England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CAMBRIDGE COUNTY COURT
HIS HONOUR JUDGE MOLONEY Q.C.
ON APPEAL FROM DISTRICT JUDGE PELLY

		Royal Courts of Justice Strand, London, WC2A 2LL
		13 July 2010

See Order

Lord Justice Lloyd:

1. This appeal concerns the liability of the claimants, Mr and Mrs Ghadami, for costs following the dismissal of their claim against the defendant insurance brokers, Lyon Cole. On that dismissal, the claimants were ordered to pay Lyon Cole's costs on the indemnity basis, and to make an interim payment of £20,000. So far so good, or so bad for the claimants, but at any rate an apparently straightforward order leading to an assessment of Lyon Cole's costs, if not agreed, with any doubts as to reasonableness to be resolved in favour of Lyon Cole.
2. The point that has arisen is this. Lyon Cole had a professional indemnity insurance policy which extended to the costs of the proceedings, giving cover subject to an excess of £1,000. Lyon Cole paid that £1,000; the rest of the bill of CMS Cameron McKenna (CM) was paid by the insurers, a syndicate at Lloyds called Markel. The claimants contend that, on the indemnity principle as regards costs, they are only liable to pay the £1,000 that Lyon Cole itself paid out.
3. District Judge Pelly, before whom the point was taken on the assessment, held that the claimants were correct, assessed their liability at £1,000 and ordered repayment of £19,000 in respect of the interim payment. His Honour Judge Moloney QC allowed Lyon Cole's appeal. Pitchford LJ granted permission to appeal to this court.
4. The District Judge considered two letters, one from CM to Lyon Cole dated 7 November 2003 and the other from CM to Markel dated 22 July 2004. He noted that CM had not sent a client care letter to Lyon Cole nor had they complied with other obligations in the Law Society's client care code in relation to Lyon Cole. He recognised that the normal position is that the paying party is liable for the costs borne by the receiving party's insurer as well as any paid out by the receiving party itself, but said that this was subject to any agreement to the contrary between the receiving party and the solicitors. He held, from the letters, that there was such an agreement under which Lyon Cole's liability for costs was limited to £1,000.
5. Judge Moloney approached the case on the same principle but came to the opposite conclusion. He recognised that it was not necessary to find a formal agreement in writing or otherwise in order to show that CM were acting as solicitors with Lyon Cole as their client. He referred to the fact that undoubtedly CM did act as Lyon Cole's solicitors in the proceedings. He said that the claimants had to show that there was an agreement that, although CM would act for Lyon Cole, Lyon Cole would not under any circumstances be liable for more than £1,000 in respect of CM's fees. It was not enough to show that in practice that was expected to be the case. He commented on the solicitors' failure to comply with the client code in relation to Lyon Cole. He referred to three letters, those seen by the District Judge and another, also dated 22 July 2004, sent by CM to Lyon Cole. He said it was clear that CM had acted both for the insurers and for Lyon Cole. He concluded that the letters in question did not show an agreement that Lyon Cole were not liable to pay CM more than £1,000 in any circumstances. In relation to that he took into account the fact that Lyon Cole are in the insurance business and would have understood the position as between insurer and insured in relation to costs.
6. Up to this point, and indeed up to and beyond the point at which they obtained permission to appeal, the claimants acted in person. They filed a fully argued skeleton argument on the appeal, on the basis of which permission to appeal was granted. On the hearing of the appeal, they had the advantage of having counsel acting for them, Mr Haque (who had also filed a supplemental skeleton argument), although later they decided to dispense with his help. He submitted that it was right to construe the sequence of events, including the letters to which I have referred, as showing that Lyon Cole were in any event only liable to CM to the extent of the £1,000 attributable to the excess under the policy. He argued that the District Judge had been right to say that, if for example the insurers had been unable to pay or had repudiated liability to pay, it was inconceivable that Lyon Cole could have been made liable for the whole of CM's fees, at any rate absent some further agreement under which Lyon Cole assumed full responsibility for those fees. He also pointed to the reasoning of Judge Moloney who observed at paragraph 20 of his judgment that if the letters in question had been sent to a client who was not in any way active in the insurance market he would have been well inclined to construe the letters in favour of the client, resolving any ambiguity or doubt in their favour, so as to find that the client was not liable for the solicitor's fees beyond £1,000. The judge drew a distinction by reason of the fact that the present client was in the insurance business and would therefore be familiar with the basic concepts of the insurance market including the fundamental concept, as he described it, that insurance companies indemnify people in respect of their own liabilities. Mr Haque submitted that the judge was wrong insofar as he had regard to what the subjective understanding of Lyon Cole would have been. Ignoring that subjective understanding, he submitted that the judge would, apart from that, have construed the letter as not giving rise to a liability to pay fees in excess of £1,000 limit.
7. He further submitted that the solicitor's failure to comply with the obligations in the client care code, and in particular the obligation, spelled out in terms in the Law Society's documentation, to make it clear to an insured that responsibility for the payment of the solicitor's costs remains with the insured so that if for any reason the insurer refuses to pay, the solicitor will look to the insured for payment, meant that if CM had found it necessary to seek payment from Lyon Cole, Lyon Cole would have had the best possible basis for arguing that they were not liable beyond the £1,000.
8. In his able submissions, Mr Haque emphasised the dilemma of the claimants, in that, in a sense, they stand in the shoes of Lyon Cole seeking to resist the attempt of CM to establish that Lyon Cole are liable for the substantial costs which have been billed and which are sought to be recovered by way of the assessment, but that, partly in the nature of things, and to a substantial further extent because of the failure of CM to comply with the client code, the claimants are in the dark as to what Lyon Cole are in truth liable to pay to CM as a matter of obligation. He showed us a decision of the Court of Appeal, Griffiths v. Evans, [1953] 1 WLR 1424 in which Denning LJ, dissenting on the appeal and on his own as regards this particular comment, but referring to a disagreement or difference between solicitor and client as to the scope of the retainer, said that in relation to such a dispute:

"the word of the client is to be preferred to the word of the solicitor, or, at any rate, more weight is to be given to it. The reason is plain. It is because the client is ignorant and the solicitor is or should be learned. If the solicitor does not take the precaution of getting a written retainer he has only himself to thank for being at variance with his client over it and must take the consequences."

9. In that case the difference between the parties was as to the scope of the duty undertaken by and entrusted to the solicitor as regards advising the client. In the present case there was no dispute or difference as to that but the uncertainty and scope for dispute would be as to the terms on which the solicitors were to act in respect of fees.
10. The point relied on in the present case is of a kind which has been taken on many occasions in the past. In Adams v. London Improved Motor Coaches Limited [1921] 1 KB 495, the plaintiff brought an action against his former employers for wrongful dismissal. He was supported by his trade union who instructed a firm of solicitors to act for him in the matter. The plaintiff recovered judgment in the action against the defendants and was held to be entitled to judgment with costs. The plaintiff had given no written retainer to the solicitors and there was no agreement between the solicitors and the plaintiff as to costs. Bankes LJ said this at page 501:

"When once it is established that the solicitors were acting for the plaintiff with his knowledge and assent, it seems to me that he became liable to the solicitor for costs, and that liability would not be excluded merely because the union also undertook to pay the costs. It is necessary to go a step further and prove that there was a bargain either between the union and the solicitors or between the plaintiff and the solicitors that under no circumstances was the plaintiff to be liable for costs."

Atkin LJ agreed with him on that.

11. A similar point arose as between a successful appellant and the Law Society where the unsuccessful respondent had been in receipt of legal aid in Lewis v. Averay (No. 2) [1973] 1 WLR 510. In that case the defendant, unable to obtain legal aid, resorted to the Automobile Association which indemnified him for his costs of his successful appeal. The respondent was legally aided on the appeal and the appellant sought an order for his costs against the Law Society. The Law Society could only be liable in respect of costs which had been "incurred" by the unassisted litigant. The Law Society took the point that the costs had been incurred by the AA and not by the litigant. Despite it being stated by the AA's solicitors that Mr Averay had been told that he would be indemnified in all respects by the AA so that no part of the costs of the appeal had or would have fallen on him, the Court of Appeal held that he was the party to the appeal, the person responsible for costs, and, if the appeal had failed, the person who would have been ordered to pay costs, and that if those costs had not been paid his goods would have been liable to execution rather than those of the AA.
12. In turn in Davies v. Taylor (No.2) [1974] AC 225 in a similar context, the House of Lords held that costs in fact defrayed by the litigant's insurance company were nevertheless incurred by the litigant. Lord Cross said this:

"No doubt if it were shown that the respondent's solicitor had agreed with him that in no circumstances would he be liable to pay any part of them then the costs though incurred by the solicitor in defending the case would not be costs incurred by the respondent."

13. Mr Haque showed us one case in which the point was taken successfully. This is British Waterways Board v. Norman, Queens Bench Divisional Court, unreported, 26 November 1993. The board had been ordered by magistrates to pay to Mrs Norman the sum of almost £9,000 by way of her costs of a prosecution of the board under the Environmental Protection Act 1990. The magistrates had had to decide whether those costs were "properly incurred" within the terms of the Act. It was argued that there had been an agreement between Mrs Norman and her solicitors that the latter would not in any circumstances look to her for any part of the costs. McCowan LJ held that the relevant agreement need not be express but could be implied from the circumstances. He considered the evidence, which included a history of silence between solicitor and client as to liability for costs until a very late stage when the prosecutor (the respondent) was told not to worry if the court did not make a costs order, but that did not occur until after the magistrates had retired to consider their verdict. He said that it was clear that if the point had been raised at any earlier stage she would have been told the same and he said:

"Moreover had an officious bystander intervened at an earlier stage and asked if she would have to pay the solicitor's costs in the event of that prosecution failing the answer forthcoming would undoubtedly have been no".

14. One of the factors which the judge had regard to was the failure of the solicitors to fulfil their professional obligations to inform their client as to the position in relation to costs and as to the amount of their charges and so on. He came to the conclusion there must have been an understanding between them amounting in law to a contract that they would not look to her for any costs if she lost.
15. Mr Haque submitted that, subject to the qualification that in the present case Lyon Cole were undoubtedly liable for £1,000, the case was very similar and that particularly having regard to CM's failure to comply with their professional obligation to send to Lyon Cole a client care letter in which costs and so on would be fully dealt with, it was inconceivable that CM could have recovered anything over £1,000 from Lyon Cole if they had had to have recourse to them.
16. In the course of the hearing of the appeal it became clear that it is common ground that CM did have Lyon Cole as clients, though the insurers were no doubt also their clients. Otherwise, Lyon Cole would not have been liable to pay even £1,000 to them. We had some submissions about burden of proof, but no such issue arises in practice in the case.
17. It is highly regrettable that CM failed to comply with their professional obligations as regards a client care letter in relation to Lyon Cole. We were shown a letter from CM to Markel about the rates at which they would be charging in relation to litigation conducted on Markel's behalf of which the present case was no doubt one example among many. There was no such letter to Lyon Cole. Miss Powell, for Lyon Cole, in her brief and cogent argument, submitted that in that situation the position is that there was undoubtedly a contract between CM and Lyon Cole under which the solicitors would act for Lyon Cole in relation to the defence of the litigation, but there were no expressed terms as to remuneration. She submitted that the solicitors would be entitled to be paid at reasonable rates for the work properly done in pursuance of the retainer. What she contested was that, either in principle or as a result of any of the correspondence, there was any limitation to £1,000 of the amount that the solicitors could recover from Lyon Cole.
18. I must refer to the letters. As it seems to me the only relevant letters could be those which passed between CM and Lyon Cole. The first, dated 7 November 2003, followed a telephone conversation and confirmed that CM had been instructed to act on behalf of Markel. The claim by Mr and Mrs Ghadami had already been issued and served, and no doubt Lyon Cole had reported it to their insurers and had asked for assistance under the policy. The letter made it clear that CM were acting without prejudice to the insurer's rights. Embarking on the defence of the claim was not to waive any right which the insurers might later discover to repudiate liability. The writer confirmed a request for all Lyon Cole's relevant papers, and described the steps that were intended to be taken in relation to the claim. She said she would be in touch with her advice on initial steps to be taken.
19. CM proceeded to act, and in due course filed a Defence on 1 July 2004. The papers do not include any intervening correspondence between CM and Lyon Cole. There may well have been contact, but not, so it seems, of relevance to the present issue. On 22 July 2004 CM wrote again to Lyon Cole with a report on the state of the proceedings. The writer enclosed an invoice for some £3,000 odd (addressed to Markel), which had been rendered to Markel in February 2004, and which had been settled in full by Markel. She pointed out that the policy was subject to an excess of £1,000, and that Lyon Cole was therefore responsible for meeting that sum first. She asked for payment of this amount. She said "All costs which exceed £1,000 are payable by your insurers."
20. In parenthesis I note that, if the insured had been carrying on a business which was subject to VAT (such as that of a firm of solicitors), CM would in the ordinary way have rendered its invoices to the insured, because the insured could recover the VAT element of the bill by deduction against its own liability for VAT, and the insurer would only be liable to indemnify the insured for the net amount of the bill. Since insurance brokers cannot recover VAT, either by deduction from the amounts charged to their customers or directly from HM Customs, there was no need to go through this process.
21. By the time of the letter dated 22 July 2004, CM had been acting for Lyon Cole in the litigation for some 8 months. I do not find it possible to read that letter as containing a proposal by CM to Lyon Cole as to the terms on which they would continue to act for Lyon Cole in the litigation. Rather, the writer referred to the position under the policy, of which all of Markel, CM and Lyon Cole were aware, namely that Lyon Cole had to bear the first £1,000 of the costs, and that Markel would indemnify them for the balance of the costs, in practice by paying CM directly.
22. The bundle before us (and therefore, I take it, that before the judges below) did not include a complete copy of the policy. It omitted the insuring clauses, though it referred to them. We were supplied with a complete copy, which confirmed that which one would expect, both from general knowledge and from the pages that had previously been disclosed, namely that the insurer is liable under the policy to indemnify the insured against claims arising from the insured's business, including against costs and expenses, subject to various limitations and conditions, of which the £1,000 excess is the main point relevant for present purposes. The policy also gives the insurer the right to step in and take over the conduct of proceedings brought against the insured.
23. It seems to me that when the judge referred to the knowledge that Lyon Cole would have had of how insurance works, he was not speaking of the subjective knowledge or understanding of a particular person within Lyon Cole, but of the fact that the company was active in the insurance market and could and would be expected to understand enough not to need to be told that, in principle, they were liable for costs but that the insurers would indemnify them for all but the excess. On that basis the judge's comment is entirely apposite.
24. It is not necessary to speculate as to the terms in which CM might have written to a different client, and how the letter might have been understood by such a client. As I have mentioned, if the insured had been registered for VAT, CM would have been rendering invoices to the insured, and might well, therefore, have explained at the outset that the insured had to recover the VAT from the Customs & Excise, and had to pay the excess of £1,000 but that otherwise the bills would be met by the insurer.
25. As it is, the letter dated 7 November 2003 says nothing at all about costs or charges, and therefore cannot possibly show an agreement that Lyon Cole would not be liable for more than £1,000 costs. The second letter was written long after the solicitor-client relationship had started. It does not read as if it were intended to propose terms on which the relationship is to proceed. On the contrary, as I have said, the references to costs are no more than comments on the position under the policy.
26. Accordingly, I agree with the judge that there was no agreement such as Mr and Mrs Ghadami would have to show, as mentioned in Adams and in Davies v Taylor, and as was found in British Waterways Board v Norman.
27. In my judgment, on the material before the court, there was an implicit agreement that CM would act as Lyon Cole's solicitors in relation to the claim brought by Mr and Mrs Ghadami, but without any express terms as to charging rates or the like. CM's failure to comply with the client care code does not prevent them from recovering fees or disbursements: see Garbutt v Edwards [2006] 1 WLR 2907 (coincidentally, another case which started before District Judge Pelly). CM would be entitled to charge Lyon Cole reasonable fees and disbursements for the work reasonably done.
28. After the draft of this judgment had been made available, on a confidential basis, to the parties and their legal representatives, Mr Ghadami decided to dispense with the assistance provided until then by Mr Haque, and to make representations to the court in the light of the judgment himself. He sought to take a number of points which were not taken at the hearing of the appeal, and asked the court to defer handing down the judgment pending further oral argument. The court declined to allow him that opportunity. It is not necessary to refer to any of the points which he sought to take.
29. It follows from what I have said earlier that Judge Moloney was right to discharge District Judge Pelly's assessment of the costs payable at £1,000. There must be an ordinary detailed assessment, on the indemnity basis. On that assessment, Mr and Mrs Ghadami will be entitled to query items charged for on the basis that they are unreasonable in amount or were unreasonably incurred. That is not different, in principle, from the position on a detailed assessment in any event. Miss Powell commented, and she may be right, that the rates charged to insurers by the solicitors who act for them regularly may be found to be well within the range of reasonable fees, because insurers can be hard bargainers, with the strength that comes from having a lot of work to allocate.
30. Those, however, are matters for the future. For the present, I would dismiss the appeal, because no agreement has been shown whereby the liability for Lyon Cole for CM's fees and disbursements was expressly limited to £1,000, CM's neglect of its professional duties does not prevent it from recovering fees and disbursements from Lyon Cole, and Lyon Cole were therefore liable to CM to pay costs and disbursements at reasonable rates for the work reasonably undertaken in the course of the retainer.

Lord Justice Etherton

31. I agree.

Lord Justice Elias

32. I also agree.
Ghadami v Lyon Cole B2 2009/2239 Terms of order

1. Appeal dismissed

2. Appellants to pay respondent's costs of the appeal to be assessed in detail if not agreed

3. The respondent having filed and served a Request for Detailed Assessment of the costs of the action dated 8 October 2008:

(i) The Defendant's costs of the action shall be the subject of immediate detailed assessment

(ii) The costs referred to in paragraph 2 of this order and in paragraph 5 of His Honour Judge Moloney's order dated 25 September 2009 shall be assessed at the same hearing, and the filing and service of a Request for Detailed Assessment in relation to those costs shall be dispensed with

4. The assessment of costs shall be referred to a District Judge other than District Judge Pelly

5. The Claimants' applicatio n for permission to appeal to the Supreme Court of the United Kingdom is refused