It is a well-embedded principle of legal costs that a successful party is unable to charge an unsuccessful party more than the successful party has been charged by its solicitor. As I am sure that everyone knows, this is referred to as ‘The Indemnity Principle’, and is not to be confused with the Indemnity Basis, one of the two bases of costs recoverability prescribed by the Civil Procedure Rules (CPR).

The reasoning that a party should not be allowed to make a profit out of his legal costs is that the award of costs is purely compensatory. In practice, this is usually only partial compensation due to the restrictions imposed upon recovery of costs by the CPR and its practice directions.

The principle is found in Harold v. Smith [1860] 5 H&N 381, although the leading case of Re Eastwood [1975 ] Core Costs Law Reports 50 is the binding authority which relates to the recovery of costs by government and other corporate institutions. The subtitle of this case is Lloyds Bank Limited v. Eastwood (Deceased) and it concerned whether a fee earner working in house, for example in local government, can recover costs from an unsuccessful party at the same level as a fee earner in private practice.

A strong Court of Appeal heard the case and Lord Justice Russell gave the judgment of the court which he explained was applicable “to the case of a local government authority, a nationalised industry… and any industrial concern conducting litigation through its own legal department of which all the expenses, including the salaries of solicitors, assistant solicitors and legal executives, are paid by it and not by instructing an independent solicitor or firm to act for it”.
In summary the court held:

1. In cases of this sort it is the proper method of [assessment] of a bill to deal with it as though it were the bill of an independent solicitor, assessing accordingly the reasonable and fair amount of a discretionary item such as this, having regard to all the circumstances of the case.
2. There is no reason to suppose that the conventional method [of assessing hourly rates] is other than appropriate to the case of both independent and employed solicitors.
3. It is a sensible and reasonable presumption that the figure arrived at on this basis will not infringe the principle that the [assessed] costs should not be more than an indemnity to the party against the expense to which he has been put in the litigation.
4. There may be special cases in which it appears reasonably plain that that principle will be infringed if the method of taxation [assessment] appropriate to an independent solicitor’s bill is entirely applied; but it would be impracticable and wrong in all cases of an employed solicitor to require a total exposition and breakdown of the activities and expenses of the department with a view to ensuring that the principle is not infringed, and it is doubtful, to say the least, whether by any method of certainty on the point could be reached.

The conclusions in Eastwood remain binding precedent today, yet there have been several challenges to these established principles, all of which have failed. The latest challenge is to be found in the case of R (Mazanov Bakhtiyar) v. The Secretary of State for the Home Department IJR[2015] UKUT 519 (IAC).

Here, an order was made that the Applicant in these Judicial Review proceedings in the Upper Tribunal (Immigration and Asylum Chamber) should pay the costs of the Acknowledgment of Service. These had been assessed at £400 but the Applicant challenged this amount on two grounds: (a) the amount of time claimed for the work (this was conceded by the Government Legal Department); and (b) the hourly rate of £200 breached the indemnity principle and was in any event unreasonably high.

The court reviewed in detail the Eastwood case as decided by the Court of Appeal and remarked that “the decision in Eastwood has survived attacks in the High Court in Maes Finance Ltd. V. Edwards & Partners [2000] 2 Costs LR 198 and in the Court of Appeal in Cole v. British Telecommunications plc [2000] 2 Costs LR 310.
It went on to say that “Eastwood is clear authority for the proposition that the process of calculation of the costs to which the successful party has been put by the litigation is the same whether that party has engaged a solicitor in private practice or employed a solicitor as part of his or its organisation.”

The court attributed a new description to the situation covered in conclusion 4 above of the court in Eastwood, namely the “presumed indemnity principle”. It then considered the Applicant’s submissions that this was a case where it was ‘reasonably plain’ that the indemnity principle had been infringed on the basis that the charging rates adopted by the Government Legal Department when charging out its legal work to other departments.
The court felt obliged then to consider the ‘nature of government’ which it did with the assistance of the various judgments in Town Investments Ltd. And Others v. Department of the Environment [1978] AC 359. It is not necessary for the purposes of this article to explore those judgments.

In paragraphs 36 to 38 of the judgment, the Upper Tribunal concluded that, although the Department makes charges to other government departments, there are a number of other costs which are not covered by the internal chargeable hourly rates adopted. Their lawyers give advice on litigation strategy and can attend conferences with counsel or assist in formulating a response to a claim, and these costs are not included in the hourly rate.

In addition there are other costs generally falling upon the government in that HM Treasury and the Cabinet Office incur costs in providing what is described as ‘oversight, financing, advice and other services’. Such costs, if incurred in the private sector, would be included in a fee earner’s hourly rate, yet they do not form part of any charge made by the Department to other government departments.

Using a table of rates showing what one government department may charge to another is not the correct basis of assessment (paragraph 38) and the Town Investments decision shows that all figures in such a table are irrelevant. The costs being repaid are the government’s costs and not the sums of money being paid by one department to another.
In conclusion, the original order for costs was affirmed, Eastwood was followed and £200 per hour, the rate claimed by the Respondent was not unreasonably high. The Upper Tribunal also concluded that:

1. The Secretary of State for the Home Department is the nominal defendant in an immigration judicial review but the party to the litigation is in truth the government.
2. Even if the costs were to be calculated on the basis of the amounts of money the Secretary of State pays to the Government Legal Department, it would be wrong to confine the costs to the hourly rate for lawyers because that rate does not take into account factors that would have been taken into account if a charge was being made by a solicitor in private practice.
3. Because the successful party is the Crown, other general overhead costs of the Government Legal Department also fall for consideration and charge. It would be an unrealistically expensive and perhaps impossible task to calculate precisely the costs attributable to the production of an Acknowledgment of Service. The presumption in Eastwood applies.

It is to be hoped that we have now finally seen the end of challenges to this particular aspect of costs. Hopefully, paying parties who are the subject of adverse costs orders in favour of the government, corporations, and local authorities will in future not seek to resuscitate the (to date) fruitless challenges to the Eastwood principles.