|Judgments - Callery v Gray
63. The civil courts of this country have power to order a party to litigation to pay to the other party his (the latter's) costs of the litigation. This power presumably owes its origin to the inherent power of the court to regulate the proceedings before it, but in modern times the power has been a statutory one, embodied in rules of court made under rule-making powers conferred by statute. The power to make costs orders has always been, and remains, a discretionary one. But the discretion is circumscribed by guidance laid down under rules of court and by principles established by judicial precedent.
64. At the risk of some over-simplification, the issues that may arise in relation to costs orders fall into three groups. First, there are issues as to which, if any, of the litigants should have a costs order made in his favour and against whom the order should be made. Secondly, there may be issues as to the extent of the receiving party's costs that the paying party should be ordered to pay. And, thirdly, there may be issues of quantification. The sum that, under the order, the paying party must pay to the receiving party will have to be quantified. A process of assessment must be carried out.
65. For example, a successful claimant in a road traffic accident case would expect to have an order for costs made in his favour against the negligent defendant. But if the engagement by the claimant of a particular expert witness appeared to have been unnecessary, the court might exclude the fee paid to the expert witness from the costs payable under the order. And if the engagement of the expert witness appeared reasonable but the fee paid to the expert appeared to be excessive, the court might reduce to a reasonable amount the sum in respect of the fee payable under the costs order. These basic principles are very well known and understood and hardly need repeating, but, in my opinion, need to be kept in mind in considering some of the issues before the House on this appeal.
66. The appeal relates to costs issues arising out of a very simple and commonplace type of claim. The difficulties that have led to this appeal are attributable to recent changes in the costs regime, which reflect changes in the means by which the bringing of actions can be funded. In order to deal with these issues it is necessary to set out the facts which have given rise to them and the statutory provisions that bear upon them.
67. On 2 April 2000 Mr Callery, respondent before your Lordships, was a passenger in a car which was struck side-on by a vehicle driven by the appellant, Mr Gray. Mr Callery sustained minor injuries. He instructed solicitors, Messrs Amelans, to pursue a claim for damages against Mr Gray. Amelans are a firm who deal with a large number of road traffic accident claims. They are specialists in this field. I have described Mr Callery's claim as commonplace. It was. There are thousands of such claims every year. They rarely reach the courts.
The funding arrangements
68. Under the Access to Justice Act 1999, legal aid to support road traffic accident claims such as Mr Callery's was no longer available. Instead the use of conditional fee agreements (CFAs) was authorised. A feature of a CFA is that, if the claim fails, the lawyer, whether solicitor or barrister, who has given his services under the CFA, receives no remuneration but, if the claim succeeds, the lawyer becomes entitled not only to the normal fee for his services but also to a success fee, calculated as a percentage of the normal fee. (see the Conditional Fee Agreements Order 1998 (SI 1998/1860). The percentage uplift is required by the 1998 order to be specified in the CFA and must not exceed 100 per cent of the normal fee.
69. The logic of the success fee is that its size will reflect the risk the lawyer is incurring in taking on the case. The more difficult the case and the less clear that the outcome will be a successful one, the higher the percentage uplift that can be justified; and, of course, vice versa. A CFA protects the claimant who enters into it from having to remunerate his lawyers if the claim fails. A typical CFA does not, however, protect the claimant from having to reimburse his lawyers for their disbursements in pursuing the claim. These disbursements might, for example, include the fees of experts whose opinion on some issue or other had been sought. If the claim succeeds the claimant will have the expectation that the burden of paying for his solicitor's reasonable disbursements will fall on the defendant. If the claim fails, he will have to meet the disbursements himself.
70. Nor does a CFA protect the claimant from the risk that if litigation is commenced he may find himself ordered to pay the costs, or some part of the costs, of the defendant. But it is important to notice that this risk cannot arise unless litigation is commenced.
71. In order to protect himself against the risk that he may find himself liable to pay the costs, or some of the costs, of the defendant, a claimant can take out after-the-event ("ATE") insurance.
72. In the present case Mr Callery entered into a CFA with Amelans at the same time as instructing them to pursue his damages claim. The CFA was dated 28 April 2000. It said that if Mr Callery succeeded in his claim for damages he would pay Amelans' basic charges and a success fee. It said that, win or lose, Mr Callery would have to pay their disbursements. It set the success fee at 60 per cent of Amelans' basic charges but provided also that in the event of an assessment of costs by the court
73. The effect of a provision in these terms would be, in practice, and save in exceptional circumstances, to relieve the claimant of his contractual liability to pay any excess of the success fee above the amount that, on the assessment of costs, the court had decided the defendant should pay.
74. On 4 May 2000 Mr Callery took out an ATE insurance policy with Temple Legal Protection Ltd ("Temple"). This was the date on which Amelans' first letter to Mr Gray, informing him of the claim, was sent. The policy was taken out before Mr Callery or his legal advisers, Amelans, could have come to the conclusion that litigation to pursue the claim would be necessary or even likely. The premium for the policy was £350 plus £17.50 tax, a total of £367.50. Under the policy Temple agreed to indemnify Mr Callery, up to a limit of £100,000,
(i) for any sum in respect of Mr Gray's costs that might be ordered by the court to be paid by Mr Callery; and
(ii) for disbursements paid out by Amelans in the event that the litigation came to an end without the disbursements becoming payable by Mr Gray.
In this description of the insurance cover provided under the policy I have attempted to describe the broad scope of the cover rather than set out its exact details. The exact details are not relevant to any issue before the House.
75. A noteworthy feature of the policy is that the premium of £350.00 would not become payable until the conclusion of the legal proceedings in respect of which the policy had been taken out and, if the amount of the premium were challenged by Mr Gray in any cost assessment process, the recoverable amount of the premium would be reduced to the amount payable by Mr Gray under the assessment.
The progress of Mr Callery's claim
76. On 4 May 2000 (the day on which the ATE policy was taken out) Amelans wrote to Mr Gray giving notice of their client's damages claim and enclosing a copy of the letter for his insurers. The letter asked for an acknowledgement within 21 days from Mr Gray or his insurers.
77. On 19 May 2000, Mr Gray's insurers, CGU Insurance, replied. Their reply said that they were able "to admit liability as to negligence but not to causation". Following an exchange of offer and counter-offer, the parties reached agreement on 2 August 2000 that Mr Callery should receive damages of £1500. Amelans wrote on 7 August 2000 to CGU confirming "acceptance of your offer in the sum of £1500 in respect of our client's damages" and that "acceptance of the offer is subject to payment of our client's reasonable costs and disbursements . ". However, the parties were unable to agree the amount of the "reasonable costs and disbursements". There were two main issues.
78. First, CGU took the view that a 60 per cent success fee for Amelans was unreasonably high. It was always certain, they thought, that Mr Callery would succeed in recovering damages. He had been a passenger in a vehicle struck side-on by Mr Gray's vehicle. He had been injured in the accident. He was bound to recover something. So this was not a case in which there was any risk that Amelans, in pursuing the claim on Mr Callery's behalf, would be working for nothing. It followed that any success fee should be very low.
79. Second, CGU contended that the £350.00 premium was an item of expenditure that had not been reasonably incurred. The likelihood of litigation being necessary was always very remote. At the least Mr Callery should have waited until a response to Amelans' letter of 4 May 2000 had been received before taking out a policy to protect himself against the costs consequences of litigation that was unlikely ever to materialise.
80. In these circumstances, there being agreement as to the amount of the damages and agreement that Mr Callery would be paid his reasonable costs and disbursements but no agreement as to the amount of a reasonable success fee or whether the £350.00 premium represented a reasonable disbursement, Mr Callery commenced "costs only" proceedings (see CPR 44.12A) in order to have the reasonable costs and disbursements to which he was entitled under the settlement agreement quantified by the court.
The relevant statutory provisions
81. The statutory provisions relevant to the recovery under a costs order of a CFA success fee or of the premium payable for ATE insurance cover have been comprehensively set out in paragraphs 24 to 39 of the judgment of the Court of Appeal handed down by Lord Woolf CJ, sitting with Lord Phillips of Worth Matravers MR and Brooke LJ, on 17 July 2001:  1 WLR 2112, 2118-2123. This was the first of the two Court of Appeal judgments from which the appeal to the House is brought. It is unnecessary for me to do more than refer to the critical provisions.
82. Section 58(A)(6) of the Courts and Legal Services Act 1990, as substituted by section 27 of the Access to Justice Act 1999 provides that:
Section 29 of the 1999 Act provides:
83. There is, therefore, no doubt but that a costs order can require the paying party to pay a sum in respect of a success fee for which the receiving party has become contractually liable and to pay a sum in respect of the premium payable for an ATE insurance policy that the receiving party has taken out.
84. In the Civil Procedure Rules, Rule 43.2 provides that:
and that "additional liability" includes the success fee under a CFA and the premium payable for an ATE insurance policy.
85. Rule 44.4 sets out the basis upon which costs are to be assessed:
86. Rule 44.5 sets out the factors the court must take into account in assessing costs:
87. These factors, as one would expect, concentrate on the circumstances and conduct of the parties in relation to the claim in question and on the nature of the particular claim. They are case specific factors.
88. The Costs Practice Direction that supplements the Rules relating to costs contains further guidance on the assessment, for costs purposes, of an additional liability. Section 11 of the Costs Practice Direction contains the following relevant provisions:
89. Rule 44.12A and Section 17 of the Costs Practice Direction relate to "costs only" proceedings. "Costs only" proceedings may be commenced where the parties, before the commencement of litigation, have agreed in writing on all issues in the case, including which party is to pay the costs, but have been unable to agree the amount of the costs (see CPR 44.12A). In effect, the court is allowing its costs quantification procedures to be used to support an out-of-court settlement under which one party is to pay the reasonable costs and disbursements of another party. It is implicit in such a settlement agreement (unless the contrary is expressly stated) that the costs to be paid should be quantified on the standard basis in accordance with the Rules and Practice Directions that would have been applicable if there had been a court order for the payment of the costs.
90. Paragraph 17.8(2) of the Costs Practice Direction makes clear that in assessing the reasonableness of an additional liability, whether a success fee or an ATE premium, the likelihood of litigation having to be commenced is an important factor. The paragraph provides that:
The course taken by the "costs only" proceedings
91. On 12 September 2000 Mr Callery commenced proceedings under CPR Part 8 asking the court to assess his reasonable costs of and occasioned by his damages claim against Mr Gray. The particulars of claim pleaded the agreement that had been reached that Mr Gray would pay £1500 damages and Mr Callery's reasonable costs.
92. On 14 September an ex parte order was made in the Macclesfield County Court ordering, inter alia, that Mr Callery's costs be assessed.
93. The assessment hearing took place before District Judge Wallace on 7 November 2000. The District Judge assessed Amelans' basic charges, reduced the success fee from 60 per cent to 40 per cent of the basic charges and allowed the ATE insurance premium of £350 plus tax as a disbursement. The assessment allowed a total of £1008, plus VAT, for fees and £617.50 for disbursements.
94. Mr Gray (prompted by CGU) appealed to the circuit judge. The appeal was heard by Judge Edwards in the Chester County Court on 29 January 2001. Two points were taken on the appeal, one relating to Amelans' success fee under the CFA, the other relating to the ATE insurance premium. They are the two points to which I have already referred. The appeal was dismissed on both points.
95. CGU took the view that important points of principle were at stake, with implications for personal injury litigants and their insurers generally, and prompted Mr Gray to apply to the Court of Appeal for permission to bring a second appeal to that court. On 16 March 2001 Lady Justice Hale granted permission on condition that Mr Gray, if successful, would not seeks costs from Mr Callery unless his liability to pay were covered in full by the terms of the ATE policy.
96. Further evidence was, with the permission of the Court of Appeal, introduced at the hearing of the appeal and written and oral intervention by the Law Society, the Association of British Insurers, the After Event Insurers Group Forum, the Association of Personal Injury Lawyers and the Forum of Insurance Lawyers was authorised. The hearing of the appeal was directed to be conjoined with the hearing of the appeal in Russell v Pal Pak Corrugated Ltd under which similar success fee issues arose.
97. The Court of Appeal heard the appeal on 5, 6 and 7 June 2001. On 17 July 2001 the court handed down the judgment of the court on the success fee issue, reducing Amelans' success fee from the 40 per cent fixed by the district judge to 20 per cent (and dismissing the appeal in Russell v Pal Pak)  1 WLR 2112. In addition the court ruled that an ATE insurance premium could in principle be recovered as part of a claimant's costs in "costs only" proceedings. But the court formed the view that, on the evidence available, it was not possible to come to a conclusion as to the reasonableness in amount of the £350.00 premium. So the court postponed judgment on the issue relating to the amount of the ATE insurance premium pending an inquiry by a costs judge, Master O'Hare. A separate judgment on that issue would await Master O'Hare's report.
98. It is important to be clear that the court's further reservation of judgment regarding the ATE insurance premium related only to the reasonableness of the amount of the premium. In principle the premium was held to be recoverable notwithstanding that the policy had been taken out before the commencement of litigation for the purpose of recovering damages had become necessary, or even likely. As it was put at p 2134, para 100 of the judgment:
99. I will return later to examine the reasons why, in relation to the ATE insurance premium, the court came to this conclusion.
100. Master O'Hare's report was dated 23 July 2001. The purpose of his report was expressed to be
101. Master O'Hare had received written submissions from a number of interested parties but nonetheless concluded that:
And, at para 23:
102. On 31 July 2001 Lord Phillips of Worth Matravers, sitting with Brooke LJ, handed down the judgment of the court dealing with the reasonableness of the amount of Mr Callery's ATE premium  1 WLR 2142. The Court concluded that "the amount of the premium does not strike us as manifestly disproportionate to the risk" (p 2159, para 70).
103. So the appeal on the insurance premium point was dismissed. The appeal on the success fee point had been allowed by the reduction of the percentage uplift from 40 per cent to 20 per cent.
The section 29 jurisdiction issue
104. One of the contentions argued on behalf of Mr Gray, the appellant, before the Court of Appeal was that section 29 of the 1999 Act was not applicable to a case where a settlement out of court had been reached and all that was left was the quantification of the claimant's costs and disbursements to be paid by the defendant. The point was based on the language of section 29. The "proceedings" referred to in the section were the substantive proceedings for recovery of damages. Absent the section, ATE insurance premiums would not have been recoverable under a costs order. So, in the absence of any substantive proceedings for the recovery of damages, or any order for costs made in such proceedings, the court, it was said, had no jurisdiction to include an ATE insurance premium in the recoverable costs. This argument was advanced in the Court of Appeal but was rejected. The argument has not been raised again before your Lordships and I mention it only in order to express my respectful agreement with the Court of Appeal's rejection of it. It was a term of the settlement agreement that Mr Callery would be paid his reasonable costs and expenses. It was plainly implicit that these would be standard basis costs and that the amount, unless agreed, would be assessed by a costs judge in accordance with the relevant rules and practice directions. These rules and practice directions allow for a sum in respect of an ATE premium that has been reasonably incurred to be included in the recoverable costs. So in quantifying Mr Callery's recoverable costs on that basis the district judge was acting in accordance with the agreement the parties had made. There is no jurisdictional reason why a costs judge should not assess the costs to which a party has become contractually entitled (see Gomba Holdings (UK) Ltd v Minories Finance Ltd (No. 2)  Ch 171, 188). No issue of jurisdiction, in my opinion arises.
The issues before the House
105. The appellant's written case identifies ten issues
"(1) Was the insurance premium recoverable given the stage when the policy was taken out? (prematurity).
(2) Was the amount of the premium reasonable having regard to the characteristics of the instant case?
(3) Was the amount of the premium reasonable having regard to prematurity?
(4) Was the Court of Appeal wrong not to resolve doubt - if any - as to the amount of the recoverable premium in favour of the paying party?
(5) Should the defendant be liable for any part of the premium which covers adverse costs orders and all aspects of own costs, however incurred?
(6) The success fee ("uplift"): is the full uplift recoverable given the stage when the CFA was effected?
(7) Was the 20 per cent uplift a reasonable maximum for simple accident cases?
(8) Was the Court of Appeal's assessment of 20 per cent uplift for the instant case wrong?