Proportionality in litigation costs: a practical update

1st August 2019

In this latest in our series of articles on this topic [1], Gwendoline Davies reviews a recent case which sheds some light on the courts’ practical application of the notoriously elusive concept of ‘proportionality’ in the assessment and recovery of litigation costs.

Why is this case of interest?

Malmsten v Bohinc [2] is the first High Court case to consider the proportionality test set out in the Civil Procedure Rules (CPR) and it confirms a number of important elements of the assessment.  In particular, whilst the assessment of any reduction in recoverable litigation costs made on grounds of proportionality will be highly dependent upon the facts of any individual case, this decision offers some useful practical insight as to how and when the courts ought to apply the proportionality test.

What is the Proportionality Test?

Under the CPR [3], costs incurred in the course of litigation are considered proportionate if they bear a reasonable relationship to:

• (a) the sums in dispute in the proceedings
• (b) the value of any non-monetary relief in dispute in the proceedings
• (c) the complexity of the litigation
• (d) any additional work generated by the conduct of the paying party
• (e) any wider factors involved in the proceedings, such as reputation or public importance.

What happened in this case?

The appellant in Malmsten v Bohinc was ordered to pay the respondent’s costs following a relatively brief dispute. (The parties were the sole shareholders in a small jewellery company and did not see eye-to-eye on the future of the business. The litigation lasted only 3 weeks and was concluded at a 30 minute hearing.)

Despite the swift resolution of this matter, the respondent claimed in excess of £60,000 in costs, which were reduced to £47,500 by the Master in the first instance. On appeal, the High Court criticised the Master’s approach to proportionality, setting out some key practical points in the process. The High Court then ultimately slashed the bill even further to the significantly lower (and more ‘proportionate’) amount of £15,000.

How should the test be applied?

The judge noted the following points, which should help any party involved in litigation to better assess the likelihood and level of any costs recovery:

• Proportionality should be considered right at the end of the assessment process. It is a separate test and is distinct from the question of reasonableness and necessity.
• The correct approach is for the court, having made an assessment of reasonable costs, to take a step back and consider whether the total figure is proportionate by reference to the CPR 44.3(5) factors listed above. If not, a suitable reduction should be made.
• A sensible approach to a proportionality assessment would be to consider what a reasonable client (of adequate but not extravagant means) would be prepared to pay in all of the circumstances…
• …However, the court should not take too much of a ‘client-centric’ approach and must balance this against the due weight of the costs figures as assessed, particularly where agreed budgets are in place.
• VAT and the costs of preparing the bill of costs itself are not relevant when considering proportionality and would serve only to distort the figures if included.
• Where the court is influenced under ground (d) of CPR 44.3(5) not to make a proportionality reduction, it should expressly identify how the conduct of the paying party has generated extra work.

WM Comment

This latest case evidences an attempt, on the part of the High Court, to inch ever-closer to a reliable and conclusive approach by which parties, practitioners and the courts can attempt to accurately assess proportionality and therefore the level of likely costs recovery.

In any event, whilst every case will turn on its own facts, parties should note that reductions made on proportionality grounds can often be significant indeed. To protect themselves as much as possible, parties should take specialist advice as to settlement and/or alternative dispute resolution tactics which might be able to offer pre-emptive costs protection; and they should manage their cases efficiently and effectively at all times so that, when it comes to costs assessment and recovery, their conduct cannot be used against them.

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[1] Our previous articles on this topic are available here.
[2] [2019] EWHC 1386 (Ch)
[3] CPR 44.3(5)