In addition to the overriding objective, a new test of proportionality has been introduced when assessing costs.
The intention in doing so is that there will be a greater focus on how litigation costs are managed, which should result in cases being conducted more economically and efficiently.
Lord Woolf had similar intentions in 1998, but the decision in Home Office v Lownds  EWCA CIV 365 meant that those intentions were not realised. In that case, the court held that necessary costs could be allowed without regard to the value of what was at stake.
It is intended that the new test will reverse the approach in Lownds in order that disproportionate costs cannot be recoverable from the paying party even if such costs have been necessarily incurred. In other words, proportionality will outweigh necessity.
For cases commenced on or after 1 April 2013
If a case is commenced on or after 1 April 2013, and costs are to be assessed on the standard basis, the court will only allow costs that are proportionate to the matters at issue.
Disproportionate costs may be disallowed or reduced even if they were reasonably or necessarily incurred (CPR 44.3(2)(a)).
If there is any doubt as to whether costs were reasonably and proportionally incurred or were reasonable and proportionate in amount, the court will resolve that doubt in favour of the paying party (CPR 44.3(2)(b)).
In accordance with CPR 44.3(5) the court will decide that costs are proportionate if they bear a reasonable relationship to:
- the sums in issue in proceedings;
- the value of any non-monetary relief in issue in the proceedings;
- the complexity of the litigation;
- any additional work generated by the conduct of the paying party;
- any wider factors involved in the proceedings, such as reputation or public importance.
For cases commenced before 1 April 2013
Where a case is commenced before 1 April 2013, the old rules under CPR 44.4(2)(a), coupled with the Lownds decision will apply i.e:
"Where the amount of costs is to be assessed on the standard basis, the Court will:
(a) only allow costs which are proportionate to the matters in issue; and
(b) resolve any doubt which it may have as to whether costs were reasonably incurred or reasonable and proportionate in favour of the paying party."
Costs incurred in respect of work done before 1 April 2013 will not be disallowed if they would have been allowed under the rules in force immediately before that date.
The indemnity principle
The indemnity principle remains the same because there is already a presumption of proportionality and reasonableness in favour of the paying party.
It is anticipated that there will be a certain amount of satellite litigation, because inevitably there will be disputes about what is proportionate.
Without any clear guidance from the courts, it is likely that what is meant by 'proportionate costs' will be developed on a case by case basis. It is imperative that courts adopt a consistent approach. In a speech about the new test, Lord Neuberger (Proportionate Costs (29 May 2012)) said there will be certain judges hearing all Jackson-related Court of Appeal cases.
Bearing this in mind, it is hoped that consistency will be applied to proportionality at the appeal stage at least.
In the absence of concrete guidance from the courts, you should consider taking the following practical steps to comply with the new test of proportionality and the overriding objective:
- remember that proportionality applies throughout the case and not just when costs are assessed;
- if costs budgeting applies to your case you need to consider proportionality for every part of a costs budget;
- proportionality is relevant to every application in a case. When making an application, you should ensure that you can explain why something is a key issue and proportionate. If you can do this, your application should have a greater chance of success and you should be more likely to recover your costs of the application;
- when determining the amount of costs to claim, ensure that figure is proportionate and reviewed throughout the case with proportionality in mind;
- remember that the new proportionality test is fact sensitive. It may no longer be appropriate to talk about costs recovery in percentage terms but instead you can use proportionality as the guiding principle;
- when costs are assessed, paying parties will inevitably use the proportionality argument to reduce their liability as to costs. If you are the receiving party, you should check the extent to which those ordered to pay were responsible for costs being incurred and if it can be argued that they acted unreasonably.
What should I do?
Proportionality is not just a principle: it applies to every case. If you are in any doubt about how proportionality works or how it applies to your case, please do not hesitate to get in touch.