Proportionality and legal costs

The Jackson civil litigation reforms introduced in April 2013 have the concept of proportionality of costs at their core. The idea is that costs should be proportionate to the dispute and this arises in two main contexts:

1. At an early stage the court is required to determine whether the cost of taking a particular step in the litigation is proportionate (for example how many independent expert reports are required). The implication is that if the cost is disproportionate, a different (less expensive) approach will have to be used.  
2. Secondly, in those cases where the losing party is required to pay the winning party’s costs, the court will limit the costs that the winning party can recover to those costs that were proportionate. 

This should be a good thing: we should not need a sledgehammer to crack a nut.  

However, the meaning of proportionality is not straightforward and the new rules do not provide clear guidance on how proportionality should be applied. The suggestion seems to be that a body of law will develop on a case-by-case basis until gradually the meaning will become clear. Until that happens, litigants, legal advisers and judges will have to guess at what costs will be considered proportionate in particular circumstances.

Moreover, the new rules specifically state that the previous legal test for determining whether legal costs were proportionate – which was closely related to concepts of reasonableness and necessity – no longer applies. Instead the rules now state specifically that even if all the legal steps are considered reasonable and necessary, they could still be disproportionate. The implication is that it may no longer be proportionate to use a nutcracker to crack a nut. 

This article attempts to explore what proportionality could possibly mean once it is separated from the concepts of reasonableness and necessity. It suggests that any attempt to define proportionality in a way that is consistent with the civil procedure rules faces a number of difficulties and it is arguable that the task faced by the courts is in fact an impossible one.

The concept of proportionality

Proportionality is based upon a mathematical concept governing a relationship between two numbers/shapes etc. Two things are said to be proportionate if there is an appropriate relationship between them. There is a similar concept in law which is based upon the idea of a balance; for example a punishment is supposed to be proportionate to the crime (‘an eye for an eye’) or a response by a householder to a threat of violence should not be disproportionate (one should not shoot non-threatening burglars). A proportionate step is one that is no more than is necessary. 

Pre-April 2013

Until April 2013 the guidance on the issue of proportionality came from Lord Woolf in the Court of Appeal in the case of Lownds v Home Office (2002). He concluded that if the legal steps that had been taken had been reasonable and necessary, the other party could not object to the cost of these steps on the grounds of proportionality. This matches the idea that the response (to an alleged civil wrong) should not be greater than necessary. It was accepted that you would have to incur a certain level of costs to achieve your remedy, but you should not go over the top (and if you did, that was at your own expense).

At paragraphs 31 and 32 Lord Woolf said that if ‘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. … the requirement that the costs should be proportionate means that no more should be payable than would have been payable if the litigation had been conducted in a proportionate manner. This is turn means that reasonable costs will only be recovered for the items which were necessary if the litigation had been conducted in a proportionate manner.

‘Only those costs which would have been recoverable if the litigation had been appropriately conducted will be recovered. No greater sum can be recovered than that which would have been recoverable item by item if the litigation had been conducted proportionately.’

The 2013 amendments to the civil procedure rules

Since April 2013, the civil procedure rules, the rules which govern the resolution of civil disputes in England and Wales, have a revised ‘overriding objective’, which is to enable ‘the court to deal with cases justly and at proportionate cost’.

Although proportionality is not defined, the rules (at CPR44.3(5)) state that:

‘Costs incurred are proportionate if they bear a reasonable relationship to –

(a) the sums in issue in the proceedings;

(b) the value of any non-monetary relief in issue in the proceedings;

(c) the complexity of the litigation;

(d) any additional work generated by the conduct of the paying party; and

(e) any wider factors involved in the proceedings, such as reputation or public importance.’

The most significant new rule in the context of proportionality is set out at CPR44.3. This rule states that: ‘Costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred.’

As noted above, this is a specific reversal of the approach set out by Lord Woolf in the case of Lownds. The crucial point is that the courts are now able to reduce a successful party’s costs on the grounds of proportionality even if those costs are reasonable and necessary.  

Since this is a new approach to proportionality and, in this new sense, even steps which are reasonable and necessary could be disproportionate, it is necessary to consider what this could possibly mean in practice.

A formula for proportionality

As noted above, the rules indicate that the courts are required to deal with cases in ways which are proportionate to a number of factors (the sums in issue, the value of any non-monetary relief, the complexity of the litigation, wider factors such as reputation or public importance) but give no guidance on how to do this.  

The first criterion is the amount of money involved and this is a sensible starting point. Is there a consistent/logical/mathematical approach for assessing whether the costs are disproportionate by reference to the amount of money involved?   

Consider the following situation. Following the conclusion of a clinical negligence case in which the claimant has recovered compensation of £10,000, the court decides that the cost of all the steps which were reasonable and necessary (without considering proportionality) was £100,000. The court then has to decide whether this amount was proportionate. How should it approach this task? The same question can of course be asked in advance – in a dispute where the likely amount in issue is £10,000, what legal steps (and hence costs) should the court authorise?

At first sight, most people would suggest that incurring costs of £100,000 on something that is only worth £10,000 is clearly disproportionate. However, it is necessary to consider carefully what a litigant is doing when he incurs legal costs. When a person embarks on litigation, he is not planning to spend £100,000 to obtain £10,000. In most cases, if the dispute is successful, the litigant will recover his legal costs as well. It would therefore be a mistake to equate a litigant in these circumstances with someone willing to pay £100,000 for a car that is only worth £10,000. 

Arguably a better comparison is with someone making an investment. The example given might be considered comparable to someone who invests £100,000 for (say) three years and achieves a return of £10,000 on their investment. If this is a reasonable analogy, then (on current interest rates) an ‘investment’ of £100,000 of legal costs to achieve a return of £110,000 seems more proportionate. 

But perhaps the analogy does not work because litigation is (arguably) more risky than financial investment? It might be suggested that a better analogy is a bet (or a stock market investment) because there is a greater risk of losing and recovering nothing. The litigant has to perform a risk/benefit analysis and this exactly what Lord Justice Jackson referred to at paragraph 5.17 of his final report when justifying the new rules on proportionality: ‘The policy which underlies the proposed new rule is that cost benefit analysis has a part to play, even in the realm of civil justice. If parties wish to pursue claims or defences at disproportionate cost, they must do so, at least in part, at their own expense.’

The test of what is a proportionate amount of costs to incur therefore involves considerations of the amount at issue, the likely level of costs and the prospects of success rather than simply comparing the cost to the amount recovered. Further support for the notion that we are on the right tracks is that this is similar to the test that has been applied in recent years by the Legal Services Commission in determining what cases should be funded out of public funds.

If it is correct to use this analogy – balancing the investment of costs against the likely outcome – it might be hoped that there are simple mathematical models (based on probability) which could be adopted to calculate proportionate costs given particular amounts in dispute. However, any such model would have to take into account a number of different factors:

a) the odds (the prospects of success).

For example, if the prospects of a successful outcome are very good, this should be relevant. An investment of £100,000 with a 95% chance of achieving a potential return of £110,000 would seem very reasonable. 

b) the stake (the costs to be incurred).

Although the above investment is likely to lead to a profit, most people will have a limit on the amount they would gamble depending on what they can afford to lose. With a 95% chance of success, how much would you stake? £10? £100? £1,000? It is apparent that any satisfactory model would have to take into account the amount that the litigant is staking in comparison with their overall wealth, the idea being that a gamble would not appear reasonable/proportionate if the person could not afford to lose the gamble.

c) the prospects of an early settlement.

A party may have assumed that their case would settle in their favour without reaching trial and, since most cases do not reach trial, it would be reasonable to build that into the risk/benefit analyses. If a party has been advised that his case is likely to settle before trial, perhaps at costs of £50,000 (rather than £100,000) how could this be built into the model?

d) any changes to the value of the claim (or the prospects of success) during the course of the dispute.    

A case which starts off with a potential value of £500,000 and high prospects of success could change for a number of reasons (the death of the litigant; the development of an unrelated illness that would have prevented him working anyway; the discovery that the claimant would have had a poor outcome irrespective of negligent medical treatment). How could this be built into a proportionality formula?

There is a further objection to this attempt to find an objective/mathematical approach to proportionality; the subjective nature of value.

Consider the case of a person who has £100,000 but needs an extra £10,000 to achieve a particular purpose? Suppose the cost of a particular cancer drug that this person needs to keep himself alive is £110,000? If £100,000 is simply not enough and the person has no other way of affording the drug, on what basis could a court say that the investment in legal costs to achieve this outcome is disproportionate? And if this was thought to be a good reason, would it matter what the odds were? Could the court criticise a litigant on the grounds of proportionality who invests £100,000 even if the prospects of success are lower than 50% (if the alternative means that he cannot get the drug at all)?   

A court might decide it would be reasonable to make an exception in these circumstances but would it matter if the litigant instead said that the sum of £110,000 was needed not for a life-saving drug but to fund the cost of  once in a life time trip around the world? Would that be any less of a good reason? What criteria should the courts use to decide between different litigants with different priorities? Given that the professed aim of compensation is to put the person back into the position he would have been if the negligence had not occurred (and so is often directly related to improving his quality of life) on what basis could a court conclude that any investment with this in mind is disproportionate? 

It is perhaps for reasons like this that the rules also require consideration of other factors such as the value of any non-monetary relief, complexity, and wider factors such as reputation or public importance. Somehow the court is supposed (when considering proportionality) to take all of these factors into account and it is very hard to see how any sort of consistent approach can be produced.

What all these examples really demonstrate is that the best (and arguably the only) person that can decide whether a particular investment of legal costs is proportionate (that it is a risk worth taking) is the litigant. If he decides it is worth investing £100,000 (even with low prospects of success) because that is the only way he can afford the cancer drug, that is surely a matter for him? On what basis can a court second guess that? Each litigant has to decide if he thinks the amount of costs he would need to incur is proportionate to the likely outcome if he wins (irrespective of whether the money is to be used for physiotherapy, specialist equipment or the holiday of a lifetime).  

In practice, the type of risk/benefit analysis referred to by Lord Woolf and presumably intended to be reinforced by the changes to the rules, already takes place. If a litigant is funding his claim himself he will conduct a risk benefit analysis. If the claim is being funded through insurance, the same process will be required by the insurer. If it is a conditional fee case, both the litigant and solicitor will conduct their own risk/benefit analysis. If these careful analyses are being undertaken at the outset anyway, and if the litigant and his solicitors have decided that it is a proportionate investment from their points of view, why and on what basis should the court’s separate assessment be preferred? On what basis could it be demonstrated that the litigant’s own assessment of proportionality was wrong?  

Conclusions

I emphasise that this article is not attempting to justify the high cost of litigation. Efforts should be made to find less expensive methods of resolving disputes and costs budgeting should be welcomed in so far as it encourages parties and the courts to consider in advance what costs a party should be permitted to incur to address a particular part of a dispute. 

However, the above analysis suggests that any attempt to assess whether costs are proportionate faces a number of obstacles; any “mathematical” model of proportionality would have to try to incorporate a number of factors including the anticipated costs, the prospects of success, the likely amount to be recovered, the prospects of early settlement and possible changes in the value of the claim. Even if this could be achieved, it could not realistically take into account the importance to the parties and, for the reasons demonstrated, there is no obvious basis upon which a court could substitute its own assessment in place of that of the litigant. And this is before the courts have taken into account the value of non-monetary relief, complexity, public importance.

The irony is that in fact litigants are already carrying out a risk/benefit analysis (which will include their own subjective assessments of proportionality). Furthermore, particularly in conditional fee cases, the process undertaken by the lawyers should be self-regulating – if the lawyers get it wrong (by taking on too many high-risk cases where the likely benefits do not match the risks) they will soon start making a loss and go out of business. It is only those that assess these risks properly that will thrive.

Many of these objections could be overcome if proportionality remained closely linked to reasonableness and necessity (as it was prior to April 2013). It is submitted that the court should be able to determine what steps are reasonable and necessary to resolve a dispute and the cost of those steps should be recoverable by the successful litigant. The court could still try to control the level of costs, for example by trying to find cheaper ways of resolving a particular issue, but if particular steps have to be taken, it is difficult to see how they can be considered disproportionate (on any commonsense understanding of the term).

It can be argued that what the rules in fact do is place 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 adjustment must be made to reflect the possibility that the costs recovered from the other party will be reduced on the grounds that they are disproportionate. Given the absence of any helpful guidance to establish how this test will be applied, it is a bit like having a tax rule which does not specify the rate of tax. It inevitably makes a litigant’s cost-benefit analysis even more difficult.   

Finally, it can also be suggested that this rule is unfair in another way. If a party has succeeded in his claim, why should the other party pay less than the costs which were reasonable and necessary to achieve that outcome? This is really a windfall for the unsuccessful party and a threat to access to justice. It implies that only those that can afford to pay some of the costs themselves will be able to resort to litigation. 

In this context, a final extract of Lord Woolf’s words from the Lownds case (at paragraph 38) bear repeating: ‘Access to justice would be impeded if lawyers felt they could not afford to do what is necessary to conduct the litigation. Giving appropriate weight to the requirements of proportionality and reasonableness will not make the conduct of litigation uneconomic if on the assessment there is allowed a reasonable sum for the work carried out which was necessary.’

Paul Taylor, partner at Legal 500 top-tier clinical negligence practice Tees Law