The new rule on the proportionality of costs has been the subject of two recent decisions that have potentially far reaching consequences for all litigants and their representatives.
As all litigators will be aware, part of the April 2013 changes to the CPR was a substantial amendment to CPR r.44.3. The new rule provides:
(2) Where the amount of costs is to be assessed on the standard basis, the court will—
(a) only allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred; and
(b) resolve any doubt which it may have as to whether costs were reasonably and proportionately incurred or were reasonable and proportionate in amount in favour of the paying party.
The addition to r.44.3(2)(a) of the second sentence was intended to overturn the effect of the Home Office v Lownds  EWCA Civ 365 which provided that costs were recoverable even if they were disproportionate provided that they were reasonably and necessarily incurred.
The factors to be considered in determining whether costs are proportionate are set out in r.44.3(5) which states that:
Costs incurred are proportionate if they bear a reasonable relationship to–
(a) the sums in issue in the proceedings;
(b) the value of any non-monetary relief in issue in the proceedings;
(c) the complexity of the litigation;
(d) any additional work generated by the conduct of the paying party; and
(e) any wider factors involved in the proceedings, such as reputation or public importance.
There has been speculation over what impact these changes would have on the way in which costs are assessed on the standard basis. However two recent cases from judges in the SCCO provide an indication that successful parties’ costs awards could be slashed under the new approach.
BNM v MGM  EWHC B13 (Costs) concerned proceedings brought by a primary school teacher against the Defendant news publisher. In short, the Claimant had been in a relationship with a successful premiership footballer. In March 2011 she lost her phone which found its way into the hands of the Sunday People newspaper. The Claimant’s father complained and the phone was returned to the Claimant on 3rd May 2011. In March 2013 the Claimant instructed solicitors on a CFA who in turn instructed counsel on a CFA. Proceedings were commenced on 31st July 2013. The claim settled after the Defendant had filed and served its Defence whereby the Defendant gave an undertaking not to use or disclose any confidential information and agreed to pay the Claimant £20,000 in damages as well as her costs on the standard basis.
On detailed assessment Master Gordon-Saker held that the Claimant’s reasonable and necessarily incurred costs were £167,389.45. He then turned to the issue of proportionality on which he noted there was limited guidance. The Master did refer to the general approach described in the Jackson report and endorsed by Lord Neuberger in the 15th implementation lecture – that proportionality should trump reasonableness and that the proportionality test should be applied on a global basis.
Master Gordon-Saker then addressed the factors in r.44.3(5):
- The case was always going to have a modest value; the claim settled for £20,000 and the Claimant’s first offer had been £40,000. However he considered that had the rule been intended to state that costs should never exceed the amount in issue the rule could have easily have said this.
- The non-monetary relief was not easy to value but the Master relied on the fact that the claim had not been brought for a period of two years and that the information had not been published in the intervening period to conclude that it was not substantial.
- The case was not particularly complicated although the work was “Londoncentric” and warranted the instruction of a specialist firm.
- Little additional work had been generated by the Defendant.
- There were no wider factors in the proceedings as there was no real threat of publication. The Defendant’s conduct had been “reprehensible, [but] so much of civil litigation is based on the bad behaviour of others”
Having considered those factors the Master assessed that a reduction of 50% was required to render the costs proportionate and therefore allowed the bill in the sum of £83,964.80.
The case of May v Wavell Group Plc  EWHC B16 (Costs) concerned the Claimants’ claim for private nuisance relating to the building of a ‘mega-basement’. The Claimants had accepted the Defendants’ Part 36 offer of £25,000 after issue of the claim but prior to defences being entered. Master Rowley assessed the Claimants’ reasonable costs at £99,655.74.
The Master then addressed the factors set out under r.44.3(5). He considered that:
- The value of the claim for the purposes of assessment was the £25,000 settlement value. The fact that the Claimants did not negotiate with the Defendants over the settlement and that the Claimants did not appear to have been given written advice as to the acceptability of the offer were central to this conclusion.
- No injunction was pursued in the claim, however the Master concluded that the Claimants were entitled to consider an injunction even if they decided not to pursue it. Therefore the time spent considering this should weigh in the balance of factors considered under proportionality.
- This case was not considered to be legally or factually complicated.
- No additional work had been generated by the Defendants.
- The First Claimants’ campaign to disrupt the creation of mega basements fell outside of the ambit of the proceedings and was not to be considered under the Part 44 proportionality test.
Having addressed these individual heads under the test, Master Rowley went on to consider the post-April 2013 approach to proportionality. In particular he addressed the dictum of Leggatt J in Kazakhstan Kagazy Plc v Zhunus  EWHC 404 (Comm) that:
"The touchstone is not the amount of costs which it was in a party’s best interests to incur but the lowest amount which it could reasonably have been expected to spend in order to have its case conducted and presented proficiently, having regard to all the relevant circumstances."
Master Rowley considered that this approach is too generous; the Kazakhstan approach referred to cases where the amounts in issue were so large that the costs would always be ‘proportionate’ if they were simply compared to the amount in issue and does not apply to a low value claim. However like Master Gordon-Saker in BNM, Master Rowley rejected the idea that costs should never exceed the amount in issue in the proceedings, on the basis that this would elevate that factor in r.44.3(5)(a) above the others.
Setting out the change in approach brought in by the April 2013 rules, Master Rowley stated that a proportionate amount “is not the amount required to achieve justice in the eyes of the receiving party but only a contribution to that receiving party’s costs in many modest cases”. On the way in which a reduction on the basis of proportionality would be applied by the Courts, he stated that it would be unusual for a line by line assessment to be carried out. In most cases a global reduction would be appropriate. The effect of such an approach is to make the proportionate costs “entirely a matter of judgment”. By way of conclusion on the correct approach to be applied Master Rowley stated:
"There is only so much finesse that can be employed when using a broadsword rather than a rapier. A concluding global assessment of proportionality as envisaged by the new approach involves the court wielding a blunt instrument rather than a precision tool"
Considering all of the factors and taking the global approach he had described. Master Rowley held that the proportionate recoverable costs in the case were £35,000.
These cases demonstrate the potential power of the proportionality rule to reduce costs found to be reasonable on assessment. This fundamental change to the assessment of costs on the standard basis means that costs bills are more vulnerable to attack than was previously the case. Further assessments on the basis of proportionality will be broad-brush in nature, giving the Court a substantial discretion in coming to a view as to the proportionate costs in the circumstances of any given case.
Beyond this point there are practical lessons for all practitioners dealing with civil litigation.
The Importance of Indemnity Costs
There can be no reduction to a receiving party’s costs on account of proportionality where they are entitled to indemnity costs; costs on the indemnity basis need only be reasonably incurred and reasonable in amount. This will benefit a party where the other side is punished for non-compliance with rules or other bad behaviour.
However, this will also benefit parties who beat their own Part 36 offer and who are thereby entitled to costs on the indemnity basis from the end of the relevant period. The benefit of beating a Part 36 Offer will be greater than was the case when – because necessity trumped proportionality – the effective difference between costs on the indemnity and standard basis was the operation of the benefit of the doubt. Therefore parties will be well advised to make realistic Part 36 offers at an early point in (or before commencement of) proceedings.
Advising as to Costs Recovery and Commerciality
The new approach to the assessment of costs on the standard basis means that legal representatives will have to be aware of potential arguments as to proportionality when advising clients as to the commercial benefit of engaging in or continuing litigation. The change in the rules on recoverability means that such advice will require more thought and will depend more on the facts of the case than was previously true. It will no longer be sufficient for a lawyer to advise their client as to the typical percentage of costs recovered by a party on standard assessment. This is foreshadowed in the judgment of Master Rowley in May:
"In cases such as this, it seems to me that the new test of proportionality … will require legal representatives to inform their clients that, even if successful, they will receive no more than a contribution to the costs that will be incurred"
This means that a client may have to be advised that commencing or continuing a case with good prospects may not make commercial sense because of the risk on costs recovery.
The dictum of Master Rowley also presents the possibility of a client who is not so advised and later has their costs reduced bringing a claim against their lawyer. It is well established that solicitors must advise their clients as to how they are going to fund a claim and as to their potential liability for the other side’s costs. A failure to advise as to the risk that costs would not be recoverable and that therefore litigation may not be in the client’s best interests could also constitute a breach of duty.
Advising as to Settlement
It may well be that in appropriate factual circumstances it will be advantageous to a client to make a costs inclusive Calderbank offer to settle proceedings. This could be the case where litigation has run for a substantial period or has been particularly expensive and the other side may be concerned as to the risk that they face on assessment. In such circumstances concerns about costs recovery could be used as leverage to negotiate a favourable overall settlement for a client.
The change in the rules governing assessment of costs has been marked. The Court’s approach to this is not settled and it is unlikely to be clear until the Court of Appeal gives guidance on the point. However, the new rules undoubtedly give the Court more flexibility to reduce costs on the standard basis as a consequence of the prioritisation of proportionality over necessity. The “blunt instrument” of proportionality could have a substantial impact on a client’s case and on the commercial benefit of litigation. As ever, substantial change to the CPR heralds pitfalls for the unwary and opportunities for the astute.