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Session 2001- 02
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Judgments - Callery v Gray

HOUSE OF LORDS

Lord Bingham of Cornhill Lord Nicholls of Birkenhead Lord Hoffmann Lord Hope of Craighead Lord Scott of Foscote

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

STEPHEN CALLERY

(RESPONDENT)

v.

CHARLES GRAY

(APPELLANT)

ON 27 JUNE 2002

[2002] UKHL 28

LORD BINGHAM OF CORNHILL

My Lords,

    1. For nearly half a century, legal aid provided out of public funds was the main source of funding for those of modest means who sought to make or (less frequently) defend claims in the civil courts and who needed professional help to do so. By this means access to the courts was made available to many who would otherwise, for want of means, have been denied it. But as time passed the defects of the legal aid regime established under the Legal Aid and Advice Act 1949 and later statutes became more and more apparent. While the scheme served the poorest well, it left many with means above a low ceiling in an unsatisfactory position, too well off to qualify for legal aid but too badly off to contemplate incurring the costs of contested litigation. There was no access to the courts for them. Moreover, the effective immunity against adverse costs orders enjoyed by legally-aided claimants was always recognised to place an unfair burden on a privately-funded defendant resisting a legally-aided claim, since he would be liable for both sides' costs if he lost and his own even if he won. Most seriously of all, the cost to the public purse of providing civil legal aid had risen sharply, without however showing an increase in the number of cases funded or evidence that legal aid was directed to cases which most clearly justified the expenditure of public money.

    2. Recognition of these defects underpinned the Access to Justice Act 1999 which, building on the Courts and Legal Services Act 1990, introduced a new regime for funding litigation, and in particular personal injury litigation with which alone this opinion is concerned. My noble and learned friend Lord Scott of Foscote makes full reference to these Acts and the relevant subordinate legislation made under them in his opinion, which I have been privileged to read in draft, and I gratefully adopt his account which I need not repeat. The 1999 Act and the accompanying regulations had (so far as relevant for present purposes) three aims. One aim was to contain the rising cost of legal aid to public funds and enable existing expenditure to be refocused on causes with the greatest need to be funded at public expense, whether because of their intrinsic importance or because of the difficulty of funding them otherwise than out of public funds or for both those reasons. A second aim was to improve access to the courts for members of the public with meritorious claims. It was appreciated that the risk of incurring substantial liabilities in costs is a powerful disincentive to all but the very rich from becoming involved in litigation, and it was therefore hoped that the new arrangements would enable claimants to protect themselves against liability for paying costs either to those acting for them or (if they chose) to those on the other side. A third aim was to discourage weak claims and enable successful defendants to recover their costs in actions brought against them by indigent claimants. Pursuant to the first of these aims publicly-funded assistance was withdrawn from run-of-the-mill personal injury claimants. The main instruments upon which it was intended that claimants should rely to achieve the second and third of the aims are described by my noble and learned friend: they are conditional fee agreements and insurance cover obtained after the event giving rise to the claim.

    3. At the time when the 1999 Act was enacted and brought into effect, new Civil Procedure Rules were also in the course of being implemented. The objects underlying these rules were not new, but the rules gave a sharply increased emphasis to the need for expedition in the conduct of legal proceedings, to the need for simplicity and to the need to avoid unnecessary and disproportionate costs. To achieve these ends new and detailed procedures were devised to moderate the traditional adversarial approach to the making and defending of claims. There was inevitably a bedding-down period during which both judges and practitioners adjusted to the practical implications of the new procedural regime to which they were required to give effect.

    4. If the objects underlying the new procedural regime were not new, those underlying the new funding regime were. Arrangements which had until relatively recently been professionally improper were to become the norm. It was however evident that the success of the new funding regime was threatened by two contingencies which, had they occurred, could have proved fatal. One was that lawyers, in particular solicitors, would decline to act on a conditional fee basis. To counter that risk the maximum permissible uplift, on the first introduction of conditional fees in 1995, had been fixed, despite very strong opposition, at 100% and this high level of permissible uplift was retained. It was no doubt felt, rightly as events have proved, that if solicitors were permitted in some cases to earn, as the reward for success, double the fee otherwise receivable, they would be tempted into the market. The other contingency was that no accessible market would develop in after the event insurance. There was at the outset very little knowledge and experience of whether or how such a market would develop.

    5. Even if these contingencies did not occur, the new funding regime was obviously open to abuse in a number of ways. One possible abuse was that lawyers would be willing to act for claimants on a conditional fee basis but would charge excessive fees for their basic costs, knowing that their own client would not have to pay them and that the burden would in all probability fall on the defendant or his liability insurers. With this expectation the claimant's lawyers would have no incentive to moderate their charges. Another possible abuse was that lawyers would be willing to act for claimants on a conditional fee basis but would contract for a success uplift grossly disproportionate to any fair assessment of the risks of failure in the litigation, again knowing that the burden of paying this uplifted fee would never fall on their client but would be borne by the defendant or his insurers. A third possible abuse was that claimants, although able to obtain after the event insurance, would be able to do so only at an unreasonably high price, the after the event insurers having no incentive to moderate a premium which would be paid by the defendant or his insurers and which might be grossly disproportionate to the risk which the insurer was underwriting. Under the new regime, a claimant who makes appropriate arrangements can litigate without any risk of ever having personally to pay costs either to those acting for him or to the other side and without any risk of ever having to pay an after the event insurance premium whatever the outcome: the practical result is to transfer the entire cost of funding this kind of litigation to the liability insurers of unsuccessful defendants (and defendants who settle the claims made against them) and thus, indirectly, to the wider public who pay premiums to insure themselves against liability to pay compensation for causing personal injury.

    6. The front-line responsibility for making the new funding regime work fairly and effectively and in accordance with the objects both of the 1999 Act and the new Civil Procedure Rules lay with lawyers agreeing to act under conditional fee agreements and insurers offering after the event insurance cover. The role of watchdog would be exercised, in the first instance, by district judges and costs judges, on whose judgment and insight in assessing recoverable costs much would depend. If they were too restrictive in the level of success fees or after the event insurance premiums which they allowed, lawyers and clients might be deterred from acting or proceeding on this basis and the objects of the new regime would be defeated. If they were too generous and too uncritical, excessive fees and premiums might be allowed and an unfair and disproportionate burden placed on defendants and their liability insurers, thereby undermining one of the key objects of the Civil Procedure Rules. The difficult task entrusted to district judges and costs judges called for a clear understanding of the object of both the 1999 Act and the Civil Procedure Rules, an understanding how the new funding regime was developing in practice and an alert willingness to make appropriate orders if and when signs of abuse appeared. However carefully and attentively district judges and costs judges applied themselves to their task, it was inevitable that occasions would arise when judges misdirected themselves and made erroneous orders, and given the number of orders made by different judges in different parts of the country disparities in practice would be likely to arise. The responsibility for curbing errors and giving guidance to district judges and costs judges on the exercise of their powers in this context, of correcting erroneous orders and of seeking to harmonise practice between various courts rests with circuit judges and then, importantly, with the Court of Appeal.

    7. There is obvious force in the appellant's contention that even a 20% success uplift provided a generous level of reward for Mr Callery's solicitors given the minuscule risk of failure which his claim apparently presented, that it would have been reasonable to await a reply from Mr Gray or his liability insurers before obtaining after the event insurance cover and that the premium charged for such cover, on the facts of the case as they then appeared, was unreasonable and disproportionate. There are nonetheless two reasons which lead me to the conclusion that the House should not intervene.

    8. The first is that the responsibility for monitoring and controlling the developing practice in a field such as this lies with the Court of Appeal and not the House, which should ordinarily be slow to intervene. The House cannot respond to changes in practice with the speed and sensitivity of the Court of Appeal, before which a number of cases are likely over time to come. Although this is a final and not an interlocutory appeal, there is in my view some analogy between appeals on matters of practice and interlocutory appeals, of which Lord Diplock in Birkett v James [1978] AC 297 at 317 observed that only very exceptionally are appeals upon such matters allowed to come before the House.

    9. Even if this were one of those exceptional cases, however, I would decline to intervene because, as the Court of Appeal repeatedly stressed, the present issues arise at a very early stage in the practical development of the new funding regime, when reliable factual material is sparse, market experience is meagre and trends are hard to discern. I would draw attention, in the first judgment of the Court of Appeal reported at [2001] 1 WLR 2112, to passages in paragraphs 64, 99(v), 103, 105 and 116. In the second judgment of the Court of Appeal reported at [2001] 1 WLR 2142 similar points are made in paragraphs 14, 15, 17 and 69. In the report of Master O'Hare annexed to the second judgment of the Court of Appeal, relevant passages appear in paragraphs 19 and 23. The Court of Appeal made plain that it was not purporting to lay down rules applicable for all time but was giving provisional guidance to be reviewed in the light of increased knowledge and developing experience.

    10. For these reasons (and those given by my noble and learned friends Lord Nicholls of Birkenhead and Lord Hope of Craighead) I would dismiss this appeal. In doing so I would not wish to discount either the risk of abuse or the need to check any practices which may undermine the fairness of the new funding regime. This should operate so as to promote access to justice but not so as to confer disproportionate benefits on legal practitioners or after the event insurers or impose unfair burdens on defendants or their insurers. I feel sure that district and costs judges, circuit judges and in the last resort the Court of Appeal can be relied on to maintain a fair and publicly beneficial balance between competing interests.

LORD NICHOLLS OF BIRKENHEAD

My Lords,

    11. I have had the advantage of reading in draft the speeches of my noble and learned friends Lord Bingham of Cornhill and Lord Hope of Craighead. For the reasons they give I too would dismiss this appeal. I wish to emphasise only one point.

    12. All legal procedures are open to abuse. A theme running through much of the appellant's case in your Lordships' House was that the new funding arrangements for personal injuries claims in road traffic cases are unduly open to abuse and are being abused. Costs are being incurred unnecessarily and at an excessive level. The underlying problem, it was said, is that claimants now operate in a costs-free and risk-free zone.

    13. In short, this result comes about as follows. By entering into a conditional fee agreement at the outset, a claimant achieves the position that his solicitor's charges will never be payable by him or at his expense. If his claim is successful the fees, including the amount of the uplift, will be payable by the defendant's liability insurers. If his claim is unsuccessful, nothing will be due from him to his solicitor under the agreement. Likewise with the premium payable for after the event insurance: if the claim is successful, the premium will be payable by the other side's liability insurers. If the claim is unsuccessful, nothing will be payable by the claimant when, as frequently happens, the policy provides that no premium will be payable in that event.

    14. The consequence, it was said, of these arrangements, hugely attractive to claimants, is that claimants are entering into conditional fee agreements, and after the event insurance, at an inappropriately early stage. They have every incentive to do so, and no financial interest in doing otherwise. Moreover, in entering into conditional fee agreements and insurance arrangements they have no financial interest in keeping down their solicitors' fees or the amount of the uplift or the amount of the policy premiums. Further, they have no financial incentive to accept reasonable offers or payments into court: come what may, their solicitors' bills will be met by others. So will the other side's legal costs.

    15. As a result, it was said, the new arrangements, as they are currently working, are unbalanced and unfairly prejudicial to liability insurers and the general body of motorists whose insurance policy premiums provide the money with which liability insurers meet these personal injuries claims and costs. The appellant urged your Lordships to promulgate guidelines to reduce the scope for abuse in this situation.

    16. My Lords, I agree that for the two reasons given by Lord Bingham your Lordships should decline this invitation. Plainly, however, the criticisms outlined above give cause for serious concern. It is imperative that these aspects of the new funding system should be watched closely as the system develops and matures.

LORD HOFFMANN

My Lords,

    17. The Court of Appeal is traditionally and rightly responsible for supervising the administration of civil procedure. This is an area in which your Lordships have in the past seldom intervened and, it must be said, the few exceptions to this policy of self-restraint have usually tended to confirm the wisdom of the general practice. In addition, the issues in this case arise out of an interaction between the new Civil Procedure Rules and the new conditional fee system for funding personal injury litigation. Both are in a relatively early stage of development. So I would be very reluctant to differ from a Court of Appeal which included Lord Woolf CJ, the architect of the new system, Lord Phillips MR, the Head of Civil Justice and Brooke LJ, one of the foremost experts on civil procedure. I am not satisfied that their decisions were wrong and therefore would dismiss the appeals.

    18. That said, I am bound to add that I feel considerable unease about the present state of the law. In this respect I do not think that I am alone. There seems to be widespread recognition among those involved in personal injury litigation that costs, particularly in relation to small claims, are getting out of hand. They are excessive in relation to the amounts at stake (contrary to the principle of proportionality), some elements (such as after the event insurance premiums) lack transparency and, perhaps in consequence, too much time, money and court resources are spent in disputes over costs. The view of the Court of Appeal, at any rate as expressed in the judgments under appeal, is that things will settle down when costs judges acquire greater experience of applying the new rules to the new system of litigation funding. But I must express some doubt as to whether the questions which arise in these appeals are capable of solution by the traditional method of adjudication by costs judges, subject to guidance from the Court of Appeal. It may be that they are not justiciable and require a legislative solution.

19.

    Callery v Gray was a typical straightforward personal injury claim. On 2 April 2000 Mr Callery was a passenger in a car driven by Mr Wilson, which was involved in a collision in Ormskirk with a car driven by Mr Gray, insured by the Norwich Union. He instructed Messrs Amelans, solicitors who specialise entirely in personal injury litigation and process such claims on an industrial scale. On 28 April 2000 he signed a conditional fee agreement (CFA) which provided for a success fee of 60%. On 4 May 2000 he took out an after the event (ATE) insurance policy with Temple Legal Protection Ltd ("Temple") for a premium of £367.50 inclusive of VAT. On the same day Amelans wrote a standard letter of claim to Mr Gray, which he passed on to his insurers. On 19 May 2000 Norwich Union wrote back admitting liability. A medical report were obtained and on 12 July 2000 Amelans made a Part 36 offer to accept £3,010 and costs. On 24 July 2000 the Norwich Union made a counter-offer of £1,200. On instructions from Mr Callery, Amelans telephoned Norwich Union and agreed to accept £1,500 and reasonable costs. This was confirmed on 7 August 2000.

    20. There followed a dispute over costs. Amelans submitted a bill for £4,709.35. In proceedings commenced by Amelans under CPR 44.12A, District Judge Wallace summarily assessed their costs at £1,941 (including VAT) and ordered them to pay £285 as costs of the assessment. The assessment included a 40% success fee and allowed the Temple insurance premium as a disbursement. Norwich Union obtained permission to appeal on the question of whether it was reasonable to incur the cost of ATE insurance before sending the letter before action. At the hearing before Judge Edwards QC it also argued that a 40% success fee was far too high. The judge dismissed the appeal on both points. The Court of Appeal upheld the judge on the insurance point but reduced the success fee to 20%.

    21. There are two points in relation to the success fee. The first is whether it was reasonable to fix it without waiting to find out whether the claim would be admitted. The second is whether in any event a 20% fee was too high for a claim which was as certain of success as anything in litigation can be (the Court of Appeal described as a "very, very low risk case":([2001] 1 WLR 2112, 2140).

    22. Three arguments were given for fixing the success fee at once. The first was that it was a necessary part of a conditional fee agreement and that it was natural for client and solicitors to want to agree at the first opportunity upon the terms of engagement. The client wants to be sure from the beginning that whatever happened he will not have to pay any costs and the solicitor wants to be sure that any work he did will be covered by the agreement and recoverable (in the event of success) from the defendant. The Court of Appeal recorded (at p 2132, para 90) the claimants' argument:

    "The claimant will be concerned [when he first instructs a solicitor] that, by giving instructions...he is not exposing himself to liability for costs. The solicitor for his part will be anxious to offer the claimant services on terms that, whatever the outcome, he will not find himself liable for costs."

    23. I am sure that giving such an assurance is an important selling point (it is stressed on the Amelans web site) and perhaps under the present rules an immediate conditional fee agreement is the only practical way of achieving it. In a large-scale study undertaken in 1998 on behalf of the Legal Aid Board Research Unit (Report of the Case Profiling Study Personal Injury Litigation in Practice) Mr Pascoe Pleasence noted (at p. 19) that "it was common for clients to have their initial advice in a free consultation with a solicitor. Often firms used free first consultations as a marketing tool..." It may therefore be that if a solicitor had to wait until he received an answer to his letter before action before fixing the success fee, he would be willing for marketing purposes to take the risk of not being able to recover from anyone the relatively trivial costs already incurred. On the other hand, it may need a change to the indemnity principle to provide him with the additional incentive of being able to recover those costs from the defendant if the claim succeeds. These are empirical questions on which it is difficult for judges to form a view.

    24. The second argument was that by agreeing to a success fee at the first meeting, the client so to speak insures himself against having to pay a higher one later if his case turns out to be more difficult than at first appeared. (This is very similar to the argument for an early ATE insurance, which I shall come to later). At first sight, therefore, one could say that agreeing an immediate success fee is no more than economically rational behaviour on the part of any client and that the fee should therefore be recoverable as an expense reasonably incurred.

    25. The difficulty is that while, in principle, it may be rational to agree a success fee at the earliest moment, it is extremely difficult to say whether the actual "premium" paid by the client was reasonable or not. This is because the client does not pay the "premium", whether the success fee is agreed at an earlier or later stage. The transaction therefore lacks the features of a normal insurance, in which the transaction takes place against the background of an insurance market in which the economically rational client or his broker will choose the cheapest insurance suited to his needs. Since the client will in no event be paying the success fee out of his pocket or his damages, he is not concerned with economic rationality. He has no interest in what the fee is. The only persons who have such an interest are the solicitor on the one hand and the liability insurer who will be called upon to pay it on the other. And their interest centres entirely upon whether the agreed success fee will or will not exceed what the costs judge is willing to allow.

    26. Amelans in fact assessed the success fee by reference to a "matrix" under which points were allocated between 0 (no success fee) and 20 (100%). The effect of the matrix was that virtually no personal injury cases could score less than 7 (35%) and Mr Callery's scored another six because there were no witnesses (2) Amelans were funding the case (2) and it was expected to take over 6 months to settle (1). No doubt some kind of point system like this is essential in a firm in which large numbers of claims are processed. But it can hardly be regarded as a rational calculation and I do not think that the judge took much notice. What in fact determines the success fee solicitors charge is what costs judges have been willing to allow in more or less comparable cases, the fee being set at the level regarded as optimistic but hopefully not so optimistic as to provoke the liability insurers into contesting the amount. I shall in due course come back to the question of whether this is a sensible system.

    27. The third argument is that assessing risk at the earliest stage is logical because the success fee should be related, not to the prospects of success in a particular case, on which it might be reasonable first to find out more before making the assessment, but on the prospective success rate over the whole range of cases which the solicitor undertakes. The argument for the Norwich Union, on the other hand, was that the success fee should reflect the risk in the particular case. If it was thought to be 90%, the success fee should be 11%. If it was evenly balanced, it should be 100%. If the prospects were less than even, an economically rational solicitor, faced with a statutory maximum success fee of 100%, should not undertake the case at all.

    28. The respondents on the other hand said that lawyers needed to be compensated for undertaking risks at all. If they undertook two cases with even prospects of success, they might statistically be expected to win one and lose one. But there was a 25% chance they might lose both and they were entitled to compensate for this by charging a higher success fee on cases almost certain to win. If they could not do so, they would have to decline cases which appeared less than sure fire winners and this would reduce access to justice.

    29. The Court of Appeal accepted this argument, which it described as a "global" approach to fixing success fees. It said, at p 2132, para 93:

    "Including success fees in recoverable costs has the general effect of shifting from the legal aid fund to defendants, or their insurers, the costs incurred by litigants whose claims fail. In the first instance the claimants' solicitors shoulder the risks in relation to these costs, in exchange for uplift. But the fact that the uplift in successful cases is transferred to unsuccessful defendants results, if one takes a global view, in the burden of unsuccessful claimants' costs being [borne] by unsuccessful defendants."

    30. It was therefore, said the Court of Appeal, an "inevitable consequence of Government policy that unsuccessful defendants should be subjected to an additional costs burden": p 2133, para 95. As between the individual parties, it might appear unjust to saddle defendants with the cost of (high) success fees without giving them a fair chance to identify cases in which success is assured, but the alternative would be to impose liability for the same overall costs in the form of higher success fees payable by defendants who (perhaps reasonably) contested liability and lost. Turning to the question of what success fee could be regarded as reasonable in a simple road accident claim, the court said in its view 20% was the maximum which a costs judge should allow in a "modest and straightforward claim" which had no special features to suggest that the claim might not be sound: see p 2135, paras 102-104. It acknowledged that this view was based on very limited data and might have to be revised in the light of experience.

 
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