Proportionality and cost budgeting: Key case update and practical advicePrint publication
In September/October 2017, Gwendoline Davies and Claire Acklam considered the rules and recent case law on proportionality of costs in their article Keep it in proportion, published in the Commercial Litigation Journal. The “fertile ground” for costs disputes identified continues to develop, and proportionality of costs, in particular, remains a hot topic. As the courts continue to grapple with what constitutes proportionate costs, Gwendoline and Claire provide an update and some practical advice.
We reported previously that in the case of May v Wavell Group plc the claimant accepted the defendant’s first Part 36 offer in the sum of £25,000, but by the time the offer was made the claimant’s costs were in excess of £208,000. The senior costs judge assessed the claimant’s reasonable costs at £99,000, but then reduced these to just £35,000 plus VAT on grounds of ‘proportionality’.
The claimant appealed the senior costs judge’s decision and on appeal the court held that the costs judge:
- had not given appropriate weight to the complexity of the litigation;
- had undervalued the sums in dispute; and
- had disproportionably reduced costs due to early settlement.
The appeal court gave more weight to these factors and concluded that proportionate costs were £75,000 plus VAT, a significant increase from the award made by the senior costs judge.
May v Wavell appeal
Civil Procedure Rule (CPR) 44.3 (5) lists factors to be considered by the court when assessing proportionality, but judges have a wide discretion and there is little (if any) determinative approach or methodology to date. The May v Wavell appeal judgment  was keenly awaited within the profession for the clarity that many anticipated it might bring to the issue.
The judge acknowledged on appeal that the CPRs do not specifically state that the assessment must involve two stages, but he did clarify that they require a costs judge to apply the two tests of reasonableness and proportionality, and then to make an adjustment if necessary. In addition, he confirmed that a costs judge could either have both tests in mind while considering each item in the bill of costs, or could apply the tests sequentially.
However, the decision actually serves to further highlight the difficulty in applying the proportionality rules, and does not provide the hoped-for clear solution. The judge on appeal criticised the costs judge for failing to base his figure on “any specific mathematical calculation”, but arguably his method of reaching the increased figure was no more scientific or objective, and instead potentially just reflects an alternative subjective assessment of the weighting to be given to the relevant factors.
…and costs budgeting
Another area of continuing confusion in the costs arena is that of cost budgeting, and especially its interaction with proportionality.
The case of Sharp v Blank and others  was not one to which the costs budgeting process would typically apply (the claim having a value of circa. £350 million). However, the claimant required some clarity as to the defendants’ likely costs for the purposes of obtaining ATE insurance. The claimant therefore asked the court to make a costs management order.
The defendants’ budget estimated their costs to be circa. £24.4 million, and argued that these costs (circa. 7% of the amount of the claim) were proportionate to the claim. Nevertheless, the defendants opposed the claimant’s request for a costs management order.
The court considered the applicability of proportionality and reasonableness to the costs budgeting stage, with Mr Justice Nugee stating: “one can look at proportionality not only in the way that some judges have done by reference to the overall cost of the proceedings compared to the overall amounts at stake and the complexity of the issues and the like, but also by looking at what is or ought to be involved in the action and saying whether the proposed spending of money of that level is proportionate to the work that was involved”.
Sharp v Blank considerations
The court concluded that it was not enough for the defendants to oppose a costs management order on the basis their costs were proportionate to the overall sums claimed, the complexity, and other matters relevant to the dispute. Accordingly, the court made a costs management order as the claimant had requested.
Subsequently the defendants sought to revise their costs budget following what the defendants alleged to be significant developments in the litigation. The claimant then opposed the defendants’ request.
Emphasising the need to consider each case on its own facts, the court permitted some increases to the defendants’ costs budget as a consequence of events which the court concluded to be significant (including the 48 business day extension to the trial timetable, specific disclosure given by the claimant and expert evidence served by the claimant which was not anticipated by either party). The increased costs were considered by the court to be reasonable and proportionate to the claim. However, other matters (such as the claimant’s third party disclosure order) were not found to be “work that can properly be characterised as giving the court jurisdiction to revise the defendants’ budget either by the sum claimed of nearly £73,000, or at all.”
Sharp v Blank provides some guidance as to what the court will consider a significant development following which a revision to the costs budget may be permitted. It also provides useful commentary on proportionately and its application to the costs budgeting stage. However, there is still some way to go before parties and practitioners will be confidently able to anticipate, with any real degree of precision, the outcome of any court calculation of proportionality and reasonableness of costs – either at the budgeting or costs assessment stage.
With costs management orders and costs awards made on the standard basis being a matter of wide judicial discretion and being particularly unpredictable while uncertainty surrounding the assessment of proportionality reigns, parties may be well-advised to agree budgets and costs between themselves wherever possible.
When it comes to costs disputes per se, claimants may be minded to issue Part 36 offers to settle costs disputes at an early stage, so as to have the benefit of indemnity costs if their costs claim is ultimately successful. Where costs assessment proceedings are contemplated or pursued, parties should be prepared to very critically consider the strength of any arguments as to the proportionality (or otherwise) of their costs incurred.
 (unreported), Case no A02CL398, (County Court at Central London)
  EWHC 141 (Ch)