Rosier, Peter --- "A new order or same old, same old? Reasonable and proportionate : tricky concepts to enforce" [2016] PrecedentAULA 79; (2016) 137 Precedent 38

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A NEW ORDER OR SAME OLD, SAME OLD?

‘REASONABLE’ AND ‘PROPORTIONATE’: TRICKY CONCEPTS TO ENFORCE

By Peter Rosier

THE NEW TEST

In NSW and Victoria, by reason of s172 of the Legal Profession Uniform Law (LPUL) and in NSW by reason of its incorporation into the terms of the Legal Profession Uniform Law Application Act 2014 (NSW) (LPULAA) by s76 of that Act, costs in matters that are covered by those Acts are to be ‘no more than fair and reasonable in all the circumstances and that in particular are

(a) proportionately and reasonably incurred; and

(b) proportionate and reasonable in amount.’

The effect, in NSW, is that both the assessment of party/party (or ordered costs, as they are now known) and law practice/client costs are to be assessed on the basis that they are no more than fair and reasonable and proportionate and reasonable in amount and in the manner in which they are incurred.

This is novel inasmuch as, so far as I am aware, even the philosophical home of proportionality in legal costs – the United Kingdom - has not applied the concept to law practice/client costs: see The Civil Procedure Rules 1998 (CPR) r44.4 (6).

Given that in NSW proportionality has not been a formal (that is, openly mandated) factor in the assessment of either ordered or solicitor/client costs in the past, this is a significant change.

The concept of proportionality in costs has been around for a long while. It reflects the idea that the costs of the proceedings and the amount involved in the dispute should bear some proportion the one to the other. The Oxford English Dictionary defines proportionality as ‘the quality of corresponding in size or amount to something else.’ This is easy when the claim is for $2,000 and the costs are $10,000. But it is not so easy when the claim is for maintenance of support for a boundary wall, or the plaintiff seeks an injunction preventing the development of a coal mine, or in defamation cases where the damages can be quite small but the reputation of the plaintiff significant.

Because s172 of the LPUL applies only to solicitor/client costs, we have to look elsewhere for guidance as to proportionality in solicitor/client costs: sadly, it appears that NSW lawyers are about to give guidance rather than receive it. In the meantime, we have plenty of guidance (little of which will cause one to jump with joy) on proportionality in ordered costs.

OUR NEW TEST IS AN OLD TEST

The idea of proportionality in relation to ordered costs, as manifest in the LPULAA, is derived from the provisions of the CPR before the Jackson ‘reforms’ commenced in April 2013.

The CPR introduced to the English system the idea of proportionality as one of, if not the main, considerations in deciding the costs that one party would have to pay to another to satisfy an adverse costs order. As enacted, CPR r44.4(2)(a) required the court to allow only costs that are proportionate to the matters in issue. The court was to have regard to all the circumstances in deciding whether the costs were reasonable and proportionate in amount and reasonably and proportionately incurred. This is the test the legislatures of Victoria and NSW (where the ‘Uniform’ Law is writ of the land) have now adopted for both ordered costs and, in NSW, for solicitor/client costs.

WHY?

The Woolf report said, of costs:

‘2. 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... 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.’

HOW THE WOOLF REPORT AFFECTS US . . . TODAY?

In NSW and Victoria, we are in one sense a step behind the British and, in another, a step ahead. Nevertheless, it has long been the view of many in that part of the legal community which specialises in the arcane but important area of legal costs that costs must be ‘proportionate’. Proportionality is often invoked by respondents to costs applications so as to reduce the costs payable to an amount ‘in proportion’ to the amount at stake. Despite a newly discovered parsimony in the UK (discussed briefly below), the invocation has rarely been successful in NSW, with the reason given often being the lack of any statutory basis for the application of the principle.

The obiter statement by Ipp JA in Skalkos v TS Recoveries Pty Limited is often quoted as authority for the proposition that proportionality on costs is a notion binding on an assessor:^[1]

‘8. In my opinion, in determining whether costs have been reasonably and properly incurred, it is relevant to consider whether those costs bear a reasonable relationship to the value and importance of the subject matter in issue. See in this regard Szlazko v Travini [2004] NSWSC 610, Moore v Moore [2004] NSWSC 587, Gallagher v CSR Limited (unreported, Supreme Court of Western Australia, 31 March 1994). This conclusion is supported by s208G(f) of the Legal Profession Act.’

Skalkos, where in fact an amount was allowed which was significantly (perhaps ‘hugely’ would be the better word) disproportionate to the amount recovered in the proceedings, is nonetheless often invoked in support of an argument that the costs claimed in a particular matter are ‘disproportionate’. This is a common theme: when proportionality is raised by the paying party, the real reasons for the expansive costs becomes apparent.

Then s60 of the Civil Procedure Act 2004 has been called in aid. That section has nothing to do with the assessment of costs – it relates to the manner in which courts are to govern the cases that come before them – but it still gives comfort to the plaintive cry of the paying party that the costs are disproportionate.

On the face of it, though, this has now changed. While costs must be ‘fair and reasonable’, proportionality is given an open airing for the first time. The keystone provision for solicitor/client costs is s172 (1) of the LPUL.

‘172 Legal costs must be fair and reasonable

(1) A law practice must, in charging legal costs, charge costs that are no more than fair and reasonable in all the circumstances and that in particular are–

(a) proportionately and reasonably incurred; and

(b) proportionate and reasonable in amount.’

Section 76 of the LPULAA applies s172 by incorporation to ordered costs. That section reads as follows:

‘76 Criteria for costs assessments of ordered costs

(1) In conducting an assessment of ordered costs, the costs assessor must determine what is a fair and reasonable amount of costs for the work concerned.

(2) In considering what is a fair and reasonable amount of costs for the work concerned, the costs assessor may have regard to the factors in section 172 (1) and (2) of the Legal Profession Uniform Law (NSW) (as if that section also applies to ordered costs and so applies with any necessary modifications).’

HOW THE ENGLISH COURTS TREATED THE NEW TEST

The provenance of the NSW and Victorian tests of proportionality is pt 44 of the CPR as it stood until recently amended. In CPR r44.5 –

‘The court is to have regard to all the circumstances in deciding whether costs were–

(a) if it is assessing costs on the standard basis –

(i) proportionately and reasonably incurred; or

(ii) were proportionate and reasonable in amount,. . .’

Lord Chief Justice Woolf himself came to grapple with the difficulties of the concept in Home Office v Lownds.^[2] The effect of this decision (most of the costs here were pre-CPR incurred costs) was to guide courts where a claimant recovers significantly less than claimed, by providing that the following approach should be followed:

‘Whether the costs incurred were proportionate should be decided having regard to what it was reasonable for the party in question to believe might be recovered. Thus:



(i) The proportionality of the costs incurred by the claimant should be determined having regard to the sum that it was reasonable for him to believe that he might recover at the time he made his claim.



(ii) The proportionality of the costs incurred by the defendant should be determined having regard to the sum that it was reasonable for him to believe that the claimant might recover, should his claim succeed. This is likely to be the amount that the claimant has claimed, for a defendant will normally be entitled to take a claim at its face value.’^[3]

The process is said to involve two steps – a global assessment and then, if the global amount is found to be proportionate, applying the ‘reasonableness’ test to all items:

‘There has to be a global approach and an item by item approach. The global approach will indicate whether the total sum claimed is or appears to be disproportionate having particular regard to the considerations which Part 44.5(3) states are relevant. If the costs as a whole are not disproportionate according to that test then all that is normally required is that each item should have been reasonably incurred and the cost for that item should be reasonable. If on the other hand the costs as a whole appear disproportionate then the court will want to be satisfied that the work in relation to each item was necessary and, if necessary, that the cost of the item is reasonable. If, because of lack of planning or due to other causes, the global costs are disproportionately high, then the requirement that the costs should be proportionate means that no more should be payable than would have been payable if the litigation had been conducted in a proportionate manner. This is turn means that reasonable costs will only be recovered for the items which were necessary if the litigation had been conducted in a proportionate manner.’^[4]

The nub of the advice to be found in the case was to force (I do mean force) the commencing parties to make a judgement as to the likely recovery (in addition to prospects) and to tailor their litigious cloth accordingly. If a judicial exercise in hindsight gave rise to a determination that the costs spent were globally proportionate and individual items were assessed as reasonable, the costs would be ‘proportionate.’ Accordingly, a party should ‘budget’ for the costs of the proceedings and endeavour to run the case within the budget in the expectation that the costs recovered would never exceed the budget. If they can’t do this, the practitioner must warn the client. (Note, though: it is not thought that the client should not have to pay the solicitor the costs which cannot be recovered from the paying party!)

However, this approach did not appear to have stopped what the English judges saw as a form of rot. So much so that, by 2009, in Willis v Nicolson, Lord Justice Buxton was moved to say (from the luxury of a positon where he did not have to worry about his income any more)^[5]–

‘While disputants should be given every encouragement to settle their differences without going to court, that encouragement should not include the making of litigation prohibitively costly so that litigants are deterred irrespective of the merits of their case. One element in the present high cost of litigation is undoubtedly the expectations as to annual income of the professionals who conduct it. The costs system as it at present operates cannot do anything about that, because it assesses the proper charge for work on the basis of the market rates charged by the professions, rather than attempting the no doubt difficult task of placing an objective value on the work.’

I will return later to how the English judicial system managed to ‘right’ this ‘wrong’. But, for the moment, the way the English interpreted their version of our s172(1) appears to be the way that our assessors and courts will interpret the effect of s172(1)in assessing ordered costs.

SOLICITOR/CLIENT COSTS

However, we will have to muddle through when it comes to deciding how assessors and courts will treat the concept of proportionality in solicitor/client costs. Because s184 tells us that a costs agreement may be enforced in the same manner as any other contract, it does not appear that costs charged in accordance with an enforceable costs agreement can ever be disproportionate. On the other hand, where there is no costs agreement (or, possibly, because s178 renders it void) and the costs have to be assessed, how is an assessor to determine proportionality? The only guidance is to be found in s200 (Factors in a costs assessment) by reason of which the assessor is to apply the principles in s172 as far as they are applicable but also have regard to whether there was compliance with any disclosure actually made, any advertisement or, finally, to ‘any other matter’. This is not particularly useful.

What, then, are the factors that are most likely to give rise to a sense that costs are not reasonable because they have not been reasonably or proportionately incurred or are not reasonable or proportionate in amount? We are used to the concept of ‘overcharging’ even though that is, to some extent, a moveable feast; is a want of proportionality nothing more than overcharging, or is it something different again? Costs in cases where clients are in dispute with a neighbour or want to sue in the Small Claims Division or in respect of a matter which can be decided only in the NSW Civil and Administrative Tribunal will have little relationship to the amount in issue. Should, as a matter of law, a practice be obliged to charge an amount that represents a net loss to the practice if the client wants to proceed and understands the likely costs even if proper disclosure is not made (for some minor technical reason, perhaps)? And what of the conduct of the client? Some ring three or four times a day, only to complain at the end that a charge was made for every telephone call. Lawyers provide a service which is paid for by reference to either time or a class of work. One way or the other, a telephone call by a client is one for which a practitioner is entitled to charge. This question is deserving of more detailed examination than space here allows.

WHAT NEXT?

I do hope that we do not follow the UK’s lead any further than we have already. Consider this example of how the British system now delivers costs justice:

When Dr Brian May – he of Queen fame – and his wife found themselves in a dispute with the owner of a neighbouring property, they brought an action for private nuisance. The nuisance was, perhaps ironically, the transmission of noise into Dr May’s property from that of the defendant. Perhaps being rocked by the identity of the neighbour, Wavell Group PLC put in place some measures to minimise the transmission of noise between the two properties and, when notwithstanding this, the litigation commenced they, eventually – before defences were filed – made an offer of £25,000, which Dr May accepted. Upon acceptance, a standard costs order followed as a matter of course. Dr May had directly briefed senior counsel, Mr Farrell QC. The application for assessment of the costs came before Master Rowley and, all of the work having been performed after 1 April 2013, the shiny new provisions of Rule 44 of the Civil Procedure Rules (CPR) applied. Despite what may be thought to be the economy arising from direct representation (then also pretty shiny new) by senior counsel, the costs claimed were £208,236.54. The Master was then bound to apply the revamped principle of proportionality found in CPR r44.3(2). After a consideration of the derivation of that new provision, the Master found that the appropriate reasonable and proportionate costs were £35,000 plus VAT. In coming to that conclusion, he commented that:

‘ . . . the new test of proportionality as described in paragraphs 5.5 and 5.6 of the final report (see [30] above), will require legal representatives to inform their clients that, even if successful, they will receive no more than a contribution to the costs that will be incurred. It may be that such advice proves to be a driver for the costs to be reduced or for alternative dispute resolution mechanisms to be explored. It is to be hoped that cases such as this one, which are in a transitional phase of understanding the new proportionality test, will be relatively rare.’^[6]

A CAUTIONARY TALE

The driver for reform as far back as 1996 (and, it appears, in the LPUL) was the perception that legal costs orders inhibit access to justice. Could, in fact, a considerable restriction on amounts recovered have exactly that effect: if a person without the means to fund litigation to enforce a right with excellent prospects of success is confronted by a ‘budget’ in accordance with the test propounded by Lord Woolf in Lownds might they not think very hard before proceeding?

Peter Rosier is principal of Rosier Partners Lawyers. He has been a costs assessor in New South Wales for 20 years, a Review Panellist and a member of the Costs Committee of the NSW Law Society. PHONE: [phone] EMAIL: [e-mail]

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^[1] [2004] NSWCA 281 (18 August 2004) [8] (Ipps JA).

^[2] [2002] EWCA Civ 365.

^[3] Ibid, [39].

^[4] Ibid, [31].

^[5] [2007] EWCA Civ 199, [18].

^[6] May & May v Wavell Group PLC & Bizarri [2016] EWHC B16.