Injury compensation awards
Urgent call back

Free claim assessment

Desc of accident and injuries:

Enter the text above

United Kingdom residents only


Personal Injury Judgements - Callery vs Gray


Back to previous page

65. For example, a successful claimant in a road traffic accident case would expect to have an order for costs made in his favour against the negligent defendant. But if the engagement by the claimant of a particular expert witness appeared to have been unnecessary, the court might exclude the fee paid to the expert witness from the costs payable under the order. And if the engagement of the expert witness appeared reasonable but the fee paid to the expert appeared to be excessive, the court might reduce to a reasonable amount the sum in respect of the fee payable under the costs order. These basic principles are very well known and understood and hardly need repeating, but, in my opinion, need to be kept in mind in considering some of the issues before the House on this appeal.

66. The appeal relates to costs issues arising out of a very simple and commonplace type of claim. The difficulties that have led to this appeal are attributable to recent changes in the costs regime, which reflect changes in the means by which the bringing of actions can be funded. In order to deal with these issues it is necessary to set out the facts which have given rise to them and the statutory provisions that bear upon them.

The accident

67. On 2 April 2000 Mr Callery, respondent before your Lordships, was a passenger in a car which was struck side-on by a vehicle driven by the appellant, Mr Gray. Mr Callery sustained minor injuries. He instructed solicitors, Messrs Amelans, to pursue a claim for damages against Mr Gray. Amelans are a firm who deal with a large number of road traffic accident claims. They are specialists in this field. I have described Mr Callery's claim as commonplace. It was. There are thousands of such claims every year. They rarely reach the courts.

The funding arrangements

68. Under the Access to Justice Act 1999, legal aid to support road traffic accident claims such as Mr Callery's was no longer available. Instead the use of conditional fee agreements (CFAs) was authorised. A feature of a CFA is that, if the claim fails, the lawyer, whether solicitor or barrister, who has given his services under the CFA, receives no remuneration but, if the claim succeeds, the lawyer becomes entitled not only to the normal fee for his services but also to a success fee, calculated as a percentage of the normal fee. (see the Conditional Fee Agreements Order 1998 (SI 1998/1860). The percentage uplift is required by the 1998 order to be specified in the CFA and must not exceed 100 per cent of the normal fee.

69. The logic of the success fee is that its size will reflect the risk the lawyer is incurring in taking on the case. The more difficult the case and the less clear that the outcome will be a successful one, the higher the percentage uplift that can be justified; and, of course, vice versa. A CFA protects the claimant who enters into it from having to remunerate his lawyers if the claim fails. A typical CFA does not, however, protect the claimant from having to reimburse his lawyers for their disbursements in pursuing the claim. These disbursements might, for example, include the fees of experts whose opinion on some issue or other had been sought. If the claim succeeds the claimant will have the expectation that the burden of paying for his solicitor's reasonable disbursements will fall on the defendant. If the claim fails, he will have to meet the disbursements himself.

70. Nor does a CFA protect the claimant from the risk that if litigation is commenced he may find himself ordered to pay the costs, or some part of the costs, of the defendant. But it is important to notice that this risk cannot arise unless litigation is commenced.

71. In order to protect himself against the risk that he may find himself liable to pay the costs, or some of the costs, of the defendant, a claimant can take out after-the-event ("ATE") insurance.

72. In the present case Mr Callery entered into a CFA with Amelans at the same time as instructing them to pursue his damages claim. The CFA was dated 28 April 2000. It said that if Mr Callery succeeded in his claim for damages he would pay Amelans' basic charges and a success fee. It said that, win or lose, Mr Callery would have to pay their disbursements. It set the success fee at 60 per cent of Amelans' basic charges but provided also that in the event of an assessment of costs by the court

"and the court disallows any amount of the success fee percentage on the ground that it is unreasonable in view of what we [the solicitors] knew or should have known at the time, that amount ceases to be payable under this agreement unless the court is satisfied that it should continue to be payable."

73. The effect of a provision in these terms would be, in practice, and save in exceptional circumstances, to relieve the claimant of his contractual liability to pay any excess of the success fee above the amount that, on the assessment of costs, the court had decided the defendant should pay.

74. On 4 May 2000 Mr Callery took out an ATE insurance policy with Temple Legal Protection Ltd ("Temple"). This was the date on which Amelans' first letter to Mr Gray, informing him of the claim, was sent. The policy was taken out before Mr Callery or his legal advisers, Amelans, could have come to the conclusion that litigation to pursue the claim would be necessary or even likely. The premium for the policy was £350 plus £17.50 tax, a total of £367.50. Under the policy Temple agreed to indemnify Mr Callery, up to a limit of £100,000,

(i) for any sum in respect of Mr Gray's costs that might be ordered by the court to be paid by Mr Callery; and

(ii) for disbursements paid out by Amelans in the event that the litigation came to an end without the disbursements becoming payable by Mr Gray.

In this description of the insurance cover provided under the policy I have attempted to describe the broad scope of the cover rather than set out its exact details. The exact details are not relevant to any issue before the House.

75. A noteworthy feature of the policy is that the premium of £350.00 would not become payable until the conclusion of the legal proceedings in respect of which the policy had been taken out and, if the amount of the premium were challenged by Mr Gray in any cost assessment process, the recoverable amount of the premium would be reduced to the amount payable by Mr Gray under the assessment.

The progress of Mr Callery's claim

76. On 4 May 2000 (the day on which the ATE policy was taken out) Amelans wrote to Mr Gray giving notice of their client's damages claim and enclosing a copy of the letter for his insurers. The letter asked for an acknowledgement within 21 days from Mr Gray or his insurers.

77. On 19 May 2000, Mr Gray's insurers, CGU Insurance, replied. Their reply said that they were able "to admit liability as to negligence but not to causation". Following an exchange of offer and counter-offer, the parties reached agreement on 2 August 2000 that Mr Callery should receive damages of £1500. Amelans wrote on 7 August 2000 to CGU confirming "acceptance of your offer in the sum of £1500 in respect of our client's damages" and that "acceptance of the offer is subject to payment of our client's reasonable costs and disbursements …. ". However, the parties were unable to agree the amount of the "reasonable costs and disbursements". There were two main issues.

78. First, CGU took the view that a 60 per cent success fee for Amelans was unreasonably high. It was always certain, they thought, that Mr Callery would succeed in recovering damages. He had been a passenger in a vehicle struck side-on by Mr Gray's vehicle. He had been injured in the accident. He was bound to recover something. So this was not a case in which there was any risk that Amelans, in pursuing the claim on Mr Callery's behalf, would be working for nothing. It followed that any success fee should be very low.

79. Second, CGU contended that the £350.00 premium was an item of expenditure that had not been reasonably incurred. The likelihood of litigation being necessary was always very remote. At the least Mr Callery should have waited until a response to Amelans' letter of 4 May 2000 had been received before taking out a policy to protect himself against the costs consequences of litigation that was unlikely ever to materialise.

80. In these circumstances, there being agreement as to the amount of the damages and agreement that Mr Callery would be paid his reasonable costs and disbursements but no agreement as to the amount of a reasonable success fee or whether the £350.00 premium represented a reasonable disbursement, Mr Callery commenced "costs only" proceedings (see CPR 44.12A) in order to have the reasonable costs and disbursements to which he was entitled under the settlement agreement quantified by the court.

The relevant statutory provisions

81. The statutory provisions relevant to the recovery under a costs order of a CFA success fee or of the premium payable for ATE insurance cover have been comprehensively set out in paragraphs 24 to 39 of the judgment of the Court of Appeal handed down by Lord Woolf CJ, sitting with Lord Phillips of Worth Matravers MR and Brooke LJ, on 17 July 2001: [2001] 1 WLR 2112, 2118-2123. This was the first of the two Court of Appeal judgments from which the appeal to the House is brought. It is unnecessary for me to do more than refer to the critical provisions.

82. Section 58(A)(6) of the Courts and Legal Services Act 1990, as substituted by section 27 of the Access to Justice Act 1999 provides that:

"A costs order made in any proceedings may, subject in the case of court proceedings to rules of court, include provision requiring the payment of any fees payable under a conditional fee agreement which provides for a success fee."

Section 29 of the 1999 Act provides:

"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."

83. There is, therefore, no doubt but that a costs order can require the paying party to pay a sum in respect of a success fee for which the receiving party has become contractually liable and to pay a sum in respect of the premium payable for an ATE insurance policy that the receiving party has taken out.

84. In the Civil Procedure Rules, Rule 43.2 provides that:

"'Costs' . . . includes any additional liability incurred under a funding arrangement …. "

and that "additional liability" includes the success fee under a CFA and the premium payable for an ATE insurance policy.

85. Rule 44.4 sets out the basis upon which costs are to be assessed:

"44.4 (1) Where the court is to assess the amounts of costs (whether by summary or detailed assessment) it will assess those costs—

(a) on the standard basis; or

(b) on the indemnity basis, but the court will not in either case allow costs which have been unreasonably incurred or are unreasonable in amount. ….

(2) Where the amount of the costs is to be assessed on the standard basis, the court will—

(a) only allow costs which are proportionate to the matters in issue; and

(b) resolve any doubt which it may have as to whether costs were reasonably incurred or reasonable and proportionate in amount in favour of the paying party."

86. Rule 44.5 sets out the factors the court must take into account in assessing costs:

"(1) The court is to have regard to all the circumstances in deciding whether costs were—

(a) if it is assessing costs on the standard basis—

(i) proportionately and reasonably incurred; or

(ii) were proportionate and reasonable in amount;


(3) The court must also have regard to—

(a) the conduct of all the parties, including in particular—

(i) conduct before, as well as during, the proceedings; and

(ii) the efforts made, if any, before and during the proceedings in order to try to resolve the dispute;

(b) the amount or value of any money or property involved;

(c) the importance of the matter to all the parties;

(d) the particular complexity of the matter or the difficulty or novelty of the questions raised;

(e) the skill, effort, specialised knowledge and responsibility involved;

(f) the time spent on the case; and

(g) the place where and the circumstances in which work or any part of it was done."

87. These factors, as one would expect, concentrate on the circumstances and conduct of the parties in relation to the claim in question and on the nature of the particular claim. They are case specific factors.

88. The Costs Practice Direction that supplements the Rules relating to costs contains further guidance on the assessment, for costs purposes, of an additional liability. Section 11 of the Costs Practice Direction contains the following relevant provisions:

"11.2 In any proceedings there will be costs which will inevitably be incurred and which are necessary for the successful conduct of the case. Solicitors are not required to conduct litigation at rates which are uneconomic. Thus in a modest claim the proportion of costs is likely to be higher than in a large claim, and may even equal or possibly exceed the amount in dispute.


11.5 In deciding whether the costs claimed are reasonable and (on a standard basis assessment) proportionate, the court will consider the amount of any additional liability separately from the base costs.

11.6 In deciding whether the base costs are reasonable and (if relevant) proportionate the court will consider the factors set out in rule 44.5.

11.7 Subject to paragraph 17.8(2), when the court is considering the factors to be taken into account in assessing an additional liability, it will have regard to the facts and circumstances as they reasonably appeared to the solicitor or counsel when the funding arrangement was entered into and at the time of any variation of the arrangement.

11.8 (1) In deciding whether a percentage increase is reasonable relevant factors to be taken into account may include:

(a) the risk that the circumstances in which the costs, fees or expenses would be payable might or might not occur;

(b) the legal representative's liability for any disbursements;

(c) what other methods of financing the costs were available to the receiving party.

(2) ….

11.9 A percentage increase will not be reduced simply on the ground that, when added to base costs which are reasonable and (where relevant) proportionate, the total appears disproportionate.


11.10 In deciding whether the cost of insurance cover is reasonable, relevant factors to be taken into account include:

(1) ….

(2) the level and extent of the cover provided;

(3) the availability of any pre-existing insurance cover;

(4) whether any part of the premium would be rebated in the event of early settlement;

(5) …. "

89. Rule 44.12A and Section 17 of the Costs Practice Direction relate to "costs only" proceedings. "Costs only" proceedings may be commenced where the parties, before the commencement of litigation, have agreed in writing on all issues in the case, including which party is to pay the costs, but have been unable to agree the amount of the costs (see CPR 44.12A). In effect, the court is allowing its costs quantification procedures to be used to support an out-of-court settlement under which one party is to pay the reasonable costs and disbursements of another party. It is implicit in such a settlement agreement (unless the contrary is expressly stated) that the costs to be paid should be quantified on the standard basis in accordance with the Rules and Practice Directions that would have been applicable if there had been a court order for the payment of the costs.

90. Paragraph 17.8(2) of the Costs Practice Direction makes clear that in assessing the reasonableness of an additional liability, whether a success fee or an ATE premium, the likelihood of litigation having to be commenced is an important factor. The paragraph provides that:

"In cases in which an additional liability is claimed, the costs judge or district judge should have regard to the time when and the extent to which the claim has been settled and to the fact that the claim has been settled without the need to commence proceedings."

The course taken by the "costs only" proceedings

91. On 12 September 2000 Mr Callery commenced proceedings under CPR Part 8 asking the court to assess his reasonable costs of and occasioned by his damages claim against Mr Gray. The particulars of claim pleaded the agreement that had been reached that Mr Gray would pay £1500 damages and Mr Callery's reasonable costs.

92. On 14 September an ex parte order was made in the Macclesfield County Court ordering, inter alia, that Mr Callery's costs be assessed.

93. The assessment hearing took place before District Judge Wallace on 7 November 2000. The District Judge assessed Amelans' basic charges, reduced the success fee from 60 per cent to 40 per cent of the basic charges and allowed the ATE insurance premium of £350 plus tax as a disbursement. The assessment allowed a total of £1008, plus VAT, for fees and £617.50 for disbursements.

94. Mr Gray (prompted by CGU) appealed to the circuit judge. The appeal was heard by Judge Edwards in the Chester County Court on 29 January 2001. Two points were taken on the appeal, one relating to Amelans' success fee under the CFA, the other relating to the ATE insurance premium. They are the two points to which I have already referred. The appeal was dismissed on both points.

95. CGU took the view that important points of principle were at stake, with implications for personal injury litigants and their insurers generally, and prompted Mr Gray to apply to the Court of Appeal for permission to bring a second appeal to that court. On 16 March 2001 Lady Justice Hale granted permission on condition that Mr Gray, if successful, would not seeks costs from Mr Callery unless his liability to pay were covered in full by the terms of the ATE policy.

96. Further evidence was, with the permission of the Court of Appeal, introduced at the hearing of the appeal and written and oral intervention by the Law Society, the Association of British Insurers, the After Event Insurers Group Forum, the Association of Personal Injury Lawyers and the Forum of Insurance Lawyers was authorised. The hearing of the appeal was directed to be conjoined with the hearing of the appeal in Russell v Pal Pak Corrugated Ltd under which similar success fee issues arose.

97. The Court of Appeal heard the appeal on 5, 6 and 7 June 2001. On 17 July 2001 the court handed down the judgment of the court on the success fee issue, reducing Amelans' success fee from the 40 per cent fixed by the district judge to 20 per cent (and dismissing the appeal in Russell v Pal Pak) [2001] 1 WLR 2112. In addition the court ruled that an ATE insurance premium could in principle be recovered as part of a claimant's costs in "costs only" proceedings. But the court formed the view that, on the evidence available, it was not possible to come to a conclusion as to the reasonableness in amount of the £350.00 premium. So the court postponed judgment on the issue relating to the amount of the ATE insurance premium pending an inquiry by a costs judge, Master O'Hare. A separate judgment on that issue would await Master O'Hare's report.

98. It is important to be clear that the court's further reservation of judgment regarding the ATE insurance premium related only to the reasonableness of the amount of the premium. In principle the premium was held to be recoverable notwithstanding that the policy had been taken out before the commencement of litigation for the purpose of recovering damages had become necessary, or even likely. As it was put at p 2134, para 100 of the judgment:

"we have 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."

99. I will return later to examine the reasons why, in relation to the ATE insurance premium, the court came to this conclusion.

100. Master O'Hare's report was dated 23 July 2001. The purpose of his report was expressed to be

"to enable the Court of Appeal to give guidance in its judgment as to the practice to be adopted in future in taking out [ATE] insurance." (para 1).

101. Master O'Hare had received written submissions from a number of interested parties but nonetheless concluded that:

"For several reasons it is not possible to state standard or average premiums for different classes or categories of ATE insurance. The industry is still immature …." (para 19).

And, at para 23:

"now is not the time to publish guideline figures for ATE premiums …."

102. On 31 July 2001 Lord Phillips of Worth Matravers, sitting with Brooke LJ, handed down the judgment of the court dealing with the reasonableness of the amount of Mr Callery's ATE premium [2001] 1 WLR 2142. The Court concluded that "the amount of the premium does not strike us as manifestly disproportionate to the risk" (p 2159, para 70).

103. So the appeal on the insurance premium point was dismissed. The appeal on the success fee point had been allowed by the reduction of the percentage uplift from 40 per cent to 20 per cent.

The section 29 jurisdiction issue

104. One of the contentions argued on behalf of Mr Gray, the appellant, before the Court of Appeal was that section 29 of the 1999 Act was not applicable to a case where a settlement out of court had been reached and all that was left was the quantification of the claimant's costs and disbursements to be paid by the defendant. The point was based on the language of section 29. The "proceedings" referred to in the section were the substantive proceedings for recovery of damages. Absent the section, ATE insurance premiums would not have been recoverable under a costs order. So, in the absence of any substantive proceedings for the recovery of damages, or any order for costs made in such proceedings, the court, it was said, had no jurisdiction to include an ATE insurance premium in the recoverable costs. This argument was advanced in the Court of Appeal but was rejected. The argument has not been raised again before your Lordships and I mention it only in order to express my respectful agreement with the Court of Appeal's rejection of it. It was a term of the settlement agreement that Mr Callery would be paid his reasonable costs and expenses. It was plainly implicit that these would be standard basis costs and that the amount, unless agreed, would be assessed by a costs judge in accordance with the relevant rules and practice directions. These rules and practice directions allow for a sum in respect of an ATE premium that has been reasonably incurred to be included in the recoverable costs. So in quantifying Mr Callery's recoverable costs on that basis the district judge was acting in accordance with the agreement the parties had made. There is no jurisdictional reason why a costs judge should not assess the costs to which a party has become contractually entitled (see Gomba Holdings (UK) Ltd v Minories Finance Ltd (No. 2) [1993] Ch 171, 188). No issue of jurisdiction, in my opinion arises.

The issues before the House

105. The appellant's written case identifies ten issues—

"(1) Was the insurance premium recoverable given the stage when the policy was taken out? (prematurity).

(2) Was the amount of the premium reasonable having regard to the characteristics of the instant case?

(3) Was the amount of the premium reasonable having regard to prematurity?

(4) Was the Court of Appeal wrong not to resolve doubt - if any - as to the amount of the recoverable premium in favour of the paying party?

(5) Should the defendant be liable for any part of the premium which covers adverse costs orders and all aspects of own costs, however incurred?

(6) The success fee ("uplift"): is the full uplift recoverable given the stage when the CFA was effected?

(7) Was the 20 per cent uplift a reasonable maximum for simple accident cases?

(8) Was the Court of Appeal's assessment of 20 per cent uplift for the instant case wrong?

(9) Should an uplift be assessed by reference to the risk in the particular case, or on a more general, and if so what, basis?

(10) Should uplift levels be conditioned, and if so how, by public interest considerations?"

Issues (1) to (5) relate to the ATE premium; issues (6) to (10) relate to the success fee.

The ATE premium

Issue (1) - The ATE policy and prematurity

106. The prematurity issue was dealt with at [2001] 1 WLR 2112, 2130-2134, in paragraphs 80 to 100 of the first Court of Appeal judgment in relation both to the time at which a claimant could reasonably enter into a CFA and to the time at which he could reasonably take out ATE insurance. The Court of Appeal's approach to the prematurity issue is expressed at p 2132, para 91 of the judgment:

"we consider that, from the viewpoint of both the claimant and his solicitor, it will normally be reasonable for a CFA to be concluded and ATE cover taken out on the occasion that the claimant first instructs his solicitors. What we have to decide is whether, having regard to the statutory provisions, (i) The cost of the success fee and (ii) the ATE premium, when incurred at that early stage, can be recovered."

107. I agree with the Court of Appeal's proposition that it is reasonable for a claimant to enter into a CFA with his solicitor at their first meeting and before the defendant's reaction to the claim is known. It was not contended before your Lordships that Mr Callery instructed Amelans prematurely. It was plainly reasonable for him to instruct solicitors to pursue his claim and for them then to notify Mr Gray of his claim. And it was reasonable for him, having instructed Amelans, immediately to enter into a CFA with regard to their fees. After all, the fees clock begins ticking as soon as a solicitor is instructed. The issues for your Lordships regarding the success fee relate, in my opinion, not to the time when the CFA was entered into but to the size of the success fee and the manner in which its reasonableness should be assessed.

108. It is otherwise with an ATE policy. The main issue, indeed I think the only real issue before the House, is whether it is reasonable, in a cost assessment context, for a claimant to take out an ATE policy at a time when litigation is highly unlikely. The purpose of an ATE policy is to protect the claimant against adverse costs orders. But the risk of such orders cannot arise unless and until the claimant commences litigation to pursue his damages claim. The CFA is needed as soon as he instructs his solicitors. But the ATE policy is not needed unless there is going to be litigation.

109. The circuit judge, Judge Edwards, interpreted CGU's reply of 19 May 2000 to Amelans' letter of 4 May as a denial of liability. This led him to conclude that it had been reasonable for Mr Callery to take out ATE insurance cover at an early stage "because a contest was looming". The Court of Appeal, rightly in my opinion, did not accept that view of the letter of 19 May. They commented, at [2001] 1 WLR 2112, 2139-2140,in para 131 of the first judgment:

"In view of that letter, the claimant's solicitors would not be justified in continuing to investigate and prepare the case on liability. Their sole concern after the letter was to establish the extent of the damages. Thereafter all that was required of the claimant's solicitors was that they should proceed in accordance with the protocol to obtain a medical report and investigate the question of damages. From a practical point of view, this was, as Mr Birts contends on behalf of the defendant, a very, very low risk case."

110. I would respectfully agree with this analysis of the letter of 19 May and how matters stood after it had been received. But the content of the letter was not the reason why the ATE policy was taken out. The policy had been taken out well before Amelans' receipt of the 19 May letter. Indeed, it was taken out before either Mr Gray or CGU could have received the letter of 4 May notifying them of the claim.

111. It is apparent, therefore, that the Court of Appeal's conclusion that it had been reasonable for Mr Callery to take out the ATE insurance policy on 4 May immediately on instructing Amelans was not based on any perception that, on what was then known, the policy was a reasonable precaution to be put in place in order to protect Mr Callery against the possibility of an adverse costs order in litigation. No one in Amelans was contemplating that litigation might be needed in order to obtain the payment of a satisfactory sum of damages for Mr Callery; it was not completely impossible that litigation might be needed, but it was very unlikely indeed. On what then was the Court of Appeal's conclusion based? It seems to me to have been based on the evidence placed before the court about the ATE insurance market and the Court of Appeal's concern that unless premium recovery under costs orders were allowed in such commonplace, minimal risk cases as Mr Callery's, the market in ATE insurance policies might wither. The Court of Appeal was told that if claimants in road traffic accident cases postponed taking out cover until a litigation contest seemed likely, the premiums charged would rise steeply, putting at risk the ability of those who needed the cover in risky or speculative litigation to obtain it and thereby impeding their access to justice. The Court referred, in particular, to evidence from Mr Ward, managing director of Abbey Legal Protection, whose firm ran the Law Society's Accident Line Protect conditional fee insurance scheme. Under this scheme, nominated solicitors were given delegated authority to offer clients ATE insurance cover once agreement on a CFA had been reached. But, in order to ensure that the principle of "the many paying for the few" was observed, solicitors who wished to offer the Accident Line Protect cover to their clients had to do so at the time the CFA was entered into and before notifying the proposed defendant, or his insurers, of the claim (see p 2129, para 70 of the first Court of Appeal judgment commenting on Mr Ward's evidence). As to the policy of Temple, Mr Callery's insurers, paragraph 74 of the first judgment said this:

"Mr Wait [underwriting director of Temple] told us that most of the ATE insurance schemes available on the market today can only provide insurance if cover is in place before the initial letter of claim is sent. Again, the practice follows the basic insurance principle that 'the many pay for the few.'"

112. It may be noticed how, in the ATE insurance context, the "many pay for the few" insurance principle has become distorted. The principle means that the "many", all those who take out policies and pay premiums but many of whom do not suffer an insured risk, build up a premium fund by means of which the "few", who likewise take out policies and pay premiums but who do suffer an insured risk, can have their insured losses met. In the ATE insurance field, however, the "many", ie the defendants who are to be called upon to meet the premiums that build up the premium fund from which the insured losses of the few can be met, do not take out policies at all. The premium fund is not built up for their benefit or protection. It has been suggested that defendants, as well as claimants, benefit from ATE insurance because, in the event of costs orders in favour of a defendant being made, the claimant's insurance cover will provide a means by which this liability can be met. In view of the number of exclusions likely to be found in a typical ATE policy (see paragraphs 1, 2, 7 and 8 of the exclusions clause in Mr Callery's policy), I doubt whether this will be of much practical comfort to defendants. More importantly, the policy will come into play only in the event of litigation and in a case, such as the present, where the prospect of litigation was always highly remote, the suggested benefit to the defendant seems to me theoretical and illusory.

113. Your Lordships cannot know what will be the consequence for the ATE insurance market if premiums payable under ATE policies that have been taken out where there is no real risk of litigation, and therefore no real risk of the occurrence of the event insured against, are ruled to be irrecoverable from defendants. I would for my part be prepared to accept that, if recovery of premiums is restricted to those premiums paid in respect of policies taken out where there is at least a fair likelihood that litigation in pursuit of the damages claim will be needed, the size of premiums will rise. But I would certainly not be prepared to accept that cover will be unavailable. In any event, however, it is, in my opinion, contrary to principle for the reasonableness of the premature taking out of ATE insurance to be judged by reference to arguments about the impact on the ATE insurance market if recovery of premiums in commonplace cases such as Mr Callery's is not allowed.

114. The correct approach for costs assessment purposes to the question whether an item of expenditure by the receiving party has been reasonably incurred is to look at the circumstances of the particular case. The question whether the paying party should be required to meet a particular item of expenditure is a case specific question. It is not a question to which the macro economics of the ATE insurance market has any relevance. If the expenditure was not reasonably required for the purposes of the claim, it would, in my opinion, be contrary to long-established costs recovery principles to require the paying party to pay it.

115. Section 29 of the 1999 Act allows recovery of ATE insurance premiums: "…. the costs payable to him may ... include costs in respect of the premium …." (my emphasis). The section does not mandate the inclusion of costs in respect of the premium. And whether a particular ATE insurance premium, or part of it, should be included in the costs ordered to be paid in a particular case should be tested and answered by reference to the same principles of reasonableness that apply under the rules and practice directions to all other items of expenditure.

116. There is, I think, no dispute that the likelihood of litigation being necessary in order to pursue Mr Callery's damages claim was always very remote. Amelans, with their experience in the field, knew this. They offered ATE insurance to their client on 4 May, before notifying the defendant of the claim and obtaining his reaction to it, not on the footing that their client would be likely to need it, but because it had become their practice to do so. The offer was no doubt made on the footing that it would not be he who would have to pay the premium.

117. The argument advanced by the respondent, both in the Court of Appeal and before your Lordships, is, in effect, that defendants to claims which are bound to succeed and where litigation to pursue the claims is highly unlikely, must bear the cost of ATE insurance cover that is not needed in order to enable ATE insurance cover in cases where it is needed to be offered by insurers at lower rates than would otherwise be commercially possible. The clear principles on which costs recovery is based, both before and after the 1999 Act, are in my opinion hostile to this argument. In my opinion, the Court of Appeal fell into error in accepting it and in adopting an approach to the ATE premium that was not case specific but was based on the evidence about the ATE insurance market to which I have referred.

118. Submissions made to the House on behalf of the Lord Chancellor's Department have contended that "access to justice would be restricted if claimants could not insure against liability for costs from the point they instructed a solicitor" (para 13 of the written case). This, in my opinion, misses the point. There is nothing to prevent claimants from taking out ATE policies as soon as they instruct a solicitor. The question is whether this is a reasonable step to take vis-à-vis the defendant who they expect to bear the burden of paying the premium. If there is no real risk of litigation or of adverse costs orders, the absence of an ATE policy will not discourage access to justice for the claimant in question. If, despite the absence of any such real risk, the claimant wants to take out the policy, he can do so but cannot then reasonably expect the defendant to pay for it. To describe this state of affairs as restricting access to justice seems to me unwarranted.

119. Paragraph 13 of the Lord Chancellor's case continues by referring to:

"the Department's policy objective … that successful claimants would ordinarily be able to recover the cost of ATE premiums from unsuccessful defendants even though the policy was entered into before the defendant's response to the claim was known."

120. The paragraph does not say that it is the Department's policy objective that claimants would ordinarily be able to recover ATE premiums even though there was never any likelihood that litigation in which adverse costs orders might be made would be necessary. If that is or was the Department's policy, I would expect your Lordships to be unimpressed by it. In any event, it is Parliament's policy underlying section 29, not the Department's policy, that the House should take account of and, as to that, there is nothing to lead one to suppose that expenditure on ATE premiums was, for costs purposes, to be approached differently from any other item of potentially recoverable expenditure.

121. Moreover, if general policy considerations are to be brought into account, they tend strongly, in my opinion, against allowing recovery of this ATE premium. One of the main purposes of Lord Woolf's civil justice reforms was to reduce the cost and the complexity of pursuing legal remedies and an important step in that direction was the introduction of pre-action protocols. These set out steps which parties are intended to take before the commencement of litigation so as to confine litigation, as a means of dispute resolution, to cases where the dispute cannot be resolved without it. Under pre-action protocols the claimant must write a letter to the proposed defendant giving the outline of the claim and an opportunity to the defendant to respond. Various key documents, eg a medical report in accident cases, should be supplied to the defendant. This correspondence enables the parties to ascertain what, if anything, is in issue between them and whether, or on what issues, litigation will be necessary. If litigation is shown to be unnecessary, because the defendant admits the claim and the parties can agree terms of settlement, the expense of unnecessary litigation is, by the parties' observance of the pre-action protocol requirements, avoided. And if a claimant fails to observe the requirements of the relevant pre-action protocol and commences litigation prematurely, the court may, even if his claim succeeds, deprive him of costs or order him to pay the defendant's costs (see paras 2.2 and 2.3 of the Protocol Practice Direction: Civil Procedure, 2000, vol 1, C1-002, p 1303).

122. In the present case, Amelans' letter of 4 May 2000 corresponded with the relevant pre-action protocol requirements. So did CGU's response on 19 May. So did their ensuing correspondence which led, by early August, to a settlement agreement. Litigation was not necessary to pursue Mr Callery's claim. The pre-action protocol had served its purpose. In these circumstances the proposition that the defendant should have to pay by way of costs for an item of Mr Callery's expenditure that related exclusively to the litigation that the parties had succeeded in avoiding seems to me inconsistent with the purpose of the pre-action protocol. If during the pre-action protocol period the claimant incurs expenditure for the purpose of litigation that, in the event, never happens, there are, in my opinion, very sound policy reasons, consistent with those that underlie the civil justice reforms, for leaving the claimant to bear the cost of what, in the event, is useless expenditure.

123. For all these reasons I would give the answer "No" to the question posed in issue (1) and allow the appeal to that extent.

Issues (2), (3) and (4)

124. Issues (2) and (3) are fact dependent reasonableness issues. Your Lordships should not, in my opinion, second guess the courts below on issues such as these unless their decisions are plainly unreasonable or unless some evident error has been made. In the present case, the Court of Appeal, in the second judgment, [2001] 1 WLR 2142, 2159, para 70, concluded that the amount of the premium was not manifestly disproportionate to the risk being under taken and was reasonable. But in reaching this conclusion the Court of Appeal was proceeding under a misapprehension as to the basis on which the premium had been calculated. The court thought that Temple had fixed the amount of the premium, £350, having regard to the facts of this particular case. Counsel are agreed that this was an error. The £350 premium was in fact a uniform premium charged by Temple for ATE insurance cover in respect of every claim which carried a prospect of success of better than 50 per cent (see para 22 of the second judgment). This was a "block rating" case, not an individual assessment case.

125. The factual basis, therefore, on which the Court of Appeal concluded that the £350 premium was reasonable in amount was erroneous. The Court of Appeal did not address the question whether in a case, like the present, where the percentage prospect of success is at the least in the mid 90s, it was reasonable to charge a premium calculated on a block basis for all cases with a percentage prospect of success of better than 50. Your Lordships do not know what answer the Court of Appeal would have given. It is at this point that issue (4) becomes relevant.

126. The injunction in CPR 44.4 (2)(b) that requires the court to resolve doubts about reasonableness or proportionality in favour of the paying party does not mean that in every case where a decision as to reasonableness or as to proportionality is a difficult one to reach, with something to be said on each side, the paying party must win. The costs judge must endeavour to reach a conclusion on the issue, taking account of all the circumstances and of the factors that the rules and practice directions require to be taken into account. If, having done so, the costs judge remains uncertain whether the item of costs under review is reasonable and proportionate, then the paying party should win.

127. In the present case, where a block rate calculated for use in cases with a prospect of success of above 50 per cent, has been applied to a case with a prospect of success of well over 90 per cent, there cannot, in my opinion, be other than doubt as to the reasonableness of the charge. It might be over-simplistic to conclude that a charge reasonable for a case with a prospect of success of, say, 70 per cent, must be too high for a case with a prospect of success of, say, 95 per cent. But at least there must be doubt. So CPR 44.4 (2)(b) comes into play and requires that the doubt be resolved in favour of the paying party. The £350 premium, and the £17.50 tax, should, in my opinion, have been disallowed on this ground as well.

Issue 5

128. This issue relates to adverse costs orders made against a claimant where (a) the claimant has failed to beat a CPR Part 36 offer; or (b) the claimant has lost on some discrete issue and been ordered to pay the costs of that issue; or (c) there has been some other adverse exercise of costs discretion in the defendant's favour. It is contended that recovery of the part of an ATE premium that relates to adverse costs orders of the sort described ought not to be allowed. It is put almost as a point of public policy. The burden of adverse costs orders that reflect the court's disapprobation of some aspect of the manner in which a claimant has conducted his case ought not to be shifted to the defendant.

129. Counsel for the appellant accepts that a premium, or more likely part of a premium, paid to protect a claimant against the risk of liability under these adverse costs orders is within the scope of section 29 but submits that it cannot be reasonable to require the defendant, who has presumably been unsuccessful on the main issue in the case and who has had a normal order for costs made against him, to reimburse the claimant for that premium, or that part.

130. If it is reasonable for a claimant to take out ATE insurance cover in order to protect himself against incurring a costs liability in litigation, whether in respect of the other side's costs or his own costs, I can, for my part see no reason why any distinction should be drawn between the types of adverse costs orders that might be made or the circumstances in which the orders might be made. If the claimant becomes entitled to costs and the expenditure has been reasonably incurred and is reasonable in amount, the expenditure, in my opinion, ought in principle to be included in the costs to be paid.

131. In my view, for the reasons already expressed, the expenditure on the ATE premium was not reasonably incurred. If, on the other hand, it was reasonably incurred, and is reasonable in amount, I do not think there is any principle that could justify subtracting from the recoverable premium some part of it notionally attributable to the risk of the adverse costs orders described.

The Success Fee

Issue 6

132. The full contractual uplift of 60 per cent was reduced by the district judge to 40 per cent and then further reduced by the Court of Appeal to 20 per cent. The full uplift was held to be not recoverable. There has been no cross appeal on the point and this issue does not, therefore, arise.

Issues (7) and (8)

133. These issues are fact dependent reasonableness issues. Your Lordships should not, in my opinion, interfere with the decision of the Court of Appeal that 20 per cent represented a reasonable uplift. The appellant has submitted that the 20 per cent was unduly high for "a very, very low risk case". I think this may be so, but it is not, in my opinion, sufficiently out of line to justify your Lordships in interfering. It is reasonable, for the reasons I have given, for a would-be claimant to enter into a CFA with his solicitors as soon as he instructs them. The amount of the success fee must be stated in the CFA and, therefore, fixed before it is possible for the solicitors to know for certain what part, if any, of their client's story the defendant will accept.

Issue 9

134. I am in no doubt but that a success fee should be assessed by reference to the risk in the particular case. As I have said already, a costs assessment process should be case specific. I agree with the appellant that the costs rules and practice directions reflect a case specific approach. If the risk of a claim failing is minimal then, in my opinion, the success fee should be correspondingly low.

Issue 10

135. This is too general a question to enable a useful answer to be given. I would simply repeat that, in my opinion, the reasonableness of a success fee is a case specific issue.


136. I would allow the appeal to the extent of disallowing recovery by the respondent of the £350 premium and £17.50 tax.