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Proportionality - The End Of The Necessity Test

11 March 2013

Background

 

 

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

 

For years the Courts struggled to arrive at a consistent approach to assess proportionality, until Lord Chief Justice Woolf’s Court of Appeal judgment in Lownds v Home Office [2002] EWCA Civ 365.  The Lownds test, as it became known, requires the Court at the beginning of a detailed assessment hearing to undertake a global assessment of the proportionality of the costs claimed, taking into account the various factors set out in CPR 44.5 (3) such as importance, value, conduct, skill and complexity.  If the costs are globally disproportionate, each item claimed will have to pass the test of necessity, with unnecessary costs being disallowed.

 

This judgment has been criticised over the years, largely due to Courts treating any necessary cost (irrespective of the amount) to be proportionate, even when it is seems to be clearly not!  What should not be ignored is that when Lownds was decided the Courts and parties involved in litigation were crying out for guidance as to how proportionality should be assessed.

 

Jackson’s Reform of Proportionality

 

Moving forward over a decade since Lownds, the Jackson reforms being introduced on 1 April 2013 include changes to how the Courts will deal with proportionality in future. 

 

Proportionality is the foundation on which many of the Jackson reforms are built.  Indeed the very first rule, CPR 1.1 has been amended to place greater emphasis on proportionality.  The overriding objective of the rules is now to enable the courts to deal with cases justly and at proportionate cost.  Justice must now be proportionate!

 

Any action taken under the CPR must therefore be proportionate and whether it was necessary or not is no longer a factor.  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. Costs that are disproportionate will now be disallowed or reduced even if they were reasonably or necessarily incurred.

 

Curiously CPR 44.3 (3) still removes reference to proportionality in indemnity basis detailed assessments, even though the Courts now have to deal with cases justly and at proportionate cost.  Surely under the new rule disproportionate costs will be disallowed, irrespective of what basis the costs are being assessed!

 

The new rules seek to replace the Lownds test with rule 44.3 (5) that specifies the requirements needed for costs to be deemed proportionate.

 

The rule states that costs incurred will be 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 new Practice Direction (PD) gives no guidance as to how to apply this new assessment of proportionality, although it will be extremely difficult to make a final determination of proportionality until the end of a detailed assessment, as at that point the proportionality of the amount allowed will be known.

 

The new proportionality rule does not apply to cases commenced before 1 April 2013 or in respect of work done before 1 April 2013. Although the rule is unclear, it is presumed that “commenced” means when substantive proceedings were issued.

 

Conclusion

 

Despite the best of intentions, satellite litigation seems inevitable.  Indeed Lord Neuberger confirmed in his speech on the subject that:

 

“The law on proportionate costs will have to be developed on a case by case basis. This may mean a degree of satellite litigation while the courts work out the law, but we should be ready for that, and I hope it will involve relatively few cases.”

 

The number of cases needed to develop this law will surely depend on how quickly ‘Lownds 2’ can be decided.  Until then we must anticipate many battles to resolve the numerous questions that exist, such as: what procedure will Costs Judges follow on detailed assessment? Will proportionality be a “good reason” to depart from an approved costs budget?  What is the effect of CPR 44.3 (3) removing reference to proportionality on the indemnity basis assessment?

 

Rule and PD amendments are likely, but what is clear now is that necessity no longer trumps proportionality!