In respect of costs allowed on the standard basis, in cases in which the claim form was issued after 1 April 2013, the Jackson test applies to all costs incurred on or after 1 April 2013. The former test (known as the Lownds test) still applies to costs incurred in such cases before that date, and also still applies to all costs incurred in cases commenced before 1 April 2013 (CPR 44.3(7)).
Under the Jackson test, the court must first assess what costs are reasonable and must then step back to consider whether those reasonable costs are proportionate. Costs which are disproportionate in amount may be disallowed or reduced, even if they were reasonably or necessarily incurred (CPR 44.3(2)).
CPR 44.3(5) sets out five factors which may influence the decision as to proportionality:
“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.”
CPR 44.3(5) deals with the question of whether costs are disproportionate. However, other than CPR 44.3(2), there is little guidance in the rules or practice directions as to what the court should do after a finding that the costs are disproportionate. Even though the Jackson test has been in force for over three years, this aspect of it has not yet been considered by the Court of Appeal. There are, however, three reported cases which have attracted a fair amount of comment: Kazakhstan Kagazy plc v Zhunus, a decision of Leggatt J, and two decisions of costs judges, Hobbs v Guy’s and St Thomas’ NHS Foundation Trust and BNM v MGN.
Proportionality trumps reasonableness and necessity
All three cases demonstrate that, when costs are assessed on the standard basis, parts of them which are reasonable may nevertheless be disallowed as disproportionate. In Kazakhstan Kagazy plc (a very high value claim), the costs allowed were less than the reasonable costs, even though the total costs claimed were much lower than the claim value. In each of the other two cases (both low value claims which settled early), the costs allowed were less than the reasonable costs, but were several times greater than the value of the claim in question.
Both of the costs judges’ cases have attracted a lot of bitter criticism. The main grievance expressed is that, once a bill of costs has been reduced to an amount the court thinks is reasonable, any further reduction which is then made must, of itself, be unreasonable. There is an inbuilt assumption here that any costs which are reasonable must also be proportionate. However, reasonableness and proportionality are two different things. It is true that, when applying the Lownds test of proportionality, the court is required to assume that any costs which are “necessary” must also be “reasonable”. However, post Jackson, proportionality now trumps reasonableness, and also necessity (CPR 44.3(2)).
Kazakhstan Kagazy plc v Zhunus
All three cases made some reduction on grounds of proportionality, but in doing so, each of the judges took a different route from the others. In Kazakhstan Kagazy plc, Leggatt J held that, in very high value cases, each party should expect to recover only the lowest amount of costs which could have reasonably been incurred, whether or not they had, in fact, reasonably incurred higher costs than that:
“[13] In a case such as this where very large amounts of money are at stake, it may be entirely reasonable from the point of view of a party incurring costs to spare no expense that might possibly help to influence the result of the proceedings. It does not follow, however, that such expense should be regarded as reasonably or proportionately incurred or reasonable and proportionate in amount when it comes to determining what costs are recoverable from the other party. What is reasonable and proportionate in that context must be judged objectively. 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. Expenditure over and above this level should be for a party’s own account and not recoverable from the other party. This approach is first of all fair. It is fair to distinguish between, on the one hand, costs which are reasonably attributable to the other party’s conduct in bringing or contesting the proceeding or otherwise causing costs to be incurred and, on the other hand, costs which are attributable to a party’s own choice about how best to advance its interests. There are also good policy reasons for drawing this distinction, which include discouraging waste and seeking to deter the escalation of costs for the overall benefit for litigants.”
The result in this case would probably have been the same even if the learned judge had taken the approach which was later taken in either Hobbs or BNM.
Hobbs v Guy’s and St Thomas’ NHS Foundation Trust
Hobbs was a clinical negligence claim which settled pre-issue for £3,500 plus costs. I assessed the reasonable costs at about £12,000 and reduced them on grounds of proportionality by about £1,400. This reduction (about 12% of the sum found reasonable) was calculated by reference to three items of work which, had the solicitor known the low value of the claim at the outset, would not have been reasonably incurred (costs relating to an anaesthetist, costs of a Part 36 offer to settle for £10,000 and the difference between hourly rates calculated at Grade C instead of Grade B):
“When considering what reduction to make on grounds of proportionality I decided against chopping off a slice of all of the costs I had just found to be reasonable. In my view it is better to target particular items of work which it was disproportionate to do in the particular circumstances of the case in hand. In the result I disallowed the costs of three items which now appear, with hindsight, to be inconsistent with the true value of the claim.”
“The rule against the use of hindsight in costs assessment (Francis v Francis and Dickerson [1955] 3 All ER 836) is a rule based upon reasonableness, which, today, is trumped by proportionality (see r.44.3(2), quoted above).”
In the judgment, I stated that no reduction would have been made if I had simply adopted the approach taken in Kazakhstan Kagazy plc. It seems probable that I would have made a reduction greater than 12% in this case if I had taken approach taken in the latest case, BNM.
BNM v MGN
BNM v MGN arose after a newspaper sent a reporter to the claimant asking questions about certain information of a personal and confidential nature. The reporter may have been acting on information the newspaper might have gleaned from the claimant’s mobile phone, which had been wrongly handed in to the newspaper. The claim was for an injunction to restrain the newspaper from using or publishing confidential information taken from the phone, damages and an order for delivery up of any confidential information. It settled before the first case management conference on the basis of undertakings, plus compensation of £20,000 plus costs. Master Gordon-Saker (the Senior Costs Judge) assessed the reasonable costs at about £167,000 but, considering that sum to be disproportionate, imposed an across-the-board reduction of 50% on all items except court fees. The judgment explains why the total reasonable costs were held to be disproportionate; note paragraphs 40 to 48 and, in particular, note paragraph 49:
“In these circumstances base profit costs of £46,000 and base counsel’s fees of £14,000 must be disproportionate under the new test, being over 3 times the amount of agreed damages, and covering work which fell far short of trial. In my judgment costs of about one half of those figures would be proportionate.”
No explanation was given as to why the figure of 50% was chosen rather than, say, 10% or some multiple of 10%. Perhaps the learned costs judge took 50% as the default figure, to be adopted whenever costs are disproportionate unless some good reason is shown for choosing a higher, or a lower, reduction. It is arguable that the learned costs judge would have made no reduction on grounds of proportionality had he simply adopted the approach taken in either Kazakhstan Kagazy PLC or Hobbs.
Which case is right?
In Kazakhstan Kagazy plc, the winner lost all reasonable costs which exceeded the bare minimum. In Hobbs, the winner lost all reasonable costs which were inconsistent with the true value of the claim. In BNM, where, after early settlement, the reasonable costs exceeded the claim value many times over, there was an across-the-board reduction of 50% on all reasonable costs except court fees. It is, of course, entirely possible that all three cases reached the right result and that all of them correctly state some of the principles to be applied. Nevertheless, a Court of Appeal ruling settling these matters is now urgently needed.
Whatever happens, lawyers should not assume that all reasonable costs are proportionate. Also, they should appropriately manage their clients’ expectations by warning them not to expect a full recovery of their costs even if they win.
