Fears of spiralling costs as indemnity principle is scrapped

The indemnity principle states that, in litigation, the loser pays costs on a pre-set rate that the winning client agreed to pay their solicitor at the start of the action. Now there is a danger that unscrupulous solicitors could inflate their costs after winning a case.
Alastair Brett, legal manager at The Times, said: “Defendant lawyers aren't happy about this. If the indemnity principle goes, the paying party could be made to pay more by unscrupulous solicitors falsifying their costs.”
The principle is being abolished as it conflicts with conditional fee arrangements (CFAs), which replaced most civil legal aid after the Woolf reforms. CFAs are conducted on a 'no win, no fee' basis, meaning the client cannot truly agree to pay anything, said Davies Lavery managing partner Philip West.
A decision to scrap the principle was arrived at by Lord Philips late last year, but discussions have now begun as to how to implement the change.
“Scrapping the principle will allow CFAs to work as they should, without convoluted attempts to maintain the fiction of a true indemnity between solicitor and client,” argued 36 Bedford Row barrister Gordon Wignall.
The changes could be good news for pro bono lawyers. Their clients could not agree on costs with their solicitors, so under the indemnity principle, lawyers could not claim back costs. Without it, they can recoup their fees.
Michael Smyth, pro bono and litigation partner at Clifford Chance, said that his firm could propose to recover costs from the defendant in pro bono cases to strengthen negotiations.
“If the other side thinks they'll be liable for a pro bono client's costs, they may be more likely to settle,” he said.
But what will replace the principle to standardise costs is not yet established.
“The principle is going. The Master of the Rolls is now circulating a draft of ideas about what should replace it and thinks the change will need primary legislation,” said Lord Phillips' spokesperson.
David Holland, a barrister at 29 Bedford Row, whose practice includes costs matters, said: “Almost certainly the abolition will lead to a change in the way costs are assessed. The abolition of the indemnity principle and the increased use of summary assessments will mean that standard sums or tariffs will increasingly become the norm, rather than the court having to examine the detailed arrangements be-tween the client and the solicitors.”