UK: Whose Money Is It Anyway?

Last Updated: 2 April 2013
Article by John Darnton

Litigation can often be very expensive; sadly sometimes disproportionately so compared to the value of the dispute measured in purely financial terms.  Increasingly the courts are showing an inclination to limit the extent of legal costs and significant changes are to be introduced from 1 April 2013 that will greatly enhance the courts' powers in this regard.

The starting point is that solicitors look to their own clients to pay their costs but the normal rule in many forms of litigation is that the loser pays the winner's legal costs.  Historically the recovery rate by the successful party has invariably been less than 100%; often in the region of 60% or 70%.  However, 1 April 2013 will bring about a 'sea change' in the court's attitude towards costs in respect of the majority of proceedings commenced after that date.  In future, there will be much greater emphasis on 'proportionality'.

Under the new regime, judges will take a much more active role in managing legal costs and, in particular, there will be much greater emphasis on costs budgets to be submitted by solicitors at the beginning of a case and which must be updated as the case progresses.  The new rules also provide that, on or after 1 April 2013, where one party is ordered to pay the other party's legal costs on a standard basis, the courts will only allow costs that are proportionate to the matters in issue.  Costs that are disproportionate in amount may be disallowed or reduced, even if such costs were reasonably or necessarily incurred.  Moreover, the court will resolve any doubt which it may have as to whether costs were reasonably and proportionately incurred, or were reasonable and proportionate in amount, in favour of the paying party.

The new rules stipulate that costs will be deemed proportionate if they bear a reasonable relationship to:

  • the sums in issue in the 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.

It is therefore quite likely, if not inevitable, that in respect of those proceedings to which these new rules apply a successful party may discover that the level of costs that they can recover from the losing party is significantly reduced.  This may well have a direct impact upon the manner in which cases are litigated.

The court's approach to legal costs has also been demonstrated in a number of recent reported decisions.

In a disputed probate case of Hawes v Burgess and another (a case involving a disputed Will), the costs incurred by the parties almost eroded the entire estate and the Court of Appeal was driven to say:

'The cost of contesting the 2007 Will is a calamity for this family in every way.  By the standards of a present day probate case, the Deceased's estate is modest, less than £200,000.  We were told in general terms that efforts to achieve a family compromise came to nothing, though, of course, details of the "without prejudice" negotiations have not been disclosed.  The failed negotiations mean that the estate will become if it does not already become, worthless.  A six day trial with 26 witnesses does not come cheap.  Now there is this appeal.'

Lord Justice Mummery then went on to compare the case before him to the infamous, fictional case of Jarndyce v Jarndyce which features at the heart of Bleak House by Charles Dickens.

The background facts in Hawes v Burgess were that Daphne Burgess had died in May 2009 at the age of 80 leaving three children, Julia, Libby and Peter.  In 2007, Daphne had gone with Julia's help to a solicitor to draft and execute a new Will.  The consequence of that was to cut out Peter from a one-third share of Daphne's residuary estate without his knowledge.  Peter and Libby then successfully challenged the Will as to its validity (successfully arguing both lack of capacity and a want of knowledge and approval on Daphne's part) and Julia then appealed the decision of the first judge to the Court of Appeal.  The Court of Appeal held the Will to be invalid for somewhat different reasons to those of the original judge but, as mentioned above, by that time the value of the estate had largely been wiped out in meeting legal costs.  Whilst there was little that the Court of Appeal could do about this Mummery LJ was clearly troubled by what had happened.

In the field of family work, the Legal Ombudsman has recently published a report entitled 'The price of separation: Divorce related legal complaints and their causes'.  In that the Ombudsman referred to what he saw as costs spiralling out of control.  [The Legal Ombudsman's website incidentially contains a link to a helpful document entitled "Using a divorce lawyer: Ten helpful tips".]

It does, however, seem as if the judiciary are now attempting to use such powers as are available to them to try and limit costs.

Mr Justice Peter Jackson recently handed down an anonymised judgment referred to as TF v FF.  That was a case where there had been a final financial hearing before a district judge and the wife then sought permission to appeal that order to the Court of Appeal.  Mr Justice Jackson was prepared to grant permission to allow the wife to pursue an appeal against the maintenance part of the district judge's order but he decided that he would impose a cap of £5,000 plus VAT on her costs of the appeal process.  That did not prevent the wife from incurring a greater sum in legal fees herself but meant that she could recover no more than £6,000 from her husband.  Bearing in mind that she had already spent £12,500 on the appeal getting to the hearing before Mr Justice Jackson she was already out of pocket to a significant extent.

In imposing his cost cap, Mr Justice Jackson was no doubt heavily influenced by the costs that the parties had already incurred in the original proceedings.  At the hearing before the district judge, the legal costs totalled over £150,000, the husband having spent £93,000 and the wife £60,000.  The result of this, and other liabilities, was that on gross assets worth about £1.4m there was only available for distribution between the husband and wife a net amount of approximately £209,000.

The cases referred to in this article and the proposed rule changes provide a stark warning to potential litigants that, whilst they may feel it is their entitlement to incur legal costs in fighting their cases, the courts may not ultimately agree that this was a proper use of their money.  It also highlights the importance of solicitors and clients working together to ensure that clients are under no misapprehension about the level of costs that have, and may be, incurred and the extent to which such costs may be recoverable from the other party.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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John Darnton
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