The Callery count

It is difficult to say what impact the Callery v Gray decision (see box below) will have in practice, either in simple road traffic accident (RTA) cases, or in the wider field of conditional fee agreements (CFAs) generally.
The court emphasised that the decision was in the context of simple personal injury (PI) claims in straightforward road traffic cases. Although the general statement of principle, that success fees are recoverable even when the CFA is entered into at the outset, is of general application, the judgment gives no real indication of what might be a reasonable success fee in more complex cases, save that the upper limit of the acceptable range will be greater than 20 per cent.
It is doubtful whether anyone in the profession took a different view before the Court of Appeal decision. In so far as any comment is possible on the wider ramifications of the decision – having regard to the fact that the success fee is viewed by many as pure profit (whereas in fact it covers, at the very least, the cases that are lost); and to experience of the B factor uplift under the old A + B factor approach – allowable success fees might be surprisingly low.
Fifty per cent was the starting point for B factor uplifts in simple RTA cases on a scale that went to 200 per cent in legal aid cases and more in other cases; the cases had to be “exceptional” to merit a B factor uplift of 100 per cent or more. Only a handful of cases achieved 200 per cent – what little is known about these cases suggests that they were almost unique in terms of factual and/or legal complexity, public importance, quantum of damages etc. Success fees operate on a scale of 0-100 per cent; if 20 per cent for RTA cases equates with 50 per cent under the old system, allowable success fees in cases that are more complex than simple RTA claims but nevertheless straightforward in their particular area (straightforward commercial or clinical negligence or professional negligence cases) might be in the 30-35 per cent range; cases might have to be “exceptional” (using the old language) to attract an allowable success fee of 40-50 per cent, and possibly “unique” to achieve the 100 per cent mark. It is perhaps unlikely that unique or even exceptional commercial cases will be fought on a CFA basis, whatever might happen in PI or other fields. In the main, such cases go to the City or large firms outside London, and it is difficult to see these firms embracing CFAs with any enthusiasm.
The judgment states that it will “normally” be reasonable for a CFA to be concluded and after-the-event (ATE) cover to be taken up at the outset. Advocates wishing to test the limits of the decision will look to see whether the facts of any particular case take it outside the norm and whether the CFA and ATE cover can be challenged on this basis.
The judgment states that “20 per cent is the maximum uplift that can reasonably be agreed”. The mark is not set at 20 per cent, but can range from 0-20 per cent. This opens up the prospect of lawyers and insurers (and in the event of dispute, costs judges) having to sub-divide cases that are by definition “modest and straightforward” into 21 (0-20 per cent) degrees of “modesty” or “seriousness” to set the correct success fee. Lawyers and insurers will eventually establish generally accepted standards, but the possibilities for dispute, at least initially, seem endless.
Callery v Gray could be a complete blessing to insurers because it gives them the scope to push down success fees. Prior to Callery v Gray, insurers worked on a scale of 0-100 per cent, and experience showed that 20-25 per cent was the generally accepted range for simple RTA cases. Now 20 per cent is the “maximum” rather than the norm. Insurers are in the driving seat. They deal with thousands of cases and this gives them the experience/statistics and clout to have a material affect on the levels that will be set in negotiations.
Insurers will benchmark success fees, probably at about the 5 per cent mark because of the court's reference to this figure in dealing with the example of a two-stage success fee. If success fees are benchmarked at around 5 per cent in negotiations, this establishes what the profession considers reasonable and becomes the standard by which costs judges must determine matters.
At 5 per cent, solicitors will have to achieve a high degree of success to make these cases viable commercially. If the average costs in a simple RTA case that settles are £2,500 and in a case that fights are £5,000 (which is probably on the low side), and success fees are benchmarked at 5 per cent (£125 per case), a solicitor must win 40 cases (40 x £125 = £5,000) to cover one case (£5,000) that is lost.
It is open to claimants to go to court to litigate the claim or the costs, but in practice, claimants who contemplated simple claims that would settle quickly without litigation might be unwilling or unable to embark on litigation, particularly where this is merely to resolve a dispute about the level of success fee payable to the lawyer. Where there is disagreement about the ATE premium, there might be a greater willingness to litigate because this has a direct affect on the money left over for the client, but it will be difficult to justify the costs of an action or an assessment of the proceedings when the dispute is only about the ATE premium. Insurers will probably be quick to agree ATE premiums where they are in line with the market and equally quick to point out where premiums are out of line with the market and therefore plainly irrecoverable. Arguments are likely to be about success fees and insurers
are likely to play the dominant role in establishing the norm.
So far as the size of the premium is concerned, this might be a decision on its own facts; however, it is likely that £350 will become the mark – premiums below £350 will creep up to the £350 mark and those above will be pushed down.
In practice, where everything but the success fee is agreed, solicitors are likely to be forced to agree a reduced success fee because the client will be unwilling to fund litigation over this issue. In the majority of cases, they are likely to have to agree the reduced fee with the client for the sake of a settlement. However, in cases where barristers are engaged on a CFA with a success fee, there may be difficulty in obtaining agreement to a reduced fee for the sake of settlement, particularly in cases where there is no established relationship between the solicitor and the barrister.
The jury is still out on the effect of before-the-event (BTE) insurance. The Court of Appeal heard Sarwar v Alam earlier this month and reserved judgment.
Insurers no doubt will now have in mind cutting through the whole issue by enlarging the scope of BTE insurance with every type of policy sold (eg household insurance), and in so doing will completely sidestep the points raised in Callery v Gray. Insurers will be in a position to flex their muscles to drive down the rates payable to lawyers acting for clients having the benefit of BTE insurance.
For the client, there is no-win, no-fee; for the lawyer, there is risk and a minimal success fee for the time being; for the insurer, it looks like a case of win-win, because allowable success fees and premiums are likely to be driven down by this decision.
Martin Farber is a barrister at 5 Stone Buildings and Richard Schaverien is a partner at Howlett Clark Cushman

Callery v Gray: the judgment

Callery v Gray; Russell v Pal Pak Corrugated Limited, 31/7/01, CA, Master of the Rolls Lord Phillips; Lord Justice Brooke
In Callery v Gray and Russell v Pal Pak Corrugated, the Court of Appeal dealt with the power to make an award of costs which includes (a) a sum in respect of any success fee payable under a conditional fee agreement (CFA), which is an agreement for the normal fee plus uplift in the event of success or the normal without uplift payable only in the event of success, and (b) a sum in respect of any premium payable for insurance to cover costs which the receiving party would have been liable to pay had they lost after-the-event (ATE) insurance.
The Court of Appeal held that there is jurisdiction under Section 29 of the Access to Justice Act 1999 to include an ATE premium in an award of costs made in costs-only proceedings under the Civil Procedure Rules (CPR) 44.12a.
In principle, it will “normally” be reasonable for a CFA to be concluded and ATE cover taken out “at the outset” (when they first consult their solicitor, and before the solicitor writes a letter of claim and receives the prospective defendant's response). Where, at the outset, a “reasonable uplift” is agreed and ATE insurance at a “reasonable premium” is taken out, the costs of each are recoverable from the defendant in the event that the claim succeeds or is settled on terms that the defendant pays the claimant's costs.
Regarding the reasonableness of the success fee: (a) in the context of modest and straightforward claims for compensation for personal injuries resulting from traffic accidents, where a CFA is agreed at the outset, 20 per cent is the maximum uplift that can reasonably be agreed; and (b) where there is a “special feature” that (“reasonably”?) raises apprehension that the claim may not prove to be sound, the appropriate uplift will be higher (presumably than in a simple RTA), but it may not be reasonable to attempt to assess that uplift until further information about the defendant's response is at hand – ie where there is a special feature, an uplift of more than 20 per cent might be reasonable, but in order to comply with the requirement of reasonableness, it might be necessary to wait until something is known about the defendant's response before agreeing the level of success fee. No guidance was given about the level of uplift that might be reasonable.
The court emphasised that its decision was based on limited data and must be reviewed once sufficient data became available.
The court also drew attention to a “two-stage” success fee agreed at the outset: a success fee can be agreed that assumes the case will not settle at least until after the end of the protocol period, if at all, but which is subject to a rebate if it does in fact settle before the end of that period. The example given by the court was an uplift agreed at 100 per cent subject to a reduction to 5 per cent if the case should settle before the end of the protocol period. The court stated that the requirement of reasonableness might make two-stage agreements mandatory in due course.
The court was concerned with a particular category of claims, namely claims for the consequences of a motor accident where, on the claimant's account of the accident, the solicitor reasonably concludes that the claim has every prospect of an early settlement as to both liability and quantum. The rationale for this approach is that, at that stage, the risk assessment that results in the determination of the uplift is likely to turn, not on the peculiar features of the instant case (for there will be none), but on the solicitor's experience that in a small minority of such cases, when the claim is pursued, some unforeseen circumstance results in the ultimate failure or abandonment of the claim.
With regards to the reasonableness of actual premiums: Master O' Hare has reported, but concluded that the market in ATE insurance was insufficiently developed to identify standard or average rates of premium for different categories of ATE insurance.
The Court of Appeal has been unable to give any guidance about actual figures for “reasonable premiums”, but has made some general statements of principle:
(1) The court will be concerned with the question of whether the premium is a reasonable price to pay for the benefits that it purchases. Competitively-priced premiums are likely to be reasonable. To pay an uncompetitive premium where more reasonable premiums are available may disentitle the litigant from making a full recovery of the costs of the premium.
(2) The premium is recoverable where it is a payment for insurance against the risk of liability for costs. If the premium covers other benefits, it is at least arguable that to that extent it cannot be recovered under Section 29.
(3) No objection can be taken to a premium reflecting reasonable “burning” costs, reasonable risk/profit cost, reasonable administration costs (personnel, premises, policy issue and processing and claims administration costs), premiums covering (reasonable) advertising and other marketing costs and commissions.
(4) In principle, “own costs” cover is recoverable, but the circumstances in which, and the terms on which, it will be reasonable, so that the whole premium can be recovered as costs, will have to be determined by the courts when dealing with individual cases, assisted, if appropriate, by the Rules Committee.
(5) In principle, any part of the premium that covers the risk of being unable to recover the premium as a consequence of losing the action is recoverable if reasonable in amount.

(6) It is not reasonable to presume, as a starting point, that a premium is reasonable unless the contrary is shown. It seems, therefore, that the burden is on the receiving party to satisfy the court as to the reasonableness of the premium.
On the facts in Callery v Gray, the full premium of £350 was recoverable.

Callery v Gray – a costs consultant's perspective

In 1986, the then new costs rules introduced a system whereby lawyers could claim costs on a discretionary basis by utilising an hourly expense rate supported by a reasonable markup. It took three years for the first influential case – Finley v Glaxo (9/10/89) – to be decided. This, however, only had the weight of a Queen's Bench Division unreported case. It took another three years for Johnson v Reed Corrugated Cases (1992) to be decided. In simple terms, Johnson stated that markups for run-of-the-mill cases should start at 50 per cent, and to claim rates of 100 per cent or higher, the claims needed to be “exceptional”. This case stood the test of time of the remaining seven-year history of the old costs rules.
It would be easy to criticise the decision of Callery as a 'fudge' of the main issues affecting the 100,000-odd cases awaiting a decision, and the implications of legal costs over the next three to five years. It is better, perhaps, to be more positive and suggest that what the case has attempted to do is establish a basic framework for this to grow organically to encompass all but big-ticket commercial litigation within the next couple of years.
Claimant personal injury (PI) lawyers, who have traditionally been at the bottom of the litigation food chain, now have far greater opportunities to be successful.
Analogy 1
Grade 2 fee-earner guideline hourly rates in the South West of England are averaging out at £135, with the addition of success fees of 20 per cent, using a benchmark of 100 chargeable hours per month. Then, by deducting approximately 15 per cent for loss on assessment or negotiation, Grade 2 fee-earners should be able to generate a £165,000 income per annum. This analogy is based on a 100 per cent success rate on the basis that the filter process conducted by the Grade 1 fee-earners is so good that Grade 2 fee-earners will find it difficult to lose cases. The profit element of this figure will be entirely due to the percentage of Grade 1 fee-earners to Grade 2 fee-earners.
Commercial litigators will probably brush aside Callery on the basis that this case is purely for the PI lawyers. This is a big mistake, as not only was the vast majority of case law on markup in the old system PI-related, but the present economic climate will see far more commercial clients shopping around for better/best deals. If Johnson used markup figures of 50 per cent for run-of-the-mill cases and 100 per cent for exceptional cases, with the Costs Masters in the early 1990s allowing markups as high as 200 per cent, it would not be that unreasonable to suggest ratios for commercial litigation being claimed at between 1:2-1:4 on the Callery figure of 20 per cent for success fees.
Analogy 2
Grade 1 fee-earner guideline hourly rates in the City are £325; add success fees of 50-100 per cent, using a benchmark of 2,000 chargeable hours per year, add two quality Grade 2 fee-earners (£235 per hour guideline rates), a couple of paralegals (£110 per hour guideline rates), and this small five-person commercial litigation team has the potential to generate between £3m-£4m income per annum – although it also has the potential to earn nothing.
Jim Diamond is a legal costs consultant at

Callery v Gray – an insurer's perspective

Despite the extent of the arguments and submissions sought from a number of interested parties – including the Association of Personal Injury Lawyers (Apil), the Association of British Insurers (ABI), the After the Event Insurers' Group Forum, Claims Direct, Motor Accident Solicitors Society (Mass) and the Law Society – the judgment in Callery v Gray is more remarkable for how little help it provides, than for what it does say.
In any event, a petition has been submitted to have the case considered by the House of Lords. There is also an outstanding appeal in the case of Sarwar v Alam on a related point. In this case, the cost of after-the-event (ATE) insurance was disallowed at first instance because the motor policy already provided before-the-event (BTE) cover, which was available to all occupants of the vehicle. The finding was based on the conclusion that the claimant (and/or the claimant's lawyers) were under a duty to establish whether any BTE cover was available before entering into the ATE policy. Obviously, the appeal is being made on behalf of the claimant in this case.
It is vital to reiterate that all the cases considered are concerned with what are conceived by the court as being the most straightforward of cases. They are motor claims involving no likely real issues of liability. If a 20 per cent success fee and a premium of £350 are reasonable in such circumstances, it is of great concern to try to speculate as to a reasonable success fee and insurance premium in cases where there is actually some risk.
To put this last point in context, it should be remembered that, in the two cases considered in the Callery appeal, there was an identified motorist who was clearly responsible for the accident.
Even were such a motorist uninsured, a passenger claim could have failed only if they had been aware, or if they should have been aware, that the vehicle was uninsured. In other words, a passenger would only fail to get compensation if he was, in essence, deliberately accepting the risk of travelling in an uninsured vehicle. An innocent motorist or a passenger in a vehicle driven by such a motorist would not even have that hurdle to surmount.
The only costs risk would arise from the failure of the claimant to accept an offer under Part 36 which was reasonable. In other words, the claimant's lawyer is entitled to a 20 per cent uplift and an insurer is entitled to £350 against the chance that a lawyer may advise their client badly (or the client may refuse to accept good advice). It is difficult to see the justice or equity in the cost of that risk being shifted to the defendant.
To further fuel the debate, it may be apposite to consider a real scenario of what may be seen as a far more complicated and complex case – the rail crash at Ladbroke Grove in October 1999. Because of the manner in which the railway industry regulatory regime operates, my organisation was able, as the insurer of two of the involved parties, to write to all victims within days, confirming on behalf of the railway industry that they need not be concerned about liability, and that reasonable compensation would be paid.
Interim payments were made within days, much of the activity taking place prior to solicitors even being instructed in most cases. There would be, we would argue, even less risk of failure in those circumstances, but as there are no indications as to how the courts would view such a case.
There is nothing wrong with the concept of either success fees or ATE insurance, but the situation as it stands today is inequitable and consideration should be given to the following facts:
1. The vast majority of claims for personal injury fail to be dealt with under the
fast-track procedure.
2. Admissions made during the pre-action protocol process are binding in fast-track cases.
3. Prior to the commencement of proceedings, an insured or an insurer is not able to charge costs, so the claimant is at no risk.
4. The vast majority of these cases should be settled without the need for proceedings so that the ATE insurers are receiving a premium to provide cover against a risk that does not exist.
5. The only risk run by the solicitor before the issue of the decision letter is if they have been misled by their client – why should that risk be borne by the defendants?
We would propose, in the interests of genuine justice, that no success fee should be payable until after the letter of decision, at which stage a realistic level can be agreed, based upon the real risks. Equally, we would urge that no ATE insurance should be payable where there is no risk whatsoever that the costs will be awarded against the claimant.
David Grimley is technical claims manager at St Paul International