COSTS MANAGEMENT, PROPORTIONALITY AND HOW THE COURTS WILL APPROACH COSTS INCURRED ACROSS THE 2013 DIVIDE

By Bronia Hartley

CIP Properties (AIPT) Ltd (Formerly Norwich Property Trust Ltd) v Galliford Try Infrastructure Ltd (2015) EWHC 481 (TCC) (QBD (TCC))

The Lownds test v The Jackson test

Since the introduction of the Civil Procedure Rules, the standard basis of assessment of costs in civil litigation has required costs to be proportionate to the matters in issue as well as reasonably incurred and proportionate in amount.

The judgment of Lord Chief Justice Woolf in Lownds v Home Office [2002] EWCA Civ 365 brought about a more consistent approach to the assessment of proportionality. The Lownds test requires the court at the beginning of a detailed assessment to undertake a global assessment of the proportionality of the costs claimed, taking into account the factors set out in CPR 44.5(3) including importance, value, conduct, skill and complexity. If the costs are globally disproportionate, each item has to pass the necessity test before it will be allowed. The problem is that courts began conflating necessity with proportionality in that necessary costs were generally treated as being proportionate, irrespective of the amount.

Fast forward over a decade, and the Jackson reforms introduced on 1 April 2013 changed the way in which the courts are to deal with proportionality from here on in. Of course proportionality is at the heart of the Jackson reforms. The overriding objective of the rules is now to enable courts to deal with cases justly and at proportionate cost and CPR 44.3(2)(a) states that when costs are to be assessed on the standard basis, the court will only allow costs that are proportionate to the matters in issue.

The new rules move to replace the Lownds test with CPR 44.3(5) which sets out the requirements needed for costs to be deemed proportionate. Costs incurred are proportionate if they bear a reasonable relationship to-

1. the sums in issue in proceedings;
2. the value of any non-monetary relief in issue in proceedings;
3. the complexity of the litigation;
4. any additional work generated by the conduct of the paying party; and
5. any wider factors involved in the proceedings, such as reputation or public importance.

The new proportionality rule does not apply to cases commenced before 1 April 2013 or costs incurred in respect of work done before 1 April 2013 (CPR 44.3(7)) and in relation to such cases or costs, rule 44.4(2)(a) as it was in force immediately before 1 April 2013 will apply instead.

This begs the question, how will courts approach costs incurred across the 2013 divide?

Costs management of costs incurred across the 2013 divide

CPR 3.12(2) indicates that the purpose of costs management is that of managing steps “to be taken” and costs “to be incurred” therefore the court is to exercise its powers in this respect prospectively.

So litigators can rely on two lines of defence when it comes to their ‘costs incurred’ where such costs were incurred before 1 April 2013 – (1) the prospective nature of the court’s costs management powers, and (2) the fact that the new proportionality rule does not apply to costs incurred in respect of work done before 1 April 2013. Or can they?

Practice Direction 3E paragraph 2.4 has been amended. Whilst previously it stated that the court “should” take incurred costs into account, it now says that the court “will” take those costs into account when considering the reasonableness and proportionality of the costs to be incurred. In many cases, this will mean the court taking into account costs incurred before 1 April 2013, and in such cases the new proportionality rule will be applied, in effect, retrospectively.

CIP Properties (AIPT) Ltd (Formerly Norwich Property Trust Ltd) v Galliford Try Infrastructure Ltd (2015) EWHC 481 (TCC) (QBD (TCC))

In CIP Properties (AIPT) Ltd (a relatively straightforward TCC defects case), proceedings were issued on 23rd October 2013. At the Cost and Case Management Conference, the claimant claimed that it had already incurred costs of £4,226,768.16 (a large proportion of which must have been incurred before 1 April 2013). The total damages claim is put at £18 million odd, but the direct costs of rectifying the six principal defects will, in reality, amount to less than £8 million.

Mr Justice Coulson found the claimant’s costs budget to be unreliable, disproportionate and unreasonable. Having made those findings, he asked the parties to identify what options were open to him.   Four options were identified: Option 1A was to order the claimant to prepare a new budget. Option 1B was to decline to approve the claimant’s costs budget. Option 2 was to endeavour to set costs budget figures on a phase by phase basis, looking primarily at the estimated rather than actual costs. Option 3 was simply to refuse to allow anything more in the costs budget beyond that which had already been spent, so that the claimant could not recover anything more than the costs already incurred.

Mr Justice Coulson concluded that Option 2 was the only one which was workable, but identified an obvious difficulty:

“If I simply commented on the costs incurred, and then did a budgeting exercise for the prospective costs, I would arrive at an overall figure that was far in excess of that which I consider to be a reasonable and proportionate figure for the costs as a whole.”

To get around this difficulty, Mr Justice Coulson modified Option 2 in a very clever way. In the Pre-Action Costs, Statement of Case, CMCs and Disclosure phases, he capped the amount at which the costs incurred could be assessed on any future assessment. He then took those figures into account when determining the figures for prospective/estimated costs in each given phase, which he justified as follows: to the extent that the claimant recovers more than the figure allowed for costs incurred, it would mean that more work had been legitimately done in the earlier stages of the case than thought, which would in turn mean that less remained to be done in the future. By way illustration, Mr Justice Coulson said the following in relation to the Statement of Case phase:

“In relation to the Statement of Case, I conclude that, on assessment, the costs incurred should not exceed £500,000. I take that figure into account when assessing each element of the prospective/estimated costs below. Again, to the extent that the claimant recovers more than £500,000 on assessment, it would mean that more work had been legitimately done in the earlier stages of the case than I thought, which would in turn mean that less remained to be done in the future. Thus the prospective costs figures approved below would again fall to be reduced by an equivalent sum. I allow nothing in the costs management order for the estimated costs of any future amendments because such costs have already been allowed for/included in the £500,000.”

In a nutshell, the claimant’s estimated costs fall to be reduced, pound for pound, to the extent that the amounts actually recovered on assessment in respect of costs incurred are higher than the figures which Mr Justice Coulson indicated.

The way in which Mr Justice Coulson dealt with the costs budget in question certainly requires some mental gymnastics, but what it boils down to is this: your ‘costs incurred’ (even when incurred before 1 April 2013) are at large and will fall to be considered in light of the Jackson proportionality test.