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What Is This Proportionality Test I See Before Me?

10 minutes read

The recent decision in BNM v MGN Limited [2017] EWCA Civ 1767 provided illumination on how the new and old proportionality tests are to work in relation to additional liabilities, but how did the Court of Appeal reached its decision that the success fee and ATE insurance premium in this privacy claim should be subject to the old proportionality test?

The Old Test

The old proportionality test is the one that practitioners are most familiar with and was introduced with the Woolf reforms of 1999. It was encapsulated within the old CPR r 44:

CPR r 44.4(2) provided that:

‘Where the amount of costs is to be assessed on the standard basis, the court will –

(a)          Only allow costs which are proportionate to the matters in issue’

And CPR r 44.5(1) set out the factors to be taken into account:

‘The court is to have regard to all the circumstances in deciding whether costs were-

(a)          If it is assessing costs on the standard basis

  1. Proportionately and reasonably incurred; or
  2. Were proportionate and reasonable in amount…’

Further guidance as to how the old test was to be applied was provided in the infamous Lownds v Home Office [2002] 1 WLR 2450, in which the court held 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 costs of the item is reasonable’. The court went on to state that ‘when an item is necessarily incurred then a reasonable amount for the item should normally be allowed’.

In essence, that test provided that if costs are necessary, then they should be recoverable if they are reasonable in amount.

The New Test

The new test is one that has only existed since the introduction of the Jackson reforms in 2013. Currently, there is no guidance and, unlike the old test, it provides that even where costs were necessarily incurred and even if they are reasonable in amount, they may still be subject to a deduction.

CPR r 44.3(2) now states that:

‘Where the amount of costs is to be assessed on the standard basis, the court will –

(a)          only allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may disallowed or reduced even if they were reasonably or necessarily incurred.’

Significantly, the new test allows for a percentage reduction of the overall fees where, after the assessment, the court still considers the costs are disproportionate. 

In essence, then, under the old test, if a cost was considered to have been necessary to the litigation it would generally be allowed. However, under the new test, even if costs are necessary, if they are still too high taking into account the circumstances and value of the claim, then they may still be disallowed or reduced.

The Original Decision

The issue first came before Master Gordon-Saker. The Master considered that:

‘A consequence of the reduction of the base costs to a proportionate figure will be that the success fee, a percentage of those base costs, also reduces. It would be absurd and unworkable to apply the new test of proportionality to the base costs, but the old test of proportionality to the success fee.

‘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 under CPR 44.3(2)(a) to allow only those costs which are proportionate’

He therefore considered that the new test should be applied to the whole of the costs. Having assessed the bill, he then stepped back and looked at the whole figure inclusive of the additional liabilities. Considering that it was still too high, he reduced it by around one half.

The Claimant appealed and the matter was fast tracked to the Court of Appeal for determination.

The Appeal

Sir Etherton, MR gave the lead judgment, with which Longmore, LJ and Irwin, LJ agreed. The court considered both the old and new tests of proportionality and the transitional provisions relating to these. They concluded that:

‘the assessment should have been conducted on the footing that the proportionality test in the old CPR r 44.2(2) and the relevant provisions in the old Costs Practice Direction, applied to the success fees and the ATE insurance premium’

Although the receiving party asked the Court of Appeal to provide an order that the amount allowed be the total following the assessment but prior to the further percentage reduction applied by the Master, the Court of Appeal declined stating instead that the appropriate course would be to remit the matter back to the Master ‘to consider the proportionality of the costs again’.

It was not all good news for the claimant, however. The defendant had argued at the original hearing that the claimant had prematurely issued the claim.  The Master had disagreed and so the defendant cross-appealed, arguing that the Master had not properly considered the various factors.  Whilst the Court of Appeal was keen to stress that this issue had no ‘right’ answer, they did decide to remit the issue back to the Master for him to further consider the matters raised by the defendant.

To the victor all the spoils?

The matter will now be remitted back to Master Gordon-Saker for reconsideration, but the claimant may not get as happy an outcome as they were hoping for.

The Master is still entitled to take the base costs from post-April 2013 without the success fee and apply a reduction to them under the new proportionality test. If this is done, then the amount of the success fee will reduce in line with the general damages in any event.

Furthermore, at the initial hearing, although Master Gordon-Saker considered that the ATE insurance premium was necessary, he found that it was disproportionate in amount. Proportionality has always applied to ATE premiums, although historically the appetite by the court to reduce them appeared to be absent, especially following Rogers v Merthyr Tydfil [2007] 1 WLR 808, which will still apply.  However, in the modern approach to litigation, it is still open to the court to reduce the premium under the old test.

There will also be an issue for the claimant in respect of the success fee if the Master, on reconsideration of the matter determined that proceedings were prematurely issued since the solicitor’s success fee prior to issue was 0%.

Thus, although the case has clarified the position in relation to how the old and new tests of proportionality apply to additional liabilities, it may ultimately result in something of a pyrrhic victory for the Claimant.

What about the assessment of ATE Insurance Premiums in clinical negligence claims?

The introduction of the Jackson reforms in 1 April 2013 ended the recovery of ATE insurance premiums in many types of litigation, including personal injury. However the Recovery of Costs Insurance Premiums in Clinical Negligence Proceedings (No. 2) Regulations 2013 allows the recovery of an element of the ATE insurance premium in clinical negligence claims if—

‘(a)         the financial value of the claim for damages in respect of clinical negligence is more than £1,000; and

(b)          the costs insurance policy insures against the risk of incurring a liability to pay for an expert report or reports relating to liability or causation in respect of clinical negligence (or against that risk and other risks).’

There has been some doubt as to the correct approach Courts should follow when assessing such premiums and indeed the Court of Appeal is waiting to hear appeals in the cases of Maria McMenemy v Peterborough & Stamford Hospitals NHS Trust and Michael Reynolds v Nottingham University Hospitals NHS Trust on that very point.

Unsurprisingly as this was a privacy case, the Court of Appeal was not asked to make a decision on this point, however paragraph 68 of the judgment does include the following:

“Mr Hutton reinforced that argument by reference to the provisions in section 4 of the new PD 48 for recovery of ATE insurance premiums in clinical negligence cases where a costs insurance policy is taken out on or after 1 April 2013. Those provisions, which were made pursuant to the Recovery of Costs Insurance Premiums in Clinical Negligence Proceedings Regulations 2013 (SI 2013/92) (“the Clinical Negligence Regs”), which were themselves made pursuant to section 46 of the 2012 Act, state that “the provisions in force in the CPR prior to 1 April 2013 relating to funding arrangements will not apply”. It was common ground between Mr Simon Browne QC, for BNM, and Mr Hutton that the new proportionality provisions in CPR 44.3(2) will apply to such premiums.”

Whilst acknowledging that this extract is at best obiter, the view of Leading Counsel for both parties was not disputed by the Court of Appeal and thus it would appear that there is a consensus of opinion that the new proportionality test applies to post 1 April 2013 ATE insurance premiums in clinical negligence cases. Such premiums will therefore be subject to the overall assessment of proportionality at the conclusion of the detailed assessment.

Matters Unresolved

Although it was hoped that they would do so, the court has not given any general guidance on how the new test of proportionality should be applied. This may be because, in some ways, the guidance given in Lownds was not especially helpful and may be because the new test is almost impossible to try to define or provide guidance on.

It would appear, then, that the courts and the parties must continue with the arbitrary and subjective approach to costs that the new proportionality test has given rise to.

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