Proportionality of costs and judicial hindsight

A strain of judicial hindsight tends to accompany important changes to our civil procedural rules. Although transitional provisions are meant to ensure that past actions are judged by the rules in place at the relevant time, it is natural for some judges to create a more coherent picture by interpreting the old rules so as to bridge the gap between the old and the new.

Consultation before a major change such as the introduction of the CPR or the Jackson reforms takes years, and during that period judicial opinions are influenced by the debate and the proposals that follow. One example of this is the courts’ attitude to the recovery of success fees. Once the problems with the system had been debated as part of Jackson LJ’s review and it became clear that a winning claimant’s right to recover a success fee from the defendant would be removed, judges began to scrutinise success fees with a rigour that had been lacking in the past. Now that the right to recover has been removed for pre-April 2013 conditional fee agreements, those seeking to recover success fees set many years before will receive a very different reception to that prevailing at the point when the success fee was set.

The latest example of judicial hindsight concerns the proportionality test applied to the recovery of costs. We’re still waiting for guidance about how the new Jackson proportionality test will work, but in the meantime the courts have turned their attention to the way in which the old Lowndes proportionality test should be applied.

The transitional provisions

Before looking at the decision in Finglands Coachways Ltd v O'Hare, we need to remind ourselves of the old and new tests, and the transitional provisions. The old test (the Lowndes test) applies to all costs in cases commenced before 1 April 2013 and to costs incurred in respect of work done before that date in cases begun on or after 1 April 2013. This explains why we have yet to have any decisions on the new test (the Jackson test), since it only applies to costs incurred from 1 April 2013 in cases begun from that date onwards.

The Lowndes test

The Lowndes test was formulated by Lord Woolf LCJ in Lowndes v Home Office (2002) and it requires the court to take the following two-stage approach:

• Does the total costs figure appear to be proportionate? (The global approach.)
• If yes, apply the reasonableness test to the assessment of each item. If no, apply additionally the stricter test of necessity to the assessment of each item. (The item by item approach.)

The Jackson test

Jackson LJ concluded that the Lowndes test was not fit for purpose because it often resulted in costs far exceeding the damages recovered. He favoured the approach rejected in Lowndes, namely to assess the costs first by applying the reasonableness test to each item and then to reduce the total to a proportionate figure. The new CPR 44.3(2) provides that “costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred.”

To apply the new two-stage test, the court should:

• Apply the reasonableness test to the assessment of each item.
• Stand back and consider whether the resulting total figure is proportionate. If it is not, reduce the figure appropriately.

The crucial point is that necessity is no longer relevant at all.

The decision in Finglands Coachways Ltd v O'Hare

Cranston J held that, when applying the Lowndes test, the court can consider on an item by item basis whether a particular item is proportionate and necessary, even if the costs are proportionate on a global basis. He relied upon Giambrone v JMC Holidays Ltd (2002) where Morland J considered the judgment in Lowndes and commented:

“For my part I do not accept that if a Costs Judge has ruled at the outset of a detailed assessment that the bill as a whole is not disproportionate he is precluded from deciding that an item or a number of items are or appear disproportionate having regard to the "matters in issue".”

Cranston J concluded that this view was not disapproved by the Court of Appeal in Motto v Trafigura Ltd (2011) when it considered Morland J’s judgment in a different context, nor was there anything in Lowndes to rule out such an approach.

Practical implications

It is not surprising that Morland J’s comment in Giambrone twelve years ago should now influence the courts in their approach to the assessment of costs under the Lowndes test. Limiting recoverable costs to a proportionate sum has become the judicial grail, and this attitude will inevitably affect the assessment of costs incurred long before the introduction of the Jackson reforms and the addition of the phrase “and at proportionate cost” to the overriding objective in CPR 1.1 and the relief from sanctions provision in CPR 3.9.

If this approach is adopted generally, it could significantly reduce recoverable costs. Pre-action and incurred costs are not subject to the new costs budgeting regime but they could be assessed on this more stringent version of the Lowndes test if they were incurred before April 2013, even where the proceedings were begun on or after 1 April 2013. Winning parties stand to lose since the shortfall between the costs recoverable from the other side and the fees payable by the party to their lawyers will only increase. All concerned need to be aware that previous presumptions about costs recovery and reserves for costs liability may no longer be valid.

Click here to read the judgment in Finglands