Prior to 1st April 2013 it was assumed that any costs which were reasonable in amount and reasonably incurred were recoverable from a successful party’s opponent. Even if the costs were considered to be disproportionate in amount they were still recoverable providing that they were reasonable in amount, reasonably incurred and had been necessarily incurred.
However, since 1st April 2013 the question of whether or not costs are proportionate has been subject to a different, more restrictive test. Essentially, since 1st April 2013 the Court will only allow those costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced by the Court even if they were reasonable in amount and reasonably and necessarily incurred.
According to the Part 44.3(5) of the Civil Procedure Rules 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.
However, despite the fact that it is now almost 3.5 years since the rule change took effect we are still waiting for a definition of what “proportionate” actually means to be provided.
What has become clear as a result of a number of recent decisions is that the concept of proportionality has provided the Courts with substantial discretion when deciding what constitutes ‘proportionate’ costs in any given case. Indeed, this discretion is so broad that it is now almost impossible to advise clients with any degree of certainty as to the amount of their legal costs that are likely to be recoverable from their opponent in the event of a successful outcome to their claim.
May v Wavell Group Plc
In the case of May v Wavell Group Plc  the Senior Courts Costs Office conducted a detailed assessment of costs in an action where the Claimant accepted the Defendant’s first Part 36 offer of £25,000 which meant that the Defendant was automatically liable for the Claimant’s costs under the provisions of CPR Part 36.
The Bill of Costs came to just over £208,000 and following an assessment of those costs the Court held that the reasonably and necessarily incurred costs came to £99,655.74. However, Master Rowley found that despite those costs having been reasonably and necessarily incurred they were still ‘disproportionate’ and reduced the recoverable costs to £35,000 plus VAT.
At paragraph 42 of his Judgment the Master Rowley stated “In cases such as this, it seems to me that the new test of proportionality…will require legal representatives to inform their clients that, even if successful, they will receive no more than a contribution to the costs that will be incurred.”
BNM v MGN Ltd
In the case of BNM v MGN Ltd  Master Gordon Saker dealt with the issue of proportionality in a breach of privacy case where damages of £20,000 were awarded to a Claimant after confidential information had been illegally obtained by Mirror Group Newspapers from her mobile phone.
The costs claimed on the Claimant’s behalf were just over £240,000. Following a detailed assessment the Master held that the sum of £167,389.45 had been reasonably and necessarily incurred.
However, the Defendant argued that this figure was disproportionate and should be reduced further. The Master agreed and reduced the recoverable costs by 50% to £83,694.80. However, what the Master didn’t do was to explain why he had chosen to reduce the recoverable costs by 50%. Why not 25% or 75%?
The Judgement of Master Gordon-Saker highlights the arbitrary and random nature of the new approach to proportionality.
The problem with these Judgments is that whilst practitioners will be able to advise clients as to whether a particular step in the litigation is reasonable and necessary they will not be able to advise whether the Court will consider those sums to be proportionate and therefore recoverable from their opponent.
The reality of this is that some clients may have to be advised that notwithstanding the fact they have a very strong claim it would not be in their best interests to pursue it because of the risks that only a very small percentage of their costs will be recoverable at the conclusion of the claim.
For example, would the Claimant in May have brought a claim at all if he had known at the outset that he would incur costs of £208,000 but that the costs and damages recovered on his behalf would only be £60,000? In other words, notwithstanding the fact that he clearly had a meritorious claim would that claim have been brought if he had known he was ultimately going to be £150,000 out of pocket despite having ‘won’ his case? Surely the answer to that question is “no”.
I suppose this is one way of easing the burden on the creaking Court system i.e. discouraging claims from being brought in the first place.
Part 36 offers
One thing that these cases have demonstrated is the potential importance of CPR Part 36.
In this regard, there can be no reduction to a receiving party’s costs on account of proportionality when they are entitled to indemnity costs as costs on the indemnity basis need only to be reasonably incurred and reasonable in amount.
This will therefore benefit parties who beat their own Part 36 offer and are thereby entitled to costs on the indemnity basis from 21 days after the offer was received by their opponent.
Indeed, the decision of the Regional Costs Judge in the recent case of Sutherland v Khan goes even further than this and confirmed that where a paying party accepted a receiving party’s Part 36 offer after the expiry of the 21 day period the paying party was liable to pay indemnity costs from the date of expiry of the offer to the date that the offer was eventually accepted. In other words, indemnity costs also apply to the situation where a Part 36 offer is accepted out of time and not just in circumstances where a receiving party subsequently beats its own Part 36 offer at trial.
Indeed, this is an argument which I have run myself recently in a clinical negligence claim which settled for £5,000 (following late acceptance of a Part 36 offer) subsequent to the commencement of proceedings but prior to the filing of a Defence.
However, notwithstanding the relatively modest level of damages received by the Claimant costs were subsequently agreed between the parties in the sum of £45,000 which I am sure is due in large part to the fact that I argued for indemnity costs in relation to the period from the expiry of the initial Part 36 offer to the date of acceptance (which was more than 6 months or so later).
Despite the recent Judgments in May and BNM we are still no closer to knowing what proportionality actually means and it is to be hoped that the Court of Appeal will soon provide some much needed guidance on this issue.
So, does size matter? In May Master Rowley rejected the argument that costs should never exceed damages because that would elevate the first aspect of CPR 44.3(5) test to another level from the remainder. However, it does appear that the importance of the sum in issue is being heightened in more modest cases whilst perhaps being discounted in larger cases where the costs are well below the damages sought. Accordingly, whilst each case will need to be looked at on its merits, where an offer is made for costs which is well above the damages figure, serious consideration will have to be given as to whether or not to accept that offer. If costs can be agreed without an assessment of those costs being required then the uncertainty as to how the Court will exercise its discretion when considering what constitutes a ‘proportionate’ level of costs is removed from the equation.
In the meantime, one of the ironies arising as a result of the uncertainty caused by the new test of proportionality is that it makes the possible extension of fixed costs more attractive than perhaps was thought to be the case previously.
Indeed, if proportionality is ever to be truly defined then fixed costs may well be the only way of achieving this.