Law firms can indemnify clients against paying other side’s costs, CA rules

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By Legal Futures

26 January 2011

Appeal court: indemnity does not make it an insurance contract

It is not champertous for a solicitor to indemnify his client against paying the other side’s costs in the event of not finding insurance, the Court of Appeal ruled yesterday in a much-anticipated decision.

In the housing disrepair case of Sibthorpe and Morris v London Borough of Southwark [2011] EWCA Civ 25, the Master of the Rolls Lord Neuberger said champerty case law all involved a gain if the action succeeded. No case had been cited in which it has been held to be champertous for a person just to agree to run the risk of a loss if the action failed, without enjoying any gain if it succeeded.

It is thought that law firms may find themselves offering such arrangements more frequently in a post-Jackson/legal aid reform world so as to secure work, but they will need to win most of the cases to make it economic.

“I find it hard to accept that, by shouldering the risk of an adverse order for costs against his client, a solicitor is acting contrary to public policy, which is, of course, the basis for the law of champerty,” Lord Neuberger said.

He had earlier concluded that though the law of champerty has been relaxed to a degree in relation to agreements involving third parties, this did not extend to agreements involving lawyers. Lord Neuberger said it would be another thing altogether to expand the law to include the kind of indemnity provided in this case.

He added: “There is also much to be said for a properly funded legal profession, which has no need to have recourse to conditional fees or contingency fees or the like. It is a matter for the legislature if such arrangements are thought to be necessary for economic or other reasons, and, if they are so necessary, then it is for the legislature to decide on their ambit.”

The court also agreed with Mr Justice Macduff’s earlier ruling that providing an indemnity such as this does not transform a contract for legal services into a contract of insurance regulated under financial services law.

The Law Society intervened in the case, although president Linda Lee said funding of this type will not replace after-the-event insurance, itself under threat from the Jackson reforms. “The public should be aware that their ability to defend their rights will disappear,” she said.

“The Court of Appeal has reached an eminently sensible decision which, in addition to providing a clear message about the importance of access to justice, also paves the way for clients to be fully indemnified against adverse costs orders by solicitors in cases where either legal aid or legal expenses insurance are unavailable.

“The Law Society was surprised that the appeal was commenced in the first place especially bearing in mind the government’s policy on public spending cuts and the fact that the solicitors’ indemnity would have reimbursed the local authority’s legal costs had it successfully defended the original claim.”

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