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How does one assess proportionality of costs under the CPR following the changes brought about by the Jackson reforms?

In West v Stockport NHS Foundation Trust [2019] EWCA Civ 1220, the Court of Appeal has provided guidance on how the court should now assess proportionality. So what has changed?

Assessing proportionality is nothing new. Long before Sir Rupert Jackson conducted his review of civil litigation costs, the Civil Procedure Rules required costs assessed on the standard basis to be proportionate to the matters in issue.

In Lownds v Home Office (Practice Note) [2002] EWCA Civ 365, [2002] 1 WLR 2450, at paras 28-31, Lord Woolf said that if an item of cost was both necessary and reasonable then it was automatically proportionate. In reaching this conclusion, he cited the Costs Practice Direction (as then was) at paras 11.1 to 11.2, which stated:

“11.1 In applying the test of proportionality the court will have regard to rule 1.1(2)(c). The relationship between the total of the costs incurred and the financial value of the claim may not be a reliable guide. A fixed percentage cannot be applied in all cases to the value of the claim in order to ascertain whether or not the costs are proportionate.

11.2 In any proceedings there will be costs which will inevitably be incurred and which are necessary for the successful conduct of the case. Solicitors are not required to conduct litigation at rates which are uneconomic. Thus in a modest claim the proportion of costs is likely to be higher than in a large claim, and may even equal or possibly exceed the amount in dispute.”

Lord Woolf then said this:

“The reference in 11.2 to costs “which are necessary” is the key to how judges in assessing costs should give effect to the requirement of proportionality. If the appropriate conduct of the proceedings makes costs necessary then the requirement of proportionality does not prevent all the costs being recovered either on an item by item approach or on a global approach. The need to consider what costs are necessary is not a novel requirement. It was reflected by the former provisions of RSC order 62 which applied to the taxation of costs prior to 1986. Rule 28 (2) dealt with costs on a party and party basis and stated:

“........ there shall be allowed all such costs as were necessary or proper for the attainment of justice...”

In assessing costs judges should have no difficulty in deciding whether, in order to conduct the litigation successfully, it was necessary to incur each item of costs. When an item of costs is necessarily incurred then a reasonable amount for the item should normally be allowed. Any item that was not necessary should be disallowed.

In his advice the Senior Costs Judge drew attention to the problems that can arise from “double jeopardy”; in other words from making a deduction when considering the bill item by item and then looking again at the situation as a whole and making a further global deduction. This danger will be avoided if a party receives at least a reasonable sum for the items of costs which were necessarily incurred.

In other words what is required is a two-stage approach. There has to be a global approach and an item by item approach. The global approach will indicate whether the total sum claimed is or appears to be disproportionate having particular regard to the considerations which Part 44.5(3) states are relevant. If the costs as a whole are not disproportionate according to that test then all that is normally required is that each item should have been reasonably incurred and the cost for that item should be reasonable. If on the other hand the costs as a whole appear disproportionate then the court will want to be satisfied that the work in relation to each item was necessary and, if necessary, that the cost of the item is reasonable. If, because of lack of planning or due to other causes, the global costs are disproportionately high, then the requirement that the costs should be proportionate means that no more should be payable than would have been payable if the litigation had been conducted in a proportionate manner. This is turn means that reasonable costs will only be recovered for the items which were necessary if the litigation had been conducted in a proportionate manner.”

Sir Rupert Jackson recommended that the effect of Lownds be reversed and that an item of cost could be disproportionate even if it were necessary. Following changes to the CPR consequent to his report, CPR 44.3(2)(a) now states:

“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…”

Unless there was any doubt, the Court of Appeal has now made clear that CPR 44.3(2)(a) overturned Lownds, which must no longer be regarded as good law: West v Stockport NHS Foundation Trust [2019] EWCA Civ 1220, at [50]. The Court of Appeal went on to give guidance on the proper approach to assessing proportionality under the new rules.

The appeals in West v Stockport NHS concerned a challenge to the amount of the ATE premiums recoverable on an inter-parties assessment. However, by common consent, the Court of Appeal considered more general issues as to reasonableness, proportionality and the assessment of costs. In this article, I focus on the Court of Appeal’s discussion of proportionality, which is of general application.

Proportionality – general considerations

The Court of Appeal held that proportionality is to be assessed by reference to all the circumstances, encompassing matters not necessarily related to the case in question. Questions of proportionality are to be considered by reference to the specific matters noted in CPR 44.3(5) and, if relevant, any wider circumstances identified under CPR 44.4(1) [73].

By way of reminder, CPR 44.3(5) 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.”

The Court of Appeal stated that proportionality is sufficiently established by satisfying CPR 44.3(5). However, failure to satisfy CPR 44.3(5) does not preclude the receiving party from establishing proportionality by reference to other circumstances in CPR 44.4 [76].

CPR 44.4(3) states that:

“The court will also have regard to –

(a)   the conduct of all the parties, including in particular –

(i) conduct before, as well as during, the proceedings; and

(ii) the efforts made, if any, before and during the proceedings in order to try to resolve the dispute;

(b)  the amount or value of any money or property involved;

(c)   the importance of the matter to all the parties;

(d)  the particular complexity of the matter or the difficulty or novelty of the questions raised;

(e)   the skill, effort, specialised knowledge and responsibility involved;

(f)   the time spent on the case;

(g)  the place where and the circumstances in which work or any part of it was done; and

(h)  the receiving party’s last approved or agreed budget.”

Importantly, when considering proportionality, the court need not have regard to every item of cost. Some items of cost should be left out of account [81]. The exceptions are those items of costs “which are fixed and unavoidable, or which have an irreducible minimum, without which litigation could not have been progressed”. The Court of Appeal considered that court fees are perhaps the best example [82]. Other examples are VAT and the costs of drawing up a bill of costs [83].

Also, as specifically considered in West v Stockport NHS, the reasonable premium for a block-rated ATE insurance policy must be left out of account as it cannot be assessed as disproportionate. The Court of Appeal gave two reasons for this conclusion. First, as a block-rated policy, the amount of the reasonable premium would bear no relationship to the value of the claim, much less the amount for which it was settled. Secondly, ATE insurance is critical to access to justice in clinical negligence claims.

When undertaking a proportionality exercise, it is those elements of cost which are not inevitable or which are not subject to an irreducible minimum which will be vulnerable to reduction on proportionality grounds [85]. The court stated that such costs were likely to have been incurred as a result of the exercise of judgment by a solicitor or counsel and were precisely the sorts of costs which the new rules as to proportionality were designed to control.

The court stated that leaving particular items out of account when considering proportionality because they are both reasonable and an unavoidable expenditure did not re-introduce the Lownds test, by which necessity always trumped proportionality. Most costs will still be subject to the proportionality requirement [86].

The right approach to costs assessment

The Court of Appeal noted that judges were being inconsistent in the way they were assessing costs bills. Therefore, although anxious not to restrict judges or force them to follow inflexible or overly-complex rules, the court gave the following guidance as to an appropriate approach [88-93]:

First assessment

(1)  First, the judge should go through the bill line-by-line, assessing the reasonableness of each item of cost. If the judge considers it possible, appropriate and convenient when undertaking that exercise, he or she may also address the proportionality of any particular item at the same time. That is because, although reasonableness and proportionality are conceptually distinct, there can be an overlap between them, not least because reasonableness may be a necessary condition of proportionality (Rogers v Merthyr Tydfil County Borough Council [2006] EWCA Civ 1134; [2007] 1WLR 808, at [104]). This will be a matter for the judge. It will apply, for example, when the judge considers an item to be clearly disproportionate, irrespective of the final figures.

(2)  At the conclusion of the line-by-line exercise, there will be a total figure which the judge considers to be reasonable (and which may also take into account some aspects of proportionality). That total figure will have involved an assessment of every item of cost, including court fees, the ATE premium and the like.

(3)  The proportionality of that total figure must be assessed by reference to both r.44.3(5) and r.44.4(1). If that total figure is found to be proportionate, then no further assessment is required.

Second assessment

(4)  If the judge regards the overall figure as disproportionate, then a further assessment is required. That should not be line-by-line, but should instead consider various categories of cost, such as disclosure or expert’s reports, or specific periods where particular costs were incurred, or particular parts of the profit costs.

(5)  At that stage, however, any reductions for proportionality should exclude those elements of costs which are properly regarded as unavoidable, such as court fees, the reasonable element of the ATE premium in clinical negligence cases, and the like. Specifically, therefore, if the ATE premium is assessed as reasonable, it will not fall to be reduced by any further assessment of proportionality.

(6)  The judge will undertake the proportionality assessment by looking at the different categories of costs (excluding the unavoidable items) and considering, in respect of each such category, whether the costs incurred were disproportionate. If yes, then the judge will make such reduction as is appropriate. In that way, reductions for proportionality will be clear and transparent for both sides.

(7)  Once any further reductions have been made, the resulting figure will be the final amount of the costs assessment. There would be no further stage of standing back and, if necessary, undertaking a yet further review by reference to proportionality. That would introduce the risk of double-counting.

The Court of Appeal provided an example of the effect of excluding items of costs from the proportionality assessment in relation to ATE premium as follows.

A claim is settled at £10,000. The receiving party’s costs are £50,000, of which £5,000 is made up of the recoverable element of an ATE premium. The assessing judge may have some overall figure for costs in mind that would be proportionate. In such circumstances, when working through the various categories of costs to assess proportionality, that figure will remain unchanged: the reductions that the judge will make to achieve it will simply be by reference to other elements of cost, not the ATE insurance premium.

Comment

The new costs rules came into effect on 1 April 2013. It is perhaps surprising that it has taken 6 years to obtain guidance from the Court of Appeal as to how to assess proportionality under the new rules. Nevertheless, the guidance will no doubt be welcome.

In making clear that it did not intend to re-introduce the test of proportionality set out in Lownds, it is interesting that the Court of Appeal described the Lownds test as one “by which necessity always trumped proportionality”. I don’t think that is a fair assessment of the Lownds test. Ultimately, all Lownds and West v Stockport NHS are doing is interpreting how proportionality is defined by the CPR in force at the time. At the time of Lownds, the Court of Appeal interpreted para. 11.2 of the Costs Practice Direction as meaning that costs were proportionate if they were necessary. Therefore, necessity did not trump proportionality: necessity was proportionality. By the time the Court of Appeal reconsidered the definition of proportionality in West v Stockport NHS, para. 11.2 of the Costs Practice Direction had vanished and CPR 44.3(2)(a) had been amended to state that disproportionate costs could be disallowed even if they were necessarily incurred.

In an attempt to reduce the amount of recoverable costs, the rule changes have redefined proportionality. Costs may as a result be more proportionate in some subjective or objective sense (outside of the CPR). But the rule change will mean that costs which were in fact proportionate under the old rules may now be rendered disproportionate under the new rules on exactly the same facts.

One may question the merits of the policy decision to redefine proportionality in this manner. The result must be that a receiving party may be disallowed costs that he/she incurred which were necessary for the attainment of justice and/or necessary to conduct the litigation successfully. But that was the evident intention of the rule changes. Logically, on their literal meaning, the new rules could allow for circumstances in which a party with a valid claim can only conduct the litigation unsuccessfully at proportionate cost (in which case there is no point in conducting it at all) or conduct it successfully at disproportionate cost (and fail to recover the necessary costs of pursuing a valid claim). Is that not an impediment to access to justice?

In interpreting the new rules, the Court of Appeal has created a new test: costs will be proportionate if they are “fixed and unavoidable, or which have an irreducible minimum, without which litigation could not have been progressed”. These are not words to be found in the CPR. Therefore, while the CPR Rule Committee may have removed the guidance in paras 11.1 and 11.2 of the Costs Practice Direction as to how to approach the proportionality assessment and put nothing in their place, the Court of Appeal has decided to fill the void with its own test.

It remains to be seen what the actual difference is between costs that are “necessary” to progress litigation and costs which are “fixed and unavoidable, or which have an irreducible minimum, without which litigation could not have been progressed”. Surely another way of accurately stating the new test would be costs which are “fixed and unavoidable, or which have an irreducible minimum, necessary to progress litigation.” Is the test really so different?

Going forward a key issue between parties is likely to be what categories of costs fit into this new category of costs which are fixed and unavoidable, or which have an irreducible minimum. The Court of Appeal suggests that expert’s reports will be considered as a category of cost under a proportionality assessment [90]. However, why should they not be excluded from the proportionality assessment?

A court must further the overriding objective by actively managing cases (CPR 1.4(1)) and must seek to give effect to the overriding objective when exercising any power under the rules (CPR 1.2(a)). A court must therefore deal with cases at proportionate cost and, so far as practicable, deal with cases in ways which are proportionate to the amount of money involved, the importance of the case, the complexity of the issues and the financial position of each party (CPR 1.1(2)(c)). When considering whether to allow each party to rely on its own expert – as opposed to a single joint expert – the court will take into account whether it is proportionate to have separate experts (PD 35, para. 7(a)). Therefore, the court’s case management directions must factor in proportionality. The court should only give permission for an expert if the court considers it proportionate for the party to be granted permission to rely on a report from that expert. Once the court has made that decision, there must surely be an irreducible minimum fee that must be paid to an expert to produce a report for use in the proceedings. That being so, surely the court should exclude from its consideration of proportionality the reasonable cost of instructing any expert that the court gave the receiving party permission to instruct, which the court should only have done if it considered it proportionate to give permission for that expert.

Going further, are not all elements of legal costs subject to an irreducible minimum (absent a party being fortunate enough to obtain services pro-bono)? If it is proportionate for a party to instruct solicitors and/or counsel, there will be an irreducible minimum at which a party can obtain such services. The Court of Appeal obviously did not intend its newly created test to be applied in that manner. However, as presently constructed, its wording appears to allow for it. No doubt more refinement will be provided as parties argue over what can and cannot be excluded from the proportionality exercise.

Furthermore, despite the helpful guidance that the Court of Appeal has provided on the mechanics of assessing proportionality, when it comes to the actual decision by an individual judge of whether the amount spent of a particular category of cost is disproportionate, I expect that individual judges’ subjective views on what is “proportionate” will produce varying results on similar facts.

Winston Jacob / 19th Jul 2019


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