What is it and how does it work?

The indemnity principle simply provides that the receiving party cannot recover more costs from the paying party than he himself would be liable to pay his own solicitors. It is very common for paying parties to dispute or at least question the terms of the receiving party's retainer agreement, and furthermore demand sight of the retainer, without much regard to CPR Part 47.18 and the Costs Practice Direction Section 45.4. One response is to say that a request for sight of the retainer is covered by privilege. In fact some useful guidance was provided by the Court of Appeal in Hollins -v- Russell. In that case disclosure of a Conditional Fee Agreement was differentiated from the suggestion of handing over the Rule 15 letter. A key case here was Bailey -v- IBC Vehicles Limited [1998] 3 All ER 570 CA where Henry LJ stated reminded the Court that the signing of the Bill of Costs is no empty formality and is sufficient to satisfy the Court that there has been no breach of the indemnity principle. In his words:


"The signature of the bill of costs under the rules is effectively the certificate by 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. The court can ( and should unless there is evidence to the contrary) assume that his signature to the bill of costs shows that the indemnity principle has not been offended."


If there is good reason to question the validity of the Partner’s signature and good grounds for disputing the terms of engagement between the solicitor and client the later case of Hazlett -v- Sefton Metropolitan Borough Council [2000] 4 All ER 887 may offer more guidance.


A paying party might make reference to some of the much older cases such as Harold -v- Smith [1860] 5 H&N 381 and Gundry -v- Sainsbury [1910] 1 KB 645. The latter case involved an impecunious labourer whose solicitor appeared to have agreed to act for no charge upon the assumption that his client would recover costs from his losing opponent. Upon oral cross-examination the lack of an agreement for the solicitor's costs to be paid was revealed by the Claimant. The acting solicitor made an application in an attempt to give oral evidence as to the terms of the agreement. The application was refused on the grounds that terms of engagement must be placed in writing to be enforceable against the client in accordance with the then Attorneys and Solicitors Act 1870.


If a solicitor was acting 'in-house' for a hypothetical company such as “Great Telecom Plc” in their litigation department a paying party might question whether the client company would actually pay his solicitor anything in he way of fees and consequently what would be recoverable from the paying party in such circumstances. In this regard I would refer the paying party to the case of Re Eastwood (Deceased), Re; sub nom Lloyds Bank Ltd -v- Eastwood & others [1974] 3 All ER 603. The costs judge had initially decided that the paying party should only have to pay the basic overheads paid by a company in employing the acting solicitor. This was of course overturned in the Court of Appeal whereupon it was confirmed that the indemnity principle was not in breach and that the solicitor, in these circumstances, should be allowed hourly rates of similar equivalent to those charged by the average solicitor working for the average firm in the area concerned. It may be said that, in practical terms, that the indemnity principle does not have the same significance here as it would in the traditional sense.


Where a matter has been funded by way of legal expenses insurance (before the event) or a trade union and the paying party takes the point it makes sense refer them to the cases of Adams -v- London Improved Motor Coach Builders Ltd [1920] All ER 340 and R -v- Miller & Glennie [1983] 1 WLR 186, 191-2. The former relates to a case of wrongful dismissal where the successful party's trade union has undertaken to pay his costs. The paying party argued that the agreement appeared to be between the trade union and the solicitor rather than between the client and the solicitor.


The cases of Miller & Glennie arose when the Defendants were accused of causing an affray whereupon their employers agreed to pay their legal costs. Regardless of who was to pay the legal costs, the clients had established an indemnity by instructing their solicitors whereby a third party, whether union or legal expenses insurer, will cover any irrecoverable legal costs. Bankes LJ in Adams -v- London Improved Motor Coach Builders Ltd [1920] All ER 340 decided that where solicitors act with the client's "knowledge and assent" the client becomes liable for costs regardless of whether another party has undertaken to pay the costs. It would furthermore have to be proven by the paying party that under no circumstances was the client liable to pay costs, the principle that seems to have been established in the case of Rex -v- Archbishop of Canterbury [1903] 1 KB 289.


Of course, not all clients could afford to pay a solicitor well in excess of £100 per hour. Until quite recently such clients could obtain assistance by way of government funded legal aid in most cases. Under such a scheme the client did not have to pay his client any costs (not taking the statutory charge in account). However, the Legal Aid Act 1964 provided for the recovery of the Legal Aid Fund's costs to be recovered between the parties. Nevertheless, the amount a solicitor could recover from the Legal Services Commission was limited by way of capped rates and indeed significantly lower than that which he could expect to recover from the losing party. An unsuccessful Defendant would not have any grounds to raise the indemnity principle issue in such circumstances.





Costs Monkey

Content last updated: 30/10/09