Keeping costs in proportion

District Judge Julie Exton on indemnity costs and proportionality, with some help from the Court of AppealThe court will assess costs on the standard basis or the indemnity basis.

Either way, costs will be disallowed to the extent that they have been unreasonably incurred or are unreasonable in amount (rule 44.4(1) of the Civil Procedure Rules 1998 (CPR)).What's the difference?On the standard basis, the court will only allow costs which are proportionate to the matters in issue.

Any doubt which it may have as to whether costs were reasonably incurred or reasonable and proportionate in amount will be resolved in favour of the paying party (rule 44.4(2)).

On the indemnity basis, proportionality has no part to play and the court will resolve any doubt which it may have as to whether the costs were reasonably incurred or were reasonable in amount in favour of the receiving party (rule 44.4(3)).Unlike the old rules, rule 44.3 gives the court a wide discretion - not only whether costs are payable at all by one party to another, but also as to the amount of those costs and when they are to be paid.ConductIn exercising its costs discretion, the court must have regard to all the circumstances, including (rule 44.3(4)) whether a party has succeeded on part of his case, even if he has not been wholly successful, any payment into court or admissible offer to settle made by a party which is drawn to the court's attention (whether or not made in accordance with part 36).

And the conduct of all the parties.

This includes, under rule 44.3(5), conduct before, as well as during, the proceedings and in particular the extent to which the parties followed any relevant pre-action protocol; whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue; the manner in which a party has pursued or defended his case or a particular allegation or issue; and whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim.Indemnity costsIn Petrotrade Inc v Texaco Ltd (2000) The Times, 14 June CA, it was held, albeit in the context of rule 36.21 (claimant beats his own part 36 offer), that the ability of the court to award indemnity costs should not be regarded as penal as, even on this basis, a receiving party would not be fully compensated for having to come to court.

It was simply a way of achieving a fairer result.

That was taken up in Reid Minty (A Firm) v Gordon Taylor [2001] EWCA Civ 1723, [2001] All ER (D) 247 (Oct) CA (where the defendant warned he would seek indemnity costs if the claimant did not discontinue) with the ruling that an indemnity award was not intended to be penal and regard was to be had to what was fair and reasonable.

Indemnity costs could be awarded against a party whose conduct has been unreasonable, even though the conduct cannot properly be regarded as lacking moral probity or deserving moral condemnation.Lord Justice Kay said: 'The approach of the CPR is a relatively simple one - namely, if one party has made a real effort to find a reasonable solution to the proceedings and the other party has resisted that sensible approach, then the latter puts himself at risk that the order for costs may be on an indemnity basis.

What would be a reasonable solution will depend on all the circumstances of the case, and might, in a case which is clearly of no merit, include pointing out, in such detail as is appropriate, the fundamental weaknesses of the case being presented by the other side and inviting consideration of abandonment.'However, in Kiam II v MGN Ltd (Costs) [2002] EWCA Civ 66; (2002) LTL February 18 the Court of Appeal was swift to point out that the refusal of a settlement offer would rarely attract an adverse order for costs on an indemnity rather than a standard basis.

In other words, Lord Justice Kay's 'reasonable solution' and 'sensible approach' stance should not be understood as if it was generally appropriate to condemn those who declined reasonable settlement offers in indemnity costs.

Rather, Reid Minty had decided no more than that conduct, albeit falling short of misconduct deserving of moral condemnation, could be so unreasonable that it justified an order for indemnity costs.

Such conduct would need to be unreasonable to a high degree and not merely wrong or misguided in hindsight.

In proportion The over-arching consideration in relation to an order for costs on the standard basis is that costs are not only reasonable but are also proportionate.

In deciding on proportionality, the court must take into account the rule 44.5(3) criteria including conduct and the amount involved.

But what has caused problems in practice, for both judges and solicitors, is how to reconcile the requirement of reasonableness with the requirement of proportionality.

Where, for instance, there is a conflict between the two, which is to prevail?The two-stage approachIn Lownds v Home Office [2002] All ER (D) 329 (Mar) the Court of Appeal (sitting with Senior Costs Judge Hurst) endorsed what it described as a two-stage approach.

In other words, there had to be both 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 set out in rule 44.5(3).

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.Reassuringly for those at the coal-face, the Court of Appeal in Lownds counselled the adoption of a sensible standard of necessity which should avoid setting too high a standard with the benefit of hindsight.

Although the threshold of necessity is higher than that of reasonableness, it is still a standard that a competent practitioner should be able to meet without undue difficulty.And conduct - againImportantly, in deciding what is necessary, the conduct of the other party is highly relevant.The other party can save costs by being co-operative, and can also increase them by beingunco-operative.If he is unco-operative, there may be costs which would have otherwise been unnecessary.

It is perfectly acceptable that he should pay the costs for the expense he has made necessary.District Judge Julie Exton sits at Weston-super-Mare County Court