For cases commenced on or after 1 April 2013, there is a ‘new test’ of proportionality (albeit not too new anymore!), which provides that costs incurred by a party are proportionate if they bear a reasonable relationship to:

  • the sums in issue in the proceedings;
  • the value of any non-monetary relief in issue in the proceedings (the only real factor that the Court seem s to take into account);
  • the complexity of the litigation;
  • any additional work generated by the conduct of the paying party; and
  • any wider factors involved in the proceedings, such as reputation or public importance

As recommended by Lord Justice Jackson, the objective of the ‘new test’ was intended to act as a longstop to thwart costs from becoming disproportionate to the value, complexity and importance of the claim.

Almost three years later, where are we up to?

Perhaps the three leading cases are as follows:

  • Kazakhstan Kagazy PLC v Zhunus [2015] EWHC 404
  • Hobbs -v- Guy’s and St Thomas’ NHS Foundation Trust [2015] EWHC B20
  • BNM v MGN Limited [2016] EWHC B13

All three cases demonstrate that, when costs are assessed on the standard basis, elements of costs despite being reasonable may nevertheless be disallowed as disproportionate.

Kazakhstan Kagazy PLC v Zhunus [2015] EWHC 404

In Kazakhstan Kagazy PLC, a claim for an injunction to freeze global assets, the costs allowed were less than the reasonable costs, even though the total costs claimed were much lower than the claim value. The costs claimed were £945,000.00 and the value of the claim was almost $120 million. The Court however only allowed £150,000.00. Despite on a cost to damage ratio, the costs were proportionate, the Court drastically reduced the costs claimed.

This is what the Court had to say: ‘In a case such as this where very large amounts of money are at stake, it may be entirely reasonable from the point of view of a party incurring costs to spare no expense that might possibly help to influence the result of the proceedings. It does not follow, however, that such expense should be regarded as reasonably or proportionately incurred or reasonable and proportionate in amount when it comes to determining what costs are recoverable from the other party’.

The Court’s position is worrying and does of course raise concern as to the notion of Access to Justice.
Hobbs -v- Guy’s and St Thomas’ NHS Foundation Trust [2015] EWHC B20

Hobbs was a clinical negligence claim involving a pensioner whose treatment had been delayed for five weeks by the Trust. The matter settled pre-issue for the modest sum of £3,500 plus costs. The costs were claimed at £32,329.12. Master O’Hare considered that the clam had “no complexity worthy of mention” and that the Claimant’s representative had “greatly overestimated the complexity and importance of the case”. Upon provisional assessment the bill was reduced by two thirds on the grounds of reasonableness, and then further reduced to £9,879.34 on the grounds of proportionality.

When considering what reduction to make on grounds of proportionality, whilst the same objective was achieved as Kazakhstan, the Court decided against arbitrarily reducing the costs. Instead, in applying the ‘new test’ of proportionality, the Court targeted particular items of work which upon further consideration, it found to be disproportionate.

BNM v MGN Limited [2016] EWHC B13

BNM v MGN arose after a newspaper sent a reporter to the claimant asking questions about certain information of a private nature. The claim was for an injunction to curb the newspaper from using or publishing confidential information. The case settled before the first case management conference on the basis of undertakings together with compensation of £20,000 plus costs. Master Gordon-Saker (the Senior Costs Judge) assessed the reasonable costs at about £167,000 but, determining that sum to be disproportionate, imposed a sweeping reduction of 50% on all items except court fees. The judgment explains why the total reasonable costs were held to be disproportionate; note paragraphs 40 to 48 and, in particular, note paragraph 49:

“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.”

Summary

In Kazakhstan Kagazy plc, the winner lost all reasonable costs which exceeded the bare minimum. In Hobbs, the winner lost all reasonable costs which were inconsistent with the nature and modest value of the claim. In BNM, where, after early settlement, the reasonable costs exceeded the claim value many times over, there was an across-the-board reduction of 50% on all reasonable costs except court fees. It is, of course, entirely possible that all three cases reached the right result and that all of them correctly state some of the principles to be applied, but they definitely punish the respective receiving parties to various degrees.

The SRA make it very clear that clients must be given the best possible information about the cost of their matter, both at the start of the retainer and throughout the matter. The difficulty with the ‘new test’ of proportionality is the questions that it raises. How exactly is a lawyer supposed to advise their client on the level of costs if the application of the ‘new test’ of proportionality is so diverse?

Furthermore, it can be argued that the rule places an unfair obstacle on litigants and their legal advisers. The current situation is that a potential litigant is expected (at the outset and throughout the course of the litigation) to work out whether the costs that will be incurred are justified in relation to the risks and likely outcome. In doing so it should be possible to estimate with some accuracy what the minimum necessary and reasonable costs of the litigation will be.

However the litigant cannot assume that the reasonable and necessary costs will be permitted by the court or recovered from the unsuccessful opponent. Instead, an additional alteration must be made to reflect the prospect that the costs recovered from the paying party will be reduced on the grounds that they are disproportionate.

In conclusion, what is clear, is that proportionality is here to stay and it is important for lawyers not to assume that all reasonable costs are proportionate.

In addition, and arguably, more importantly, lawyers should appropriately manage their clients’ expectations by warning them not to expect a full recovery of their costs even if they are successful.