Applying proportionality -- the two-way processThe usual process of the court in applying the principle of proportionality to costs is first to consider the costs on an item-by-item basis in accordance with the schedule of objections.

Having excluded the items which are unreasonable in amount or were unreasonably incurred, the judge or costs officer will then consider whether the overall sum is proportionate.

Many judges will only invite submissions on the issue of proportionality after they have considered the first stage.

It may be suggested that a proper analysis of the first stage ought to leave nothing further to consider.

If the court has excluded all the work that was devoted to unsuccessful matters, considered the proper charge-out rate for each item of work and restricted each item to that which was properly incurred in furtherance of the case, what is there left?The answer is provided in part by the dicta of Lord Woolf in the recent case of Jefferson v National Freight Carriers plc CA (2001) 7 February.

'They [the claimant's solicitors] must bear in mind that if they are going to conduct litigation of a modest nature, of the sort that was being conducted here, which the likely sum that was to be recovered, even on their own part 36 offer was a sum below £3,000, they are under a heavy duty to conduct that litigation in as economic a manner as possible'.The court is always enjoined to consider proportionality as a distinct issue from that of unreasonableness.

Civil Procedure Rules 1998 (CPR) rule 44.4(2) requires the court to only allow those items that are proportionate to the matters in issue.

Note that the size of the recovery is but one of the matters to be taken into account and that the primary thrust concerns, not quantum but the issues in the case.

The court will take into account the rule 44.5 factors of conduct; value of the claim; importance of the matter to the parties; complexity, skill, effort, specialist knowledge and responsibility; time spent; and the place where the work was done.In Jefferson, the claim was allocated to the fast track and limited to £5,000 and the recovery was slightly more than £2,250.

The costs in the case were £6,905 (inclusive of VAT and disbursements).

The trial judge's assessment of costs (based solely on proportionality) came to £3,500 which was upheld by the Court of Appeal.Some assistance is offered to the receiving party (paragraph 11 of the practice direction supplementing rule 44.5).

This makes the point that, in any litigation, there are costs that will inevitably arise and solicitors will not be required to conduct litigation at rates that are uneconomic.

It concludes with the observation, 'Thus in a modest claim the proportion of costs is likely to be higher than in a large claim, and may even equal or possibly exceed the amount in dispute.' It is not clear whether the practice direction was cited to the court in Jefferson.

However, some may think that the tenor of the note is such that it is unlikely that the court will exceed the amount recovered by a significant amount.It is not just the smaller cases that are likely to fall foul of the proportionality trap.

In Solutia UK Ltd v Griffiths [2001] 1 Costs LR 99 (see first part of this article) specialist lawyers acting for 165 claimants in an environmental case spent £210,000 to recover £90,000.

While the Court of Appeal was not called upon to decide the issue, two of the appeal judges described the costs as 'ludicrous' and exhorted judges to exercise greater control of proportionality through case management.Costs estimatesIt has to be recognised that the reduction of costs on assessment could severely threaten the viability of a conducting solicitor's practice.

It takes few miscalculations to turn a profit into a loss.

This is especially true where the solicitor is operating under a conditional fee agreement with a success fee.

The effect of the success fee is to increase the discrepancy between the budgeted income from the case and that actually recovered.The truth is that solicitors have to cater fo r this cost regime from the outset of the case, in terms of the resources that they apply to the case, the risk analysis and the transparency of the advice and decisions influencing any settlement of the case.Clear guidance has emanated from Lord Woolf in Jefferson where he endorsed every word of the following extract from the judgment of the trial judge:'In modern litigation, with the emphasis on proportionality, it is necessary for parties to make an assessment at the outset of the likely value of the claim and its importance and complexity and then to plan in advance the necessary work, the appropriate level of person to carry out the work, the overall time that would be necessary and the appropriate spend on various stages in bringing the action to trial and the likely overall cost.'It seems to me that it is incumbent on all solicitors, especially those acting for claimants in fast-track personal injury work, to spend some time identifying the very matters alluded to in the above extract.

Such an analysis will provide the foundation for the defence of the receiving party's bill, showing the court how the issue of proportionality was addressed from the outset.

And such an analysis should lead to much clearer costs estimates.Only now are some firms finding that their rather imperfect costs estimates on allocation and with the listing questionnaires are coming home to roost.

Many do not appreciate that section 6.6 of the costs practice direction provides: 'On an assessment of costs of a party the court may have regard to an estimate previously filed by that party, or by any other party in the same proceedings.

Such a factor may be taken into account as a factor, among others, when assessing the reasonableness of the costs claimed'.With a plan, such as that envisaged in Jefferson, the costs estimate becomes a check for the solicitor to see how they are progressing as against the internally set budget for the case.And risk assessmentsThe earlier extracts from Shirley v Caswell indicate that the solicitors risk assessment must be more sophisticated.

The Court of Appeal has made it clear that parties are going to have to be selective about the matters that they pursue to trial.

Where there are a number of aspects to the case then the solicitor will have to form a view about the advisability in cost efficiency terms of fighting a particular point.

Any risk assessment, particularly linked to a success fee, must be directed to each facet of the case.

This is particularly true of claimant personal injury work, where the different heads of claim and the degree of success may well be apparent to the defendant and the judge.'Pass the hot file'Solicitors must be aware that courts are going to be invited to consider their files to form a view as to whether aspects of costs should be disallowed.

Part 36 offers have to be crafted to give a clear view of the basis on which they are put.

The advice to the client may illuminate the issues in which the party was successful and when issues were abandoned.It is now becoming apparent that the appellate courts are looking to judges and costs officers on assessment to ensure that the level of fees under the CPR does not grow at the alarming rate experienced pre-1999.

There is unequivocal guidance as to how the issue of costs should be addressed.

The lessons are there for the profession and failure to learn them could prove costly for litigation practices.