Legal Cost Specialists

Ghadami v Lyon Cole – Indemnity principle challenge

Whenever a legal costs dispute arises you can be sure that our old friend the indemnity principle is never far behind. There has been a long line of case law on this subject where the costs are actually being funded by a third party such as a trade union or legal expenses insurer.

The Court of Appeal has recently given us a useful reminder of some of the basic principles in the case of Ghadami & Ghadami v Lyon Cole Insurance Group Ltd [2010] EWCA Civ 767.

The claimants brought a claim against the defendant, a firm of insurance brokers. The defendant had the benefit of professional indemnity insurance which covered the costs of the proceedings subject to an excess of £1,000. The defendant paid the £1,000 and the rest of the costs of defending the claim were paid by the insurers. The claimants, who lost their claim and became liable for the defendant’s costs, argued that, on the indemnity principle, they should only have to pay the £1,000 paid by the defendant.

The solicitors acting for the defendant had failed to send them a client care letter. Nor had they complied with the obligations contained in the Law Society’s client care code. During the course of the claim, a letter had been sent to the defendant saying: “All costs which exceed £1,000 are payable by your insurers”.

The district judge at first instance accepted the claimant’s arguments and limited the recoverable costs to £1,000.

At the initial appeal, Judge Moloney reached the opposite conclusion. He concluded that there was no evidence that showed an agreement that the defendant would not be liable to pay their solicitors more than £1,000 in any circumstances. He held that if the letters sent to the defendant by the solicitors had been sent to a client who was not in any way active in the insurance market he would have been well inclined to construe the letters in favour of the client, resolving any ambiguity or doubt in their favour, so as to find that the client was not liable for the solicitor’s fees beyond £1,000. The judge drew a distinction by reason of the fact that the present client was in the insurance business and would therefore be familiar with the basic concepts of the insurance market including the fundamental concept that insurance companies indemnify people in respect of their own liabilities.

The matter went to the Court of Appeal who reviewed the relevant authorities on this issue.

The Court agreed with the conclusions of Judge Moloney and interpreted the letter to the defendant as doing no more than indicating that the defendant had to bear the first £1,000 of the costs and the insurers would indemnify them for the balance of the costs. The Court agreed that there was no agreement such as to show that the defendant would not, under any circumstances, have to pay the solicitors’ costs themselves. Recovery of full costs was therefore allowed.

Now, on the one hand this judgment simply highlights the difficulties that paying parties will always face trying to mount this kind of challenge. On the other hand, it did succeed at first instance and Judge Moloney may well have reached a different conclusion if dealing with a less sophisticated client. The Court of Appeal very much left that door open. This issue, naturally, will more often arise with unsophisticated clients. Of course, the other problem paying parties face is trying to obtain enough evidence to start to mount such a challenge.

I suppose this type of problem could be avoided entirely if solicitors simply complied with Law Society obligations concerning the costs information to give to clients.

Sorry. I’ve just realised how silly that sounds.

1 thought on “Ghadami v Lyon Cole – Indemnity principle challenge”

  1. This is just the CA defeating technical challenge at every opportunity. The way the letter to the client is construed is hardly reconcilable with the approach to letter to the client in Jones v Wrexham Borough Council, where various vague assurances were seen as obvious and binding promises by the solicitor never to charge for shortfalls on recovery!

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