Does proportionality still have a role in legal costs disputes?

At the end of a costs presentation I recently gave to some solicitor clients I was asked if the issue of proportionality was one that still carried any weight in legal costs disputes.

Given how central the issue of proportionality was meant to be when the Civil Procedure Rules were introduced, it is strange that this question even needs to be asked.  However, it is one that is entirely legitimate to raise.  As Cook on Costs 2009 states: “‘What is proportionality?’ is a conundrum the courts are still trying to solve”.  In an effort to throw some light on the issue, I will let you have my thoughts on the subject.

The starting point is CPR 44.4(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”.

In the early days of the CPR, defendants, naively with the benefit of hindsight, thought this meant what it said.  Costs would not be allowed at a level that was disproportionate to the matters in issue.  Therefore, for example, if there was a straightforward RTA claim with damages of £3,000 being recovered, if at the detailed assessment hearing the judge reduced the costs to £7,000 on the basis of what had been “reasonably” incurred, the judge would then stand back and make a further reduction to, say, £3,000 to ensure that the final amount allowed was “proportionate”.  If only.

The correct approach was indentified by the Court of Appeal in Lownds v Home Office [2002] EWCA Cic 365:

“what is required is a two-stage approach. There has to be a global approach and an item by item approach. The global approach will indicate whether the total sum claimed is or appears to be disproportionate having particular regard to the considerations which Part 44.5(3) states are relevant. If the costs as a whole are not disproportionate according to that test then all that is normally required is that each item should have been reasonably incurred and the cost for that item should be reasonable. If on the other hand the costs as a whole appear disproportionate then the court will want to be satisfied that the work in relation to each item was necessary and, if necessary, that the cost of the item is reasonable.”

 This test begs the question of what is the difference between “necessary” and “reasonable”.  Surely costs that are not necessary will not be reasonable.  Equally, costs that are not reasonable will not be necessary.  It is the lack of any obvious distinction between the two tests that has led to the widely held view that “proportionality” is a dead issue.  I have certainly routinely been in the Senior Courts Costs Office (as we must now call it) where, having heard detailed arguments as to whether the costs claimed are proportionate, the judge has given his decision and then commented, as an aside, that in his experience it will make little or no difference to what costs are ultimately awarded.

This problem, at least in part, appears to have been recognised by the House of Lords in Fourie v Le Roux [2007] UKHL 1 where Lord Scott of Foscote said:

“I think it needs to be understood that the difference between costs at the standard rate and costs on an indemnity basis is, according to the language of the relevant rules, not very great. According to CPR 44.5(1), where costs are assessed on the standard basis the payee can expect to recover costs ‘proportionately and reasonably incurred’ or ‘proportionate and reasonable in amount’; and where costs are assessed on the indemnity basis the payee can expect to recover all his costs except those that were ‘unreasonably incurred’ or were ‘unreasonable in amount’. It is difficult to see much difference between the two sets of criteria, save that where an indemnity basis has been ordered the onus must lie on the payer to show any unreasonableness. The criterion of proportionality, which applies only to standard basis costs, seems to me to add very little to the reasonableness criterion. The concept of costs that were unreasonably but proportionately incurred or are unreasonable but proportionate in amount, or vice versa, is one that I find difficult to comprehend.”

So is there any mileage at all in this issue from a paying party’s perspective?

It is clear that the judge at the outset of the detailed assessment must make a decision as to whether the costs overall are proportionate or not, assuming the issue has been raised.  The judge’s decision is then meant to influence how he approaches the assessment itself on an item-by-item basis.

If the paying party persuades the Court that the costs are disproportionate, then there is some scope to use this finding to attack costs that might not otherwise be considered unreasonable.  For example, an EL claim with a value at the lower end of the multi-track might have been handled by a Grade A fee earner.  Depending on the facts of the case, this might not be “unreasonable”.  However, the issue arises as to whether it was “necessary”.  This is a far higher hurdle and the receiving party may struggle to show that it was a necessary step and that a Grade B or C fee earner could not have handled the matter.  The Court may reduce the hourly rates accordingly.  Equally, in a particular claim it may not be “unreasonable” to obtain an advice on quantum from counsel.  Whether such a step was actually “necessary” is a different issue.  It is important at the detailed assessment for the paying party’s advocate (whether costs draftsman, costs counsel or other) to keep reminding the judge of his preliminary finding, where the costs have been found to be disproportionate, when dealing with individual items. 

The fact that, at the first stage, the costs as a whole appear to be proportionate does not prevent the court from finding that individual items are disproportionate and applying the test of necessity to them alone (Giambrone v JMC Holidays [2002] EWHC 2932 (QB))

Going back to the original question, the issue of proportionality can be a useful tool in nibbling at the edges of the costs claimed.  However, it is important to understand that even where a claim for costs is ruled at the outset to be wholly disproportionate, at the end of the assessment the amount may still be allowed in full.  Whether this is what those drafting the rules had in mind when they drafted: “the court will only allow costs which are proportionate to the matters in issue” is doubtful.  It is this problem that I constantly struggle to explain to some of my solicitor/insurer clients who cannot understand why it may be necessary to offer a figure that is clearly disproportionate to the damages recovered.