Case No. DMC/PI/02/01

Callery v. Gray and Russell v. Pal Pak Corrugated Ltd
English Court of Appeal: Judgment given by Woolf LCJ: Unreported: July 2001

Facts
These cases, which were heard together, related to appeals from costs-only proceedings brought under Part 8 of the Civil Procedure Rules (CPR). The original claims arose out of straightforward claims following road traffic accidents. The three issues were:

1 can the premium for an ATE insurance be recovered in costs-only proceedings?
2 at what stage was it reasonable for the claimant to enter into a Conditional Fee Agreement (CFA) and to buy ATE insurance?
3 were the success fees agreed (the ‘uplift’) and the amount of the ATE premium reasonable?

Judgment
The judgment was delivered by the Lord Chief Justice, Lord Woolf, the ‘architect’ of the wide-ranging procedural reforms introduced into English law with effect from April 1999.

Issue 1
On the first issue, the court held that it was possible for an ATE insurance premium to be recovered in costs-only proceedings. The key provision here were Rule 44.12A of the CPR, which reads:
"(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 pay the costs) which is made or confirmed in writing; but
(b) they have failed to agree the amount of those costs; and
(c) no proceedings have been started."
and section 29 of the Access to Justice Act 1999, which reads:
"Where in any proceedings a costs order is made in favour of any party who has taken out an insurance policy against the risk of incurring a liability in those proceedings, the costs payable to him may, subject in the case of court proceedings to rules of court, include costs in respect of the premium of the policy."

The court found unattractive the argument that the only way in which ATE premiums can be recovered is by first commencing proceedings claiming substantive relief, because it would discourage those who had taken out the insurance from settling claims before substantive proceedings had been commenced. Instead, the court favoured the following approach:
1 ‘the proceedings’ referred to in section 29 of the Act were to be interpreted as proceedings advancing a claim for substantive relief;
2 CPR 44.12A is a new procedure introduced to enable ‘pre-action’ costs to be recovered where an action has been settled before substantive proceedings have been commenced;
3 the meaning to be accorded to ‘the costs’ and ‘those costs’ in paragraph (1) of the Rule (quoted above) is ‘the costs which would have been recoverable in the proceedings had the proceedings been commenced’; 
4 by reason of section 29 of the Act, such costs may include the costs of an ATE insurance premium taken out in contemplation of the commencement of substantive proceedings.

Therefore the Circuit Judge had been correct in including the ATE premium in his costs award.

Issue 2
The question here was whether the courts should allow recovery of uplift (and of ATE premium) where these are agreed at the initial stage of the case or whether it should require all solicitors to defer agreeing uplift until the defendant’s response is known, so that the risk of failure can be assessed on an individual basis. The court held that from the viewpoint of the claimant and his solicitor, it would normally be reasonable for a CFA to be concluded and an ATE insurance taken out when the claimant first instructs his solicitors. It is from that moment that the risk of costs begins to run.

The next issue was whether the uplift and the ATE premium, agreed at the outset of the case, were recoverable from the defendant. In deciding this point, the court set out the following considerations:
1 If the new regime was to achieve its object of widening access to justice to all, the legal costs of claimants whose claims fail will inevitably fall upon unsuccessful defendants. The court has to decide whether to permit liability for success fees to be apportioned in relatively small amounts among many unsuccessful defendants or to adopt an approach under which they will be borne in much larger amounts by those unsuccessful defendants who persist in contesting liability.
2 If the latter approach is adopted, the defendants who contest liability will not share liability for costs in an equitable manner. Where there is a strong defence which it is reasonable to advance, a larger uplift will be appropriate than where a defendant unreasonably persists in contesting liability, despite the fact that the defence is weak.
Therefore, the more reasonable the conduct of the defendant, the larger the uplift he will have to pay if his defence fails!
3 ATE insurance premiums produce cover which benefits the defendants, for they will ensure that costs are awarded against unsuccessful claimants and that such awards will be satisfied.
4 Defendant interests, with the help of the court, should be able to restrict uplifts and insurance premiums to amounts that are reasonable – in circumstances where there is adequate data available to make an informed judgement. That situation has not yet been reached.
5 Claimants naturally want to know at the outset of a case that a satisfactory arrangement has been made to cover the costs of litigation, which provides sufficient protection for them, no matter what the outcome will be.
6 Claimants incur liabilities for costs to their legal advisers as soon as they give them instructions.
7 Solicitors and claims managers are anxious to be able to offer legal services on terms that the claimant will not be required to pay costs in any circumstances. This assists access to justice.
8 There is overwhelming evidence from those who provide ATE insurance that, unless the policy is taken out before it is known whether a defendant is going to contest liability, premiums will rise substantially.

On this basis, the court concluded that, 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 pay the claimant’s costs.

Issue 3.1 – The Success Fee

In determining whether the success fee (uplift) was reasonable, the court specifically limited its guidance to the context of the type of claims before it – modest and straightforward claims for compensation for personal injuries resulting from traffic accidents. The court thought it reasonable to proceed on the basis that at least 90% of such claims will settle without the need for proceedings, or will succeed after proceedings have been commenced. The court concluded that, where a CFA is agreed at the outset in such cases, the maximum uplift that can be reasonably agreed is 20%. This conclusion assume that there is no special feature in the case, which raises apprehension that the claim may not prove to be sound. It was also based on very limited data and the court recognised the need to review its conclusion once sufficient data were available to make a fully informed assessment of the position.

The court drew attention under this heading to the possibility of using a ‘two-stage’ success fee. The court said that a success fee can be agreed which assumes that the case will not settle, at least until the end of the three-month protocol period, if at all, but which is subject to a rebate if it does in fact settle before the end of that period.

Issue 3.2 – the ATE Insurance Premium
This issue arose only in the case of the first appeal, Callery v. Gray. The question was whether the amount of the ATE premium paid in that case, £350, was reasonable. To help the court determine the point, it directed a Costs Judge, Master O’Hare, to produce a report on ATE insurance premiums in general, after considering submissions and evidence submitted on behalf of a number of interested parties, including ATE insurers. A copy of the report was attached to the judgment. The court pointed out, however, that whilst the views expressed in the report ‘may prove of assistance to those faced with the task of ruling on the recoverability of ATE premiums, they cannot be treated as definitive.’

The principal issue raised by the appeal was ‘whether the costs of failure to recover one’s own costs can be recovered under section 29 of the Access to Justice Act, 1999.’ The issue arose because the insurance policy bought by Mr.Callery included, in addition to cover for ‘Opponent’s Costs’, cover for the ‘Insured’s Disbursements’, including the policy premium itself. The court concluded that the words ‘ insurance against the risk of incurring a costs liability’ in section 29 of the Act should be interpreted as meaning ‘insurance against the risk of incurring a costs liability that cannot be passed on to the opposing party’. On this interpretation, insurance against own costs fell, in principle, within the section. The court added: ‘The circumstances in which and the terms on which own costs insurance 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… ’ In the case of Mr. Callery, the court could see no objection to this cover ‘forming part of that afforded to him by his legal costs insurance’ and [considered] that the whole of the cover fell within the terms of section 29.

In determining the reasonableness of any premium, the court had also to look at the use made of the premium by the insurer. The court ‘will be concerned with the question whether the premium is a reasonable price to pay for the benefits that it purchases. Ultimately, this should be a question to be considered having regard to experience, or evidence, of the market…. Unfortunately Master O’Hare concluded that the market in ATE insurance was not yet sufficiently developed to enable him to identify standard or average rates of premium for different categories of ATE insurance…It is highly desirable in the interests of justice, that an effective and transparent market should develop in ATE insurance…..In the meantime, where an insurance premium is challenged, it must be open to the insurer… to place evidence before the court in an attempt to demonstrate that the premium is reasonable having regard to the costs that have to be covered….. The judge can only give broad consideration to such evidence, for it is not part of the function of a judge assessing costs to carry out an audit of an insurer’s business.’

The court further found that the premium of £350 paid by Mr.Callery in this case ‘does not strike us as manifestly unreasonable. We do not find it possible to be more precise than this…. The premium was one tailored to the risk and the cover was suitable for Mr.Callery’s needs. The policy terms also had the attractive feature that they gave his solicitors control over the conduct of the proceedings on his behalf, without any involvement by a claims manager until a settlement offer was made. We have concluded that the court below was right to find that the premium was reasonable’