Costs Lawyer & Partner
Proportionality - what exactly is going on?
Costs Aware Issue 3
Ever since the Jackson Reforms, legal practitioners have been in a state of uncertainty regarding how exactly the judiciary intend to give effect to the new definition of proportionality and the new test found at CPR 44.3(5).
Under the old proportionality test for costs incurred before 1 April 2013 - which we shall call “the Lownds test” - proportionality was something the parties argued about at great length at the outset of a hearing. The end result was usually a very careful and well-reasoned judgement from the court which, invariably, made little, if any difference, to how the rest of the hearing proceeded. All too often the cost of arguing costs were disproportionate came at a disproportionate cost itself and had little effect financially on the outcome of the claim.
So when Sir Rupert Jackson advocated a new definition of proportionality which would in turn give rise to a more stringent test and application, this was largely welcomed by paying parties and compensators. We shall call this “the Jackson test”.
The difficulty in practise, however, has been threefold:
- When is the Jackson test applied?
- How often is the test applied?
- To what items of costs is the test applied?
Let us briefly example these three distinct points.
1) When is the Jackson test applied?
CPR 44.3(7) plainly states that paragraphs (2)(a) and (5) do not apply to:
- Cases commenced before 1 April 2013; or
- Costs incurred in respect of work done before 1 April 2013
The latter point seems clear enough, providing as it does an easily defined cut off point for the Jackson test of proportionality. In short, it can never apply to costs incurred before 1 April 2013.
It is the former point that has required careful consideration and argument on many cases since the Jackson reforms. The effect of this rule is to dis-apply the Jackson test to any case commenced before 1 April 2013.
But what does “case” mean? And what does “commenced” mean?
It has been argued on many occasions that case means “action” as opposed to “proceedings” or “claim”. For example, in any given action, you may have numerous different sets or types of proceedings – such as substantive proceedings; detailed assessment proceedings; enforcement proceedings.
Likewise, surely the deliberate use of the word “case” by the draftsman suggests a deliberate meaning?
It has been successfully argued on numerous occasions that the Jackson test cannot apply to any costs on a case which commenced before 1 April 2013 irrespective of whether some costs were incurred after 1 April 2013. The consequence of this is that the Lownds test applies in respect of proportionality at all times.
The second issue arising is when does a claim “commence”? Is this at first notification stage in accordance with the pre action protocols? Or only when court proceedings are issued? It is arguable either way and I am not aware of any authority that deals with this distinct point.
The upshot of the above is that lawyers continue to be somewhat confused as to when exactly the Jackson test of proportionality takes effect.
2) How often is the test applied?
Under the Lownds test, proportionality was initially applied globally at the outset of the hearing to the total base costs. If the court concluded costs were disproportionate as a whole, then the burden for recovery of each item of costs shifted from reasonable, to reasonable and necessary.
Following the case of Giambrone v JMC Holidays, paying parties were afforded a second bite of the cherry where proportionality was concerned. The effect of Giambrone was that, even if the court found costs as a whole were not disproportionate, they could still find individual items or tranches of costs were disproportionate and apply the higher standard of reasonableness and necessity to said items.
So under the old Lownds test, proportionality could be considered twice, initially in respect of the overall costs, and then again on an item by item or tranche by tranche basis.
Under the new Jackson test, Master Gordon-Saker formulated some key principles in his judgment of BNM v MGN Limited from:
- On an assessment of costs on the standard basis proportionality should prevail over reasonableness
- The court should first make an assessment of reasonable costs
- 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
Whether these key principles are yet to be accepted and adopted with uniformity remains to be seen. The Court of Appeal will hear the appeal arising from Master Gordon-Saker’s decision in BNM in October 2017.
As matters currently stand, many receiving parties feel aggrieved that a costs judge is effectively left with free-reign at the conclusion of a costs assessment to further reduce the assessed amount to whatever figure is subjectively believed to constitute “proportionate costs” in the judge’s mind.
On the flipside, paying parties are unsure what exactly a proportionate amount is to offer for costs given the rather subjective divergence that can occur from judge to judge in respect of what one may deem “proportion”. This has major implications where the receiving party has made a Part 36 offer to which the costs consequences of CPR 36.17 will apply following judgment – in particular the much dreaded “additional amount” (not exceeding 10%) than can be awarded on top of any assessed sum.
3) To what items of costs is the test applied
Under the Lownds test, the Costs Practice Direction expressly stated that when considering proportionality of costs, the court would consider the amount of any percentage increase or insurance premium separately from base costs.
In his judgment in BNM v MGN, Master Gordon-Saker stated the opposite in respect of the Jackson test. When setting out some further key principles, the Master states:
- The test of proportionality applies to additional liabilities which remain recoverable after 1st April 2013
- A consequence of the reduction of the base costs to a proportionate figure will be that the success fee, a percentage of the base costs, is also reduced
- When applying the new test of proportionality the court need not consider the amount of any additional liability separately from the base costs
- It was not intended that the costs should never exceed the sums in issue - the rules do not state that
- There will be cases in which the costs bear a reasonable relationship to the sums in issue even though they exceed those costs
- If an insurance premium is reduced on the grounds that it is disproportionate the court should identify the figure allowed
There have been, however, a number of decisions that conflict with BNM v MGN, some of which stem from other Masters within the Senior Courts Costs Office.
Whilst both the Lownds test and the Jackson test do not exempt additional liabilities from meeting the requirement of proportionality, how the court approaches its application of proportionality during a hearing differs significantly depending on which test prevails if the decision in BNM v MGN remains sound law.
A hidden view on proportionality?
In Lord Sumption’s opening remarks in Plevin v Paragon Personal Finance, he states:
“It need hardly be said that these sums [£31,378.92 for the success fee and £531,235 for the ATE insurance premium] are wholly disproportionate to the relatively modest amount at stake, in the event just £4500. This was a common feature of the costs regime introduced by the Access to Justice Act 1999, which ultimately led to its abrogation on the recommendation of Sir Rupert Jackson’s Review of Litigation Costs (2010). Subject to transitional provisions, the 1999 costs regime was brought to an end with effect on 1 April 2013 by Part 2 of the Legal Aid Sentencing and Punishment of Offenders Act 2012.”
In October 2017, the Court of Appeal will have looked at the application of the new test of proportionality in BNM v MGN Limited. There are three possible outcomes:
- All additional liabilities are subject to the new proportionality test.
- Additional liabilities incepted post 1 April 2013 are subject to the new proportionality test but those incepted pre 1 April 2013 are exempt.
- All additional liabilities are exempt from the new proportionality test.
Lord Sumption may have dropped a strong hint as to how the Supreme Court see the new test of proportionality operating (i.e. scenario 1). This will significantly benefit paying parties defending clinical negligence claims.
We shall notify you of the outcome of BNM v MGN Ltd once it is known.