PROPORTIONALITY & SURVIVAL FOR LITIGATORS: PART 2: A WHOLE NEW APPROACH?

It is no accident that there is nearly a month between the first post in this series and the second. Nor is it surprising that very little (if anything) has been written on “proportional” litigation.  This is a difficult subject.  It is not, generally, a subject welcomed by litigators, unless they are representing the paying party.  The need to engage in “proportional” litigation is essential yet, almost universally, the practical consequences of this are being ignored. Few, if any, litigators have a strategy for dealing with the requirement that costs be proportional.  This could lead to some nasty shocks on assessment.  Some (considerable) discussion is needed as to these issues are going to be dealt with. Proportionality effects the very way in which litigation is conducted, not just the costs hearings at the end.

WHAT THE RULES SAY: PROPORTIONALITY RULES OK

It is important that we remember how central the issue of proportionality now is to the assessment of costs and, thus, the conduct of litigation.  CPR 44.3(2) provides that when costs are awarded on the standard basis:-

“If costs are awarded on the standard basis, the court assessing costs will disallow any costs –

(a) which it finds to have been unreasonably incurred;

(b) which it considers to be unreasonable in amount;

(c) which it considers to have been disproportionately incurred or to be disproportionate in amount; or

(d) about which it has doubts as to whether they were reasonably or proportionately incurred, or whether they are reasonable and proportionate in amount.”

SOME EXAMPLES

It is easy to point to examples of where costs appear to be disproportional. For instance the previous posts pointed tp the case of Seagrove -v- Sullivan [2014] EWHC 4410 (Fam) where the applicant spent £800,000 in costs seeking to recover £500,000. If the costs judge felt that £300,000 was a proportional figure in costs then the applicant would, effectively, be litigating for nothing.

Another recent example is  Ted Baker plc -v- Axa Insurances UK Plc [2014] EWHC 4178 (Comm) where the parties ran up a combined bill of £7 million in a case worth about £904,000.

DISPROPORTIONAL LITIGATION?

On the face of it the Defendants in the Ted Baker case were careful and prudent.  They made an early offer OF £250,000 to the claimant in a case where they succeeded totally.  However one cannot escape a strong suspicion that they may have been better of financially handing the money over to the claimant at the outset.  However the defendants had conducted part of the action in, what the judge held, was a wholly disproportional manner.  There had been a trial on a preliminary issue on which the claimant succeeded. The judge held that, given the early Part 36 offer by the defendant, it would be unreasonable for the defendant to recover the costs of that action. However the defendant only recovered 25% of the costs of that first trial.
  1. However, certainly in the context of Part 1, it does seem to me that it would, indeed, be unjust within the meaning of Part 36 to require the claimants to pay the entirety of the costs of Part 1. I reach this conclusion because, in my view, the central issue in Part 1 concerned the proper construction of the successive insurance policies which could and, in my strong view, should have been dealt with during a short trial of perhaps 1-2 days. Instead, the defendants pursued an approach which, as submitted by Mr Cogley, left “no stone unturned” and seemed to ignore all sense of proportionality. In particular, the defendants sought to raise a wide range of issues which went far beyond the question of construction – in particular, matters of what was said to be admissible as part of the “factual matrix”, alleged evidence of “market practice” and discrete allegations of estoppel, rectification and non-disclosure. As a result, the trial took an inordinate 7 days (instead of 1-2 days) with some 16 factual witnesses and 2 expert witnesses although, as appears from the first Judgment, it was my conclusion that much of this evidence was, in truth, inadmissible on the question of construction; and that, as I stated, the defences of estoppel and rectification both failed in limine.
  2. It is for these reasons that I consider that it would be unjust to order the claimants to pay the entirety of the costs of Part 1 notwithstanding the offers (in particular, the first offer) made by the defendants. In my view, the just course is to reduce the amount of the costs to which the defendants are entitled by a substantial amount to reflect the very exceptional circumstances which I have described. Whilst recognising that any assessment of such reduction involves an exercise which is necessarily imprecise and somewhat broad-brush, the conclusion which I have reached is that the defendants should be entitled to 25% of their costs of Part 1 (including the hearing which led to my second Judgment) assessed on a standard basis together with interest on such costs from 29 July 2010.

THE NET EFFECT OF THIS: THE CLIENTS COULD BE CONSIDERABLY OUT OF POCKET

We do not know the precise amount of the defendants’ costs (the combined costs bill was around £7 million). If we assume that £3 million was attributable to the defendants and that (say) £1.5 million was attributable to the first trial (all of this is guesswork) and that the defendants are successful in recovering all of this then they will be £1,125,000 out of pocket. (The defendants also financed an unsuccessful trip to the Court of Appeal).

Further the majority of the costs were ordered to be paid on the standard basis. There is nothing to prevent the costs judge finding that these costs were  disproportionate and reducing them further. Overall guesswork suggests that there could be an overall shortfall of £1.5 million, and possibly more. This shortfall, I repeat, by defendants who made prompt and proper early Part 36 offers which were not beaten at trial.

(I fully appreciate that all these figures are guesswork. Any costs lawyers who can offer a different view are welcome to comment).

THE DISPROPORTIONATE CONDUCT OF LITIGATION

It is important to note that this reduction in costs arose out of the defendants’ conduct of that the first trial.

“the defendants pursued an approach which, as submitted by Mr Cogley, left “no stone unturned” and seemed to ignore all sense of proportionality.”

It is that ignoring all sense of proportionality that could (indeed did) prove to be very costly so far as recoverable costs were concerned.

THE TOWIE EFFECT: TONE DOWN DEMANDS

The effect of disportionate litigation  on costs can be clearly seen in the judgment of Eder J in Sugar Hut Group -v- AJ Insurance [2014] EWHC 3775 where he awarded costs to the defendant after an offer of settlement had been made, despite the fact that the claimant had beaten that offer. The judge held that the claimant’s conduct had been unreasonable and the defendant was entitled to costs, despite beating the offer.  There was, on occasions, little or no evidence to support large tranches of the claim for damages.

WHAT PRACTICAL STEPS CAN BE DONE?

It is easy to point to cases where the courts have criticised parties for disproportional conduct. It is far more difficult to point to practical steps that litigators can take to avoid criticism.

1. Tell the client about proportionality

The client should be warned about the need for costs to be proportional at the outset and of the real dangers of disproportional costs will not be recovered.

2. Any step or strategy must be considered against the requirement for proportionality

There are numerous examples of cases being conducted where applications are made “strategically” rather than with the aim of helping a party prepare for trial.  Before any strategy is adopted consider:-

(i) The costs involved;

(ii) Whether there is any possibility that the costs could be classified as disproportional;

(iii) Whether the steps proposed could lead to a total costs

 3. Always keep in mind how much the case is worth

Added to this is have a realistic view of how much the claim is worth and have a wholly realistic view of the value of the claim.

4. If you are the claimant make an early, and realistic, Part 36 offer as early as you can

If the claimant beats its own offer then costs are awarded against the defendant on an indemnity basis for the period after the offer expired.  The “proportionality” test does not apply to indemnity costs.

5. Make proportionality your watchword

Proportionality does not mean “cheap” or “without value” or “the lowest possible price”. In essence it means “value for money”. The need to ensure that the litigation strategies adopted represent value for money should be central to the litigation strategy.

THERE IS MUCH MORE TO BE SAID: THAT IS CERTAIN

Much criticism has been made of the very principle of “proportionality” (see for example Paul Taylor’s excellent article on Proportionality and Legal Costs). However it is a concept that we, as litigators, have to live with. I suspect that those litigators that survive, in the long run, will be those who adopt the principle of proportionality and find strategies that use this to their client’s advantage.

More will be said on this subject (but it may be another month at least).

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