#14951 - Costs - Principles of Civil Procedure

Costs

Policy factors

• Need for efficient market, which requires transparency of information – re price (including time where time-based), quality, cost price, etc

• Difficulty in civil litigation

  • Difficult to determine — not a transparent market

    • scope of work & time required

    • Also difficult to compare quality

  • Agency problem

    • Lawyer’s economic interests at odds with client – lawyer can determine that scope – because client lack expertise

    • Preservation of monopolies – eg notaries, rights of audience

  • Monopolisation of rights of audience

• Exacerbated by

  • Hourly rates of pay

  • Cost shifting

Legal aid

• Reform

  • Prosecution taken in-house

  • Defence – firms of solicitors required to bid for blocks of work, which creates competition

Arguments in principle

Three rationales compete for the basis for costs schemes. Corrective justice would be best served by a traditionally British costs shifting system where no party is out of pocket for successfully vindicating or defending their rights. Distributive justice would be best served by spreading the cost of litigation appropriately between parties and the public at large via taxes or insurance, via such mechanisms as QOCS and ATE. Litigant autonomy would be best served by an American system where each party determines their own investment in litigation without fear or expectation of costs orders.

Although all three must play a role, corrective justice should be the starting point because, unlike the other two, it has a valid normative claim rather than merely an instrumental one. However, corrective costs shifting alone cannot attain the instrumental aspirations of equity and access to justice shared by all three rationales. Rather, where the risk and amount of adverse cost orders is unpredictable risk-averse parties will be discouraged from litigating. Certainty is needed to avoid the deterrent threat of large adverse cost orders. A degree of autonomy and individual responsibility for costs is needed to incentivise cost control. Clarity is needed to encourage settlement and avoid satellite litigation. Simplicity is needed to avoid tactical exploitation of finely tuned rules. On these fronts, the costs rules in England have failed and post-Jackson will most likely go on failing.

Costs recovery <> no costs recovery — economic analysis

• Indemnity<>standard basis

  • Standard basis — whether reasonably incurred + whether proportionate <> indemnity — only whether reasonably incurred

• If no cost recovery — rational to proceed if —

  • Value of litigation x prospects of success > (Certain) cost of litigation

  • EG 10k x 50% > 4k 5k > 4k

  • EG 10k x 80% > 4k 8k > 4k

• If cost shifting — rational to proceed if —

  • Value of litigation x prospects of success > Prospects of failure x (cost of own litigation + cost of opponent’s litigation)

  • EG 10k x 50% > 50% x (4k + 4k) 5k > 4k

  • EG 10k x 80% > 20% x (4k + 4k) 8k > 1.6k

• IE more favourable to parties with greater prospects of success

• BUT aggravated by

  • Risk factor — if one party more risk averse = has less resources — less likely to engage

  • fact that richer=less risk averse party incurs more costs

  • costs not fixed — can be expanded by protracted litigation, appeals, etc

  • uncertainty of costs

• Creates ‘ratchet effect’ where it is rational for parties once engaged in litigation to expend greater amounts to win & recover costs

Cost shifting — Arguments in favour

Justice – redressing wrongs should include reasonable costs

• Positive Law

  • CPR 44.2(4) states that court to have regard to all circs incl conduct of parties

  • 44.2(5) says conduct of parties incl before & during proceedings, disregard of PDs, whether reasonable to raise, pursue or contest a particular issue and the manner in which done so; whether exaggerated partly-successful claim

  • Blame gives reason for exempting public authorities from costs — as they are acting in the public interest eg in disciplinary proceedings — Baxendale-Walker v Law Society

• Argument

  • Fault-based justification – characterisation of failed litigation as fault

  • access to justice is fundamental rights

  • Costs required to make full indemnity — whether by C for inconvenience of failed litigation or by D for refusing to give compensation — Arkin v Borchard Lines per Lord Phillips MR

    • Causation is therefore a vital consideration

• Response

  • Analogy between litigant & tortfeasor is weak — litigation short of abuse of process or malicious prosecution is not a ‘wrong’

    • Lord Denning — “every civilised system” must make available to its citizens a means of dispute resolution

  • Weak cases involve less cost — will be struck out or summary judgment

  • Assumes judges will get it right — eg findings of fact are only on balance of probabilities, but have to pay full costs

  • Assumes ‘declaratory’ theory of justice — that there was an ascertainable objective truth before litigation, therefore fault

    • Where dependent on factual question — clearly is a factual truth

      • Except that not all factual questions ascertainable — some information would be available to parties — disclosure in course of litigation may reveal

    • Where dependent on a legal question — no certainty

Access to justice – if have no financial resources won’t pursue claim

• Argument

  • Instrumental argument — based on restorative principle

  • Would effectively allow discounting of debts — debtor would just let creditor sue or offer to settle for less, even for clear debts

  • Justifies only compensatory not punitive view of costs — that successful party’s position should not be worse off because they had to go to court to vindicate rights: Ex parte Child Poverty Action Group (1998) per Dyson LJ

• Inversely — deters unmeritorious claims/defences; encourage compromise

  • EG CPR 36 offers with costs consequences

  • BUT settlement induced by fear of costs risk is not a fair or desirable one

Arguments for No Cost shifting

• If parties bear own costs – will regulate their own costs

• Cost-shifting removes incentive to settle – settlements are often exclusive of costs – once reach tipping point of costs, incentive is just to proceed & roll the dice

• “ratcheting mechanism” – once committed, disincentive to pull out, as have to bear own & other party’s costs

  • has its own access to justice element

• NB Regulation of recoverable costs

  • Court restricts to reasonable – in cost assessing

Cost shifting — other models

• Belgium — fixed cost shifting with standard, minimum & maximum costs according to value of litigation

• Spain — costs capped at 1/3 of value of litigation, ‘reasonable’ costs assessed by clerk of court & subject to dispute

• Poland — lawyers fees capped at 1200, but other expenses can be recovered on top of that

• India — rule is that costs follow the event, but in practice never awarded; cost caps haven’t been amended since 1950s so are now extremely low

• US — no costs

• Germany — fixed costs — AZ’s favourite

  • Calculated as percentage of amount recovered (not amount of claim)

  • Percentage reduces as amount increases

  • Percentages reviewed periodically

  • Calculated in brackets — commencement, evidence, trial

  • Figures are small but substantial enough to allow clients to pay lawyer no more than recoverable fee

  • Get 2 brackets on settlement

  • Impact on lawyers

    • Costs are affordable so more litigation

    • Of course bad for the top end as restricts costs

Fixed costs

• AZ recommended to Wolff report – met with opposition from profession

• Woolf – instead imposed case management, transferring control to court, in order to reduce costs

  • Instead caused increased costs as more issues to litigate – case management procedures; pre-commencement (front-loading of litigation); costs litigation

  • Incentive not changed — hourly costs rewards inefficient solicitors— and penalises well-run businesses that conclude matters quickly (Lord Neuberger as MR)

• Criticism —

  • Impractical — solicitors can’t know how much work is going to be involved in a matter — unlike barristers who receive the brief in full

  • Increased negligence claims & higher insurance premiums

  • Inaccurate charges — higher and lower than services are worth

  • Freedom of contract — in mutual interest of client and solicitor to enter into a contract that will permit the solicitor to adjust to the vagaries of litigation

• Isolated fixed fees

  • Civil Justice Council in 2005 recommended Costs Council to introduce recoverable fixed fees (fast-track) & guideline hourly rates (multi-track)

  • BUT hourly rates will have to reflect complexity etc — hourly rate is only one of “7 pillars”

  • Pilot schemes in fixed fast-track costs threw out widely differing results following recommendation in 2005 report

• Compromise

  • For any fixed costs regime to be fair it must have an ‘exceptional circumstances’ clause

  • But any discretion or exception undermines certainty

  • No harm in fixing recoverable costs as between the parties in fast-track — can form part of the analysis for determining whether a matter should go on that track in the first place

Methods of combatting costs

• Case management — to bring down cost of litigation generally

  • But post-CPR, costs became a means of disciplining parties, creating more discretion & more disputes

  • Does not address incentives of lawyers to prolong & raise cost of litigation

Jackson reforms —

• Background & Context

  • There have been over 60 reports since the 19^th century attempting to reduce costs — Woolf like all those before him failed; unlikely that Jackson will succeed

  • But Jackson reforms specifically targeted at costs review based on ...