The proportionality test has reached its 21st birthday, having been introduced in the Woolf Reforms and implemented in the CPR in 1999. Despite its age, no one really knows what it means or how it is supposed to work in practice.
It was introduced because the test of “reasonableness” institutionalised the level of costs that were generally charged by the legal profession at the time the services were provided.
The new test of proportionality was supposed to introduce a higher hurdle for a successful party to overcome with the risk that they may not recover all of the costs that they have reasonably incurred. The test was designed to contain costs and resolve the perceived problem with the test of “reasonableness”.
The difficulty for practitioners is that “proportionality” was not given a definition when it was included in the rules in 1999 which provided that costs had to be “proportionate to the matters in issue”.
Beyond that, the rules provided no guidance as to what it meant or how it was to be applied and whether it applied if an item was reasonably incurred and reasonable in amount. The need for answers to these questions led to the decision in Lownds v Home Office [2002] EWCA Civ 365.
The Court of Appeal decided that the test was to apply on a global basis at the start of an assessment. The court looked at the global amount of costs claimed and considered whether they were disproportionate to all of the matters in issue. Where they were, then the court would consider each item and determine whether it was necessarily incurred. In other words, proportionality meant “necessary”.
But hold on a minute! What does “necessary” mean and how does it differ from reasonableness? It was what a judge thought was something that had sensibly been required in order to conduct the case.
However, it soon became clear that “proportionality” as defined in Lownds wasn’t working. The judiciary had difficulty in applying the new test because if the work done was reasonably necessary and reasonable in amount then it appeared proportionate.
In effect, despite the new test, the courts were still assessing the recoverable amount for the work on the basis of the market rates charged by the legal profession, rather than placing an objective value on the work as a whole. It did not overcome the institutionalised level of costs generally charged by the legal profession. The market rate still dictated the amount of recoverable costs.
In effect, just “necessity” did not render costs proportionate to the matters in issue. This was accepted and in the Jackson Reforms which were implemented in 2013, a new multi-factorial test of proportionality was introduced in CPR 44.3 (5). It provides:
“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.”
Lord Justice Jackson had intended that costs should be assessed and then the court should look at the amount and ask if these costs bear a reasonable relationship to the five factors above. In effect, to take a red pen to the amount and to reduce it so it looks proportionate.
The new test was introduced along with costs management with the intention of having prospective effect. Sounds simple enough, but no guidance was given in the rules and practice directions and it was again left to practitioners to seek guidance from the judiciary.
As to what it meant and with no guidance on how it was to be applied and it was again left to practitioners to muddle through until the Court of Appeal gave practical guidance on what it means and how it is to be applied.
So what do we know in terms of its application?
We also know that proportionality bites on approved budgeted costs at the end of the case. In Harrison v University Hospital Coventry [2017] EWCA Civ 792: “… a costs judge on detailed assessment will be assessing incurred costs in the usual way and also will be considering budgeted costs (and not departing from such budgeted costs in the absence of “good reason”) the costs judge ordinarily will still, as I see it, ultimately have to look at matters in the round and consider whether the resulting aggregate figure is proportionate, having regard to CPR 44.3 (2)(a) and (5): a further potential safeguard, therefore, for the paying party.”
The assessed incurred costs and the approved estimated costs are aggregated and this aggregate is subject to the test of proportionality.
But then we received further guidance in West v Stockport NHS Foundation Trust & Demouilpied v Stockport NHS Foundation Trust [2019] EWCA Civ 1220 where the Court of Appeal made three key points:
This new approach significantly weakens the effect that paying parties thought it would and should have on receiving party’s costs.
So 21 years on a reasonable litigant is left to meet institutionalised level of costs that the legal profession choose to charge on a time basis. Or is there another way?
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