England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		30 January 2017

1. MR JUSTICE NUGEE: I have listened with great interest to the arguments on both sides. I was addressed on the construction of rule 3.15(2) which provides that:

"The court may at any time make a costs management order. Where costs budgets have been filed and exchanged, the court will make a costs management order unless it is satisfied that the litigation can be conducted justly and at proportionate cost in accordance with the overriding objective without such an order being made."

2. But I did say on the last occasion that the fact that I was directing budgets was not to be taken as giving rise to a presumption or prima facie conclusion that it was an appropriate case for costs management order and I said:

"I regard this as a case where the purpose of budgeting is to enable the parties to keep an eye on whether the costs that have been incurred, and are expected to be incurred, are reasonable and proportionate, with a view to asking for a costs management order if they can make out a case that they are not."

3. I take the view that the resolution of what I have to decide today is not going to be determined by a narrow construction of the words in 3.15(2). For what it is worth, I understand from the authorities that in considering proportionality, one test of proportionality is to look at the overall cost compared to the overall amounts in issue, the overall amounts in issue being the first listed of the matters which are relevant to proportionality in 44.3(5)(a) which refers to "the sums in issue in the proceedings." In certain cases, one can see, simply by comparing the overall budget for costs with the overall sums at issue, that the amounts in issue do not prima facie justify spending that amount of money and various authorities were put before me in which judges have said that spending 50 per cent is prima facie disproportionate and one in which Chief Master Marsh said that 25 per cent was one that would ring alarm bells. That is in Frost v Capita Financial Managers Ltd (24.2.2015) at paragraph [17].
4. I do not accept the submission that that is all that proportionality is concerned with and that given that the budgets of the defendants of some £24 million odd are about 7 per cent, I was told, of the claim which now stands at £350 million, proportionality does not need to be further considered. It does seem to me that on this narrow point, Mr Hutton's submissions are to be preferred, which is that one can look at proportionality not only in the way that some judges have done by reference to the overall cost of the proceedings compared to the overall amounts at stake and the complexity of the issues and the like, but also by looking at what is or ought to be involved in the action and saying whether the proposed spending of money of that level is proportionate to the work that was involved.
5. At that point, however, it really becomes quite difficult to distinguish the reasonableness question from the proportionality question. I accept that they are separate questions, they are treated as separate questions, for example, by Mr Justice Coulson in CIP Properties v Galliford Try [2015] EWHC 481 TCC where he deals first of all with proportionality at section 5 of his judgment and then with reasonableness in section 6. It is also apparent from the fact that the CPR44.5 deals with proportionality whereas 44.4 deals with reasonableness. It is also apparent from the fact that proportionality is only relevant to assessment on a standard basis. On the indemnity basis, proportionality has no part to play and the only question is one of reasonableness (or rather unreasonableness) and it is apparent from the text at 44.3(2)(a) which reads that:

"Where the amount of costs is to be assessed on a standard basis the court will: (a) only allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced, even if they were reasonably or necessarily incurred."

6. So from all that, I fully accept that the concepts of reasonableness and proportionality are different concepts and that something can be reasonable but not proportionate. Nevertheless, it does seem to me that Mr Hutton is right that in assessing proportionality, one is not simply comparing the overall budget with the overall sums at stake, complexity and the other matters listed in 44.3(5) and that one can characterise as not reasonable and proportionate particular steps taken in the proceedings, just as Mr Justice Leggatt did in Kazakhstan Kagazy PLC v Zhunus [2015] EWHC 404 (Comm).
7. So I am not satisfied that it is simply an answer to the proportionality challenges to say that the overall budget is not out of line with the amounts at stake.
8. In any event, it does seem to me, as I have said, that this application is not to be determined by a narrow textual construction of 3.15(2) The text at 3.15(2) requires a test of whether the litigation "can be conducted justly… in accordance with the overriding objective, without such an order being made," and that picks up the language of the overriding objective which is to enable the court to deal with cases justly and at proportionate cost: see CPR 1.1(1).

1.1(2) explains some of the things which are included in that and that includes ensuring that the parties are on equal footing, and saving expense as well as other things. It does seem to me that this application should be determined on whether the making of a costs management order would be something that is likely overall to save expense and thereby enable the court to deal with the case more justly and more in accordance with the overriding objective or whether it would really be a waste of money and not achieve anything that was worth the money that had to be spent on it.

9. For reasons which I will not go into in great detail, interesting though they are, but which will appear on the transcript of today's hearing, in the various discussions that I had with counsel, it has become clear to me that it is really both parties' position that the risks which the claimants are currently facing of having to pay, if they lose the action, the costs of the defendants, which on a detailed assessment, even on a standard basis, may well come in at rather more than the £14.75 million for which the claimants have already obtained ATE insurance, is a risk which both parties consider should be in some way dealt with, rather than leaving matters where they would otherwise be, which is that the individual claimants will be exposed to the risk of having to contribute to the uninsured costs, which would be unattractive from the claimants' point of view, and the defendants would be left with having to collect what could be relatively small sums from a very large number of individual claimants, given the terms of the GLO under which they are not jointly liable for costs but only severally liable proportionate to their shareholdings, which would be very unattractive from the defendants' point of view.
10. Both parties, as I say, are really therefore of one mind that that risk should be mitigated in some way. The defendants' preferred way to mitigate that risk is to seek increased security from the funders who have funded the claimants' action, the claimants having been signed up, as I was told by Mr Hutton in reply, on the basis that they would not have to contribute anything towards the costs of bringing the claim.
11. I have been shown rule 25.14 which makes it clear that security for costs can be awarded against a person who has contributed or agreed to contribute to the claimants' costs in return for a share of any money or property which the claimants may recover in the proceedings and a person against whom a costs order may be made, and my understanding, which counsel did not suggest was wrong, is that under section 51 of the Senior Courts Act a funder who funds as a commercial venture, rather than one who funds out of affection or altruism or charity or a desire to see the claimants' rights properly vindicated, is a funder who is at risk of an order being made, if the action fails, under section 51 and in those circumstances, I accept that there would be likely to be jurisdiction to order the funders behind the claimants' action to provide further security for costs.
12. The claimants' preferred solution, it seems to me, is to obtain ATE insurance cover to cover the apparently uninsured risk, but as explained in the evidence, that is an expensive thing to do and in practice, given the terms on which the claimants have been signed up, it either requires the funders to pay for that insurance by way of premiums up front, which would require the claimants, if they are successful, to pay the funders several times the amount of the premiums under the terms, which I have not seen, of the agreement between the funders and the claimants; or for the insurance to be taken out on a deferred premium basis, in which case the evidence is that the deferred premium would be itself insured with the result that the claimants would only have to pay it if successful, but if successful would have to pay £3 or £4 for each £1 of insurance.
13. As can be seen, these are all quite expensive ways of meeting the currently uninsured risk and it does seem to me that the real question which I have to grapple with is whether the claimants' desire to bring more certainty to the quantification of that risk through the costs management process is one which outweighs the inevitable costs of making a costs management order which Mr Hutton put at £50,000 on each side, whereas Ms Davies told me that her costs of that exercise would be £175,000. I will proceed on the basis that Ms Davies may very well be right and that the costs are therefore likely to be £225,000 or let us say £¼ m or so.
14. I accept that that is a real and substantial cost, as I accepted on the last occasion, which would be avoided if the costs management order was not made. On the other hand, it does seem to me that Mr Hutton is right that the real value in a costs management order, so far as the claimants are concerned, is to bring much greater clarity to the exposure which they currently face. Currently, the budget for the claimants' costs comes in at some £24 million or so of which on the January 2017 figures, £14.9 million is still to be incurred, it being common ground that on the rules, costs management is only possible for costs that have not yet been incurred and that nothing can be done to manage the costs which have already been incurred, although in the costs management process the court can make comments on costs that have been incurred and can take them into account.
15. That £14.9 million is an estimate of actual costs to be incurred and it is not suggested by Ms Davies that the entirety of that will be recovered on an assessment. Her solicitors' estimate is that up to 80%  might be recoverable and the claimants' solicitors' estimate is that no more than 70% would be recoverable. If that was applied to the entirety of the £24.4 million, it would lead, on the defendants' 80 per cent figure, to some £4.75 million of exposure not being currently insured and on the claimants' figure of 70%, some £2.3 million of exposure not being insured. In the light of the evidence I had, the cost of insuring that could be three or four times the amount insured.
16. It does seem to me that there is a real value to the claimants in those circumstances in having a much more accurate figure for the risk that they are facing because if they were capable of bringing the £14.9m figure down to the rather lower levels or towards the rather lower levels that the claimants' own estimated costs from now to the end of trial are, that would give them considerable comfort, given the provisions of CPR3.18, which effectively put the onus on someone on a detailed assessment seeking to recover more than the amount in their precedent H budget, and more comfort than the current position where, although the budgets that have been exchanged can be taken into account under Practice Direction 44, paragraph 3, there is not usually a requirement for an explanation as to the difference unless the divergence is more than 20 per cent.
17. In those circumstances, when I compare the costs that are involved in a costs management order of, as I have said, £250,000 or so with the potential savings which could run into millions of pounds, it does seem to me that Mr Hutton is right, and the cost benefit analysis makes this an appropriate case to have costs management.
18. I have not thought it necessary, nor do I think it appropriate, to go into the various items which have been highlighted as the big ticket items which are said on the claimants' side to be unreasonable. I will simply say that I am persuaded that the figures are sufficiently large and the discrepancies between what the claimants are expecting to spend and the defendants are expecting to spend are sufficiently striking that there is something which merits the budget being looked at in more detail by the Chief Master to whom the task of actually managing the costs will fall. All that I have to be satisfied of is that it would be just and in accordance with the overriding objective to require the parties to spend the money on having these costs managed to enable -- which, as I see it, in the way it has been presented to me, will ultimately be to the benefit of both sides -- the level of the further ATE insurance cover which both sides wish to have put in place, or a substitute therefore, to be assessed more accurately.
19. In those circumstances, I do propose to accede to the claimants' application and will direct a costs management process to be undertaken by the Chief Master.