Dispute Resolution Update
Even if you win litigation, you can lose. Legal costs liabilities have always been a big deal, but recent court decisions on the concept of costs 'proportionality' have highlighted and magnified that problem.
Now, more than ever, litigants need to understand the merits of their case as early and as fully as possible. Legal analysis of your position in litigation should always include an assessment of the likely costs recovery alongside that of the sum in issue, taking into account the current court practice on proportionality.
Proportionality and Recovery
In cases worth less than £100,000 parties can sometimes spend a disproportionate amount on legal costs to get to trial. Depending on the claim it is possible for costs to approach or exceed the sums in dispute.
Legal practice in England and Wales has always been that, in principle, the losing party should pay the costs of the winner. Of course, those costs can't be unlimited, and the courts have for many years reduced costs claims on the basis of assessing whether the costs are reasonable. In April 2013 the relevant test was changed. In short, after assessing the reasonableness of costs, the courts now assess whether the remaining figure should be globally reduced to make it proportionate to the sums or matters in dispute. This means that, even if it was entirely reasonable and appropriate to incur costs, you may not recover those costs from the other side if you win
The application of the proportionality test has been varied and inconsistent, but two recent cases have demonstrated the serious impact it can have.
In May judgement was handed down in a case involving Brian May and Anita Dobson's objections to a neighbour building a 'superbasement' under his garden. Mr and Mrs May agreed the defendant's offer of £25,000 plus costs in settlement of their public nuisance claim and put in a costs bill of approx. £208,000. Even after a 'reasonableness' reduction the costs sat at just under £100,000. The Court found in this case that the defendants were liable to pay the sum of £35,000, which was deemed to be proportionate to the £25,000 in issue.
In another recent case decided by the Senior Costs Judge a claimant settled for £20,000 plus costs. The costs bill came to roughly £242,000 including various success fees and insurance premiums. Following 'reasonableness' deductions, the bill was around £167,000. Master Gordon-Saker decided that, to make that amount proportionate to the sums in issue, he should reduce it by about half.
In both these cases it seems likely that (depending on their funding arrangements) the claimants' irrecoverable costs exceeded the principal sums they received. Even though they received payments (and likely a certain amount of satisfaction), they were worse off for bringing the claims. While Brian May is likely to be fairly sanguine about that, other claimants will not be.
Proportionality seems to mean that the courts will take a rough and ready, difficult to predict, approach to costs. Even in the two decisions referred to above, the judges (for reasons we can't easily identify) decided to reduce reasonable costs by different measures without any obvious difference in reasoning.
We can however take one very clear message from these decisions and that is to understand the costs rules when bringing or defending litigation. Obtaining legal advice as soon as possible may rather front-end your costs, but it is the best way to ensure that all of the factors are plugged into a risk/benefit analysis on how to approach a dispute. It is also yet another reason to consider taking the matter out of the court's hands by agreeing settlement between the parties.