Claim won with costs? It is not an unreasonable expectation in that case is it not, that there will be a guaranteed recovery from your opponent of the budgeted costs (those last approved or agreed insofar as you are within budget), plus a bit for the incurred costs? Consideration of any Part 36 offer made and, indeed, the couching and calculation of any Part 36 of your own, will be based as a starting point on those figures.
Not so. When the proportionality roulette wheel is spun on detailed assessment of those costs, there is no guarantee of anything. Indeed, if there is just a sniff (or is it a whiff) of exaggeration, should the ball land on the “possible exaggeration” pocket on the wheel, there is no telling how much you will recover and certainly no assurance that even your budgeted costs will be left intact.
How so? To answer that question, it is necessary to go back a decade (yes, it is almost 10 years to the day since Sir Rupert Jackson started work on his Preliminary Report into Civil Litigation Costs) and to read what his foreword to the Final Report completed on 21 December 2009 actually said:
“In some areas of civil litigation costs are disproportionate and impede access to justice. I therefore propose a coherent package of interlocking reforms designed to control costs and promote access to justice”.
At the core of Sir Rupert’s recommendations was the redrafting of the proportionality test about costs. That concept, he found, had had a forerunner known as “extravagant costs” which related both to the sums in issue and the complexity of the case. It was to be found in the Evershed Report on Supreme Court Procedure, chaired by Lord Evershed in 1953!
Taking a leaf out of the Evershed book, Sir Rupert came up with his own proportionality test, fit for purpose in the 21st century, or so he thought. His recommendation was this (see chapter 3, paragraph 5.15):
“Costs are proportionate if, and only if, the costs incurred 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”.
Save that the first line of CPR 44.3(5) now reads “Costs incurred are proportionate if they bear a reasonable relationship to”, Sir Rupert’s recommendations were accepted by the Civil Procedure Rule Committee in full, with the new rule being implemented on 1 April 2013.
As to its workings, on the basis that the line-by-line detailed assessment would proceed in order to reach a figure for reasonable and necessary costs, it was envisaged by Sir Rupert (although not embodied in the CPR) that the proportionality test would be applied at a “standing back” stage. If the total figure was still not proportionate after the line-by-line assessment, an appropriate further reduction would be made. In short (see the Report chapter 3 at paragraph 5.22):
“It should be made clear that, in an assessment of costs on the standard basis, proportionality prevails over reasonableness and the proportionality test must be applied on a global basis.”
It is now five and a half years on and a reasonable question to ask is, how is CPR 44.3(5) working in practice?
Certainly not in the way in which Sir Rupert envisaged is the first answer. In the absence of any practice direction or Ministry of Justice guidance about how the rule should be applied, it was his expectation that case law would explain all. Interviewed by the Law Society in March this year, Sir Rupert said:
“What needs to happen is a group of appeals where one or other party is dissatisfied with the assessment of costs, to come up collectively to the Court of Appeal, presided over by the MR or a senior judge, where the court can give guidance on the rule… The rule identifies all the relevant factors. But I regret there has not yet been a cluster of test cases… I would dearly like to see all going well on this front. But I accept that the lack of any Court of Appeal guidance in a cluster of these cases is a drawback.”
Sir Rupert is correct. The reality is that in the past five years, there has been no authoritative guidance in any shape or form about how CPR 44.3(5) should be applied. True it is that the Court of Appeal agreed to take BNM v MGN as a “leap frog” appeal in November 2017, but the court declined to roll its sleeves up and get stuck in as it could have done. In that case, the line-by-line assessment had reduced the bill from £247,000 to £167,000. Applying the proportionality test to that figure at the “standing back” stage, the costs had then been reduced by a further 50% to £83,500 on the basis that additional liabilities (success fees and after-the-event (ATE) insurance premiums) incurred after 1 April 2013 fell to be determined under CPR 44.3(5).
Not so, said the Court of Appeal: the pre-1 April 2013 “Lownds v Home Office” test applied, and without giving any wider guidance about the proportionality of the base costs (which had been part of the appeal), the court simply remitted the matter to the senior costs judge to sort out the bill applying Lownds and not CPR 44.3(5), whereupon the case had promptly settled.
The next flutter on the proportionality roulette wheel was May v Wavell Group. That was a nuisance case which had settled for £25,000 damages plus an injunction to prevent an underground garage excavation causing drilling noise in leafy Ladbroke Gardens. The privately paid bill sought £210,000. The reasonable and necessary costs were allowed at £99,000 and upon the application of CPR 44.3(5), that figure had been reduced to £35,000. There was then an appeal and a year later, in a reserved judgment, HHJ Dight, restored £40,000 so Mr May achieved a partial success, but Wavell remained “malcontents” and asked the Court of Appeal for permission to appeal.
“Not likely” was the answer. Lewison LJ gave the decision on the papers thus:
“Whether the Judge was entitled to substitute his own judgment for that of the Master does not raise an important point of principle, sufficient to satisfy the second appeals test.”
That was a decision about which Nicholas Bacon QC expressed frustration when speaking at the Costs Law Reports Conference on 27 September 2018.
“We are in a very unhappy place” he said.
“Nearly six years have passed and I am still standing here saying I don’t know what your costs are going to be allowed at in your case. For me, that is a completely unacceptable state of affairs. Justice can only be administered with some certainty and judges have got proper parameters in which to exercise their judicial judgment.”
That concern was developed by Mr Bacon in the context of a decision at County Court level which has been handed down recently (see Reynolds v One Stop Stores Ltd).
In Reynolds, the regional costs judge had conducted a detailed assessment over most of the day in a personal injury claim in which the claimant had been diagnosed as having developed complex regional pain syndrome. The case had settled at the door of the court for £50,000 plus costs, the defendant having increased its Part 36 offer by £15,000 immediately before the three-day trial on causation and quantum had been due to start. Past losses had been advanced at £74,067, with future losses at £100,907, making a total claim for special damages of about £175,000. The claimant’s reason for taking so much less was that her expert had “started to wobble” following the service of surveillance evidence, albeit that none of the experts had reached agreement about that evidence and would be deferring to the trial judge on the issue of her credibility.
In contrast to BNM and May, the case had been budgeted. Precedent Q indicated that the claimant’s last approved budget had been revised to £117,352.65 plus 3% for the drafting of the budget and costs management, with pre-budget costs of £66,076.29. The claimant’s old-style conditional fee agreement (CFA) provided for a success fee of 25% under CPR 45, and the total bill excluding additional liabilities and without VAT sought £134,445. A line-by-line detailed assessment had then followed with the base costs (excluding the success fee and ATE insurance premium) being allowed at £115,906.09. They were thus the “reasonable and necessary” costs and happily for Mrs Reynolds, they exceeded the defendant’s Part 36 offer.
The regional costs judge, (with the agreement of the parties), had then donned his proportionality wig under CPR 44.3(5). He held that the case had not been complex and that the matter had been:
“… teed up for a full fight and the court was led to believe that it was £300,000… so if there is a question of reasonableness, one has to say that a party who overstates the case then actually settles at an amount on which they originally pleaded, then one has to say that it’s their conduct that must be looked at… In my judgment a proportionate sum as a base cost before the additional ones should be a sum of £75,000…”
On appeal, HHJ Auerbach upheld that decision on all grounds. He found that the regional costs judge had not taken a mechanistic view based on the settlement figure or the amount originally claimed on the claim form (£50,000) and that he had been entitled to express his view that the claim had been overvalued. He had correctly reached a similar conclusion as to the complexity of the case: the judge had considered that the underlying litigation had not been complex, which was a reasoned view he had been entitled to reach drawing on the materials available to him. As to the defendant’s conduct, in the context of all the circumstances of the case, the judge had not erred in observing that this had been reasonable, and that the failure to table the additional £15,000 until the day of the trial had not been conduct that was unreasonable. Finally, the judge had not been bound to apply a mathematical formula or algorithm to the final costs figure. The sum of £75,000 which he had arrived at, had been consistent with the evaluative conclusion he had come to in his decision thus far. In arriving at his final figure, the judge had not applied his own tariff.
The outcome: appeal dismissed and as Mrs Reynolds had now failed to beat the Part 36 offer, the defendant’s costs of assessment were for her to pay from the last day on which the offer could have been accepted.
Mr Bacon QC expressed his concern at this outcome as well. In his view, too much of proportionality is guesswork and it should not be: justice needs certainty and CPR 44.3(5) was not providing it. Indeed, this was the stuff of the Wild West!
Back to the roulette wheel and it is easy to see what Mr Bacon is getting at. As it stands, or at least in the way it is being interpreted, the rule is turning a number of long established legal principles on their heads.
First, the issue of the tariff. Should the judge provide reasons for reaching the magic figure for proportionate costs? After all, if at the start of the assessment the judge believes that a case which claims upwards of £175,000 and settles for £50,000 should command costs of £75,000, what purpose is to be served in putting the parties through their detailed assessment paces, if that is going to be the result at the end of the afternoon? However, that is not how it is supposed to be, at least not according to the Court of Appeal. In Flowers Inc v Phonenames, the judge had imposed his own tariff of £10,000 for a one-day appeal from the trademark registrar, referring to it as being the sort of case he saw daily in the provinces. In doing so, he had erred: costs assessment was not to be used as a vehicle for the introduction of a scale of judicial tariffs, held Peter Gibson LJ. Although pre-CPR and not quite on all fours with the facts in Reynolds, the principle in Flowers is plain: no tariffs; how the final figure has been reached must be explained. It follows that in this respect, the judge’s decision in Reynolds was left wanting.
Second, the costs budget. What price budgeting if the judicial axe is taken not only to the incurred costs but also to the budgeted costs? After all, the task of the case managing judge is to allow costs going forward that are reasonable, necessary and proportionate.
In applying CPR 44.3(5) in Reynolds, no distinction was drawn between the costs that had gone before and those to be incurred over which the court had control, and could and did, case manage. With all phases having been limited to the budgeted amounts and with no suggestion that the claimant had fraudulently advanced her claim but at worst, had over-pleaded it, little wonder that eyebrows have been raised about whether these were just reasons for reducing the assessed costs by 38%, to a figure which the last approved budget dwarfed. Indeed, had the points of dispute been successful on every issue, meaning that Mrs Reynolds had lost at detailed assessment on every point taken in the bill, she would only have been £285 worse off than she actually was, following the application of the proportionality test. If the whiff of exaggeration is, without more, to be a crucial component sounding in the proportionality of the costs, claimants such as Mrs Reynolds might as well take their chances in court rather than submit to the vagaries of the rule, so that the suspicion of exaggeration can be nailed one way or another by the trial judge and it will be “res judicata” by the time it reaches the costs judge.
Third, hindsight. The regional costs judge had referred to the great advantages of 20/20 hindsight during submissions and in his judgment to “using a hindsight test”. The Jackson report envisaged that hindsight and proportionality would operate hand in hand, but the recommendations are not binding, whereas case law is: consider the long-established decision of Sachs J in Francis v Francis and Dickerson:
“The correct viewpoint to be adopted by the taxing officer is that of the sensible solicitor sitting in his chair and considering what in the light of his then knowledge is reasonable in the interests of his lay client.”
It cannot have been the intention of the Jackson report, surely, that after a solicitor has reasonably taken a decision considered to be in the best interests of the client based upon what was then known (in Reynolds, it was to increase the claim relying on the updated medical evidence), that years later, that decision will be put under the proportionality spotlight and the charges for the work disallowed by operation of CPR 44.3(5). Hindsight applied in this way would give the appearance of being contrary to principle as well as being unfair.
Fourth, who is to suffer the “haircut”, to adopt a word taken from the banking crisis, as in who is to bear the loss? The disbursements claimed in Mrs Reynolds’ bill were £62,300. That left, before addition of the success fee, £12,700 for the solicitors for their profit costs after everyone else had been paid. However, at least that way, Mrs Reynolds’ damages were for her to keep. Not much reward for five years’ hard work for bringing a case to trial and to a successful conclusion, the solicitors might reasonably think. Indeed, by no stretch of the imagination could £20,000 or so with the success fee added be considered “extravagant” costs for a case with 300 pages of expert evidence and listed for a three-day trial.
Of course, an unattractive alternative lay open to the solicitors. That was for the lawyers and experts to pay themselves out of the damages, but to do so here would have been to wipe out Mrs Reynolds’ compensation in its entirety. No justice there either.
Earlier in this blog, mention was made of the sniff (or was it whiff) of exaggeration in Mrs Reynolds’ claim. Surveillance evidence had been undertaken and credibility was in issue. Factors such as these could lead to the inference being drawn that she had behaved with less than candour about the severity of her injury, and that she got what she deserved (see the judgment at paragraphs 92-93). However, there had been no suggestion of malingering, dishonesty, or fraud which had been pleaded, still less proved. In these circumstances, it is a fair question to ask: for whose benefit is the proportionality test being used? On these facts, it is certainly not the claimant. The tortfeasor and his or her insurers can only be rubbing their hands with glee.
There is, of course, a more straightforward answer to how the proportionality test should be applied. Rather than resorting to CPR 44.3(5) at the “standing back” stage, it should be deployed as the line-by-line assessment progresses. Take a counsel fee for a conference, for example. It may have been reasonable and necessary to have the conference, but a fee of £5,000 would not be proportionate whereas £3,500 would be. Thus, the reasonable, necessary and proportionate fee to be allowed is £3,500. No revisit at the end. Job done. However, detailed assessment in practice is not working that way, so that, with the standing back stage capable of trumping everything that has gone before, it is impossible for parties to predict with any certainty what will be the outcome.
There is not going to be a further appeal in Reynolds. Even if that had not been the case, on present form, there is no guarantee that the Court of Appeal would have given permission. With no authoritative guidance in sight, the proportionality free-for-all is set to continue, with unpredictable outcomes depending upon which pocket on the roulette wheel the proportionality ball drops. Remember that in May, Brian May got back £40,000 on his proportionality appeal: in Reynolds, Mrs Reynolds recovered nothing of the £40,000 she had lost under the rule. Wild West stuff indeed.