Get a Grip: Keeping Sense of Proportion

First published in The Commercial Litigation Journal in November 2011.

On 12 October 2011 the Court of Appeal delivered its Judgment in Motto & ors v Ltd & anor (Rev 3) [2011] (Trafigura). Addressing various important issues relating to costs, the Court clarified the test of proportionality and ruled that the costs of investigating and entering into CFAs and ATE policies are not recoverable inter parties. In the leading Judgment, Master of the Rolls Lord Neuberger recognised that a consistent approach “in the vexed area of legal costs” is important and that the law must be “simple and clear”.

Confirming the approach taken by Woolf LJ in Home Office v Lownds [2002] regarding proportionality, and rejecting Chief Master Hurst’s first instance decision, Lord Neuberger indicated that such an approach “represents a good way of maintaining a degree of discipline in the thinking and actions of lawyers when advising or acting for their clients in contemplated or actual litigation”. The Court ruled that where the total costs claimed by a party appear to be disproportionate (applying the factors set out in CPR 44.5(3)) each item of cost must be deemed necessary, as well as reasonably incurred and reasonable in amount, before it can be recovered.

The Court of Appeal disagreed further with Chief Master Hurst and held that the costs of setting up and advising a party in relation to a Conditional Fee Agreement and/or After The Event insurance are not recoverable. In relation to a CFA the Court found that the solicitors were in fact acting for themselves, rather than their client, in negotiating the terms of a CFA and that in any event until the CFA was signed a Claimant was not in fact a client of the firm. In relation to ATE policies the Court held that the costs of negotiating an ATE policy and taking the insurers’ instructions as the case progressed were collateral to the litigation and accordingly were not recoverable.

Facts

The Defendants chartered ships to carry and treat contaminated waste. In August 2006, 528 tonnes of chemical waste was illegally fly tipped, by contractors appointed by the Defendants, at locations around Abidjan in the Ivory Coast. In the following weeks tens of thousands of people in the area became ill with a range of symptoms including headaches, vomiting and breathing difficulties. Leigh Day were appointed by various Claimant groups and agreed to represent them. Following an extensive investigation and vetting process Leigh Day signed up 29,614 Claimants, acting for each of them under a CFA. Proceedings were issued in November 2006 and a Group Litigation Order (“GLO”) was granted in February 2007.

By September 2009 a settlement was concluded with the Defendants agreeing to pay £30million in damages as well as the Claimants’ costs on the standard basis, to be assessed if not agreed. Interim payments on account for costs totalling £30million were also paid.

Leigh Day prepared their Bill of Costs and served it on the Defendants. The Bill of Costs totalled £104,707,772. This figure included success fees for both Leigh Day and their Counsel at 100% and the ATE premium of £9million. By contrast the Defendants’ own costs were £14million.

The appeal arose from three full Judgments given by Chief Master Hurst (the Senior Costs Judge) on various preliminary costs issues ahead of the detailed assessment. The hearing which gave rise to Chief Master Hurst’s main judgment was, by any standards, voluminous. Leigh Day’s Bill of Costs ran to some 55,000 items each of which was challenged by the Defendants. The Chief Master was presented with more than 60 ring-binders of documents. The Defendants’ supporting witness statement ran to over 3,000 pages and their skeleton argument to over 1,000 pages. The Claimants’ witness statement and skeleton argument were 923 and 73 pages respectively.

Proportionality

The Court of Appeal considered the two approaches to proportionality set down in Lownds and Giambrone & Ors v JMC Holidays Ltd [2002]. In Lownds, Woolf LJ suggested a two stage approach when assessing proportionality. Firstly the costs must be considered on a global basis and, having regard to the factors set out in CPR 44.5(3), a determination must be made as to whether the costs are disproportionate or not. If the costs appear proportionate then any individual item of cost claimed must be both reasonably incurred and reasonable in amount for it to be recoverable. If the global costs are disproportionate then the Court must examine each item claimed and determine that it was necessary, as well as reasonably incurred and reasonable in amount. In Giambrone, the Court held that if a global assessment of the costs deemed that they were reasonable, this did not preclude the costs Judge from determining that any individual item or group of items within a costs schedule was disproportionate and therefore not recoverable.

At first instance in Trafigura, Chief Master Hurst appeared to reject the reasoning in Lownds in favour of the approach in Giambrone. He ruled that notwithstanding that the global costs appeared disproportionate (a fact agreed by both parties) he was not precluded from deciding that an item or group of items were in fact proportionate and therefore should not be subject to the additional test of necessity.

The Court of Appeal rejected Chief Master Hurst’s reasoning and confirmed that the test in Lownds was the correct approach. Where the overall level of costs is disproportionate then each item of cost will only be recoverable if it passes the additional test of necessity. The Court held that the Giambrone decision only applied in circumstances where the overall costs were proportionate.

Cost of Funding

The Defendants challenged the Claimants’ entitlement to claim for:

1. negotiating an ATE policy;
2. setting up and advising on the Claimant CFAs; and
3. taking the ATE insurer’s instructions throughout the claim and settlement process.

The Court of Appeal upheld the Defendants’ challenge. It ruled that the costs of negotiating the ATE policy and taking the insurer’s instructions were collateral to the litigation as they were undertaken in order to control the Claimants’ risks in relation to costs rather than in respect of the litigation itself. As such the costs were not recoverable. In addition, the Court of Appeal held that when Leigh Day were setting up and advising the Claimants in relation to the CFAs they were in fact negotiating the terms of their own retainer and they should not therefore be allowed to recover those costs. The Court ruled that the costs incurred in the CFA sign up process were part of the general overheads of the firm. In any event the Court held that until the CFAs were signed the Claimants were not clients and Leigh Day could not therefore be acting for them.

ATE Premium

The ATE premium claimed, in respect of a policy with First Assist, was £9.6million. This was based on a 65% risk assessment. The Defendants argued that this was too cautious (and a lower premium should therefore have been obtained). They also argued that a variable premium should have been negotiated as the Claimants’ prospects of success would have been perceived as improving the longer the case went on. These arguments were all rejected by the Court of Appeal who indicated that the risk assessment was sound and, in any event, there had been no evidence before the Judge at first instance that any lower premium was available in the market. The Court of Appeal agreed, that due to the group nature of the claims, Leigh Day were unlikely to have been able to obtain a variable premium and they had also rightly considered the risk of a security for costs application being made if a variable premium had been taken up.

Success fee

Success fees of 100% were claimed by both Leigh Day and Counsel. Chief Master Hurst reduced these to 58% and both sides appealed this ruling. However, the Court of Appeal agreed with the Chief Master’s decision and held that, in the absence of any evidence that the first instance Judge had been wrong in his assessment of the evidence or the law, it was not prepared to revisit the Chief Master’s decision which was based on a detailed factual and legal analysis.

Proportionality – the future?

The Court of Appeal’s ruling in Trafigura provides helpful clarification in relation to the test for proportionality. However the issue is likely to resurface in the coming months as further implementation of The Jackson Report continues. Jackson LJ felt that the approach to proportionality set down in Lownds did not in fact go far enough. Indeed the Court of Appeal in Trafigura note Jackson’s views in their Judgment. In Jackson’s view even the approach in Lownds can result in disproportionate costs being awarded. Jackson recommends that “proportionate costs” be defined in the CPR and that the rules should make it clear that, in an assessment of costs on the standard basis, proportionality should prevail over issues of reasonableness and necessity. Jackson recommends that proportionality be defined by reference to:

1. the sums in issue;
2. the value of an non-monetary relief;
3. the complexity of the litigation (4) conduct; and
4. any wider factors such as reputation or public importance.

The CJC working party are currently considering the issue of proportionality. It remains to be seen whether they, the Courts or the Government will be prepared to extend the Lownds approach even further.