reasons I consider there is no impediment to an award of indemnity costs in the present case. Apart from the legal aid aspects of the present case, the decision to award indemnity costs was well within the judge’s discretion and I would dismiss this appeal.

    Costs of the Appeal

22. Mr Mellor asked for the costs of the appeal to be paid on an indemnity basis also. That gives rise to different considerations altogether. If permission to appeal had been granted, it would be rare indeed for the losing appellant to be ordered to pay indemnity costs. Mr Mellor submitted that the permission to appeal had been procured by misrepresentation but I do not think it was. Still less would I wish to encourage a satellite inquiry into the extent and effect of any representation there might have been.

    Conclusion

23. I would, therefore, dismiss the appeal against the judge’s order for indemnity costs at first instance; I would award the Respondents their costs of the appeal on the standard basis only.

    Lord Justice Tuckey:

24. I agree.

    Lord Justice Aldous:

25. I also agree.