A recent decision of the Senior Courts Costs Office shows that the post-Jackson test of proportionality can mean a significant reduction in the costs a successful party can recover, even if those costs were reasonably incurred: BNM v MGN Limited  EWHC B13 (Costs).
The decision will be of particular interest to those defending claims commenced since 1 April 2013 (when the new test of proportionality took effect) where the claimant has the benefit of a conditional fee agreement (CFA) and/or after the event (ATE) insurance policy falling within an exception to the Jackson reforms – either because it was entered into before 1 April 2013 or because it falls within one of the exceptions to the Jackson reforms (including publication and privacy proceedings, as in the present case). The decision suggests that such arrangements will be subject to the new test of proportionality in the same way as other costs, and therefore may be more susceptible to challenge.
This is one of a number of recent decisions in which the courts have slashed the successful party's recoverable costs on grounds of proportionality. For example in May v Wavell Group Plc (reported on Civil Litigation Brief), a private nuisance claim which settled for £25,000, the court found the claimant's reasonable costs were just under £100,000 (of some £208,000 incurred) but awarded only £35,000 on grounds of proportionality.
Such decisions illustrate that parties who incur costs that are out of proportion to sums at stake cannot assume they will be able to recover them on success, even if they are both reasonably and necessarily incurred. That will apply even more strongly if Lord Justice Jackson's recent suggestions for a fixed recoverable costs regime for the "lower reaches of the multi-track" become a reality; he has suggested the regime should apply for cases up to £250,000 but recognised there is room for debate as to the figure. The government's policy on the issue is not yet clear.
Post-Jackson proportionality test
Where costs are assessed on the standard basis, they will not be recoverable unless they are both reasonable and proportionate. For cases commenced on or after 1 April 2013, the Jackson reforms introduced a new test of proportionality. This 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 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.
The new rules state expressly that costs which are disproportionate may be disallowed or reduced even if they were reasonably or necessarily incurred. This contrasts with the previous approach, based on Court of Appeal guidance in Lownds v Home Office  EWCA Civ 365, under which costs were in effect deemed to be proportionate if they were both necessary and reasonable.
The rules which applied before 1 April 2013 also contained an express statement that a percentage uplift under a CFA would not be reduced simply on the ground that, when added to base costs, the total appeared disproportionate.
The claimant brought her claim in July 2013 with the benefit of CFAs entered into with both solicitors and counsel as well as an ATE insurance policy providing an indemnity for adverse costs and own disbursements of up to £165,000. The claim fell within the exception from the Jackson reforms for publication and privacy proceedings, so that the CFA success fee and the ATE premium were potentially recoverable from the defendant as part of the costs of the action.
The claim was settled for damages of £20,000 and the defendant agreed to pay the claimant's costs of the action. The claimant claimed costs of £241,817 including success fees of 60% for solicitors and 75% for counsel and an ATE premium of £61,480 (including insurance premium tax).
On detailed assessment, the court found that the reasonable costs were some £167,000, including success fees at 33% for both solicitors and counsel. However, it went on to find that those costs were about twice the sum which would be proportionate. The court therefore concluded that the total recoverable costs were some £84,000, reducing each item by about one half (save for the court fee).
The court referred to the post-Jackson test of proportionality, commenting that it was intended to bring about a real change in the assessment of costs.
Although the CFA success fee and ATE premium fell within an exception to the Jackson reforms which abolished recoverability of such "additional liabilities", and so were recoverable in principle, the old test of proportionality was not preserved in relation to those additional liabilities. If that had been intended, it could have been achieved quite easily by an express exception in the rules. The court added:
"Ringfencing and excluding additional liabilities from the new test of proportionality would be a significant hindrance on the court's ability to comply with its obligation… to allow only those costs which are proportionate."
The pre-Jackson rule that a CFA uplift would not be reduced simply on the ground that it led to costs which were disproportionate overall did not survive, save in respect of cases commenced before 1 April 2013 or costs incurred before that date.
When applying the new test of proportionality, the court was entitled to take into account the total amount of the costs, including both base costs and additional liabilities (ie CFA success fees and ATE premium).
Applying the test, the court commented that there would be cases where the costs bear a reasonable relationship to the sums in issue even though they exceed those sums. This was such a case. However, the amount claimed was not proportionate.
The ATE premium was also disproportionate, even though the court could not conclude that the premium was unreasonable, and accepted that it was necessary for the claimant to purchase the insurance. The court noted that "costs may be disproportionate even though they were necessary".
A premium of £58,000 (excluding tax) at the stage the claim settled, potentially doubling to £112,500, could not be said to bear a reasonable relationship to a claim which settled for £20,000, the court said, "where there was no substantial claim for non-monetary relief, which was not particularly complex, where no significant work was generated by the conduct of the paying party and where there were no wider factors involved".