PROPORTIONALITY CONQUERS ALL? PROFIT COSTS (AND COUNSEL’S FEES) HALVED

The decision of Master Gordon-Saker in BNM -v-MGN Limited [2016] EWHC B13 (Costs) has already received widespread publicity. The principle of proportionality was used to halve profit costs and counsel’s fees and make a substantial reduction on the insurance premium.

“…. 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 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 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.”

 

“I accept that it is not possible to approach the costs budgeting exercise in a case of this kind by assessing a case as relatively modest in scale, and the costs as high, and then simply reducing the costs to match the perceived importance of the case. As I observed in Yeo, many would suggest that the costs of litigation in this category become disproportionate at an early stage. There is no avoiding that, in many cases. So I agree that an approach based purely on financial proportionality would run the risk of disabling litigants from fairly presenting their cases.  

“Had it been intended that costs should never exceed the sums in issue the rule could easily have stated that”

THE CASE

The claimant brought an action in relation to prevent the defendant using confidential information after the defendant obtained her phone.  The claim was concluded, shortly after proceedings, by a consent order whereby the defendant agreed to pay damages of £20,000 and the claimant’s costs.

THE BILL

  1. The costs claimed were in the sum of £241,817. That included a success fee in respect of the solicitors’ costs of 60 per cent, success fees in respect of the costs of both counsel of 75 per cent and an after the event insurance premium of £58,000 plus insurance premium tax of £3,480.

THE SUM ALLOWED ON ASSESSMENT

Total costs allowed were £83,964.80.

THE ASSESSMENT

Following a “line by line” assessment the total costs came to £167,389.45.  However this was reduced to £83,964.80 because of issues of proportionality.

THE IMPACT OF PROPORTIONALITY
  1. At the hearing in April 2016 the Defendant argued that these sums were disproportionate and should be reduced further. I concluded that the sums which had been allowed as reasonable on the line by line assessment were disproportionate and were about twice the sum which would be proportionate. As I had been given the breakdown set out above I gave separate figures for the sums allowed:
Base profit costs £24,000
Base Counsel’s fees £7,300
Court fees £1,310
Base costs of drawing the bill £2,250
Atkins Thomson’s success fee £7,920
Counsel’s success fee £2,409
ATE premium £30,000
VAT £8,775.80
Total costs £83,964.80
  1. At the hearing the parties calculated the total as £84,855.80, a difference of £891.
  2. Apart from the court fee, each of the items was reduced by about one half. The success fees are 33 per cent of the respective base costs allowed.
The new test of proportionality
  1. The relevant paragraphs of CPR 44.3, in force after 1st April 2013, are:
(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; and

(b) resolve any doubt which it may have as to whether costs were reasonably and proportionately incurred or were reasonable and proportionate in amount in favour of the paying party.

(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.

(7) Paragraphs (2)(a) and (5) do not apply in relation to –

(a) cases commenced before 1st April 2013; or

(b) costs incurred in respect of work done before 1st April 2013,

and in relation to such cases or costs, rule 44.4(2)(a) as it was in force immediately before 1st April 2013 will apply instead.

  1. The new test of proportionality was introduced because the old test did not promote access to justice at proportionate cost. In Willis v Nicolson[2007] EWCA Civ 199 Buxton LJ, delivering the judgment of the court, said:
When the Civil Procedure Rules replaced the Rules of the Supreme Court, and encouraged active intervention by the court and the application of public values and not merely those values with which the parties were comfortable, it was hoped that that practice might change; and that hope was reinforced when this court said, in [2] of its judgment in Lownds v Home Office [2002] 1 WLR 2450:

‘Proportionality played no part in the taxation of costs under the Rules of the Supreme Court. The only test was that of reasonableness. The problem with that test, standing on its own, was that it institutionalised, as reasonable, the level of costs which were generally charged by the profession at the time when professional services were rendered. If a rate of charges was commonly adopted it was taken to be reasonable and so allowed on taxation even though the result was far from reasonable.’

However, in the event nothing seems to have changed. That is because, as explained in [29] of the same judgment, ‘proportionality’ is achieved by determining whether it was necessary to incur any particular item of costs. And then ‘When an item of costs is necessarily incurred then a reasonable amount for the item should normally be allowed’: and the reasonable amount per hour of the professional’s time continues to be determined by the market.
  1. At a public seminar held in Cardiff on 19th June 2009 as part of Sir Rupert Jackson’s Review of Civil Litigation Costs, Sir Anthony May, then President of the Queen’s Bench Division, said:
In my experience, there is no doubt at all but that costs are assessed with nodding respect only to proportionality. An application of rule 44.5 of the Civil Procedure Rules and section 11 of the Costs Practice Direction can scarcely expect to do better than that.
  1. It is clear that the new test of proportionality was intended to bring about a real change in the assessment of costs.
  2. The procedure that the court should follow in applying the new test was described in Sir Rupert Jackson’s final report at Part 1, chapter 3, paragraph 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 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 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. There is already a precedent for this approach in relation to the assessment of legal aid costs in criminal proceedings: see R v Supreme Court Taxing Office ex p John Singh and Co [1997] 1 Costs LR 49.
  1. In the 15th implementation lecture, entitled “Proportionate Costs” and given on 29th May 2012, Lord Neuberger, then Master of the Rolls, quoted that passage and said that it seems likely that the courts will develop the approach to proportionality “as Sir Rupert described it” in that paragraph.
The issues between the parties
  1. There is no issue that the new test of proportionality applies to the costs claimed by the Claimant. The issues are:
i) Does the new test of proportionality apply to additional liabilities?
ii) If it does, should it be applied to additional liabilities separately, rather than by the global basis described above?
iii) Are the costs allowed on the line by line assessment disproportionate?
Does the new test of proportionality apply to additional liabilities?
  1. It is not in issue that the conditional fee agreement entered into between the Claimant and her solicitors, the conditional fee agreements entered into between the Claimant’s solicitors and counsel and the after the event insurance policy purchased by the Claimant are all “pre-commencement funding arrangements” for the purposes of CPR 48.2(1)(b).
  2. CPR 48.1(1), in force after 1st April 2013, provides:
The provisions of CPR Parts 43 to 48 relating to funding arrangements, and the attendant provisions of the Costs Practice Direction, will apply in relation to a pre-commencement funding arrangement as they were in force immediately before 1 April 2013, with such modifications (if any) as may be made by a practice direction on or after that date.
  1. CPR 43.2(1)(a), as it was in force before 1st April 2013, defined “costs” as including “any additional liability incurred under a funding arrangement”. CPR 44.1, in force after 1st April 2013, defines “costs” with no reference to additional liabilities.
  2. A number of rules relating to funding arrangements in the CPR in force prior to 1st April 2013 are identified in paragraph 1.4 of Practice Direction 48, in force after 1st April 2013. They include CPR 43.2(1)(a) but do not include CPR 44.4(2) – the old test of proportionality.
  3. It seems to me that the intention was that the rules as to the recoverability of additional liabilities would be preserved in relation to those additional liabilities which remain recoverable after 1st April 2013. However the old test of proportionality was not preserved in relation to those additional liabilities. Had that been intended it could have been achieved quite easily by a further exception in CPR 44.3(7).
  4. CPR 44.4(2), the test of proportionality in force before 1st April 2013, was not a provision “in relation to funding arrangements”. CPR 43.2(1)(k), in force before 1st April 2013, defined funding arrangements as conditional fee agreements, after the event insurance premiums and arrangements with membership organisations for the purposes of s.30 Access to Justice Act 1999. CPR 44.4(2) does not therefore survive beyond 1st April 2013 by virtue of CPR 48.1(1), as in force after that date. It survives only in the circumstances set out in CPR 44.3(7).
  5. The old test of proportionality applied to additional liabilities but rarely had an impact on assessment. If the base costs were reasonable and necessary the reasonable success fee would also be necessary. An after the event insurance premium, if reasonable, would rarely not be necessary; although greater enthusiasm developed for disallowing disproportionate or unreasonable premiums: Redwing Construction Ltd v Wishart [2011] EWHC 19 (TCC) (Akenhead J); Kelly v Black Horse Limited [2013] EWHC B17 (Costs) (Master Hurst); and my decision in Banks v London Borough of Hillingdon (unrep., 3rd November 2014).
  6. A consequence of the reduction of the base costs to a proportionate figure will be that the success fee, a percentage of those base costs, also reduces. It would be absurd and unworkable to apply the new test of proportionality to the base costs, but the old test of proportionality to the success fee.
  7. Ringfencing and excluding additional liabilities from the new test of proportionality would be a significant hindrance on the court’s ability to comply with its obligation under CPR 44.3(2)(a) to allow only those costs which are proportionate.
Whether the new test of proportionality should be applied to additional liabilities separately
  1. Section 11 of the Costs Practice Direction in force before 1st April 2013 was headed:
Factors to be taken into account in deciding the amount of costs: Rule 44.5
and provided:
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.
11.9 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.
  1. In my judgment these provisions do not survive 1st April 2013 save in the circumstances described in CPR 44.3(7), in force after that date. Section 11 of the Costs Practice Direction was attendant on CPR 44.5, as in force before 1st April 2013 – “Factors to be taken into account in deciding the amount of costs”. CPR 44.5 was not a provision “relating to funding arrangements” for the purposes of CPR 48.1, in force after 1st April 2013.
  2. When applying the new test of proportionality, the court need not consider the amount of any additional liability separately from the base costs. In the event I have considered the after the event insurance premium separately.
Are the costs allowed on the line by line assessment disproportionate?
  1. Presently there is little guidance on how the new test of proportionality should be applied.
  2. In the 15th implementation lecture Lord Neuberger said:
While the change in culture should reduce the scope of costs assessments at the conclusion of proceedings, it will not obviate the need for a robust approach to such assessments. Again the decision as to whether an item was proportionately incurred is case-sensitive, and there may be a period of slight uncertainty as the case law is developed.
That is why I have not dealt with what precisely constitutes proportionality and how it is to be assessed. It would be positively dangerous for me to seek to give any sort of specific or detailed guidance in a lecture before the new rule has come into force and been applied. Any question relating to proportionality and any question relating to costs is each very case-sensitive, and when the two questions come together, that is all the more true. The law on proportionate costs will have to be developed on a case by case basis. This may mean a degree of satellite litigation while the courts work out the law, but we should be ready for that, and I hope it will involve relatively few cases.
  1. I was referred to a number of decisions made in relation to costs budgeting, but they are of little assistance to the present case. In GDK Project Management Ltd v QPR Holdings Ltd [2015] EWHC 2274 (TCC) Stuart-Smith J indicated that his
… starting point is that a case would have to be wholly exceptional to render a costs budget of £824,000 proportional for the recovery of £805,000 plus interest.
  1. Stocker v Stocker [2015] EWHC 1634 (QB), to which I was not referred, was a libel action. The defendant was alleged to have made statements in electronic posts that the claimant, her former husband, had tried to kill her. Warby J said:
I accept that it is not possible to approach the costs budgeting exercise in a case of this kind by assessing a case as relatively modest in scale, and the costs as high, and then simply reducing the costs to match the perceived importance of the case. As I observed in Yeo, many would suggest that the costs of litigation in this category become disproportionate at an early stage. There is no avoiding that, in many cases. So I agree that an approach based purely on financial proportionality would run the risk of disabling litigants from fairly presenting their cases.
  1. Had it been intended that costs should never exceed the sums in issue the rule could easily have stated that. There will be cases in which the costs bear a reasonable relationship to the sums in issue even though they exceed those sums.
  2. This is such a case; and the Defendant did not seek to argue otherwise. Mr Carpenter, on behalf of the Defendant, contended that a proportionate figure for base costs to the stage that the claim reached would be £20,000.
  3. The sum in issue in these proceedings was always going to be modest. The claim settled for £20,000. The Claimant’s first offer was £40,000.
  4. The value of the non-monetary relief claimed is not easy to quantify, but in my judgment it was not substantial. The Claimant knew in March 2011 that the Defendant had access to the information on her phone. The phone was returned to her in May 2011. Yet it was not until March 2013 that the Claimant’s father approached Atkins Thomson “to sound out whether any civil action could be brought”. That enquiry was prompted by press reports of a similar case in which Atkins Thomson had acted.
  5. No information taken from the phone had been published in the intervening 2 years. When proceedings were issued no application was made for an interim injunction. The anonymity order was required only because of the issue of proceedings. While the undertakings and the apology given by the Defendant as part of the settlement will have been of comfort to the Claimant, this was not a claim for substantial non-monetary relief. But for the claim for damages, it is unlikely that a claim would have been pursued.
  6. Nor was it a particularly complex case. I accept that a privacy case is more complex than the run of the mill. In the course of the detailed assessment I accepted that this case was of importance to the Claimant, that it was specialist “Londoncentric” work, that the allegations against the Defendant were serious, that it was reasonable for the Claimant to issue proceedings without prior warning given that she did not know what use the Defendant had made or would make of the confidential information, and that it was reasonable for her to apply for an anonymity order. It is these factors which make this a case where the costs can bear a reasonable relationship to the value of the claim even though they exceed that value and even though the claim was concluded at an early stage.
  7. Little additional work was generated by the conduct of the Defendant. There was some correspondence between the parties following the service of the anonymity application with an unfortunate allegation that the court had been misled, but the amount of that correspondence was limited to a few letters. The same can be said of the Defendant’s requests for extensions of time to serve the Defence and the Defendant’s failure to respond to a Part 18 request. I do not think that the conduct of the Defendant added significantly to the costs.
  8. Nor do I think that there were any wider factors involved in these proceedings. There was no real threat of publication and the Claimant was not seeking in any real way to protect her reputation. While the Defendant’s conduct can fairly be categorised as reprehensible, so much of civil litigation is based on the bad behaviour of others. I cannot see that there was any wider public importance.
  9. This claim settled at a relatively early stage, a year after the issue of proceedings and 16 months after solicitors were first instructed, before the first case management hearing, before disclosure of documents or exchange of witness statements, before any hearing other than the application for an anonymity order. The scope of the evidence would be very limited and the case was neither factually nor legally complex.
  10. In these circumstances base profit costs of £46,000 and base counsel’s fees of £14,000 must be disproportionate under the new test, being over 3 times the amount of agreed damages, and covering work which fell far short of trial. In my judgment costs of about one half of those figures would be proportionate.
  11. The ATE premium of £58,000 excluding tax is also disproportionate. For the reasons that I gave in the course of the detailed assessment, I could not conclude that the premium was unreasonable. I also accept that it was necessary for the Claimant to purchase after the event insurance. But costs may be disproportionate even though they were necessary: CPR 44.3(2)(a).
  12. This was not the premium which would cover the whole claim. £58,000 was the premium payable at the fourth of seven stages. Had the claim proceeded to judgment, the premium would have risen to £112,500 plus tax.
  13. As is common, the policy insures the Claimant against her liability to pay the premium in the event that she does not succeed; and, if she does succeed, the premium is limited to the amount allowed by the court on assessment. However the court approaches the new test of proportionality, if the premium is reduced on the basis that it is disproportionate, it is important that the court should identify the figure allowed.
  14. The premium has added significantly to the costs that were reasonably incurred, broadly matching the aggregate of base profit costs and counsel’s fees. I concluded in the course of the detailed assessment that, at the outset, the Claimant’s prospects of success were “significantly in excess of 50/50”. Those prospects did not reduce. The Defendant made substantial admissions in its Defence. A premium of £58,000 at the stage that the claim settled, potentially doubling to £112,500, cannot be said to bear a reasonable relationship to a claim which settles for £20,000, where there was no substantial claim for non-monetary relief, which was not particularly complex, where no significant additional work was generated by the conduct of the paying party and where there were no wider factors involved.
  15. In my judgment no more than one half of that amount could be considered proportionate.

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