Judgments - Callery v Gray

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    31. My Lords, the Court of Appeal gave this question the most anxious consideration and, as I have said, it has unrivalled knowledge of the problem. But I rather doubt whether, at any rate in their judicial capacities, they had the material on which to make a decision. The liability insurers who supported these appeals accept that the policy of the Access to Justice Act 1999 was to transfer the burden of funding unsuccessful motor accident claims from public funds to the motor liability insurers and thence to the motoring public by way of increased premiums. That is a perfectly rational social and economic policy and is not contested. The real questions are, first, whether the level of success fees chargeable by lawyers gives the motoring public reasonable value for the money it has to spend on funding litigation and, secondly, whether assessment by costs judges (with guidance from the Court of Appeal) is the best way to ensure that such value for money is obtained.

    32. The reasoning of the Court of Appeal in para 93 of its judgment, which I have quoted above, assumes that the present cost of motor accident litigation is a fixed sum which must be paid by liability insurers one way or the other. But that is the very question in issue. And the reason why it is disputed is that, in the circumstances in which such litigation is funded, market forces are insufficient to keep costs within reasonable limits. As I have already said, solicitors offering motor accident personal injury CFAs have no incentive to compete on the success fees they charge. So the next question is whether a decision of a costs judge, or the Court of Appeal on appeal from a costs judge, is the best way of compensating for the absence of price competition in the market. The traditional function of the costs judge, or taxing master, as he used to be called, was to decide what fees were reasonable by reference to his experience of the general level of fees being charged for comparable work. But this approach only makes sense if the general level of fees is itself directly or indirectly determined by market forces. Otherwise the exercise becomes circular and costs judges will be deciding what is reasonable according to general levels which costs judges themselves have determined. In such circumstances there is no restraint upon a ratchet effect whereby the highest success fees obtainable from a costs judge are relied upon in subsequent assessments.

    33. The matter becomes even more difficult when a solicitor "carrying on litigation business on a large scale" is entitled, as the Court of Appeal have said (at p 2131, para 83) to fix success fees to ensure "that the uplifts agreed result in a reasonable return overall, having regard to his experience of the work done and the likelihood of success or failure of the particular class of litigation." The costs judge has simply no way of knowing whether the solicitor is carrying on business on a large enough scale to justify such an approach, still less what level of success fees would give him a "reasonable return overall." Such matters are traditionally outside the consideration of costs judges. As your Lordships' Appellate Committee said in The Clerk of the Parliaments' Reference Regarding Criminal Legal Aid Taxation (1st Report Session 1997-1998) at para 30:

    "As to fixing fees by reference to a reasonable annual income, quite apart from the difficulties of making the necessary adjustments, to ask what is a reasonable annual income merely forces the question one stage back: what is a reasonable income for a barrister? £20,000 per annum, £100,000 per annum, £500,000 per annum? As to using remuneration paid out of public funds to, for example, doctors, Mr Lawrence Collins QC for The Law Society submitted that target incomes for barristers could be set in much the same way as they are for medical and dental practitioners. But in our view it is not the function of a taxing officer to fix target incomes for barristers by reference to the earnings of other professions. He is concerned to allow the barrister a fee which is reasonable in relation to fees which are generally allowed to barristers for comparable work and the earnings of other professions are irrelevant to this calculation. They would be proper to be taken into account (although the practical difficulties of doing so are considerable) by someone charged with fixing levels of fees for the profession as a whole, such as the Lord Chancellor when he determines levels of graduated fees. But a taxing officer, in deciding what is a reasonable fee in a particular case, must take the general levels of fees as given and use them as the basis of his taxation."

    34. I rather doubt whether difficulty is likely to be removed merely by the passage of time. All that costs judges will learn is what other costs judges are allowing. Solicitors will charge whatever is currently allowed and exert upward pressure to be able to charge more. But that will not tell anyone whether the fees paid to the solicitors represent reasonable value for money.

    35. As my noble and learned friend Lord Scott of Foscote has observed, the criteria prescribed by the Civil Procedure Rules for determining whether costs are reasonable are framed entirely by reference to the facts of the particular case. Once one invokes a global approach designed to produce a reasonable overall return for solicitors, one moves away from the judicial function of the costs judge and into the territory of legislative or administrative decision.

    36. It seems to me likely (although reliable statistical evidence is not presently available) that the costs which can reasonably be expended in a small personal injury claim conducted in accordance with the protocol and which settles within the protocol period are unlikely in the great majority of cases to vary much from the statistical mean. The present case - letter before action, acknowledgement of liability, medical report and a relatively brief negotiation - must be fairly typical. It involves standardised legal services at a fairly low level. This would suggest that these costs - both the basic costs and the success fee - should be fixed by the rules which apply in all but exceptional circumstances. I understand that such a system is under consideration by the Civil Justice Council. A legislative decision to fix costs at levels calculated to provide adequate access to justice in the most economical way seems to me a more rational approach than to leave the matter to individual costs judges. If it is considered the most appropriate way to secure value for money when the expenditure is borne by the public as a whole (as for example, in the fixing of graduated fees for criminal legal aid) it should be no less appropriate when the expenditure is borne by a section of the public, namely the motorists. Not only would this be more likely to keep the actual costs within reasonable levels but it would also greatly reduce the cost of disputes over costs. We were told that no less than 150,000 cases awaited the outcome of your Lordships' decision in this case.

    37. In their submissions to the Court of Appeal, the liability insurers said that what they wanted most was certainty. If the consequence of your Lordships' decision was that motor insurance premiums had to be raised, so be it. But they wanted to be able to make the calculations with reasonable certainty about what the motoring public would have to pay. This would not be the case if everything turned upon a case by case assessment by the costs judge.

    38. My Lords, the arguments for legislative determination of allowable costs apply even more strongly to the other two questions in these appeals, namely whether it was reasonable to take out ATE insurance before it was known whether the claim would be resisted and whether £375 was a reasonable premium in the circumstances.

    39. The arguments put forward to justify taking out an ATE insurance policy before sending the letter before action are much the same as those for fixing the success fee at the same time. The client is immediately assured that in no circumstances will he be liable for the defendant's costs. He may pay a higher premium than would be individually justifiable if it was known that the claim was admitted, but he insures himself against the possibility that a later premium might be much higher or even unobtainable. And ATE insurers say that they cannot obtain a reasonable premium income unless everyone takes out insurance when they first instruct solicitors. This was the principle upon which insurers such as Temple, in this case, delegated to solicitors the authority to issue policies.

    40. Again, as it seems to me, the Court of Appeal accepted these arguments. They said (at p 2128, para 67) that -

    "It is hardly surprising that delegated authority arrangements will only work successfully if the solicitor does not 'cherry-pick' by taking out ATE insurance only in risky cases."

    41. Perhaps that is true. I am certainly not in a position to say that it was wrong. But neither, in my respectful opinion, was the Court of Appeal. Of course it is true that, other things being equal, premiums will rise if fewer people take out ATE insurance. And it is true that when ATE insurance made its first appearance, at a time when it could not be recovered from the defendant and claimants would take out policies only if they were seriously concerned about losing the case, underwriters burnt their fingers. But premiums were then also very low compared to current rates. Now, premiums are much higher and ATE insurers insist upon all claimants taking out policies. Whether the latter is necessary to keep ATE insurers in business at current premium rates is an open question.

    42. Furthermore, it is a question which costs judges are quite unable to answer. When the Court of Appeal asked for the report of Master O'Hare on the question of whether the Temple premium in this case was reasonable, he said [2001] 1 WLR 2142, 2163, para 20:

    "I am not convinced...market forces impinge upon the premium levied to the ultimate consumer and claimed by him from his unsuccessful opponent."

    43. That seems to me obviously right. ATE insurers do not compete for claimants, still less do they compete on premiums charged. They compete for solicitors who will sell or recommend their product. And they compete by offering solicitors the most profitable arrangements to enable them to attract profitable work. There is only one restraining force on the premium charged and that is how much the costs judge will allow on an assessment against the liability insurer.

    44. Again, the costs judge has absolutely no criteria to enable him to decide whether any given premium is reasonable. On the contrary, the likelihood is that whatever costs judges are prepared to allow will constitute the benchmark around which ATE insurers will tacitly collude in fixing their premiums. In its submissions to Master O'Hare, Temple said that the court "should not arrogate to itself the functions of a financial regulator of the insurance industry": see [2001] 1 WLR 2142, 2164, para 22. I am sure that is right, because the costs judge is wholly unequipped to perform that function. But that does not mean that some form of financial regulation is not necessary. Such regulation is normally considered necessary in those parts of the economy in which market forces are insufficient to produce an efficient use of resources. And that seems to me to be the position in ATE insurance, in which the premiums are not paid either by the claimants who take out the insurance or by the solicitors who advise or require them to do so.

    45. My Lords, these are my reservations about the exercise which your Lordships are asked to undertake. But, given that your Lordships have to say whether, on the materials before you, the Court of Appeal were right or wrong, I would dismiss the appeals.

LORD HOPE OF CRAIGHEAD

My Lords,

    46. This appeal raises important questions about the operation of a new costs regime to assist members of the public who wish to claim damages for personal injury. The facts have been fully described by my noble and learned friend Lord Scott of Foscote, and I gratefully adopt his account of them.

    47. The previous scheme was based on the provision of legal aid out of public funds. But it had become clear that it was no longer possible for the government to fund legal aid in civil cases in England and Wales across the board at the required level. So the government decided to withdraw legal aid from certain categories of proceedings including actions of damages for personal injury, and to replace it with a new system based on conditional fee and litigation funding agreements. The legislation which was required to give effect to this was enacted as Part II of the Access to Justice Act 1999. An essential part of the new arrangement was the government's decision that claimants should not be at risk of being left out of pocket by reason of the additional liabilities which they would have to incur under this scheme. These included the cost of taking out an insurance policy against the risk of incurring a liability to the other party in the proceedings for costs.

    48. The new scheme was the subject of a consultation paper entitled Conditional Fees: Sharing the Risks of Litigation which was issued by the Lord Chancellor's Department in September 1999. It was based upon two recent developments in the private funding of litigation. The first was the introduction of conditional fee agreements ("CFAs") under section 58 of the Courts and Legal Services Act 1990. Initially there had been concerns that these agreements would be abused and that this part of the new system would be unworkable. But experience of its operation showed that this was not so. In Thai Trading Co (A Firm) v Taylor [1998] QB 781, 790F Millett LJ said that fears that lawyers might be tempted by such an arrangement to act improperly were exaggerated, and that there was a countervailing public policy in making justice readily accessible to persons of modest means. The second was the concept of after the event insurance ("ATE"). This was a new kind of insurance policy which had been developed by the Law Society in conjunction with insurance brokers as a means of protecting claimants against their liability for the other side's costs.

    49. These developments had gone a long way towards removing the barrier to justice for prospective litigants. But they still left one problem untouched. In its response to consultation the government said that it recognised that a major barrier to justice had always been the risk that litigants would have to pay the other side's costs as well as their own if they lost the case. The policy which it decided to pursue was to ensure that the expense of shifting the claimant's liability in costs, whether to the solicitor under a CFA or to the insurer for the premium payable under the ATE insurance policy, was met by the losing party where damages were claimed for personal injury. As the consultation paper pointed out, the purpose of the legislation was to provide the framework within which the new system was to operate. The detail was to be informed by rules of court and by practice directions. There was to be a division of responsibility between the courts and the legislature.

    50. The appellant seeks to challenge the operation of two powers which have been given by the legislature under the new scheme to the courts. The first is the power to include in an award of costs in favour of the claimant an order for payment by the losing party of the amount of the success fee payable by the claimant under a CFA entered into with his legal representative. Section 58A(7) of the Courts and Legal Services Act 1990, inserted by section 27(1) of the Access to Justice Act 1999, provides:

    "Rules of court may make provision with respect to the assessment of any costs which include fees payable under a conditional fee agreement (including one which provides for a success fee)."

The second is the power of the court to include in a costs order the amount of the insurance premium for a claimant's ATE insurance policy against the risk of incurring a liability to pay the other parties' costs in the event of his having to raise proceedings to recover damages. Section 29 of the Access to Justice Act 1999 provides:

    "Where in any proceedings a costs order is made in favour of any party who has taken out an insurance policy against the risk of incurring a liability in those proceedings, the costs payable to him may, subject in the case of court proceedings to rules of court, include costs in respect of the premium of the policy."

    51. Three broad questions are raised by these new powers. The first is whether it is right in principle that a claimant's liability for his legal representative's success fee and the cost of his insurance premium should be recoverable from the losing party. The second is whether it should ordinarily be considered to be reasonable for the purposes of any costs order for the claimant to enter into the CFA, and to take out the ATE policy at the same time, on the occasion when he first consults his legal representative. The third is whether the cost of insuring against a cost liability that cannot be passed on to the opposing party should be included in the recoverable amount of the insurance premium. In addition the appellant has challenged the decision of the Court of Appeal not to interfere with the judge's conclusion that a success fee of 20% was appropriate in this case.

    52. Answers to these questions were provided by the Court of Appeal in the two judgments which are before your Lordships in this appeal. In Callery v Gray [2001] 1 WLR 2112 (Lord Woolf CJ, Lord Phillips of Worth Matravers MR and Brooke LJ) the court held that, where a reasonable uplift is agreed at the outset as part of a CFA and an ATE insurance is taken out at that stage at a reasonable premium, the costs of both the uplift and the premium are recoverable from the defendant in the event that the claim succeeds or is settled on terms that the defendant pay the claimant's costs: p 2134F, para 100. The court said that it had reached this conclusion after taking account of the legislative policy and various practical considerations which were established by the evidence: p 2133F, para 99. Its conclusion on the issue as to the reasonableness of the uplift by way of a success fee was that, where a CFA is agreed at the outset in straightforward cases such as this one, 20% is the maximum uplift that can reasonably be agreed.

    53. The Court of Appeal dealt in a separate judgment with the reasonableness of the ATE insurance premium: Callery v Gray (No 2) [2001] 1 WLR 2142 (Lord Phillips of Worth Matravers MR and Brooke LJ). It held that the jurisdiction which has been given to the courts by section 29 of the 1999 Act to order the defendant to pay the cost of the insurance premium extends to the cost of insurance against the risk of incurring a costs liability that cannot be passed on to the opposing party: p 2157B-D; paras 59-60. The court said that it believed that this interpretation of section 29 gave the words the meaning that would be attributed to them by the reasonable litigant, and that it also gave them a meaning that accorded with the legislative intention and with the overall scheme for the funding of legal costs.

    54. I accept that the new regime is not beyond criticism. It is plain that it has transferred the burden of meeting the cost of access to justice in these cases from the taxpayer through the medium of the legal aid fund. Instead a different kind of taxation is involved. The burden of meeting the cost of access to justice now falls on liability insurers. It thus falls indirectly on their policy holders, who are likely to have to face increased premiums. Furthermore, unless the new regime is controlled very carefully, its effect may be to benefit ATE insurance providers unreasonably and to place a burden on liability insurers which is disproportionate. It may lead to a culture of incurring additional costs which lacks any incentive on claimants to keep costs down. The circumstances of the present case add force to these criticisms. It must have been obvious from the outset that this was a claim which was almost certain to succeed on liability and that there was almost nothing to discuss on the quantum of damages. The claimant's exposure to risk was, at the worst, minimal. And, as my noble and learned friend Lord Scott has pointed out, the premium which Temple charged for the insurance cover was not based on an individual assessment of the risk but was a uniform premium. The costs incurred in this case by way of the success fee and the ATE premium do indeed appear at first sight to be wholly out of line with what the case required.

    55. But it would be hard to imagine judges who were better qualified to examine these issues than the Lord Chief Justice, the Master of Rolls - who has particular responsibilities in this field as the Head of Civil Justice in England and Wales - and Brooke LJ. They are in close and regular contact with all relevant aspects of civil practice. They heard representations from a number of bodies who have a direct interest in these issues. They also had the advantage in this case of having a report on the reasonableness of the premiums charged for ATE insurance from Master O'Hare. He has an unrivalled expertise in the matter of costs. The Court of Appeal could not have been better informed. I think that their judgment is entitled to the greatest respect in a matter of this kind. I would be very slow to differ from the conclusions which they have reached.

    56. In Girvan v Inverness Farmers Dairy 1998 SC (HL) 1, 21D-G I said that the Court of Session is far better placed that this House can ever be to assess what changes could appropriately be made in procedure and practice relating to the conduct of civil jury trials in that court. I drew attention to the process of consultation that is available to it through its statutory rules council, to its ability to keep its rules under regular review and to the advantages which it can bring to bear of speed and flexibility. I suggested that the proper approach for this House to take was to leave it to the Court of Session to decide what changes, if any, should be made to its own rules. This case is concerned with the role of the court in administering the new regime in a way that seeks to do justice between the parties within the limits that have been set by the legislative policy. For similar reasons to those which I gave in Girvan I consider that the responsibility for dealing with these issues lies pre-eminently with the Court of Appeal and not with this House.

    57. Two other factors seem to me to favour the decisions which the Court of Appeal reached in this case. The first is the fact that it was common ground that not enough is yet known about the likely effect on CFAs of different levels of success fees: Callery v Gray [2001] 1 WLR 2112, 2128A, para 64. The appellant did not suggest to your Lordships that the position was otherwise. The second is the state of the evidence about the effect on the market for ATE insurance if your Lordships were to uphold the appellant's argument that the taking out of these policies should be delayed until proceedings have been issued. The Court of Appeal held that there was overwhelming evidence from those engaged in the provision of ATE insurance that unless the policy is taken out before it is known whether a defendant is going to contest liability, the premium is going to rise substantially and cover may indeed not be available at all in such circumstances: p 2134E-F, para 99(ix).

    58. Ample support for the finding about the effect on ATE insurance is to be found in witness statements provided by Christopher Ward and Christopher Wait. Mr Ward is the managing director of Abbey Legal Protection Ltd, a specialist legal expenses underwriting agency providing both before the event and after the event legal expenses insurance. Mr Wait is an underwriting director of Temple Legal Protection Ltd, which specialises in the same field. Mr Temple QC for the appellant said that these statements were self-serving and that little weight should be attached to them. But there was no contrary evidence.

    59. I note also that in para 27 of his report to the Court of Appeal Master O'Hare acknowledged the risks to which ATE providers would be exposed if increasing premiums and the need to make inquiries were to encourage more claimants to dispense with insurance altogether: Callery v Gray (No 2) [2001] 1 WLR 2142, 2165D. In preparing his report he considered written and oral submissions from many parties: see para 2. He also drew attention in para 16 to the advantages which flow from the insurers' practice of giving delegated authority to solicitors to offer ATE cover to their clients. As he explained, it is characteristic of these policies that they do not differentiate between cases which are strong and those which are borderline. This all-in approach reduces the administrative cost of risk assessment, and there is the further point that risk assessment at the outset of proceedings may well be imprecise or unreliable. His findings support the Court of Appeal's observation in Callery v Gray [2001] 1 WLR 2112, 2128H that it was hardly surprising that delegated authority arrangements would only work successfully if the solicitor did not "cherry-pick" by taking out ATE insurance only in risky cases. It is plain that a finding that the cost of taking out ATE insurance at the outset was in principle irrecoverable from the losing party would have a profound effect on the cost and availability of this form of insurance cover.

    60. These and the other practical considerations relied on by the Court of Appeal seem to me to point clearly in favour of allowing the ATE insurance policy to be taken out at the outset when the claimant first consults his legal representative. The extent to which the cost of doing so will be recoverable from the losing party will require to be watched very carefully. But a sufficient safeguard lies in the fact that it will continue to be subject to the supervision of the court on the basis described in Callery v Gray (No 2) [2001] 1 WLR 2142, 2157D, para 61:

    "The circumstances in which and the terms on which own costs insurance will be reasonable, so that the whole premium can be recovered as costs, will have to be determined by the courts, when dealing with individual cases, assisted, if appropriate, by the Rule Committee."

    61. I think that it is also worth recording that the appellant's counsel did not challenge the conclusions of the Court of Appeal in Callery v Gray (No 2) [2001] 1 WLR 2142, 2157C-D, para 60 as to how section 29 of the 1999 Act ought to be interpreted. This was an issue of law which would have been open for further consideration by your Lordships if it had been suggested that the section was not capable of bearing the meaning which the Court of Appeal said could and should be given to it. But Mr Birts QC accepted that it had reached a sound conclusion on this point, and for my part I think that he was right to do so. The remaining issues seem to me to be essentially issues of practice. They are best dealt with by penalising unreasonable behaviour on a case by case basis as the circumstances require.

    62. For these reasons, and for those given by my noble and learned friend Lord Bingham of Cornhill whose speech I have had the advantage of reading in draft and with which I am in entire agreement, I would dismiss the appeal.

LORD SCOTT OF FOSCOTE

My Lords,

Introduction

 
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