New Rules for Litigation Costs
For over two centuries litigation before the English courts has been conducted on the basis that a winning party can recover its legal costs from the losing party. This is very different from other jurisdictions such as the US where each party is responsible for its own costs and the level of those costs are left as a matter between lawyers and their clients. In the English court system the level of costs being recovered and the effect of those costs on access to justice has become an increasing concern.
The Legal Aid, Sentencing and Punishment of Offenders Act 2012 has brought in a number of new rules as part of the reforms to civil litigation proposed by Lord Justice Jackson that have changed the way in which legal costs can be recovered and litigation conducted. Since 1 April 2013 a number of changes have been made to restrict and control the level of costs that can be awarded by the courts to a successful litigant. These changes include:
wider application of fixed costs to different types of claim;
increasing the small claims limit;
qualified one-way cost shifting;
cost budgeting requirements and costs capping;
a new test of proportionality in assessing costs; and
new cost sanctions on failure to accept Part 36 settlement offers.
Fixed costs set a level for recovery of costs for a successful litigant and the application of fixed costs has been extended by the new rules to a wider range of lower value claims.
A regime of fixed costs already existed for road traffic accident claims processed through an online portal. Fixed costs have been extended to other personal injury claims for employer’s liability and public liability with a scale of costs being recoverable for claims of damages of not more than £25,000. For example a claimant making public liability claim for £20,000 in damages will now only be able to claim a maximum of £1,850 costs if liability is admitted and the level of damages are disputed through to a hearing. This is compared to position before 1 April 2013 when the costs claimed on such a claim were likely to have been 10 times that amount.
There are also fixed cost limits for personal injury claims where liability is denied, but the claim is settled before any proceedings are issued so that in a claim for £20,000 damages a maximum of £3,370 costs would be allowed present claims. In Fast Track personal injury claims (claims with a financial value of no more than £25,000) where proceedings are issued there are further fixed costs so that on the example of a £20,000 employer’s liability claim the total costs allowable on the date of trial would be £4,280 and 30% of the damages awarded.
From 1 April 2013 the damages limit for claims that are allocated to the Small Claims Track has been increased from £5,000 to £10,000 in general claims. The limit for personal injury claims has remained at £1,000 but the government is considering increasing this to £5,000. Generally the court may not order a party to pay the other party’s costs in any case allocated to the Small Claims Track so a far larger number of claims will now fall outside of the rules on recovering costs.
Qualified One-way Cost Shifting
There had been some discussion by Lord Justice Jackson about whether costs shifting, where a losing party in litigation pays the winning party’s costs, should be retained in all areas of litigation.
In the end, the only change that has been made is in personal injury claims and the introduction of qualified one-way cost shifting (QOCS). Under the new rules a defendant that successfully defends a personal injury claim is not entitled to its costs from the claimant. This provision has been introduced as a balance to the end of recoverability of ATE premiums (See our article on the New Rules on Funding) and has been justified on the basis that:
it is cheaper than paying out on ATE insurance for the insurance industry;
it is similar to the position under old legal aid system; and
most claimants are successful in personal injury litigation.
The only situations in which a personal injury defendant can recover costs is where claims are fraudulent or are struck out for no reasonable cause of action or an abuse of process.
There have also been changes to the rules for Part 36 settlement offers so that if the amount awarded to a claim fails to beat a Part 36 offer then the defendant can offset their costs from the date of the offer against any damages awarded. If the costs are greater than the damages then the defendant cannot recover the costs above the damages.
Cost Management - Budgeting and Capping
While fixed costs have been extended to tackle the problem of excessive costs in lower value claims the new rules have brought in cost budgeting in higher value claims in the Multi Track (Claims with a financial value of more than £25,000). Pilot schemes for cost budgeting have been run in Technology and construction Court and in defamation cases.
Each party is required to serve and file a detailed cost budget set out as a spreadsheet with details of cots for each stage of the litigation for any case allocated to the Multi Track (other than cases where sums in dispute exceed £2million). The budget must be filed by a date specified by the court in the notice of allocation and if a party fails to do so then the only costs it can recover are the court fees paid in the claim. The budgets must be agreed between the parties or approved by the court and can only be revised with court approval.
At the end of a case the court takes into account the last approved or agreed budget and will not depart from that budget in awarding costs unless there is a good reason to do so. In effect the budget will place a limit on recoverable costs.
The courts also have the power to cap the costs in proceedings. The Patents County Court has a limit on recoverable costs of £50,000 for intellectual property claims brought in that court. See our article on the Patents County Court.
Cost Management – Proportionality
The new rules have introduced a new test of proportionality. Since 1 April 2013 costs incurred by a party are only proportionate if they bear a reasonable relationship to:
the sums in issue;
the value of any non-monetary relief in issue;
the complexity of the litigation;
additional work generated by the conduct of the paying party; and
wider factors such as reputation or public importance.
The test expressly states that costs that are disproportionate. The previous approach based on the Court of Appeal decision in Home Office v Lownds  EWCA Civ 365, had been that costs were deemed to be proportionate if they were both necessary and reasonable. The test now expressly states that costs may be disallowed or reduced even if they were reasonably or necessarily incurred.
The overriding objective under the CPR has also been amended to require the court to deal with cases justly "and at proportionate cost". Judges are required to give effect to the overriding objective whenever they exercise any powers under the CPR.
New Cost Sanctions on Part 36 Offers
Under Part 36 of the Civil Procedure Rules, a party can make an offer to settle, which will result in certain costs sanctions if the offer is refused by the other party who fails to be awarded more at trial. Under the existing rules the court could make an order for indemnity costs and for enhanced interest on both damages and costs (up to 10% above base rate). With the new rules Part 36 has been amended so that where Part 36 offers have been made on or after 1 April 2013, there is now an extra sanction calculated as 10% of damages or 10% of costs for non-monetary claims. This amount is reduced for larger claims so that the 10% applies to of the first £500,000 and 5% to the next £500,000 with a maximum uplift of £75,000.
The new sanction is designed to put extra pressure on defendants to accept claimant’s offers of settlement.
It is still early days and it remains to be seen what effect on controlling costs the new rules will have in different areas of litigation. It is clear that with fixed costs and cost budgeting litigants will have a much clearer idea of what costs are likely to be at an early stage in a claim and disproportionate costs are going to be much harder to recover in most cases. A panel has been appointed led by Mr Justice Ramsey to review the implementation of the reforms focusing on problem areas identified by practitioners and it is expected to be completed by April 2014.
If you would like further advice about any of the issues considered above please contact Paul Northwood on 01869 331753, or email him at firstname.lastname@example.org .
This article is not intended to be, and should not be taken as being, legal advice. The law often changes and it varies from jurisdiction to jurisdiction; the information in this article is generic in nature and specific legal advice should be taken before acting on any of it.