SCCO Nos 05/380 and 383
Neutral Citation Number: [2006] EWHC 159 (QB)
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 9 February 2006
Before:

The Hon Mr Justice Simon
(sitting with Master Hurst and Mr Jason Rowley, as assessors)

_____________________

Between:

	Mohammed Butt 	Defendant/
Appellant	
	- and -		
	
Christi Nizami	Claimant/
Respondent	
			
	and		
			
	Mohammed Butt 	Defendant
Appellant 	
	- and -		
	
Cadhar Kamuluden	Claimant/
Respondent	

_____________________

Mr Roger Mallalieu (instructed by McCullagh & Co) for the Appellants 
Mr Nicholas Bacon (instructed by Colman Coyle) for the Respondents
____________________

Hearing date: 31 January 2006

Judgment

Mr Justice Simon: 

1.	This is the Defendant’s appeal from the order of Master O’Hare dated 30 June 2005.

The Background

2.	On 30 December 2003 the Claimants, Mr Kamaluden and Mr Nizami, were the driver and passenger respectively of a car which had stopped at traffic lights in Salford, Manchester. The car was struck from behind by a vehicle driven by the Defendant, Mr Butt; and as a result of the accident, both the Claimants suffered whiplash injury. 
3.	The Claimants instructed Messrs Colman Coyle to pursue claims for damages on their behalf; and at some stage, they entered into Conditional Fee Agreements ("the CFAs") in relation to the claims.
4.	In the event, the claims were each settled before proceedings were begun. Mr Nizami’s claim was settled on 28 January 2005 for £1,675.05, plus costs on the standard basis to be assessed if not agreed. Mr Kamaluden’s claim was settled on 23 February 2005 for £2,430.31, plus costs on the standard basis to be assessed if not agreed.  
5.	Costs could not be agreed; and on 19 April 2005, the Claimants issued Part 8 Proceedings in the Supreme Court Costs Office in accordance with CPR 44.12A for the determination of costs.
6.	At the heart of the dispute between the parties is the suspicion of those representing Defendant’s insurers that the CFA did not comply with the Conditional Fee Agreement Regulations 2000 (‘the Regulations’). The issue was initially articulated by Jaggards, legal costs negotiators appointed by the Defendant’s insurers. In a letter dated 10 March 2005, Jaggards wrote:
Please can you confirm in writing that … the fee earner with the conduct of the matter personally saw and checked the motor policy document of the vehicle in which the claimant was travelling for legal expense insurance and there was none available. Please confirm that the fee earner checked the household policy document for legal expense insurance and there was none available.
Please also confirm who gave oral advice to your client and when the same took place.
7.	The Claimants’ solicitors sent a copy of the CFAs, but declined to respond further to Jaggards’ interrogation. The Defendant is concerned that, before the signing of the CFAs, the Claimants’ solicitors failed to make appropriate enquiries about the availability of Before the Event ("BTE") insurance, the existence of which might invalidate the CFAs.

The Indemnity Principle and the change in the law

8.	At its simplest the Indemnity Principle provides that an unsuccessful party cannot be held liable to pay more to a successful party than the successful party is himself legally liable to pay. This principle worked satisfactorily until the introduction of conditional fee agreements. These usually provide that the client does not have to pay the solicitor’s costs unless the claim is successful. Although most modern litigation (particularly in the field of personal injuries) is now conducted on the basis of conditional fee agreements, they are difficult to reconcile with the Indemnity Principle. For this reason the law was changed.
9.	In June 2003, s.51(2) of the Supreme Court Act 1981 (‘the SCA 1981’):
Without prejudice to any general power to make rules of court, such rules may make provision for regulating matters relating to the costs of those proceedings including, in particular, prescribing scales of costs to be paid to legal and other representatives …

was amended so as to add: 
 
or for securing that the amount awarded to a party in respect of the costs to be paid to such representatives is not limited to what would have been payable by him to them if he had not been awarded costs

10.	The amendment conferred the power to make Rules of Court which provided for the inter-party recovery of costs which would otherwise be precluded by the Indemnity Principle.

CPR 45 Section II

11.	CPR Part 45, Section II provides, so far as relevant:
Scope and interpretation
45.7.  
(1)  	This section sets out the costs which are to be allowed in – 
(a)  	costs only proceedings under the procedure set out in Rule 44.12A … 
       	in cases to which this section applies.

(2)  	This section applies where - 
(a)  	the dispute arises from a road traffic accident; 
(b)  	the agreed damages include damages in respect
of personal injury, damage to property, or both;   
(c)  	the total value of the agreed damages does not exceed £10,000; and
(d) 	if a claim had been issued for the amount of the 
	agreed damages the small claims track would not 
	have been the normal track for that claim.
…

Application of fixed recoverable costs
45.8.  Subject to Rule 45.12 the only costs which are to be allowed are -
(a)  	fixed recoverable costs calculated in accordance 
	with Rule 45.9;
(b)  	disbursements allowed in accordance with Rule 45.10; and 
(c)  	a success fee allowed in accordance with Rule
45.11.
…

Amount of fixed recoverable costs
45.9 
(1)  	Subject to (2) and (3), the amount of fixed recoverable costs is the total of 
(a)  £800;
(b)  20% of the damages agreed up to £5,000;   
and  
(c)  15% of the damages agreed between £5,000 and £10,000.
(2)  	Where the claimant - 
(a)  lives or works in an area set out in the relevant Practice Direction;   and
(b)  instructs a solicitor or firm of solicitors who practise in that area, 
the fixed recoverable costs shall include, in addition to the costs specified in (1), an amount equal to 12½% of the costs allowable under that paragraph.
(3)	Where appropriate value added tax (VAT) may be 
recovered in addition to the amount of fixed recoverable costs and any reference in this section to fixed recoverable costs is a reference to those costs net of any such VAT.

Disbursements 

45.10

(1)  	The court - 
(a)  may allow a claim for a disbursement of the type mentioned in paragraph (2); but 
(b) must not allow a claim for any other type of disbursement.
(2)  	The disbursements referred to in (1) are: 
(a)  the cost of obtaining - 
(i)   medical records; 
(ii)  a medical report; 
(iii) a police report; 
(iv) an engineer’s report; or 
(v) a search in the records of the Driver Vehicle Licensing Authority; 
…
Success fee
45.11	
(1) 	A claimant may recover a success fee if he has entered into a funding arrangement of a type specified in Rule 43.2(k)(i).
(2)  	The amount of the success fee shall be 12½% of the fixed recoverable costs calculated in accordance with Rule 45.9(1) disregarding any additional amount which may be included in the fixed recoverable costs by virtue of Rule 45.9(2).
…
12.	These Rules were brought into effect following the amendment to the SCA 1981. 
The argument before Master O’Hare

13.	In their Part 8 claim forms the Claimants claimed fixed recoverable costs under CPR 45.9, disbursements under CPR 45.10 and a success fee under CPR 45.11. The costs claimed in Mr Kamaluden’s case were £2,168.91, and Mr Nazami’s case were £1,962.32. 
14.	The matter was listed before Master O’Hare for directions. The Defendant sought a direction that the Claimants’ solicitors either answer Jaggards’ questions or certify that there had been proper compliance with the Regulations. Mr Mallalieu who appeared then (as now) on behalf of the Defendant argued that the Indemnity Principle required that the costs claimed should be costs properly payable by the Claimants to their solicitors and that this presupposed valid and enforceable CFAs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

Master O’Hare’s decision

15.	Master O’Hare took the view that the entitlement to the fixed recoverable costs under CPR 45.9 and the success fee under CPR 45.11 did not depend on the existence of a valid and enforceable CFA. He held that, although disbursements were subject to assessment, fixed recoverable costs and success fees should be recoverable without any intervention by the Courts.
16.	As he put it in §7 of his Judgment:
The purpose of the Rules was to simplify the payment of costs in small cases, not to make it more complex. The fixed recoverable costs are just that; they are fixed. But they are payable by the defendant whether or not the claimant’s solicitor’s retainer is valid. An extra 12.5% is payable if the claimant and his solicitor entered into a CFA, whether that CFA is valid or not. 
So far as the disbursements claimed under CPR 45.10 were concerned, he said:
… I am unable to take the same approach to disbursements. It seems to me that, for them, the standard rules, including the familiar indemnity principle, continues to apply. I accept that it seems inconsistent to allow what might be invalid profit costs whilst at the same time disallowing unpaid disbursements … Nevertheless, I think that the inconsistency arises because Part 45 does not deal with the disbursements in the same way as it deals with profit costs. Disbursements are not fixed by Part 45.

The arguments on the appeal

17.	For the Defendants Mr Mallalieu, submitted as follows:
i)	The Indemnity Principle is fundamental to orders for the recovery of costs, see for example Harold v. Smith (1860) 5 H & N 381, Baron Bramwell at p.385, and Hollins v Russell [2003] EWCA Civ 718 at §23
ii)	Since the principle is fundamental to the recovery of costs, clear wording is required before the principle is abrogated. As Mr Mallalieu put it, the principle should only be disregarded ‘if absolutely necessary’. He referred to the clear words used in the amendment to the Conditional Fee Agreements Regulations 2000, by the introduction of Regulation 3A, which permits the recovery of costs beyond those payable to the solicitor.
iii)	In any event, and regardless of the indemnity principle, a CFA must be lawful before recovery is permitted. Mr Mallalieu drew attention to CPR 43.2(3) and (4). CPR 43 sets out the definitions and interpretations of the cost rules in CPR 44 to 48. CPR 43.2 provides:
(3) 	Where advocacy or litigation services are provided to a client under a conditional fee agreement, costs are recoverable under Parts 44 to 48 notwithstanding that the client is liable to pay his legal representative’s fees and expense only to the extent that sums are recovered in respect of the proceedings, whether by way of costs or otherwise.
(4)  	In paragraph (3), the reference to a conditional fee agreement is to an agreement which satisfies all the conditions applicable to it by virtue of section 58 of the Courts and Legal Services Act 1990.
As already indicated, underlying this submission is the suspicion (fuelled by the Claimant’s solicitors refusal to answer questions about BTE cover) that there have been material breaches of the regulations made pursuant to the 1990 Act, with the result that the CFA is unenforceable. Mr Mallalieu relied on the general statement of principle in Hollins v. Russell (cited above) at §53 in relation to the position before the change to s.51 of the SCA 1981.
… we must take it to be the policy of Parliament that the paying party should be protected by the indemnity principle in relation to the CFA entered into by the receiving party. In other words, that he should be entitled to object to paying costs which he has been ordered to pay if they are made payable under a conditional fee agreement which is not rendered enforceable by section 58(1) [of the Courts and Legal Services Act 1990].

iv)	Thus on their proper construction, although CPR 45. 9 and 11 provide for a fixed sum to be paid, this is always subject to the validity of the retainer, including the CFA. 
v)	All that is necessary to satisfy this requirement is a certificate demonstrating that the CFA complies with the rules. Mr Mallalieu suggested the following form of words:
What is claimed in the schedule/bill of costs are in respect of items which the claimant has a liability to pay the firm.
If such a certificate were given, he accepted that the paying party could not go behind the certificate.
18.	Mr Bacon, for the Claimant submitted:
i)	Master O’Hare’s analysis was correct. CPR 45 Section II provides for a self-contained scheme for the recovery of costs in litigation involving road traffic accidents giving rise to relatively small claims. The costs are recoverable whether or not they have actually been incurred. The Indemnity Principle has no place in a scheme where the costs are fixed. The Defendant’s arguments subvert this principle.
ii)	CPR 45 Section II applies to a closely confined category of cases. As CPR 45.7 makes clear, it is limited to costs-only proceedings under the procedure set out in CPR 44.12A. 
Costs-only Proceedings
44.12A 
(1) This rule sets out a procedure which may be followed where –
(a)	the parties to a dispute have reached an agreement on all issues (including which party is to bear the costs) which is made or confirmed in writing; but
(b)	they have failed to agree the amount of such costs; and
(c)	no proceedings have been started.

If the Defendant’s argument that the indemnity principle applies to this category of cases is correct, there is no reason why it could not challenge the amount of costs.
iii)	As to Mr Mallalieu’s point iii), the success fee which is recoverable under Part 43.11 is in relation to a funding agreement as defined in CPR 43.2 (1)(k)(i), and not as defined in CPR 43.2 (3) and (4), which require ‘an agreement which satisfies all the conditions applicable to it by virtue of s.58 of the Courts and Legal Services Act 1990.’ CPR 43.11 is not concerned with compliance with conditions, simply with a funding arrangement, which is defined as a conditional fee agreement which provides for a success fee within the meaning of s.58(2) of the Courts and Legal Services Act 1990. Section.58(2) provides:
For the purposes of this section and section 58A –
 (a) a conditional fee agreement is an agreement with a person providing advocacy or litigation services which provides for his fees and expenses, or any part of them, to be payable only in specified circumstances; and
(b) a conditional fee agreement provides for a success fee if it provides for the amount of any fees to which it applies to be increased, in specified circumstances, above the amount which would be payable if it were not payable only in specified circumstances.
iv)	In any event this appeal is premature since the Claimants have not yet prepared a bill of costs, let alone been in a position to provide a certificate. As Master O’Hare recorded:
The Claimants’ solicitor volunteers to give a certificate as to compliance with the Conditional Fee Agreement regulations in this case.

Conclusion

19.	I am advised by the Assessors that until the Court of Appeal decision in Hollins v. Russell [2003] EWCA Civ 718 numerous technical challenges were made to the validity of conditional fee agreements. As Mr Mallalieu put it in the course of argument, ‘the history of litigation in this field indicates that disproportionate points were taken.’ The challenges sought to show that conditional fee agreements did not comply with primary and secondary litigation; and were therefore unenforceable between solicitor and client. On this basis the paying party was able to rely on the Indemnity Principle so as to argue that it could avoid liability for the receiving party’s costs. It is clear that such challenges had a significantly detrimental effect on the efficient conduct of personal injury litigation and were inconsistent with the overriding objective of enabling the court to deal with cases justly. As Judge LJ noted in Bailey v. IBC Vehicles Ltd [1998] 3 All ER 570 at 575a:
The defendants’ request that the plaintiff be required to provide information proving that the indemnity principle has been observed represents pointless satellite litigation.
The problem was addressed in three ways.  
20.	In Hollins v. Russell (see above) the Court of Appeal gave guidance on the approach which should be adopted to technical challenges to conditional fee agreements. Among other points the Court of Appeal dealt with how the conditions in s.58(1) could be satisfied. The subsection provides:
A conditional fee agreement which satisfies all of the conditions applicable to it by virtue of this section shall not be unenforceable by reason only of it being a conditional fee agreement; but … any other conditional fee shall be unenforceable.
At §105-6 the Court gave answers:
105. … In approaching the meaning of the words ‘satisfies the conditions …’ we can be confident that Parliament would not have meant to render unenforceable a CFA which adequately meets the requirements which were designed to safeguard the administration of justice, protect the client, and acknowledge the legitimate interests of the other party to the litigation …

106. … in general conditions are generally met when there has been substantial compliance with, or in other words no material departure from, what is required. 
This guidance was intended to cut down the highly technical arguments based on minor infractions of the conditions.
21.	Secondly, there was the change in the law effected by the amendment to s.51(2) of the SCA 1981 which significantly modified the Indemnity Principle and permitted changes in the Rules to give effect to the modification. 
22.	Thirdly, changes were made to the Rules of Court. Some of these changes, and in particular the provisions of sections II to V of CPR 45, were introduced following ‘industry wide’ discussions under the aegis of the Civil Justice Council. Agreement was reached on the recoverable costs in the different situations covered by the various sections. 
23.	It seems to me clear that the intention underlying CPR 45.7-14 was to provide an agreed scheme of recovery which was certain and easily calculated. This was done by providing fixed levels of remuneration which might over-reward in some cases and under-reward in others, but which were regarded as fair when taken as a whole. 
24.	It is clear that in making this change the draftsman of the Rules intended that the Indemnity Principle should not apply to the figures which were recoverable. If that is so I can see little reason why it should be assumed that the Indemnity Principle has any application to CPR 45.9 and 11, and good reasons why it should not:
i)	The Overriding Objective of the CPR includes saving expense and dealing with the cases in ways which are proportionate to the amount of money involved.  
ii)	The Assessors have pointed out that the range of fixed costs recoverable under CPR 45.9 is £800 to £2,550; and on this basis, the range of success fees under CPR 45.11 is £100 to £318.75. It is hardly consonant with the Overriding Objective that sums of this order should be subject to the sort of scrutiny that could be a matter of course if Mr Mallalieu is right in his analysis. 
iii)	The whole idea underlying Part 45 Section II is that it should be possible to ascertain the appropriate costs payable without the need for further recourse to the court.
25.	I should add that in coming to this conclusion:
i)	I have rejected the argument that there is an overriding need to enable the paying party to satisfy themselves that the conditional fee agreement is compliant with the regulations. This may result in some non-compliant agreements having effect, but will avoid wasteful arguments about whether there has or has not been substantial non-compliance in what is required in these straightforward types of case. 
ii)	I have rejected the argument that there is an anomaly in that CPR 45.10 requires a different approach. The reason why the costs under CPR 45.10 call for a different approach is that there are no fixed figures for disbursements. 
iii)	I have rejected Mr Mallalieu’s argument that the concerns of the paying party could be dealt with by a certificate. It seems to me that such a certificate would simply invite parasitic litigation in an area which reveals a propensity for such litigation on an almost industrial scale. Nor am I attracted by the idea of a certificate whose terms are drafted (albeit deftly) in the course of argument. It seems to me that the terms of any certificate should be carefully drafted after proper consultation. 
26.	In cases falling under CPR 45 Section II the receiving party does not have to demonstrate that there is a valid retainer between the solicitor and client merely that the conditions laid down under the Rules have been complied with. 
27.	For these reasons I have concluded that the Defendant’s appeal in each case should be dismissed.