Costs Actually

Litigation costs – unlikely, probable, or actual – who knows?

Introduction

For centuries, a litigant's recurring nightmare of their costs bill can be found in a murky corner of every firm. Here, mischievous goblins weigh files, triple the weight, and calculate a figure by multiplying it with an arbitrary hourly rate determined by the senior partner’s mood of the day. The only perceived certainty is, that pound for pound, they will be paying a pound for every word in their legal documents. Therefore, the final bill is anyone’s guess.

Our view is that this perception is outdated, and this article aims to provide a broad insight into litigation costs and new rules aimed at resolving the ‘anyone’s guess’ perception.

Issues

Litigation is expensive, and two cases illustrate the minefield that is cost liability.

In Diag Human SE and Anor v Volterra Fietta [2023] EWCA Civ 1107, a firm was retained to advise on an arbitration claim under a conditional fee agreement (CFA).

The costs judge determined that the CFA was unenforceable because it failed to disclose the success fee percentage. Consequently, as the CFA was unenforceable, the firm could recover nothing under their bill, which ran to millions, and was required to refund all monies paid on account.

While emphasising that the amount of the claim and the level of costs were irrelevant, the Court of Appeal upheld the judge's decision. It also provided a salutary warning obiter that ‘…it is not open to the solicitors to claim by the back door any payment for their services which they cannot receive through the front. Equity will not step in to relieve the solicitors from the consequences of providing services pursuant to an unlawful agreement which they are precluded from enforcing.’

The result is that if the costs agreement between the client and solicitor is unenforceable, then costs cannot be recovered in their entirety, regardless of the level of service and expertise, and any funds held on account must be refunded to the client in full.

In Court–v-Van Dijk and Anor [2016] EWCA Civ 483, there was a dispute over work carried out on a common private drain. Damages of £4,227.88 plus interest were awarded to the claimants.

The Court of Appeal set aside that judgement, at which point the total costs of the claim were over £300,000, far outweighing the actual claim value.

The parties should have settled much earlier, but the case had reached a point where the actual claim had taken second place to the parties focusing on winning or losing the costs bill.

Cases like these present potential litigants with a real risk in bringing or defending cases properly because the current playing field is that if a claim fails, it will result in a litigant having to pay not only their own costs but those of their opponents, too.

The risk and uncertainty must be addressed so litigants and their legal advisers can properly decide how or whether to proceed.

Solutions

Firstly, litigants can save considerable cost exposure by voluntarily using alternative dispute resolution (ADR) before commencing proceedings.

Judges have discretionary powers to sanction costs or strike out a claim if proper efforts have not been made to seek mediation.

We foresee that compulsory ADR will replace voluntary ADR for all claims in the not-too-distant future.

This follows the Ministry of Justice's confirmation that the compulsory mediation scheme will apply in all small claims track matters up to £10,000 in value.

The scheme is free and there are minimal exceptions. For example, for claims involving the re-possession of property; cases will be referred to mediation once a defence is filed; the mediation will be an hour-long session conducted remotely; and sanctions will be imposed on parties who do not participate in the scheme.

Secondly, litigants can control their own solicitor's charging rates by requiring they:

• provide detailed cost budgets, advice, and estimates in advance;
• regularly update them as the claim proceed; and
• provide an interim invoice within agreed charging rates.

Further, all clients can have their solicitor’s costs assessed by a costs judge after the claim has concluded.

Thirdly, the opponents' costs will usually have to be paid by the losing party, in whole or in part.

To provide litigants with some certainty and reduce risk, complex rules came into force on 1 October 2023, introducing a new intermediate track relating to claims where:

• the value is between £25,000 -£100,000.
• there are no more than three parties; and
• the trial is estimated to be no more than three days.

Each claim will be allocated to one of four complexity bands to be agreed between the parties or, if not, by the court. Simple claims will be allocated to band one, and the most complex will be allocated to band four.

A new costs matrix has been created for intermediate track claims, which will determine the level of recoverable fixed costs depending on the stage the claim has reached and which will be payable by the loser.

The matrix will dispense with the need to provide cost budgets and estimated assessments in advance and simplify the entire cost process.

Conclusion

The new rules have got to be seen as a win for litigants. Any step towards improving the efficiency of the beleaguered court system must be viewed positively by all participants in such claims, and the day will come when cost matrixes apply across the board.

How the legal profession will immediately respond to adopting the rules, is another matter. Time will tell, but we suspect the goblins will not be receiving their marching orders just yet.