Assessing Costs – What does proportionality really mean?

In civil litigation the presumption is that the losing party pays the winner’s costs. However, unless agreed, such costs must be assessed by the Court.  This process is of crucial importance because the winning party must pick up the shortfall itself, eating into the proceeds of claim.

Costs that are assessed on the standard basis will be reduced if they are not reasonably incurred and reasonable in amount.  Since 2003 they must also be proportionate to the matters in issue.  This means that they must bear a reasonable relationship to:

• The sum in issue in the proceedings
• The value of any non-monetary relief in issue in the proceedings
• The complexity of the litigation
• Any additional work generated by the conduct of the paying party
• Any wider factors involved in proceedings such as reputation or public importance

This led to much uncertainty in practice. What weight should be applied to each of the 5 factors. In particular, how important is the relationship between the value of the claim and the costs bill?

These issues were considered in the recent case of Reynolds v One Stores Limited. The claim was issued for £50,000, increased to £300,000, then reduced again to just under £175,000.  It was settled before trial for £50,000.  The revised Claimant’s costs budget was £117,352. On assessment, the costs were first reduced on a “line by line” basis and further reduced on grounds of proportionality to £75,000.  The Claimant appealed on the basis that the reduction for proportionality was too big.

In rejecting that appeal, the Court set out helpful guidance as to how the proportionality test should be applied:

• It is for the assessing judge to consider when to apply the proportionality test.
• Costs that have already been budgeted are still susceptible to reduction for proportionality, although the Court should avoid double counting.
• The Court should not follow a mathematical process to assess proportionality.
• The rules do require the Judge to exercise discretion and make a value judgement. However, it is important that decision is made on a reasoned rather than arbitrary basis.
• The value of a settlement is not necessarily the same as the sums in dispute.

This case is helpful confirmation that costs will not automatically become disproportionate once they exceed a certain ratio against the value of the claim. However, it is a reminder of the wide discretion available to the Court when assessing costs, hence the need to ensure that litigation is conducted on a proportionate, in the fullest sense of the word, basis.