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Avoiding the perils of issue-based costs orders

For those practitioners who remember Order 62 of the Rules of the Supreme Court, in force until 26 April 1999 when they were replaced by the Civil Procedure Rules, it was a relatively easy life for the court when it was considering what costs order to make at the end of a trial. Expressed in law-speak, costs would “follow the event”, which meant that whoever came first past the post had won, and so was entitled to costs, even if that was by just a short head. Thus, where one party was ordered to write a cheque to the other, that, generally, was conclusive as to the identity of the winner. (There were rare exceptions: in Alltrans Express Ltd v CVA Holdings Ltd, the Court of Appeal allowed CVA’s appeal that it should have to pay Alltran’s costs for recovering £2 against a claim for £82,500!)

To make the point, a well-known case is Coronation Street actor Bill Roache’s libel claim against the Sun (see Roache v News Group Newspapers Ltd). The newspaper had paid £50,000 into court. The trial judge awarded £50,000 in damages. Who had won? The trial judge’s answer was Bill Roache, and he was awarded his costs, but that decision was reversed on appeal. The offer being equal to the amount paid in had meant that the sum recovered was not a “win”: another pound on the damages and the outcome might have been different. Instead, Roache was deemed to have lost, he sued his solicitors for negligence, failed again and then went bankrupt!

That was in 1998, but even at that time, “costs following the event” as a rigid rule was under threat. In his eponymous report written in July 1996, Lord Woolf wrote in chapter 7 that:

“8. English courts are wedded to the dual concept that costs should be treated as a whole and that costs should follow the event. In the interim report I recommended that courts should pay greater regard than they do at present to the manner in which the successful party has conducted the proceedings and the outcome of individual issues…

9. I also recommended that RSC Order 62, rule 3(3), which provides the general rule that costs follow the event, should be relaxed so that the court could use to the full its very wide statutory discretion over costs to support the conduct of litigation in a proportionate manner…

10. This will give the court an effective weapon for the first time.”

It followed that when the CPR replaced Order 62, winning by a short head no longer meant the recovery of full costs. On the contrary, the “who is writing the cheque” test was not conclusive. The court would look at what had had happened on the way and if the winner had won on some issues, but lost on others, adjustments to the costs order might be needed to reflect that lack of success.

Exaggerated claims too would mean that the mere payment of money by one party would be no guarantee of success. An inflated expectation would be suspectable to a more nuanced costs order than that they should follow the event without adjustment. Thus in the recent case of Pepe’s Piri Piri v Junaid, where the claimant had recovered just £2,523 in a claim pleaded at £500,000 and where the damages bore no resemblance to the budgeted costs of £200,000, the judge ordered the claimant to pay 80% of the costs of the defendants against whom he had been successful.

Whilst Pepe’s Piri Piri might be an example where it is plain that the claimant, in having recovered a small amount, had not “won” in the sense of being the overall winner, what happens in a less clear cut case where the court is persuaded that the defendant’s success in defending at least some of the claim should be reflected in the costs order, but that the claimant is still to be regarded as the winner overall?

The obvious answer to that is to allow the winner the costs of the issues upon which there has been success, and to deprive that party of the costs expended in arguing those which have failed and to award those costs to the losing defendant. Thus, the costs order might be couched in terms that:

“The defendant pay the claimant’s costs of the action, except that the claimant must pay the defendant its of costs of issue A, to be assessed if not agreed”.

The jurisdiction to make such an order is to be found in CPR 44.2(6)(f) which permits the court to direct that a party must pay “costs relating only to a distinct part of the proceedings”.

Sounds easy, but for judges who take a shortcut by making orders which are “issue-based”, as they are known, the result is to create a nightmare for those who are required to assess them.

First, in this scenario, whoever drafts the claimant’s bill will need to separate out all costs in relation to issue A, leaving only the costs of the action. Second, the defendant will be required to prepare a bill claiming only those costs relating to issue A, so all remaining time spent defending the claim must be excluded. It then goes without saying that there will need to be two detailed assessments, one for the claimant and one for the defendant.

Even if that that looks doable on paper, now spare a thought for the costs judge, who assesses the bills and will be required to decide what to do with any “common costs” which overlap in each bill. Take these examples. There will have been a court fee of, say £10,000, on issuing the claim, but the claimant lost on issue A. Does that mean that the defendant pays all, half or none of the issue fee? The claimant will have needed to brief counsel for the trial: should the brief fee be divided up depending upon the proportion of time spent on each issue or should it be split 50-50? And what about the solicitor’s time spent travelling to court: 100% against the defendant, 50-50 or neither of these?

“Common costs” such as these have their own body of case law going back to the famous Medway Oil Principle decided in 1929, and with their own sub-divisions into “specific common costs” and “non-specific” common costs. Happily, it is beyond the scope of this blog to say more about this arcane area of costs law and instead to point out that help is at hand in the rules to steer judges away from making issue-based costs orders.

CPR 44.2(7) provides that:

“Before the court considers making an order under paragraph 6(f), it will consider whether it is practicable to make an order under paragraph 6(a) or (c) instead.”

Those paragraphs refer respectively to “a proportion of another party’s costs” and “costs from or until a certain date only”.

Suppose these sub-rules are applied to the fictional costs order mentioned above. Before jumping in with an issue-based costs order, the court could decide that an order that “the defendant pay 70% claimant’s costs of the action”, would meet the justice of the situation. That would avoid having to have two assessments, with the broad brush effect being that the defendant would receive a 30% discount on those costs which otherwise would be payable, in order to reflect the success in defending issue A.

That is not to say that losing parties do not still press demands on unsuspecting judges for issue-based costs orders who continue to make them where they are not alert to the problems they create at detailed assessment. Happily, that was not the case in Pigot v Environment Agency, in which Stephen Jourdan QC declined to adjust his costs order to make it issue-based to reflect the claimant’s lack of success on what were described as “a number of issues of law”.

In a refreshingly short, concise and to the point judgment, the deputy judge summarised the principles:

  • The fact that a party is not successful on every issue does not, alone, justify an issue-based costs order or make it appropriate to deprive that party of their costs.
  • Such an order might be appropriate if a discrete or distinct issue has caused additional costs to be incurred or if the overall costs have been materially increased by the unreasonable raising of an issue on which the successful party failed.
  • Where a reasonably raised discrete issue has caused additional costs to be incurred, that will be likely to deprive the successful party of the costs of the issue, but if unreasonably raised, that party may also be ordered to pay the costs of the unsuccessful party of that issue.
  • If an issue-based costs order is appropriate, the court should attempt to reflect it by ordering payment of a proportion of the receiving party’s costs instead.
  • An issue-based costs order should reflect the extent to which the costs were increased by the raising of the issue; costs which would have been incurred even if the issue had not been raised should still be paid by the overall unsuccessful party.
  • Before making an issue-based costs order, the court must stand back, apply CPR 44.2, and ask if the order reflects the overall justice of the case.

Applying these principles, Mr Jourdan QC was not persuaded that there should be any order other than that the defendant should pay the claimant’s costs of the action without deduction. The claimant may not have succeeded on all the issues argued, but each had been reasonably raised and either he had not lost on them, or no additional costs had been caused. No order under CPR 44.2(6)(f) was made so, in gratitude, those charged with drafting and assessing the bill will doubtless be raising their glasses to the deputy judge!

Coincidentally, a month later in Scales v Motor Insurance Bureau, the losing MIB also wanted an issue-based order. Whilst it accepted that Mr Scales should recover the costs of the proceedings having been awarded compensation of £539,096, its contention was that the costs order should be issue-based from 21 days after the MIB had made a Part 36 offer of £500.000. That was because Mr Scales had lost the argument on care costs and on the application of established principles of Spanish law.

Like Mr Jourdan QC, Cavanagh J was having none of it. After paying credit to the judgment in Pigot, he refused to treat the arguments of law on which Mr Scales had been unsuccessful as discrete issues in the proceedings. In short, Mr Scales had won his case, no issue-based costs order was appropriate and none was made.

Happy outcomes for these claimants, but also a useful reminder of the perils of issue-based costs orders and that they should be avoided if a proportion-based costs order under CPR 44.2(7) can be made instead.

It should not to be overlooked, however, that sometimes an issue-based costs order is unavoidable.

Suppose that the claimant sues two defendants. Subsequently, the claim succeeds against D1 but is discontinued against D2 (with deemed CPR 38 costs against C). In these circumstances, C’s bill will need to exclude any costs incurred against D2 and claim only those costs attributable to the proceedings against D1. There will then be a bill for D2’s costs against C, but excluding everything in relation to D1, meaning that the court must deal with two bills on a costs-of-issues basis, a real headache to sort out.

To avoid such an eventuality, it is important, if at all possible, for a winning claimant to obtain a Sanderson or Bullock order under which the losing defendant either pays or indemnifies the claimant for the “winning” defendant’s costs (see my previous blog from 10 August 2018).

Finally, for the curious: how will the court deal with the common costs in the scenario above? Answer, the issue fee is payable in full as being an indivisible item which would have been the same whether there had been one or 101 defendants, likewise the travel time to court, whereas the brief fee will need to be divided, separating the time attributable to the claim (recoverable) and that to issue A (irrecoverable): see Lavery v Ewing. A real dog’s dinner to sort out on detailed assessment, and to be avoided unless there is no other way.

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