Reproduced from PLC Dispute Resolution with the permission of the publishers.
For further information visit www.practicallaw.com
The Court of Appeal's decision in Motto and others v Trafigura Ltd and another (Rev 3) [2011] EWCA Civ 1150 is an important one on the recoverability of costs. The judgment deals with the appeal of nine of the issues decided by Chief Master Hurst in Motto v Trafigura [2011] EWHC 90201 (Costs).
Most significantly, the Court of Appeal ruled that Chief Master Hurst was wrong to depart from the accepted basis for ensuring that costs were proportionate, as set out in Home Office v Lownds [2002] EWCA Civ 365. Both parties accepted that the level of costs claimed appeared to be disproportionate (the costs claimed were almost £105 million and the matter had settled for £30 million). The Court of Appeal followed Woolf LJ's ruling in Lownds that, when the total costs appear to be disproportionate, each item must be deemed necessary before its cost can be recovered.
The Court of Appeal also considered issues concerning vetting costs, pre-action protocols, medical reports, abandoned claims, settlement and distribution, cost of funding, success fee and after the event (ATE) insurance premiums. (Motto and others v Trafigura Ltd and another [2011] EWCA Civ 1150.)
Background
Where costs are assessed on the standard basis, the court will only allow costs which are proportionate to the matters in issue. Any doubt about whether costs were reasonably incurred or reasonable and proportionate is resolved in favour of the paying party (Civil Procedure Rules (CPR) 44.4(2)(a)).
In Home Office v Lownds [2002] EWCA Civ 365 Woolf LJ set out a two-pronged approach to assessing proportionality:
- Whether, on a global basis, the costs appear to be proportionate or disproportionate having regard to the factors set out in CPR 44.5(3), including the complexity of the matter, the value of the claim, the financial position of the parties and the importance of the matters at issue.
- If the costs appear proportionate, then for any item of costs to be recoverable, it must have been reasonably incurred and reasonable in amount. If the costs appear disproportionate, the court must satisfy itself that each item was necessary and that the cost was reasonable.
The rationale behind this analysis is that the recovering party can only ever recover what it would have done had the case been conducted in a proportionate manner.
In Giambrone and others v JMC Holidays Ltd [2002] EWHC 2932 (QB), Morland J held that, if the costs judge deemed the costs to be proportionate, he was not precluded from deciding that an item in the costs schedule was disproportionate at detailed assessment.
Facts
This judgment relates to the appeal of various points arising in the costs decision in Motto v Trafigura [2011] EWHC 90201 (Costs). The facts are set out in PLC's summary of that decision in Legal update, Senior Costs Judge rules on key issues arising in course of detailed assessment.
The parties settled the claim for £30 million by way of a Tomlin order in September 2009. The Tomlin order provided that the defendants would pay the claimants' costs on the standard basis, to be subject to detailed assessment if they could not be agreed.
The claimants' original costs bill was for almost £105 million, consisting of base costs of £49 million, a 100% success fee for both counsel and the solicitors, and an ATE policy premium of £9 million. The defendants' costs were £14 million.
Before proceeding to detailed assessment, the parties referred 22 preliminary cost issues to the Senior Costs Judge, Chief Master Hurst. The judge provided his decision on 15 February 2011.
The judge had no hesitation in determining that the claimants' costs appeared to be disproportionate and this was not disputed. As a result of the judge's preliminary decisions, the claimants' base costs were reduced from £49 million to £40 million. The judge ruled that, notwithstanding that the costs appeared to be disproportionate, he was not precluded from deciding that an item or group of items (of which there were over 55,000) were, in fact, proportionate and so not subject to the test of necessity. In making this ruling, the judge purported to reject the reasoning in Lownds in favour of the reasoning in Giambrone.
The claimants and defendants appealed and cross-appealed nine of the judge's findings on preliminary issues to the Court of Appeal.
Decision
The Court of Appeal (Lord Neuberger MR, Maurice Kay and Hughes LJJ) allowed the defendants' appeal of the judge's conclusion on the issue of proportionality. Their Lordships confirmed that the correct approach was that prescribed in Lownds: where the overall level of costs is disproportionate, each item of costs claimed will be recoverable only if it passes the test of necessity.
This decision and the Court of Appeal's findings on each of the other issues on appeal are considered below.
Proportionality
The Court of Appeal held that the decision in Giambrone, relied on by the claimants, only applied where the global costs appeared to be proportionate. In these circumstances, it is entirely acceptable at detailed assessment for a costs judge to determine that an item was disproportionate, notwithstanding that the overall costs appeared to be proportionate. However, where the global costs appear to be disproportionate (such as in Trafigura), each item must pass the test of having been necessarily incurred in the litigation.
Therefore, the Court of Appeal confirmed Lownds as setting out the correct approach for determining whether costs are proportionate according to CPR 44.4(2)(a) (paragraphs 51-53, judgment).
Vetting costs
The claimants sought to recover the costs of the identification, collection and management of each of the claims. The Court of Appeal agreed with the judge that, in principle, these costs were recoverable, subject to them being necessary and proportionate (paragraph 63, judgment). Whether any item of costs was proportionate and necessary would be a matter for detailed assessment.
Whether costs prior to each claimant entering into a conditional fee agreement (CFA) would be recoverable would depend upon whether the individual CFA was worded to cover the work undertaken in that period (paragraph 61).
Pre-action conduct
It was accepted that there was no specific pre-action protocol (PAP) for this claim. However, the defendants argued that the claimants' failure to comply with the spirit of the PAPs and the Practice Direction: Pre-Action Conduct, had resulted in the incurrence of additional and unnecessary costs. The Court of Appeal agreed with the judge's ruling that there was no evidence that the claimants' failure to take any pre-action steps resulted in additional costs (paragraph 74, judgment).
Medical reports
The Court of Appeal approved the judge's ruling that the costs relating to medical reports were recoverable, provided that the costs met the necessity test (paragraph 76, judgment).
Abandoned claims
As the litigation progressed, some of the claims were no longer pursued, although they were not formally withdrawn. The judge held that the costs of pursuing these claims were recoverable and could not be challenged, as the defendants had agreed (via the Tomlin order) to pay all of the claimants' costs on the standard basis.
The Court of Appeal agreed that the fact that the parties had agreed that some of the claims had not been established did not mean that the costs relating to these claims were irrecoverable (paragraph 87, judgment). However, the costs of abandoned claims would not be recoverable where it had not been reasonable or necessary to pursue them.
Settlement and distribution
The claimants claimed the costs of settling the claim and distributing the damages. The judge held that these costs were recoverable, in principle. The defendants challenged this decision, arguing that the parties had agreed to depart from the normal rule under the terms of the settlement. The Court of Appeal upheld the judge's decision that such costs were plainly part of the costs of the proceedings and that a clearly expressed provision in the settlement agreement would be required to exclude them (paragraph 95, judgment).
The claimants also appealed the cut-off date imposed by the judge, after which no distribution costs would be recoverable. The Court of Appeal allowed this appeal, as it found that the point had not been argued fully before the judge (paragraph 102).
Cost of funding
The defendants challenged the judge's ruling that the claimants were entitled to recover the claimants' solicitors' costs of:
- Setting up and advising on the CFA.
- Negotiating the after the event (ATE) insurance policy.
- Taking ATE insurers' instructions throughout.
The Court of Appeal ruled that the costs of setting up and advising on the CFA were attributable to the need of the litigant to fund the litigation, as opposed to the actual funding of the litigation itself. The solicitors were acting for themselves, rather than their client, in negotiating the terms of their retainer. This distinction meant that these costs were deemed to be part of the general overheads and expenses of the solicitor, which the solicitor should take into account when quoting hourly rates (paragraph 108, judgment).
The costs of negotiating the ATE policy and taking insurers' instructions were deemed to be collateral to the litigation and were necessary to ensure that the claimants were not at risk on costs. Accordingly, these costs were not recoverable (paragraph 114).
The Court of Appeal upheld the judge's decision that interest paid on loans to pay litigation costs was not recoverable, as this was not money payable to solicitors for work done (paragraph 106).
Success fee
The claimants' solicitors and counsel claimed a success fee of 100%, which the judge reduced to 58%. Both parties appealed the decision. However, the Court of Appeal accepted the judge's ruling. The court held that this was a value judgement and it was not prepared to look behind the judge's decision (paragraph 133, judgment).
ATE premium
The £9 million ATE insurance premium had been calculated on the basis of a 65% prospect of success. The defendants challenged this as being too cautious a risk analysis and, therefore, a lower premium would have been appropriate. The Court of Appeal rejected the defendants' attack on the judge's finding that the ATE premium was recoverable (paragraph 144, judgment).
Comment
Proportionality
While the Court of Appeal's ruling is not novel, no doubt it will be welcomed by practitioners as clarifying how the proportionality test should be approached in relation to costs. The court was aware of the need for a consistent approach to costs, Lord Neuberger MR stating:
"in the vexed area of legal costs, it is particularly important that the law is simple and clear, and the courts adopt a consistent approach." (At paragraph 48, judgment.) The Court of Appeal's ruling that Lownds remains the correct approach for assessing costs where the global costs appear to be disproportionate, will offer some reassurance to the paying party. Where total costs are disproportionate, the non-paying party faces the burden of establishing that every item on the costs schedule was necessary and any necessarily incurred item will then only be recoverable in a reasonable sum.
The Court of Appeal rejected the Senior Costs Judge's potential dilution of the rule in Lownds, the purpose of which is to ensure discipline among litigation lawyers when managing a case.
However, Lownds may not be the final word on this issue. In his Review of Civil Litigation Costs: Final Report (December 2009), Jackson LJ's view was that the approach in Lownds does not go far enough to limit the recoverability of costs. Paragraph 49 of the judgment notes Jackson LJ's view, that even the rule in Lownds can result in an award of costs which is disproportionate in terms of the figures involved. The government has indicated that it supports Jackson's recommendations regarding proportionality and so the rule in Lownds is more likely to be extended going forward. For more detail, see Legal update, Government response to Jackson LJ's recommendations on reforming civil litigation costs and funding and Article, Implementation of Jackson LJ's recommendations (specific types of litigation): when will they take effect?
Both the Senior Costs Judge and the Court of Appeal confirmed that, when assessing whether costs appear to be proportionate, the costs should not be judged solely by reference to the damages recovered. Costs should not be viewed retrospectively, but by reference to the facts known at the time the claim was pursued. However, the Court of Appeal said that the value of the claim offers a "reality check" when assessing whether the party was right in its belief that the claim was worthy of pursuance.
Other issues
Of note for lawyers working under a CFA is the judicial comment in relation to reviewing the success fee when the risk profile of a case changes. This judgment sets out the arguments on whether an offer from the Ivory Coast Government altered the risk profile of the case. These arguments highlight the fact that such events are likely to be viewed subjectively.
Lawyers operating under a CFA will also no doubt take heed of the ruling in relation to the recovery of costs relating to the CFA and the ATE policy (paragraphs 110 and 112, judgment). It is clear that neither the costs of negotiating and drafting a CFA, nor the costs of agreeing ATE insurance cover, will generally be recoverable.
The Court of Appeal's judgment makes it clear that the fact that parties agree certain elements of a claim have not been or cannot be established does not render the costs incurred in investigating those claims irrecoverable.
The judicial comment on the extent of compliance with the spirit of the pre-action protocols is also of interest. While the Court of Appeal accepted that the claimants' solicitors could have done more to comply with the spirit of the CPR, this did not affect the claimants' entitlement to recover costs that were otherwise proportionate, reasonable and necessary.