Friday, June 23, 2006

By Nicky Stetka and Adam Anderson
These days, it is well known that litigating is an expensive exercise, even for successful litigants.
Generally speaking, a successful litigant will be entitled to recover its legal costs but, what does this mean from a practical point of view?  Until a few years ago, this meant that a successful litigant would be entitled to recover between 40% and 50% of its taxed costs on a party and party scale.  In addition, in the event of an unsuccessful litigant facing a punitive costs order, the successful litigant would possibly be awarded costs on an attorney and own client scale which would translate into a recovery of approximately 95% of capital outlay in respect of its costs.  Today, however, things are very different.
Now a successful litigant who is awarded costs on a party and party scale, including the costs of two counsel will only be likely to recover between 15% and 30% of its capital outlay in respect of costs after taxation.  The reason for this decline in percentages is that court tariffs are not increasing in line with the increase in attorneys’ and counsels’ charges.  To give an example of this rate of recovery, we recently acted for a client with a claim of just under R50 million.  After 4 years of litigating, we were successful and our client was awarded costs including the costs of two counsel.  Our client had spent approximately R1,5 million in legal fees over the years in the lower courts and R121 795.25 in respect of the other side’s application for leave to appeal.  Of the total amount expended by our client, they recovered a total of R457 119.70 after taxation.  In another matter, the attorneys for the appellant in an appeal were dilatory in their conduct and the court awarded our client costs de bonis propriis.  This is a costs award which means that the attorney or representative of a party has to pay their client’s costs as a result of that attorney’s conduct.  In this instance, on a bill of approximately R120 000.00, our client recovered just under R23 000.00 after taxation.
Let us now consider a hypothetical example.  A has a claim against B for R1 million.  A institutes action against B for recovery of the amount owing to it and the litigation lasts for a period of two years.  A, during this period, incurs R1 million in legal costs.  In the event that A is successful and recovers all amounts due to it, and on the basis that B does not appeal the finding (in that case the costs and time periods will obviously be higher and longer respectively), A will recover the R1 million from B (being A’s claim) and between R150 000.00 and R200 000.00 in respect of its costs, after taxation.  In the event that A is unsuccessful, not only will A not recover the R1 million claimed from B but it will also not recover any of its costs and will have to pay B’s costs after taxation, whatever those may be.  The upside of this is obviously that, if a litigant is unsuccessful and ordered to pay their opponent’s costs, that litigant will only end up paying between 15% and 30% of their opponent’s costs after taxation.
We have been investigating the tariff which governs how much a litigant will recover on taxation.  Ultimately, the Department of Justice, through the Rules Board, is responsible for setting the tariff.  We discussed the issue of the status of the tariff and what steps can be taken to amend it with one of the cost consultants, the services of whom we frequently employ, and we were advised that they have made a number of representations to the Rules Board regarding the tariff and those representations have fallen on deaf ears.
In an attempt to assist litigants who find themselves in this precarious position, there is now an insurance product in South Africa offered by Legal Protection Services (Pty) Limited (“LPS”) and underwritten by Constantia Insurance Company Limited.  This product is designed to protect a losing litigant against an adverse costs order, either at an interlocutory or a final stage.  In the event that a litigant wishes to take out this insurance cover, the insurance is taken out after litigation or arbitration has commenced and the litigant has the option whether only to take out insurance in respect of their own costs, including all of their attorney’s actual disbursements and not related to tariff at all and/or insurance in respect of the taxed costs of their opponent.  The LPS insurance policy can also be used as security for costs in certain circumstances.
The premiums for this product are between 30% and 40% of the limit of indemnity in respect of the costs insured.  However, arrangements are available in terms of which the payment of the bulk of the premium can be deferred to judgment or settlement in favour of the litigant.  Under this arrangement the balance of the premium is effectively self insured and in the event of a judgment with costs against the litigant no further premium is payable and the policy will cover, up to the limit of indemnity, the costs incurred.  If the case is won then the balance of the premium becomes payable.  This means that, for example, in the event of a litigant being insured for an amount of R500 000.00 in respect of their own costs, and judgment being awarded against the litigant with costs, the litigant will be covered up to the limit of indemnity of R500 000 and no further premium will be payable the total exposure for the litigant being the initial inception fee of R20 000.
In order to explain this product from a practical point of view, let’s consider an example of a client faced with an application.  The client incurs legal costs in the sum of, for example, R800 000.00.  In the event that the client is unsuccessful and ordered to pay the applicant’s costs, the client will be liable for its own full costs and the taxed costs of the applicant.  If the client applies to LPS for insurance cover of, for example, R500 000.00 and is successful in its application to LPS, the client would have to pay a premium of R20 000.00 and would only have to pay out R300 000.00 in respect of its costs (i.e. the difference between R800 000.00 incurred and the amount of R500 000.00 insured for).  In the event that the client is also insured against paying the other side’s taxed costs, it would only have to expend R320 000.00 on legal costs. 
Whilst this product is a fairly novel and unknown concept in South Africa, it is already common practice in the United Kingdom where solicitors are obliged to bring the existence of these types of insurance products to their client’s attention at the outset of the matter.  In our view, and given the level of costs recovery in South Africa currently, legal insurance will become more popular and common in South Africa in the near future.  Should this not occur, or should the tariff not be amended to reflect the commercial realities of litigating, clients will soon be unable to litigate effectively.