Chapter 7 Costs
The importance of costs 2. The year which has elapsed since the interim report has not caused me to alter that assessment. Costs are a significant problem because:
(a) litigation is so expensive that the majority of the public cannot afford it unless they receive financial assistance;
(b) the costs incurred in the course of litigation are out of proportion to the issues involved; and
(c) the costs are uncertain in amount so that the parties have difficulty in predicting what their ultimate liability might be if the action is lost.
3. The adverse consequences which flow from the problems in relation to costs contaminate the whole civil justice system. Fear of costs deters some litigants from litigating when they would otherwise be entitled to do so and compels other litigants to settle their claims when they have no wish to do so. It enables the more powerful litigant to take unfair advantage of the weaker litigant. The scale of costs per case has an adverse effect on the scope of the legal aid system. It also adversely affects the reputation of our civil justice system abroad and may be making this country less attractive for overseas investment and as a forum for the settlement of commercial disputes. As I pointed out in the interim report, it is incorrect to assume that high costs are not a problem merely because they are met out of a relatively deep pocket or are passed on in insignificant amounts to individual consumers. They still constitute an unnecessary cost to the economy as a whole and are not acceptable however they are distributed.
4. Costs are also of great importance to my Inquiry because the ability of the court to make orders as to costs is the most significant and regularly used sanction available. The court's power to make appropriate orders as to costs can deter litigants from behaving improperly or unreasonably and encourages them to behave responsibly. Cost orders can also have a salutary effect on members of the legal profession.
5. Costs are central to the changes I wish to bring about. Virtually all my recommendations are designed at least in part to tackle the problems of costs. They are intended to:
(a) reduce the scale of costs by controlling what is required of the parties in the conduct of proceedings;
(b) make the amount of costs more predictable;
(c) make costs more proportionate to the nature of the dispute;
(d) make the courts' powers to make orders as to costs a more effective incentive for responsible behaviour and a more compelling deterrent against unreasonable behaviour;
(e) provide litigants with more information as to costs so that they can exercise greater control of the expenses which are incurred by their lawyers on their behalf.
6. These objectives are to be achieved in part by the expansion of the small claims jurisdiction to £3,000 and the establishment of a new fast track for straightforward cases up to £10,000, both with restricted costs. The remaining problem is the multi-track.
7. On the multi-track I recommended that at case management conferences and pre-trial reviews, the information available for the hearing should include an estimate of the amount of costs already incurred and the costs which would be incurred if the case proceeded to trial. I also recommended that it should be a professional obligation for lawyers to explain their charges to clients, including the potential overall cost of a case, and to give reasonable notice where an estimate is likely to be exceeded; and that legal professional bodies should encourage their members to undertake litigation, where this is practical, on fixed fees either for stages of the proceedings or for the proceedings as a whole.
8. English courts are wedded to the dual concept that costs should be treated as a whole and that costs should follow the event. In the interim report I recommended that courts should pay greater regard than they do at present to the manner in which the successful party has conducted the proceedings and the outcome of individual issues. I suggested that the court should use its powers over costs to encourage co-operative conduct on the part of litigants and to discourage unreasonable conduct. This can apply to pre-proceedings conduct as well as conduct after proceedings have been commenced. The court should also be more willing to identify areas where it considers that costs have been unnecessarily incurred. I suggested that running up excessive costs would continue unless the court was prepared to take action (Interim report, chapter 25, paragraph 23).
9. I also recommended that RSC Order 62, rule 3(3), which provides the general rule that costs follow the event, should be relaxed so that the court could use to the full its very wide statutory discretion over costs to support the conduct of litigation in a proportionate manner and to discourage excess. This new approach will be given effect by the overriding objective which is set out in Rule 1 of the new rules which at 1.3(g) requires the court to further the overriding objective by actively managing cases appropriately, in particular:
10. This will give the court an effective weapon for the first time. Generally, the response to the interim report and to the issues papers indicated that practitioners would welcome such an approach from the bench.
Research 12. However, I was concerned that the Inquiry should commission some research which could be carried out within the two years laid down by the Lord Chancellor for the preparation of this report and the new procedural rules. I therefore asked the Supreme Court Taxing Office (SCTO) to collect information from bills submitted. A preliminary analysis of the first 673 cases was included as Annex 3 to the interim report. A complete analysis of 2184 cases is set out in a report, Survey of Litigation Costs. A summary of that report appears in Annex 3.
13. The survey confirmed that it is among the lowest value claims (£12,500 or less) that costs are most disproportionate. In 40 per cent of these cases the costs of one party alone are close to, or exceed, the total value of the claim. This emphasises the importance of the fast track in bringing costs under control. I have referred in more detail to some of the findings of the research in the introduction to this section on case management.
14. Annex 5 to the interim report contained a schedule of fixed costs which applied to litigation in Germany in 1994. The object of including the schedule was to illustrate a radically different approach to costs. The costs set out in the schedule are substantially lower than the uncertain sums which parties in this jurisdiction are likely to have to pay for the equivalent representation. Following the publication of the interim report, Adrian Zuckerman, Fellow of University College, Oxford, was requested to conduct a survey of German practitioners about the German litigation cost system. That survey will be made available at the same time as this report. The survey provides an outline of German civil procedure, noting in particular that although the judge is in charge of proceedings, the system is not an inquisitorial system. Nor is the task of the German lawyer easier than that of his English counterpart, although its emphasis differs. The chief focus of the survey was to establish German practitioners' views of the system of fixed costs, in relation to concerns expressed here that such a system would result in lawyers charging above the official scales and that, were they not able to do so, clients might not be able to secure legal representation in low value litigation. A further worry was that, where lawyers did take on low value claims, they would tend to provide superficial services to compensate for the low return. The survey shows that while lawyers' fees in Germany are substantially lower than in England, there appears to be no difficulty in securing legal representation. This is the position even for low value claims where the figures are particularly modest by comparison with those that would be charged in England.
15. I do not refer to the survey with a view to recommending the adoption of the German approach to costs. I do so because the German survey indicates that, unlike in England, in Germany it has been possible to make litigation substantially more affordable, provide lawyers with what they regard as an acceptable level of income and, so far as can be judged, provide an acceptable standard of justice. This surely presents a challenge to all those responsible for our civil justice system to do better than at present
to make justice affordable.
Controlling costs 17. The paper occasioned a general outcry from the legal profession. Prospective budget-setting was seen as unworkable, unfair and likely to be abused by the creation of inflated budgets. The ability of judges to be involved in the hard detail of matters such as cost was generally doubted. The imposition of fixed fees, even relating only to inter partes costs, was seen as unrealistic and as interference with parties' rights to decide how to instruct their own lawyers. There was widespread concern that these suggestions heralded an attempt to control solicitor and own client costs. The restrictions were generally seen as "artificial and unworkable". But the debate which they occasioned has been both instructive and encouraging.
18. In my interim report I quoted the London Solicitors' Litigation Association who said:
That is what the fast track and judicial control on the multi-track are designed to achieve. The Association, in response to Adrian Zuckerman's paper, suggested that:
19. The Association welcomed procedural reforms which would achieve these costs reductions but did not believe that in themselves they would provide a complete answer to the vexed question of ever-increasing litigation costs. To achieve this, the Association said:
The impact of procedural reform (a) reduce the steps which parties have to take to enable the court to dispose of the case justly;
(b) ensure that the way in which the case is handled is proportionate to the nature of the issues involved;
(c) narrow the areas of dispute as early as practicable either by achieving the agreement or summary determination of issues when this is possible;
(d) restrict discovery and evidence to that which is appropriate;
(e) set timetables for progressing the proceedings and the hearing so the parties and their lawyers can perform their roles efficiently.
21. The court will also have an increased focus on costs relating to pre-action behaviour as a result of recommendations made elsewhere in this report. In three areas, the court will assess compliance and overall behaviour in making orders for costs:
(a) compliance with the new pre-action protocols (chapter 10). A party who has not complied with a protocol will find that he is
at a disadvantage in seeking or opposing an order for costs;
(b) the introduction of pre-action offers to settle by prospective claimants and defendants (chapter 11);
(c) wider powers of pre-action disclosure to enable such offers to be made (chapter 12); if necessary, the court will be able to order disclosure.
22. In addition, I recommend that the court should have power to deal with the question of costs even where all the other issues in dispute have been resolved without the need for litigation. If all that is left in issue is costs, it will be open to a party to make a claim to have the outstanding issue determined by the court. This will facilitate pre-litigation settlement of disputes.
Focusing attention on costs as a sanction 24. Orders for costs should reflect not only whether the general outcome of the proceedings is favourable to the party seeking an order in his favour but also how the proceedings have been conducted on his behalf. I have already referred to the need to assess compliance with protocols. Judges must therefore be prepared to make more detailed orders than they are accustomed to do now. The general order in favour of one party or another will less frequently be appropriate. Different orders will need to be made on different issues, eg, where there has been a departure from a protocol or an offer to settle that issue has been unreasonably refused.
25. In addition, failure to comply with directions and orders should produce orders for indemnity costs, payable forthwith.
26. Unless the court is prepared to take the time necessary to elevate decisions as to costs above the conventional approach adopted at present, the parties will not take as seriously as they should the obligations which a managed system will place on them. Orders for costs must in future reflect the obligations the new rules place on the parties. In addition the court should have powers to require solicitors to inform their clients of orders which have been made and why they were made.
Control by the client 28. I agree this is extremely important. I have recommended in the interim report that it should be a mandatory requirement for a solicitor to tell prospective clients how fees are to be calculated and what the overall costs might be; and to give reasonable notice when that estimate is likely to be exceeded and the reasons. If, in the past, the uncertainty of what might occur in proceedings provided justification for not making this a mandatory requirement, that justification would no longer exist under the more predictable system which I am proposing.
29. For the same reason I am recommending that clients should be present at case management conferences and pre-trial reviews, where the judge will be informed about the level of costs incurred to date and the likely amount of future costs that would be incurred by the programme of work that he is setting at the conference. The presence of the client should be a powerful incentive to adopt a realistic approach.
30. Clients have other methods of control which they can exercise. It has been suggested that all clients or funders should impose eight requirements on their solicitors:
(a) prevent major litigation strategies without instructions;
(b) eliminate unnecessary research and detail;
(c) control the hiring and use of barristers and experts;
(d) forbid interlocutory/discovery activities without prior approval;
(e) prevent convening of meetings when telephone calls will suffice;
(f) control the level of manning;
(g) agree the level and method of charging;
(h) emphasise that the case belongs to the client.
31. If clients were to impose these requirements this would go a long way towards achieving my objectives. Increasing client consciousness of costs would also increase their awareness of the need to act responsibly as litigants.
Estimates of costs and control by the court 33. Estimates need not go into detail and would therefore not disclose confidential information which might be of tactical value to an opponent. They would fall short of the radical proposals set out by Adrian Zuckerman in the issues paper. The estimates would be indications to help the procedural judge decide the best course of action rather than budgets which limited what parties could recover. My other recommendations need to be 'bedded down' before proceeding further in this direction on costs.
34. In an exceptionally complex case the procedural judge may need further assistance. In such a case, I recommend that taxing masters should be able to give guidance, as they do now on applications for security for costs. The guidance would be in a broad terms and would not be equivalent to a prospective taxation.
Benchmark costs 36. Judicial review is also a possible example. The steps taken in the majority of cases are standard. Variations are limited to the number of affidavits on either side and the difficulty of the point involved.
37. While the arrangement a party chose to come to with his own lawyers would not be of direct concern to the court, a party to a 'normal' application for judicial review would have to justify seeking to recover from the other side more than the published benchmark cost. Where a lawyer proposed to charge his client more than the guideline figure, the Law Society could require a written agreement to be entered into which would set out the client's acceptance of the increase. The figures for benchmark costs would have to be kept up to date with the assistance of those who were responsible for the original figures. I therefore recommend, as a first step, that work should be put in hand to identify provisional categories of case suitable for standard treatment and costs data collected to test the range of costs incurred and the factors associated with any significant variations.
Reconciling the needs of parties with differing resources 39. There are precedents for a similar approach being adopted. For example, under the Banking Ombudsman scheme, if the bank decides not to accept the Ombudsman's decision because there is an issue of principle involved, it is entitled to take the matter to court, but only on the basis that it meets the whole of the other side's costs. It can be a condition of leave to appeal being given, particularly to the House of Lords, that the appellant will meet the respondent's costs in any event and the order for costs made in the court below is not disturbed.
40. The court should be able to award interim costs in appropriate cases, in the same way as interim damages would be payable. That is to say, interim costs would be payable forthwith, although ultimate liability would remain subject to the court's determination, where the opponent has substantially greater resources and where there is a reasonable likelihood that the weaker party will be entitled to costs at the end of the case.
Taxation of costs 42. Although it is not, practically speaking, possible to change the retrospective nature of taxation, I would however make one recommendation designed to improve the process. The new overriding objective in Part 1 of the new rules should be a constructive influence on the process because of the duty which it imposes on litigants. Taxation would however be more in accord with the general message of this report that litigants should act reasonably if the test on taxation was changed clearly to reflect this. The test I would recommend is based on the wording of the Solicitors' (Non-Contentious Business) Remuneration Order 1994; it is that the amount allowed should be what is "reasonable to both parties to the taxation". This would be the new standard approach. The indemnity basis would remain as it is.
Litigants in person and costs 44. The amount of costs recoverable by a litigant in person is what would be allowed if the work had been done and disbursements had been made by a solicitor on his/her behalf together with any payments made by him/her for legal advice. This is, however, subject to two qualifications:
(a) where the litigant in person has not suffered any pecuniary loss in preparing his/her case or attending court he/she is only allowed £8.25 per hour for time reasonably spent on the case;
(b) he/she is limited to two-thirds of what would be allowed on taxation if he/she had been represented.
45. These provisions bear heavily on litigants in person. They are complex to operate. They do not accord with my general approach that litigants who are compelled to come to the court for a remedy should receive recognition for what this requires them to undergo. A distinction based on whether pecuniary loss can be shown is sometimes arbitrary in application. My proposals for fixed recoverable costs on the fast track and in relation to the position of companies both raise further considerations. I therefore recommend that the operation of the rule should be re-examined, with a view, if possible, to dispensing with the need to show pecuniary loss, perhaps in conjunction with a reduction in the overall proportion of what is allowable. Such a consideration should take account of the desirability of promoting arrangements whereby litigants could undertake much of the preparation of their case but with access to legal advice and representation as necessary. This is often known as "unbundling". Such an approach is of greater significance in view of the Bar's recent decision to allow referrals from Citizens Advice Bureaux, which already provide significant assistance to litigants in person.
Costs and insurance Costs and training 48. I recognise that my reforms involve learning new skills. These will have to be learned not only by judges but by members of the profession generally. The profession as well as the judiciary must pay more attention to and be better informed about costs than they are at present. My objective is to require greater attention to be focused on costs throughout the process of resolving disputes by everyone involved: judges, litigants and lawyers.
Recommendations (1) Orders for costs need to reflect more precisely the obligations the new rules place on parties.
(2) The court should have power to deal with the question of costs even where all other issues have been resolved without litigation.
(3) Where one of the parties is unable to afford a particular procedure, the court, if it decides that that procedure is to be followed, should be entitled to make its order conditional upon the other side meeting the difference in the costs of the weaker party, whatever the outcome.
(4) The court should be able to order payment of interim costs in cases where the opponent has substantially greater resources and where there is a reasonable likelihood that the weaker party will be entitled to costs at the end of the case.
(5) Benchmark costs should be established by the court with the assistance of user groups, for multi-track proceedings with a limited and fairly constant procedure.
(6) The new standard basis of taxation should be based on the wording of the Solicitors' (Non-Contentious Business) Remuneration Order 1994, ie, that the amount allowed should be what is "reasonable to both parties to the taxation". The indemnity basis should remain as it is.
(7) There should be a review of the rules on the costs recoverable by a litigant in person with a view to simplifying them.
1. I began the chapter on costs in the interim report by saying:
"The problem of costs is the most serious problem besetting our litigation system."
"(g) by considering whether the likely benefits of taking a particular step will justify the cost of taking it".
11. There is little research information on the costs of the existing system. There is, however, almost total agreement among all those engaged in the civil justice system that costs are excessive. It would therefore have been inappropriate for me to defer my Inquiry until empirical research had been carried out. This would have prolonged the Inquiry unreasonably.
16. In order to explore the issue of costs further, the Inquiry published an issues paper by Adrian Zuckerman, which discussed a number of mechanisms for controlling costs in advance, such as budget-setting, fixed fees related to value, fixed fees related to procedural activity or a mixture of the two.
". . . it is impossible to limit costs without limiting procedural activity."
". . . costs reductions in litigation can only follow a vigorous attack on the roots of the problem: unnecessary delays, complexity in procedure and the service provided by the courts themselves."
". . . it will be necessary to impose costs restraints".
20. My recommendations, together with the new rules, are intended to ensure that litigation is conducted less expensively than at present and to achieve greater certainty as to costs. The emphasis will be on using case management to:
23. Many respondents called for costs sanctions to deal with the tendency of parties at present to make numerous interlocutory applications. These are generally of a tactical nature which may be of dubious benefit even to the party making the application or which may not be warranted by the costs involved. It was agreed that the answer here is for costs orders to be made at the end of interlocutory hearings, to be payable forthwith by the party who has occasioned the hearing. At present such applications are made with impunity because the liability on the loser to pay is usually postponed until the end of the case when it is lost in the overall settlement of costs.
27. The Chief Taxing Master has suggested to me:
"that the most effective and simple method of keeping costs under control is to keep the client informed at all times as to what is proposed in his name."
32. It is important that the court is aware of the parties' estimate of the expenditure which has been and will be incurred when considering the future conduct of a case. The parties' estimates will be dependent upon how they are proposing that the case should be conducted. If one method of dealing with the case would be beyond the resources of one of the parties, then dealing with the case justly may involve not adopting that procedure. This could be particularly important where, for example, one party wishes a case to remain on the fast track but the other is arguing for the case to be transferred to the multi-track.
35. There are, however, some multi-track proceedings in which further steps could be taken to assist the parties and the courts. These are proceedings which have a limited and fairly constant procedure. Here the court, with the assistance of user groups and the information available to the SCTO, should over time be able to produce figures indicating a standard or guideline cost or a range of costs for a class of proceedings. An obvious candidate for this approach would be cases which do not substantially turn on issues of fact, for example, those dealt with in the Chancery Division using the originating summons procedure.
38. There will be some cases which require the full procedure of the multi-track because of the wider importance of the case but which one of the parties is unable to afford. Medical negligence and patents are areas where this is quite likely. Is the stronger party to be deprived of the full assistance of the legal process which he reasonably desires because of the lack of means of the other party? To meet this situation I recommend that the court, in deciding upon the procedure which is to be adopted, should be entitled to make its order conditional upon the other side agreeing, whatever the outcome, to meet the difference in the costs of the two procedures to the weaker party if the more elaborate and expensive procedure is adopted. This would ensure that a stronger party is not deprived of the benefits of the full procedure and at the same time enables the weaker party to continue to contest the proceedings.
41. The function of taxation is not to undertake an independent assessment of the charges claimed as a whole but to resolve disputes over items between the paying and receiving party. The process therefore depends upon the paying party identifying those items on the bill which are capable of being challenged effectively. The taxing officer or Master does not give his opinion of the reasonableness of the bill as a whole. Thus there is no objective assessment of what would have been be a reasonable sum for conducting a particular case; instead, it is a retrospective check on the reasonableness of the costs in fact incurred by a party over the course of the litigation. As long as a party, judged by the conventions of current practice, was acting reasonably in the way in which he conducted the case and the charges for the actual work done were reasonable in the circumstances, the taxing process does not intervene. The taxing system is therefore not a method of controlling costs absolutely but a safeguard against claims for costs which can be shown to be out of line with the norm. Taxation provides no encouragement to litigants to conduct litigation in the most economical manner.
43. In the interim report I indicated the number of litigants in person is increasing. I stated that they should cease to be seen as problems for the system but, instead, the court should adopt a pro-active role in providing information and advice for them. I did not, however, in making my recommendations, address their position in relation to costs.
46. In the future, insurance could have a larger part to play in funding litigation. This could apply both to parties' own costs and to liability for the other side's costs. A rapid increase in the availability of insurance is important to greater access to the courts. It is also important to the legal profession. However the ability to assess the risks involved is important if insurers are to increase their involvement. Certainty as to costs and moderation in their amount is critical to insurers offering affordable terms.
47. Although most respondents thought that judges would be able to achieve the aims of case management, there was considerable concern that judges did not have the appropriate background to make informed decisions about costs. This is, however, a shortcoming which can be dealt with by training and experience.
My recommendations are as follows.