By Jeremy Morgan QC, 39 Essex Street, London

The price of failure


Where are we now on the costs of issues? Before the Civil Procedure Rules (CPR), the successful party to litigation generally got the costs of the action without deduction for the fact that he may have failed on some issues. CPR rule 44.3 changed all that, sub-rules (4)(b) and (5)(b)-(d) in particular calling for the court's attention to be focused on issues.


The reason for this change was explained by Lord Woolf - then Master of the Rolls - in AEI Rediffusion v Phonographic Performance [1999] 1 WLR 1507, 1522-3: 'The most significant change of emphasis of the new rules is to require courts to be more ready to make separate orders which reflect the outcome of different issues. In doing this, the new rules are reflecting a change of practice which has already started. It is now clear that too robust an application of the 'follow-the-event principle' encourages litigants to increase the costs of litigation, since it discourages litigants from being selective as to the points they take. If you recover all your costs as long as you win, you are encouraged to leave no stone unturned in your effort to do so.'



So how has this principle been applied in practice over the first five years of the CPR? The cases that have considered the costs of issues are numerous but the following are those that offer most guidance to practitioners: Johnsey Estates v Secretary of State [2001] L&TR 32; Summit Property v Pitmans [2001] EWCA Civ 2020; Islam v Ali [2003] EWCA Civ 612; Barnes v Time Talk [2003] BLR 331 (CA); The Kastor Too [2004] 2 Ll Rep 119 (CA); Douglas v Hello [2004] EMLR 14 (Ch); Apotex v SmithKline Beecham [2004] EWHC 964 (Ch).


The general rule is that the unsuccessful party will be ordered to pay the costs of the successful party &150; CPR rule 44.3(2)(a). This refers to the successful party in the litigation, not the successful party on an issue &150; Kastor, paragraph 143 (a passage which does not fit entirely happily with Summit paragraph 27, but as that case was cited in Kastor the approach of the latter is likely to prevail). It was not normally right to segregate a large element of the costs and thereafter decide who is the successful party. It is to be decided at the outset (Barnes, paragraph 28).



In commercial litigation about money the most important thing in deciding who is the unsuccessful party is to identify the party who is to pay money to the other (Barnes, paragraph 28). However, even in money cases success is not be to judged in absolute terms &150; in Islam the defendant who faced a claim substantially greater than the amount awarded and who won the main issues in the case was held to be the winner, even though the defendant had neither admitted liability for this sum nor offered it.



Having identified the successful party, that party can be deprived of the costs of an issue on which he had failed. Furthermore, the successful party can be ordered to pay the costs of such an issue even if he has not acted unreasonably in raising or pursuing it (Summit, paragraph 17). The court can go further and deprive the successful party of the costs of an issue on which it succeeded if satisfied that it has acted unreasonably in relation to that issue (Johnsey, paragraph 21).



One approach is to apportion the costs of the action between the various issues by reference to the time spent at trial or otherwise (Apotex, paragraph 14ff). Where this is done the court must be alive to the fact that time spent in court in oral evidence is not necessarily a reliable guide to the time and money spent in research and preparation (Douglas, paragraph 19). A rigorous mathematical approach may be justified in some cases (Kastor, paragraph 149).



However, it will not be justified where the issue on which the successful party lost was not a separate head of claim, but a separate basis for putting the successful party's only claim. In such cases an adjustment for the costs spent on the issue on which the successful party failed will be made, but determination of the adjustment is a matter of judgment, weighing the various factors that have to be taken into account (Kastor, paragraph 151, 155).



Where a mathematical approach is being adopted the court must still consider all the circumstances and stand back to consider whether the mathematical result is the right result. This is not the same as asking itself whether the mathematical result is perverse (Kastor, paragraph 153).



Where the court is approaching the decision as a matter of judgment rather than mathematically, it is helpful to start by looking at the extremes of the range of orders that might be made. If the factors to be taken into account pull in equal but opposite directions, the result will be an order in the middle of this range. The task is then to see whether one set of factors pulls more strongly than the other so as to adjust the percentage appropriately within the range (Kastor, paragraph 156).



Generally if the court has decided to reflect the outcome of issues in an award of costs it should not order one party to pay the other's costs of issue X, thus leaving it to the costs judge to determine what those costs are. Rather it should award one party or the other or both a percentage of their costs of the action to reflect the court's judgment (see CPR rule 44.3(7)).



Appeals against a court's issues-based order are, like all appeals on costs, discouraged (Johnsey, paragraph 21-22), but it is surprising how many have been successful.



Practitioners who would like to get a feel for the application of these principles in practice are recommended to look at Douglas where the claimants were awarded 75% of their costs of the liability hearing (paragraph 19); Barnes where the successful claimants recovered only 25% of their costs (paragraph 30); Secretary of State v Frontline [2004] EWHC 1563 (Ch) where the claimant paid the defendant 8% of the costs of the action; and Kastor where the Court of Appeal substituted no order for costs.



These decisions show how important it is under the CPR not only to fight issues on which success is at least reasonably likely but also to treat the argument on costs at the end of a case no less seriously than the substantive dispute. An effective opponent can sometimes snatch practical victory from the jaws of what until then looked like defeat.