It is awell-embedded principle of legal costs that a successful party is unable tocharge an unsuccessful party more than the successful party has been charged byits solicitor. As I am sure that everyone knows, this is referred to as ‘TheIndemnity Principle’, and is not to be confused with the Indemnity Basis, oneof the two bases of costs recoverability prescribed by the Civil ProcedureRules (CPR).
Thereasoning that a party should not be allowed to make a profit out of his legalcosts is that the award of costs is purely compensatory. In practice, this isusually only partial compensation due to the restrictions imposed upon recoveryof costs by the CPR and its practice directions.
Theprinciple is found in Harold v. Smith[1860] 5 H&N 381, although the leading case of Re Eastwood [1975 ] Core Costs Law Reports 50 is the binding authority which relates tothe recovery of costs by government and other corporate institutions. Thesubtitle of this case is Lloyds BankLimited v. Eastwood (Deceased) and it concerned whether a fee earnerworking in house, for example in local government, can recover costs from anunsuccessful party at the same level as a fee earner in private practice.
A strongCourt of Appeal heard the case and Lord Justice Russell gave the judgment ofthe court which he explained was applicable “to the case of a local governmentauthority, a nationalised industry… and any industrial concern conducting litigationthrough its own legal department of which all the expenses, including thesalaries of solicitors, assistant solicitors and legal executives, are paid byit and not by instructing an independent solicitor or firm to act for it”.
In summarythe court held:
1. In cases of this sort it is the proper method of [assessment]of a bill to deal with it as though it were the bill of an independentsolicitor, assessing accordingly the reasonable and fair amount of adiscretionary item such as this, having regard to all the circumstances of thecase.
2. There is no reason to suppose that theconventional method [of assessing hourlyrates] is other than appropriate to the case of both independent andemployed solicitors.
3. It is a sensible and reasonable presumptionthat the figure arrived at on this basis will not infringe the principle thatthe [assessed] costs should not bemore than an indemnity to the party against the expense to which he has beenput in the litigation.
4. There may be special cases in which itappears reasonably plain that that principle will be infringed if the method oftaxation [assessment] appropriate to an independent solicitor’s bill isentirely applied; but it would be impracticable and wrong in all cases of anemployed solicitor to require a total exposition and breakdown of theactivities and expenses of the department with a view to ensuring that theprinciple is not infringed, and it is doubtful, to say the least, whether byany method of certainty on the point could be reached.
Theconclusions in Eastwood remain binding precedent today, yet there have beenseveral challenges to these established principles, all of which have failed.The latest challenge is to be found in the case of R (Mazanov Bakhtiyar) v. The Secretary of State for the Home DepartmentIJR[2015] UKUT 519 (IAC).
Here, an orderwas made that the Applicant in these Judicial Review proceedings in the UpperTribunal (Immigration and Asylum Chamber) should pay the costs of theAcknowledgment of Service. These had been assessed at £400 but the Applicantchallenged this amount on two grounds: (a) the amount of time claimed for thework (this was conceded by the Government Legal Department); and (b) the hourlyrate of £200 breached the indemnity principle and was in any event unreasonablyhigh.
The courtreviewed in detail the Eastwood caseas decided by the Court of Appeal and remarked that “the decision in Eastwood has survived attacks in theHigh Court in Maes Finance Ltd. V.Edwards & Partners [2000] 2 Costs LR 198 and in the Court of Appeal in Cole v. British Telecommunications plc [2000]2 Costs LR 310.
It went onto say that “Eastwood is clearauthority for the proposition that the process of calculation of the costs towhich the successful party has been put by the litigation is the same whetherthat party has engaged a solicitor in private practice or employed a solicitoras part of his or its organisation.”
The courtattributed a new description to the situation covered in conclusion 4 above ofthe court in Eastwood, namely the “presumed indemnityprinciple”. It then considered the Applicant’s submissions that this was a casewhere it was ‘reasonably plain’ that the indemnity principle had been infringedon the basis that the charging rates adopted by the Government Legal Departmentwhen charging out its legal work to other departments.
The courtfelt obliged then to consider the ‘nature of government’ which it did with theassistance of the various judgments in TownInvestments Ltd. And Others v. Department of the Environment [1978] AC 359.It is not necessary for the purposes of this article to explore thosejudgments.
Inparagraphs 36 to 38 of the judgment, the Upper Tribunal concluded that,although the Department makes charges to other government departments, thereare a number of other costs which are not covered by the internal chargeablehourly rates adopted. Their lawyers give advice on litigation strategy and canattend conferences with counsel or assist in formulating a response to a claim,and these costs are not included in the hourly rate.
In additionthere are other costs generally falling upon the government in that HM Treasuryand the Cabinet Office incur costs in providing what is described as‘oversight, financing, advice and other services’. Such costs, if incurred inthe private sector, would be included in a fee earner’s hourly rate, yet theydo not form part of any charge made by the Department to other governmentdepartments.
Using atable of rates showing what one government department may charge to another isnot the correct basis of assessment (paragraph 38) and the Town Investments decision shows that all figures in such a tableare irrelevant. The costs being repaid are the government’s costs and not thesums of money being paid by one department to another.
Inconclusion, the original order for costs was affirmed, Eastwood was followed and £200 per hour, the rate claimed by theRespondent was not unreasonably high. The Upper Tribunal also concluded that:
1. The Secretary of State for the HomeDepartment is the nominal defendant in an immigration judicial review but theparty to the litigation is in truth the government.
2. Even if the costs were to be calculatedon the basis of the amounts of money the Secretary of State pays to the GovernmentLegal Department, it would be wrong to confine the costs to the hourly rate forlawyers because that rate does not take into account factors that would havebeen taken into account if a charge was being made by a solicitor in privatepractice.
3. Because the successful party is theCrown, other general overhead costs of the Government Legal Department alsofall for consideration and charge. It would be an unrealistically expensive andperhaps impossible task to calculate precisely the costs attributable to theproduction of an Acknowledgment of Service. The presumption in Eastwood applies.
It is to behoped that we have now finally seen the end of challenges to this particularaspect of costs. Hopefully, paying parties who are the subject of adverse costsorders in favour of the government, corporations, and local authorities will infuture not seek to resuscitate the (to date) fruitless challenges to the Eastwood principles.
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A&MBacon is the UK's leading independent firm of Costs Lawyers. We specialise inall aspects of Civil Litigation Costs. We are regularly instructed by bothpaying and receiving parties. More information at www.aandmbacon.co.uk.
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