Bar Talk

Castle Indemnity is under siege.

First the outer defences have been breached and the link between what the client pays and what the loser pays is broken by introducing con-cepts of average and com-posite rates. Then conditional fees break through another wall, followed by collective conditional fees. It seems that the castle is about to surrender and armies of no-win no-fee lawyers are about to break through into golden sunlit uplands (yes, I know I'm mixing my metaphors but it's that sort of subject) when suddenly, the final gate is defended by the mighty figure of Cost Judge O'Hare bearing on his shield the device: 'windfall'. Everything starts to look a lot more complicated.
The windfall argument is a simple one but presents real difficulties for those who wish to challenge the indemnity principle. In the old days it was normal for clients to engage solicitors on high hourly rates that were not wholly recoverable inter party. As litigation has changed, it increasingly involves sophisticated clients instructing equally, we hope, sophisticated solicitors. Those clients, whether they are multinational companies, institutions or claims management companies, will try to drive down the cost of litigation.
This pressure affects all types of litigation and nobody wants to be left picking up the tab. The result is that there will very often be a difference between what the client has agreed to pay and what is recoverable at assessment, but now the difference is in the winning client's favour. This produces a windfall and clearly breaches the current indemnity arrangements, so on assessment, the paying party's bills are reduced. If the indemnity principle is removed, then the payment arrangements between client and lawyer become irrelevant. Any windfall will be available to be picked up by the client or their lawyer or, perhaps, shared. Does this mean that Castle Indemnity cannot be completely demolished but the central keep called 'windfall' will remain standing forever?
We need to step back and examine the problem, not from the point of the lawyer/client relationship, but by looking at the function of costs in the litigation system. The 'both sides' costs of litigation are simply part of the price of getting into the litigation game. They are intended to offer a series of incentives so that defendants do not clog up the courts with weak defences or claimants with weak claims. The question is whether the price is right or not, not what underpins the price. Take hotels, for example – I am very interested in the room rate. I might be prepared to negotiate the price down from the rack rate but I am sublimely uninterested in how that price is made up. It may be that the hotel is run by a franchisee of an offshore company, the staff are all employed by a series of agencies and the equipment is leased. This is of no interest to me, all that matters is the cost, quality and convenience of the service.
'Both sides costs' are simply the price of litigation services failing to be paid by a third party. The third party (the loser) was not involved in the original arrangements to settle the price of the lawyer's services – the loser pays ex post facto and without any option. In effect, we are dealing with the supply of a service by a monopoly. As in a monopoly, such as Railtrack, market pressures do not operate and regulation is required to protect the loser against being overcharged. The assessing judge is the regulator. The assessing judge adjusts the recoverable fees by such factors as efficiency, importance of the case and so on, as if the payer was the original client. In this way, assessed costs, influenced by local surveys, also influence the going rate.
So why should we worry about a windfall? If I pay for a hotel room without researching the market and I pay too much then the hotel operators haven't got a windfall, I've simply paid over the odds. If I pay the market rate but the hotel I choose happens to be cheaper to run, then why is the owner's extra profit a windfall? Even if it was, why would I care having paid the market rate?
Is the purpose of litigation costs not to force a party to face, in advance, the prospect of paying 'going-rate' costs, and to take that into account in deciding whether or not to proceed? Why should it have any other purpose?
John Peysner is a professor at Nottingham Law School, Nottingham Trent University