How Are Costs Dealt With In Litigation?
It goes without saying that litigation is an expensive process and therefore it is important that you understand the relevant costs implications at the outset, including what costs (if any) you can recover from your opponent.
The general rule in litigation is that the losing party pays the winning party’s costs. Costs are the fees incurred in the case, including any disbursements which have been incurred (these are expenses incurred by the solicitor on your behalf).
When considering costs, it is important to bear the overriding objective in mind, namely that courts must deal with cases justly and at proportionate cost, in accordance with rule 1.1 of the Civil Procedure Rules (“CPR”).
Recovery of costs is always at the discretion of the court and the court may depart from the usual costs rules where there has been, for example:
- a failure to comply with a pre-action protocol;
- a refusal to engage in alternative dispute resolution (ADR) and/or a failure to negotiate with the other side;
- rejection of an offer made in accordance with Part 36 of the CPR;
- exaggeration of the claim; or
- a failure to succeed on the whole claim.
It is also imperative to remember that a party cannot recover more from their opponent than they are liable to pay their own legal representative (the limit is actual costs) and this is known as the ‘indemnity principle’.
How does the court assess costs?
There are two relevant bases upon which the court will assess costs, namely the ‘standard basis’ and the ‘indemnity basis’, as set out in the table below:
|Standard Basis||The standard cost basis is where the court will allow only proportionate costs. Any doubt is exercised in favour of the paying party.|
|Indemnity Basis||The indemnity cost basis is used when the court exercises any doubt in favour of the receiving party. It is used to punish the paying party (most often for a failure to comply with the CPR). Effectively, it will be difficult for the paying party to object to costs unless it was unreasonable for the solicitor to do the work at all.|
Parties should try to agree the costs in the first instance. Although if this is not possible, there will be a hearing to determine the costs (which is often known as an ‘assessment’). The court will take into account a number of factors when assessing costs, whilst keeping in mind the goals of the overriding objective, to keep the parties on an equal footing and bearing in mind proportionality. The relevant factors include:
a. the claim’s value;
b. the complexity and importance of the claim;
c. the skill and effort involved in dealing with the claim;
d. the time spent.
The court will also consider the location of where the work was performed as it is considered that the solicitor’s location will reflect their necessary overheads. Such overheads vary regionally and solicitors based in London, for example, will generally be expected to have higher overheads.
To work out the overall costs, the parties will calculate how much time all of the lawyers working on the matter have spent. For example, the time spent writing emails, letters, having telephone calls, and preparing and considering documents will be included. Different lawyers have different chargeable rates, and a solicitor will charge more than a trainee solicitor or paralegal, for example. The recoverable amount will also depend on location, as explained above.
The court can make a number of costs orders, including:
i. a stated amount for costs;
ii. payment of costs up to a specific date or up to certain steps in the case being completed;
iii. an order to pay only a proportion of the other party’s costs; or
iv. an order that costs will be subject to detailed assessment if not agreed between the parties.
What are the costs management and budgeting requirements?
Costs are limited by way of costs management and costs budgeting. In the most complex cases (e.g., those on the Multi-Track), both parties will file and exchange costs budgets. This gives the court control over costs and ensures that the parties remain on an equal footing.
The judge will consider the costs budgets at a case management conference (“CMC”) and when the court decides to deal with costs at this hearing, it will make an order for the parties to attend a Costs and Case Management Conference (“CCMC”).
The judge may make a costs management order (“CMO”) at the hearing. The costs budget should not be departed from once a CMO has been made, although in practice there is a small amount of leeway, which would be 20% at most. A party must apply to the court for a new order if they envisage, during the proceedings, that they will exceed the CMO.
It is imperative to remember that if no costs budget is filed, there is a risk that no costs will be awarded to the successful party, only the applicable parties. Therefore, the parties must budget for the entire case.
What are inter-partes costs, ‘summary assessment, and ‘detailed assessment’?
The term ‘inter-partes’ means a party in the claim is awarded costs against another party and the term is used to make things simpler and differentiate such costs from the party’s own costs, namely the amount they have agreed to pay their own solicitor. In most cases, a judge will make an order for inter-partes costs when the case concludes and the principle that the losing party pays the winning party’s costs will be followed as a starting point.
There are two types of assessment process, namely ‘summary assessment’ and ‘detailed assessment’, described below as follows:
- Summary Assessment – this process is used in lower value cases and interim applications. The parties must file a statement of costs no less than 24 hours prior to the hearing itself, or at least two days before the trial. The judge will make a summary assessment of the costs payable at the conclusion of the hearing. Such costs are normally ordered to be paid within 14 days of the date of the hearing. The receiving party will be entitled to interest from the time of the judgment and until costs are paid; and
- Detailed Assessment – this process is used for larger value claims or those where more complexity is involved. The court will usually make an order for detailed assessment in such cases. A hearing will take place to consider the costs (often a number months after the proceedings conclude), unless the parties can agree between themselves as to the amount of costs payable.
The court will usually make an order for no costs if the claim is on the small claims track.
How do the recent changes to litigation and the fixed costs regime affect costs recovery?
On 1 October 2023, a number of changes were made to the way in which litigation is conducted in England and Wales. It is necessary to consider how the landscape of costs recovery has shifted as a result of these changes.
The fixed recoverable costs regime (“FRC Regime”) has been extended significantly and prior to 1 October 2023 fixed costs only related to a small handful of cases, for example, in low-value personal injury claims. FRCs set the amount of legal costs that the winning party can claim back from the losing party in civil litigation.
FRC Regimes give certainty in advance about the maximum amount a losing party will need to pay the winning party. However, as a consequence, the amount the winning party can reclaim may not actually cover the actual costs of the case (predicting this can be difficult). Under the new rules, the FRC Regime is extended to all civil cases in the Fast Track (i.e., those cases valued up to £25,000 in damages that will last no longer than a day (except for housing claims). The FRC Regime also applies to the new Intermediate Track (i.e., those claims that are valued up to £100,000).
We have a detailed article on the new FRC Regime, which you can peruse at your leisure here.
Is it possible to get security for costs?
A problem for defendants in litigation is that they have no choice as to whether to be in litigation or not because a claim has been brought against them by the claimant and the defendant is therefore at the behest of the claimant.
The claimant will have also been able to make a value judgement as to whether the defendant is worth suing or not, but the defendant would have had no such opportunity. Therefore, in certain circumstances, a claimant may apply to the court for a security for costs order if they are concerned that the claimant will be unable to pay their costs in the event the defendant wins the case. Such an application would be an ‘interim application’.
If the application is granted by the court, the claimant may be required to pay money into the court or provide security by way of a bond. When deciding whether to grant security for costs, the court will consider whether there is any evidence to suggest that the claimant would not be able to pay in the event they lose the case.
There are only specific situations in which the court will consider granting a security for costs order. Such situations are very strict, are set out in rule 25.13 of the CPR and are at the court’s discretion, including where:
I.the claimant resides outside of the jurisdiction;
II. the claimant is a company or other body and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so;
III. the claimant has changed address since the claim was started with a view to evading the consequences of the litigation;
IV. the claimant failure to provide an address or gave an incorrect address on the claim form;
V. the claimant is acting as a nominal claimant (that is, someone who is suing for the benefit of another person); or
VI. the claimant has taken steps in relation to assets that would make it difficult to enforce an order for costs against them (for example, moving them out of the jurisdiction of the English and Welsh courts).
Can the court award non-party costs?
In exceptional circumstances, the court can award costs in cases involving a non-party (a party who is not involved in any way in the proceedings). Remember that costs are at the court’s discretion and a costs order may be made against a non-party where that party indirectly funds the proceedings and controls or benefits from them in some way.
As a matter of procedure, the non-party would need to be added to the proceedings (only for the purposes of costs). There must be an opportunity given to the non-party to attend a hearing, during which the court will duly consider the matter.
What is qualified one-way costs shifting and to which cases does it apply?
Qualified one-way costs shifting (“QOCS”) relates to personal injury claims only. In such claims, the general rule is that the claimant is not liable to pay the defendant’s costs if the claim fails. However, the claimant may be required to do so in the event that:
- the claim was fundamentally dishonest;
- the claim was made for the financial benefit of another; or
- the claim was struck out for disclosing no cause of action or abuse.
The receiving party is only permitted to enforce a costs order to the level of damages awarded. The claimant can lose protection under QOCS if the defendant made an offer to settle in accordance with Part 36 of the CPR if the claimant failed to beat the defendant’s offer at trial. If this happens, the defendant can recover their costs up to the level of damages awarded.
What is a wasted costs order?
The court has discretion to make a wasted costs order if a solicitor has conducted themselves in a way which the court considers to be improper, unreasonable or negligent. The court must be satisfied of a number of factors to make a wasted costs order, including:
- the legal representative acted improperly, unreasonably or negligently;
- the conduct caused unnecessary cost; and
- it is ‘just’ to make the order.
Ultimately, the court will usually make such an order at the end of the trial or hearing if it feels that it is appropriate to do so. The solicitor must advise the client of the wasted costs order within seven days of the court making the order.
How we can help
It is important to understand the implications of costs of litigation at the outset, regardless of whether you are a claimant or a defendant. If you require assistance to resolve a dispute or the matter is heading towards litigation, we would be more than happy to advise and guide you, working with you to ensure that your case has the best possible chance of settlement out of court. As always, we will ensure that your matter is dealt with efficiently, diligently and effectively.
This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited 2023.