Proportionality...a broad brush approach?

Guidance from the higher courts on the application of proportionality under CPR 44.3(2)(a) and CPR 44.3(5) has been a long time coming. In a lecture delivered in March 2018, LJ Jackson lamented that the expected “cluster of test cases where the higher courts would apply the new rule to different scenarios” had not happened and called on the legal profession to bring matters before the Court of Appeal. A recent high court judgement provided some welcome direction on this topic.

In Ernst Malmsten v Lara Bohinc (2019) [2019] EWHC 1386 (Ch) Mr Justice Marcus Smith, sitting with Master Rowley as assessor, described proportionality as a broad brush test and a “separate and self-standing control” which took into account the client’s view of commerciality.

 The assessment of costs in this matter related to an application under section 306 of the Companies Act 2006 arising out of a shareholder dispute. The litigation lasted just 3 weeks and resolved at a 30 minute hearing in Ms Bohnic’s favour. She was awarded costs “of and incidental to” the application. Her bill of costs amounted to £62,520 plus vat which was assessed by Master Whalan at £47,500 plus VAT.

Mr Malmsten challenged the assessment on several grounds:

• Master Whalan was wrong to permit recovery of costs which fell outside the scope of the order. On appeal the court found that the Master had not drawn distinction between section 306 and non-section 306 costs. 
• The allowance of excessive amounts in relation to time and counsel’s fees. These grounds failed as, recognising that certain elements of costs would fall away as a result of his decision concerning scope of the order, Smith J was “reluctant to second guess the granular decisions of the master.” Importantly it was his view that the requirement of proportionality presented a means of controlling costs without the need to delve into the detail of the amounts claimed and allowed.
• The Master was wrong to conclude that the amounts allowed on assessment were proportionate and wrong, therefore, to decline to make a further reduction for proportionality. In reaching this decision, Master Whalan had identified the relevant factors in CPR 44.3(5), in ascending order of significance, as (b) the value of any non-monetary relief, (c) complexity and (d) any additional work generated by the conduct of the paying party. At the forefront of his mind was the defendant’s conduct which, in his view, had caused the proceedings to be more intensely fought than needed. Smith J found that Master Whalan’s decision not to consider a proportionality reduction was a “clear error of law”. He considered that he had attached too much weight to factor (d) concerning Mr Malmsten’s conduct. Whilst Mr. Malmsten had resisted the application this was a factor relevant to the incidence and not the quantum of costs. Moreover, Master Whalan had failed to identify how such conduct caused additional costs to be incurred.

The court found that costs of £47,500 were disproportionate “simply by reason of the narrowness and straightforwardness of the application in relation to which they were incurred.”

Rather than remitting the detailed assessment to another costs Judge, Smith J carried out a proportionality analysis bearing in mind as he did that the figure of £47,500 included non-recoverable costs.

Approving the approach set out in “Friston on Costs” he considered the correct test was what sum a reasonable client would have been prepared to pay. This, combined with a comparison based on the experience of the assessing judge as to what would be allowed in similar cases and taking into account the costs of the other side (acknowledging that both parties’ costs be disproportionate) would enable the assessing judge to reach a conclusion as to a proportionate sum to be allowed. His “initial reaction” was that £12,000 inclusive of VAT would be a reasonable sum to allow but, being mindful that he was applying a broadbrush to costs which he had not himself assessed, concluded that £15,000 plus VAT was appropriate.

This decision provides useful general guidance that a proportionality assessment must take place at the end of the assessment and that VAT and that the costs of drawing the bill should be excluded from the calculation when considering proportionality. More importantly for paying parties, however, is the finding that if conduct is to be used as a reason for effecting no proportionality deduction, it is necessary to identify how that conduct resulted in additional costs.

This is accordingly a useful decision for paying parties but not just because of the headline grabbing reduction of costs by a further 68%. Here the reduction was made, not solely on the basis of proportionality, but also to remedy the fact that costs had been allowed by the Master on assessment which fell outside the scope of the order and which therefore should never have been allowed. It is evidence of the courts’ willingness to use the broad brush of proportionality as a means of reaching a just outcome without the need to delve into a “granular analysis” on a line by line basis.