This week's Ministerial Statement confirmed – a week earlier than expected – that a new test for proportionality had been agreed and that revisions to the Costs Practice Direction were being considered with a view to adopting the new test in April 2013.
The relationship between the level of legal costs and the value of a dispute has long been a source of concern. Historically, various systems have been implemented with the intention of ensuring that the cost of litigation was proportionate to the dispute between the parties: the Duties on Law Proceedings Act 1670, for instance, imposed a cap on legal costs in proceedings where the amount in dispute was less than 40 shillings.
However, none of the many systems or procedures that were introduced managed to ensure that costs were consistently in proportion to the value of disputes. Amidst growing public concern as to the state of civil litigation generally, the Lord Chief Justice appointed Woolf LJ (as he was at the time) to chair an inquiry into access to justice which took place between 1994 and 1996.
Within his interim report in that inquiry, Woolf LJ identified eight “basic principles” which he considered should be “met by a civil justice system so that it ensures access to justice.” The third of these principles was that “procedures and costs should be proportionate to the nature of the issues involved”.
Within his final report, Woolf LJ concluded that “the costs incurred in the course of litigation are out of proportion to the issues involved.” He proposed a comprehensive set of Rules of Court which were to open with a statement of the overriding objective of those Rules.
Woolf LJ’s report and proposals were the precursors to the drafting and implementation of the Civil Procedure Rules (‘CPR’). His suggestion that a statement of the overriding objective of the Rules should feature prominently in CPR was accepted and, accordingly, CPR 1.1 provides inter alia:
(1) These Rules are a new procedural code with the overriding objective of enabling the court to deal with cases justly.
(2) Dealing with a case justly includes, so far as is practicable –
…
(c) dealing with the case in ways which are proportionate –
(i) to the amount of money involved;
(ii) to the importance of the case;
(iii) to the complexity of the issues; and
(iv) to the financial position of each party;
The specific requirement for costs (where the same are to be assessed on the standard basis) to be proportionate is contained within CPR 44.4(2) which provides:
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;
Whilst proportionality was not a new concept to English and Welsh law (the same having been introduced through European law), this was the first time that legal costs were required to be proportionate.
Woolf LJ predicted that, as a result of his proposed changes, the legal landscape would be subject to a sea change. One such anticipated transformation was that “the cost of litigation will be more affordable, more predictable, and more proportionate to the value and complexity of individual cases”.
However, in the years following the introduction of CPR there remained a view that legal costs continued to be disproportionate. In the recent case of Simcoe v Jacuzzi UK Group Plc[1] – a personal injury dispute in which legal costs of £75,000 were incurred in pursuing a claim valued at around £12,750 – Lord Neuberger MR passed obiter comment that the level of costs incurred in that case was reflective of the fact that “something is out of kilter in at least some parts of the civil justice system.”
In 2008 the Lord Chief Justice asked Jackson LJ to review “the rules and principles governing the costs of civil litigation and to make recommendations in order to promote access to justice at proportionate cost.” Jackson LJ completed comprehensive investigations and, within the introduction to his final report, summarised his findings in terms that: “In some areas of civil litigation costs are disproportionate and impede access to justice”.
It would appear, therefore, that the reduced cost of civil litigation which was expected as a result of the introduction of the requirement for proportionality may not have materialised. There are a number of potential explanations for this.
HHJ Michael Cook, in the eponymous book “Cook on Costs”, details his belief that one difficulty with proportionality is, quite simply, that “nobody knows what it means”. Indeed, CPR currently has very little to say about proportionality: it contains no definition of ‘proportionality’; little guidance as to how the Court should determine whether costs are proportionate is given; and there is no indication as to what should happen in the event the Court finds that costs are disproportionate.
The only guidance to proportionality that can be found within CPR is at CPR 43-48 PD 11 which provides, inter alia:
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.
…
11.5 In deciding whether the costs claimed are reasonable and (on a standard basis assessment) proportionate, the court will consider the amount of any additional liability separately from the base costs.
11.6 In deciding whether the base costs are reasonable and (if relevant) proportionate the court will consider the factors set out in rule 44.5.
…
11.9 A percentage increase will not be reduced simply on the ground that, when added to base costs which are reasonable and (where relevant) proportionate, the total appears disproportionate.
CPR 44.5 (which is referred to in CPR 43-48 PD 11.6) provides, so far as is material:
(1) The court is to have regard to all the circumstances in deciding whether costs were –
(a) if it is assessing costs on the standard basis –
(i) proportionately and reasonably incurred; or
(ii) were proportionate and reasonable in amount, or
…
(3) The court must 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; and
(g) the place where and the circumstances in which work or any part of it was done.
As a result of the lack of guidance contained within CPR, the law in relation to proportionality has been developed judicially.
The first binding judgement in relation to proportionality was by Woolf CJ (as he had become) in Jefferson v National Freight Carriers plc[2]. Jefferson related to an appeal from a summary assessment of costs in a personal injury claim in which the Claimant recovered damages of £2,275.74. The costs incurred stood at £4,975.75 – a figure which the Court of Appeal described as “clearly disproportionate”. It was held that:
… proportionality is a very important feature of the assessment of costs on the standard basis. This is particularly true in relation to the fast track, and if a claimant is going to seek to recover a sum which is as substantially in excess of the amount recovered, as was being sought to be recovered in this case, the legal representatives of the Claimant at the hearing have to be in a position to help the Judge further than was the case here. They first of all must bear in mind that if they are going to conduct litigation of a modest nature … they are under a heavy duty to conduct that litigation in as economic a manner as possible.
And further that:
… a litigant who is clearly entitled to succeed on the fast track must be allowed to recover costs which enable him to bring the litigation which he seeks to do, as long as he does that in a manner which is proportionate in the context indicated by the parts of the CPR to which I have made reference.
The seminal judgement in relation to proportionality is, of course, Lownds v Home Office[3]. In Lownds Woolf MR (as he had become) referred to a ‘two stage test’ which should be applied by Courts when assessing the proportionality of costs:
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.
The test outlined above must be applied at the outset of the assessment hearing and a decision as to whether costs are disproportionate should be made as a preliminary judgement. Failure to follow the two-stage Lownds test represents a “procedural irregularity of a serious nature” [4]. The Lownds test applies to both summary and detailed assessments of [5]; and the test of proportionality can be applied to discrete elements of the costs claimed as well as to the entirety of the costs[6].
Notwithstanding the numerous authorities which deal with proportionality – not to mention the fact that Lord Woolf gave the leading judgement in a number of these authorities – there remains no clear judicial guidance as to the circumstances in which costs will be held to be disproportionate. CPR 43-48 PD 11.1 currently precludes the Court from utilising a dictionary definition of ‘proportionality’ which leaves Judges in a position where they are required to apply what is seemingly a subjective ‘tick box’ test. This situation is unsatisfactory as it prevents litigants from being able to form anything other than a vague, broad-brush view as to whether the costs they are incurring are proportionate. If it is the case, as Michael Cook suggests, that nobody knows what proportionality is, it would be unsurprising if its introduction had done little to decrease costs.
Lownds, on its face, appears to provide a straightforward test that should ensure that disproportionate costs are not awarded. However, Jackson LJ reported that, in practice, the Lownds test did not necessarily result in proportionate costs. Specifically, in his preliminary report, he stated:
Disproportionate costs do not become proportionate because they were necessary. If the level of costs incurred is out of proportion to the circumstances of the case, they cannot become proportionate simply because they were “necessary” in order to bring or defend the claim.
Aside from the lack of understanding of the concept of proportionality, a number of extraneous factors may have also influenced the apparent rise in legal costs.
Perhaps the most important development since the introduction of CPR was s. 27 of the Access to Justice Act 1999 which permitted the recoverability of additional liabilities – such as success fees – on a between the parties basis. Whilst Conditional Fee Agreements existed at the time CPR was implemented, it was not possible to recover additional liabilities on a between the parties basis.
From 4 July 2000 the Costs Practice Direction has provided that the Court must consider base costs separately from additional liabilities (CPD 11.5) and that a success fee should not be reduced simply because, when the same is added to the base costs, the total costs appear to be disproportionate (CPD 11.9.)
Jackson LJ concluded in his preliminary report that the effect of this Practice Directions was that:
...recoverable costs are liable to be disproportionate in every case brought under a CFA. This is because additional sums are added to that which is reasonable and proportionate (viz the base costs) without regard to the proportionality of the total figure.
This statement can only be correct. The introduction of recoverable additional liabilities is, in some ways, a discrete issue to proportionality. Additional liabilities have clearly increased costs – in many cases doubling solicitors’ and barristers’ fees. One could question how this difficulty could be addressed in order to achieve an outcome that ensures paying parties are faced only with a liability for proportionate costs yet allows the receiving party’s solicitors to be properly compensated for the risk that is assumed in CFA-funded cases. However, the end to the recoverability of additional liabilities in most cases[7] now renders this a moot point.
The most effective way to ascertain whether the requirement for proportionality has reduced costs would be to undertake an empirical study of the cost of litigation both pre- and post-CPR. Whilst the reports by both Woolf LJ and Jackson LJ do include a quantative analysis of legal costs, a comparison between the data is of limited value due to the differing manners in which the same have been presented.
By way of example, Jackson LJ received data from a liability insurer which appeared to indicate that the ratio of costs:damages in personal injury matters stood at 1.22:1; whereas the data in the report of Woolf LJ indicated that the same ratio for the same type of litigation stood at 0.20:1. Whilst this would appear to unequivocally demonstrate that litigation has become more expensive, the former data excludes claims valued at more than £25,000, whereas more than 15% of the cases in the latter were valued at over £25,000. This is pertinent when it is borne in mind that both reports found that the costs:damages ratio generally decreases as the value of the claim increases. Further, the more recent data does not distinguish base costs from additional liabilities.
Certain of the data are, however, of use. For instance, Woolf LJ discovered that the costs:damages ratio in personal injury claims that were valued at less than £12,500 stood at 1.35:1. Jackson LJ referred to data provided by a leading insurer in relation to 1,014 RTA cases which settled at less than £10,000 and which showed that the same ratio stood at 1.27:1.
Further, in medical negligence claims, Jackson reported a costs:damages ratio of 0.28:1 whereas Woolf LJ reported a costs:damages ratio of 0.22:1. The average value of medical negligence claims in both reports was almost identical.
The information in relation to personal injury and medical negligence claims would therefore appear to indicate that the relative cost of litigation has fallen.
The introduction of the requirement for proportionality was not intended to make litigation inexpensive but, instead, aimed to ensure that costs were “kept within proper bounds.”. The empirical, comparable evidence available suggests that the cost of litigation has become more proportionate to the value of the dispute since proportionality was implemented as a requirement. However, the fact that costs seem now to be more proportionate than they once were does not mean that costs are proportionate per se. It may be the case that many simply expected too much from proportionality, but the introduction of this requirement alone was always unlikely to see a massive drop in the cost of litigation.
There remains a commitment to reducing the cost of litigation. The ministerial statement confirmed an attempt is likely to be made in April 2013 to address the perceived difficulties with the Lownds test; and most observers consider it is likely that this will be done by introducing CPR 44.4(5) in terms that:
44.4(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.
Unfortunately, the new Rule falls short of providing a definition of ‘proportionality’; and it is certainly arguable that the new test remains largely subjective. Many - including the Master of the Rolls - are bracing themselves for satellite litigation in relation to this new Rule. One has to question whether this Rule alone can cause costs to become more proportionate, and the seemingly obvious answer is that it cannot. With this in mind, a Rule permitting proportionality to be assessed at the conclusion of the assessment of a bill must be likely to be introduced at the same time.
Such a Rule could create more problems than it solves. For one, it would pave the way for Judges to impose (subjective and arbitrary) scale tariffs for certain categories of work. An obvious question that would arise would be: if the Court has the power to impose a further reduction following a line-by-line assessment, then what is the point in doing the line-by-line assessment in the first instance?
Civil litigation is undergoing an overhaul. Some of the changes that are in the process of being implemented – such as the end of recoverable success fees and ATE insurance premiums – will slash the cost of litigation; others – such as the potential introduction of more fixed costs – will make certain litigation more proportionate; whilst others still – such as the apparent preservation rather than abolition of the subjective nature of the test of proportionality – are unlikely to make any real difference.
Importantly, however, certain of the changes – such as the mooted Rule allowing an assessed bill to be further-reduced to make it ‘more proportionate’ – will not reduce the aggregate cost of litigation but will, instead, shift the costs burden from losing parties to successful parties who will be required to meet-ever increasing shortfalls between the costs recovered from their opponents and those payable to their lawyers.
The days of ‘100% compensation’ look like they may very well be numbered and many lawyers should now be planning strategies for managing the expectations of their clients.
[1] [2012] 2 All ER 60 : [2012] 2 Costs LR 401 : (2012) 156(7) SJLB 31 : [2012] CP Rep 21
[2] [2001] 2 Costs LR 313
[3] [2002] 1 WLR 2450 : [2002] 4 All ER 775 : [2002] CP Rep 43 : [2002] CPLR 328 : [2002] 2 Costs LR 279 : (2002) 99(19) LSG 28 : (2002) 146 SJLB 86 : Times, April 5, 2002
[4] Lloyds TSB Bank plc (Formerly Lloyds Bank plc) v (1) Jeffrey Wolfe Simon Lampert (2) Vanessa Cheryl Lampert [2003] CPLR 324 : [2003] 2 Costs LR 286
[5] Harries v Summers CC (Cardiff) (Judge Hickinbottom) 25/04/2007
[6] Giambrone & Others v JMC Holidays Ltd (Formerly Sunworld Holidays Ltd) [2003] 1 All ER 982 : [2003] 2 Costs LR 189 : (2003) 153 NLJ 58
[7] s.58(6) Courts and Legal Services Act 1990 c.41 as amended by s. 44(4) Legal Aid, Sentencing and Punishment of Offenders Act 2012 c.10; and s.58C(1) Courts and Legal Services Act 1990 c.41 as amended by s. 46(1) Legal Aid, Sentencing and Punishment of Offenders Act 2012 c.10