In Proportion? (Michael Heslin on inconsistency over proportionality and additional liabilities)
The new test of proportionality is at the heart of the Jackson reforms, central to case management decisions, ex ante cost budgeting, and ex post assessment of costs – its meaning should be clear, its application should yield consistent and predictable results. Yet opposing parties may agree a ‘proportionate’ costs budget without the involvement of the court, at a level significantly higher (or lower) than a case managing judge might be prepared to allow. A specialist costs judge may take a very different view on assessment. That lawyers and judges can reach different conclusions on the same facts is nothing new – discretion and flexibility are great strengths in our legal system. However, whilst most practitioners surely now accept that new proportionality means ‘less than before’ in most cases, very little else is clear. We still do not have a proper formulation of the proportionality test susceptible of general application, and the Senior Courts Costs Office has hardly shown leadership; indeed we are not even clear whether or not the new test of proportionality applies to additional liabilities (let alone how the test should be applied to base costs).
The new test
Whether or not you agree that the cost of quality access to justice in England and Wales is too high, Lord Jackson saw the reduction of recoverable litigation costs, to a ‘proportionate’ level, as essential. The ‘old’ (pre-April 2013) test, which allowed the winner to recover at least those costs ‘necessary’ to progress his case, was not working with costs ‘assessed with nodding respect only to proportionality’ according to Sir Anthony May.
The new test, which applies to costs incurred from 1 April 2013, is found at CPR 44.3 (5):
(5) 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.
Further, CPR 44.3 (2) (a) tells us:
(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…
The new ‘test ‘was intended to bring about real change in the assessment of costs’ (Master Gordon-Saker, BNM v MCG). The way in which the new test is to be applied was explained in Lord Jackson’s final report, Part 1, Chapter 3, para 5.13:
In other words, I propose that in an assessment of costs on the standard basis, proportionality should prevail over reasonableness and the proportionality test should be applied on a global basis. The court should first make an assessment of the reasonable costs, having regard to the individual items in the bill, the time reasonably spent on those items and the other factors listed in CPR rule 44.5 (3) [the factors are now found at CPR 44.3 (5)]. The court should then stand back and consider whether the total figure is proportionate. If the total figure is not proportionate, the court should make an appropriate reduction.
Described in that way, the application of the test seems simple – even following a line by line analysis the court can step back, take an overall view, and substitute a disproportionate figure with a proportionate one.
What does it mean?
But, the difficulty is that five years on we have yet to be given any meaningful guidance about what it is that proportionality is supposed to mean. What is a ‘reasonable relationship’? How do we value non-monetary relief – and from whose point of view? Claims advanced on similar grounds can vary extraordinarily in value – does this mean that a wealthy RTA victim can expect to recover a higher proportion of his costs than might his poor neighbour simply because his loss of earnings claim is more, all other things being equal? Does this mean that low value but time consuming litigation should only be contemplated by those that can afford to accept a very low costs recovery? What about wider factors – is there room to reflect the fact that a virtually meaningless sum to one company can make or break another? How are these factors to be weighted, if at all? And what about access to justice – is there space to recognise that without the possibility to recover something approaching the minimum costs necessary to bring an action, rights may go unprotected? Despite a number of high-profile SCCO judgements, we are still a long way from knowing the answers to these questions. Whilst disappointing, this is perhaps unsurprising given Lord Neuberger’s view that ‘The law on proportionate costs will have to be developed on a case-by-case basis’ (15th implementation lecture).
Whilst it is always going to be challenging to provide guidance of general applicability in relation to such a subjective, and indeed poorly explained concept as ‘new’ proportionality; the SCCO judges have at least grappled with the question whether the new test applies to additional liabilities (success fees and insurance premiums claimed between the parties). Unfortunately, even on this technical point the position remains uncertain and the Senior Costs Judge and at least two of his colleagues are in disagreement.
In BNM v MGN Ltd  3 Costs L.O. 441 Master Gordon-Saker held that whilst the pre-April 2013 rules as to the recoverability of additional liabilities were preserved in relation to ‘pre-commencement funding arrangements’ within the meaning of CPR 48.2, the old (pre-April 2013) test of proportionality - which rarely impacted on the amounts allowed – was not preserved in relation to those additional liabilities. The judge said that it would be ‘absurd and unworkable’ to apply the new test to those base costs incurred after 1 April 2013, but the old test to additional liabilities. The judge went on to provide a confusing answer to the contingent question – whether the new test should be applied to additional liabilities separately from the base costs. The answer, he said, is that the court ‘need not’ do so. In the event the judge considered the ATE separately, but presumably he ‘need not’ have done so – a bizarre state of affairs. Having reduced a cost claim of £241,000 odd to about £167,000 of reasonably incurred costs on the line by line assessment, the judge went on to allow a ‘proportionate’ costs figure of about half that amount again. This was a claim of modest value (the settlement figure was £20,000). The claim was of some, but probably not very significant, importance to the claimant; it required the involvement of specialist lawyers but it settled early and was by no means complex. In some way or another these features led the judge to conclude that an inter partes costs allowance of £84,000 odd - about four times the settlement figure and twice the value of the claimant’s first offer – was proportionate. Why four times and not eight times, or a half, or something in between remains far from clear.
In King v Basildon and Thurrock University Hospitals NHS Foundation Trust  EWHC B32 (Costs) the court disagreed with master Gordon-Saker’s decision that the new test should apply to additional liabilities incurred from 1 April 2013. Master Rowley had assessed a costs claim of £326,404, allowing £249,889 as reasonable (£234,251 of which related to the period from 1 April 2013, inclusive of success fees and ATE premium). This was in relation to a relatively straightforward clinical negligence case in which the claimant was awarded £35,000 and that had concluded after a three day trial. The key question was whether the proportionality test should apply to base costs of £88,000 odd or to the much higher figure of £234,000. The judge found that the key phrase in the new test in CPR 44.3 (5) is that ‘costs incurred are proportionate if they bear a reasonable relationship to…’. Whereas the pre-April 2013 definition of ‘costs’ included additional liabilities, the new definition does not. Thus – and consistent with the provisions of CPR 3 relating to cost budgeting – ‘costs’ can only refer to base costs and not to additional liabilities. Further, the judge said that it cannot have been Parliament’s intention for additional liabilities to remain recoverable in run-off and exceptional cases only for those sums to be assessed in aggregate with base costs. That would likely result in a ‘bizarre’ situation where success fees and insurance premiums remain recoverable in principle but not in practice. For Master Rowley the correct approach is to continue as before – allowing the agreed or assessed percentage on base costs which will already have been reduced to a proportionate level. Further, in relation to the assessment of pre-commencement insurance premiums he said that there is no good reason why the approach taken by the Court of Appeal in Rogers v Merthyr Tydfil CBC  EWCA Civ 1134 should not still apply.
Two more recent SCCO judgements - both 17 January 2017 - have followed Master Rowley’s lead. In Savings Advice Ltd, Zinc Consumer Ltd v EDF Energy Customers Plc  EWHC B1 (Costs) Master Haworth held that the pre-April 2013 rules continue to apply in relation to recoverable additional liabilities. Even if that conclusion were wrong, the judge said that he would have applied the new proportionality test to the additional liabilities (ATE premiums totalling almost £256,000) on their own rather than in aggregate with the base costs. Further, although the claim settled relatively early and for £200,000 for each claimant the judge said that even under the new test the ATE premiums were not disproportionate.
In Murrells v Cambridge University NHS Foundation Trust  EWHC B2 (Costs) Master Brown also sided with Master Rowley, finding that additional liabilities are not subject to the new test of proportionality, and that even if they were they should not be aggregated with base costs for the purpose of applying the test.
More recently, in Rezek-Clarke v Moorfields Eye Hospital NHS Foundation Trust  EWHC B5 (Costs) (judgement 17 February 2017), Master Simons – without referring either to BNM v MGN or to King v Basildon - not only applied the new test to additional liabilities (the claimant does not appear to have argued for another approach) but rejected the submission that the court should look at profit costs and additional liabilities separately. Rejecting also the submission that the Court of Appeal’s approach in Rogers should still apply, Master Simons allowed £2120 for the ATE premium against the claim of in excess of £22,000, in what was a straightforward low value claim that had settled for £3250.
The disagreement between the Costs Judges is unlikely to be resolved until autumn 2017 when the Court of Appeal will deal with BNM v MGN appeal. Whilst much has been said of the disagreement on the technical issue about the application of the proportionality test to additional liabilities, to my mind the biggest disappointment is the SCCO’s failure to give shape to the legal test itself. Master Rowley tells us that base costs of £88,000 will ‘almost always’ be proportionate for a clinical negligence case which reaches a three-day trial, save in cases that involve very modest damages. But why so? In what way does the phase in which a case concludes, or the amount of work undertaken, affect the ‘reasonable relationship’ between costs and the factors set out in CPR 44.5 (3), and how does this square with CPR 44.3 (2) (a)? The judge was ‘not at all convinced’ that he would have allowed £234,000 as proportionate had he been obliged to apply the proportionality test to base costs and additional liabilities in aggregate. So, at what point between £88,000 and £234,000 would he draw the line, and why? For Master Gordon-Saker, it was proportionate to spend four (but not eight) times the settlement figure in a privacy claim of modest value that settled relatively early and well before trial. Would it have been reasonable to spend twice as much or 10 times as much or perhaps only just the same had the case proceeded to a three-day trial?
Whilst the technical arguments will be settled one way or the other, it is most important that the Court of Appeal rises to the challenge of providing a workable test of general application. Whilst our Costs Judges seem to know a ‘reasonable relationship’ when they see one, four years on the lack of clarity around this key concept is embarrassing and costly – a shot in the arm for advocates of increased use of fixed costs.