The origins of rule 46.13(3) CPR, can be traced to the case of Voice and Script International Ltd v Ashraf Alghafar [2003] EWCA Civ 736 which from the perspective of two decades seems gloriously antique, both in the amounts at stake, and the way in which the Court of Appeal were determined to do justice in a small case that came before them from the Brentford County Court. The facts of the case were simple. The case involved a small business dispute, arising from the work done subtitling a film.
The claim proceeded on the basis of a claim for damages including loss of a video card, the cost of a replacement video card, and loss of profit. The claim in respect for the video card was bad in two respects: it represented double recovery, and was erroneously pleaded in the dollar costs, rather than the true cost in pounds. The Claimant’s claim, was therefore worth less, significantly less than the £5000 Small Claims limit, had it been pleaded properly without double recovery and the currency error. The claim was never allocated to any track.
17. As already indicated, as to the costs of the appeal hearing before Judge Oppenheimer himself, the judge ordered that three-quarters of the costs of the appeal was to be paid by the respondent to the appellant. We have not been invited to interfere with, and there is nothing which would justify interfering with, the decisions about which party should carry costs liabilities at different stages of the proceedings. We are concerned only with the level of assessment made on 13 June 2001, ground on which we should tread with the greatest possible circumspection. Perhaps by way of emphasis, however, neither the district judge nor Judge Oppenheimer were concerned with a claim in excess of £5,000 which failed on the evidence to produce an award in excess of that amount. Costs issues in such cases are resolved day-by-day up and down the country without difficulty, and I intend to say nothing which could or possibly be regarded as affecting the ordinary conduct of such litigation. Here, however, the costs order related to an unsuccessful claim for a sum originally pleaded in excess of £5,000 which was only advanced in that amount as a result of mistake or oversight or carelessness. There is, perhaps I should emphasise, no evidence of bad faith. Nevertheless, even on the most successful possible outcome from the claimant’s point of view, whether the result of a fully contested trial or a default judgment, an award in excess of £4,003 should not and could not in fact have been made.
The Court of Appeal therefore set aside the costs Order made before the District Judge, and directed that payment of costs to the proceedings at first instance would be made on the Small Claims track basis:
19. We need not pause too long to discuss whether an application to allocate to the small claims track before it was demonstrated and accepted that the claim indeed could come within that track would have been successful, or the likely response of the claimants if any such application had been made. It was not until the disposal hearing itself that it was conceded that the true maximum value of this claim fell under £5,000. I should add that I see no reason to criticise anyone who attended that court hearing who overlooked the need for an allocation order at such a late stage in the proceedings.
20. With that lengthy and slightly involved background I can turn briefly to the principle, which seems to me to be perfectly clear. By treating the absence of allocation to track as conclusive, in my judgment District Judge Jenkins misdirected himself. The omission may have meant that the small claims costs regime did not follow as a virtually automatic starting point, but it did not preclude the court even from considering whether it would be reasonable to make an assessment consistent with the small costs regime or, for that matter, to apply the regime to a claim which should never have exceeded and never was anything more than a small claim. If that approach is not expressly stated in the Civil Procedure Rules, it follows from two essential principles, first, the discretionary nature of costs orders, and second, the overriding requirement of proportionality in civil litigation generally, and also as an essential ingredient for consideration when any question of costs arises: see Home Office v Lownds EWCH 365.
21. In my view in the absence of any specific factors suggesting otherwise, in a case like this where, if sought, an allocation would have been made to small claims track the normal rule should be that small claims costs regime for costs should apply. While respecting Judge Oppenheimer’s hesitation about interfering with a decision which he personally would not have reached, in my judgment he should have done so on the basis of the misdirection which I have identified. I should therefore allow the appeal.
In the case of O’Beirne v Hudson [2010] EWCA Civ 52 the Court of Appeal had to determine the correct approach to costs in a small personal injury claim, where the claim had been pleaded at being worth more than £1000 in terms of damages for personal injury, but settled for a sum significantly below £1000:
2. On 3rd September 2006 the appellant was the driver of a car stationary at a roundabout when his car was hit from behind by a car driven by the respondent. Costs of repairs to the appellant’s vehicle were paid prior to the issue of proceedings. The appellant issued proceedings claiming general damages exceeding £1000. Prior to the case being allocated to any track, settlement was achieved in the sum of £400 general damages and £719.06 hire charges and payment of costs. That settlement was recorded in a consent order, paragraph 4 of which provided that “The defendants do pay the claimant’s reasonable costs and disbursement on the standard basis, to be subject to detailed assessment if not agreed.”
The Court of Appeal stated:
16. In my view, despite the attractive argument of Mr Williams, the answer to this case is straightforward. This was a consent order providing for costs to be assessed on the standard basis; the addition of the words reasonable to my mind adds nothing to the order that costs were to be assessed on that basis. It certainly follows from that that the costs judge was not free to rule that the costs would be assessed on the small claims track basis and if and in so far as Judge Stewart might be understood to be saying that he was in my view wrong. But, and this is the critical point, in making an assessment the Costs Judge is entitled to take account of all circumstances (see CPR 44.5(1)), including the fact that the case would almost certainly have been allocated to a small claims track if it had been allocated. In so doing she would have regard to what could or could not be recovered if the case had been so allocated.
And:
19. I have quoted the passage from Judge LJ’s judgment in Voice and Script above. I accept that what was under consideration in that case was what order a trial judge should make when making an order for costs. Thus in many cases the problem that occurred in this case will not arise because the trial judge can actually make an order that costs be assessed on a small claims track basis. I also accept that as Judge Stewart noted, a costs judge has no power to alter the order for costs made by the a judge, and thus make a direction from the outset where costs have been awarded on the standard basis that costs will be assessed on a small track basis. But what lay behind what Judge LJ said reflects what Lord Woolf was saying in Lownds and provided the Costs Judge does not purport to vary the original order or tie himself to assessing by reference to the small claims track it is quite legitimate to give effect as far as possible to the philosophy which lies behind the above statements. There is a real distinction between directing at the outset that nothing but small claims costs will be awarded and giving items on a bill very anxious scrutiny to see whether costs were necessarily or reasonably incurred, and thus whether it is reasonable for the paying party to pay more than would have been recoverable in a case that should have been allocated to the small claims track. Was it for example necessary to have had lawyers and is it reasonable for the paying party to have to pay for lawyers are questions that should arise where a claim should have been allocated to the small claims track.
These cases led to the introduction of rule 46.13(3) CPR: in a sense it can be seen as the codification of the approach taken in O’Beirne v Hudson: but arguably going rather further, in that instead of spending time agonising over whether lawyers should be instructed or their costs recoverable whilst taking into account that a case would have been allocated to the Small Claims track, had matters got so far, a court is given the express power, to effectively move straight towards limiting the claimant’s costs to the nominal sums recoverable on the Small Claims track.
But although these authorities go some way to explaining how the rule has its origins: they do not go so far as to explain how the court should form a view as to whether the case would have been allocated to the Small Claims track. How should the court evaluate whether a case is a dressed up small claim, or a properly arguable and valuable case, where the court should award proper costs?
The rules themselves, as well as the caselaw permit the court to take into account “all the circumstances” of the case, and so the fact of settlement, the amount of the settlement, the reasons for the settlement would all form part of the factual matrix, against which the court has to make an evaluative judgment. If it is tolerably clear that the settlement has involved the abandonment of issues or claims, that is another reason to discount the costs claimed: see Shirley v Caswell [2001] 1 Costs LR 1 which might short circuit arguments as to whether the claim was reasonably included when issued: the short point is that it was not pursued to allocation and tacitly abandoned and so should be left out of account when considering the financial value of the claim:
60. But there is, I think, more force in the criticism of the judge’s approach to the first element in his order for costs. Prima facie the claimants were entitled to recover the costs properly incurred in relation to the issues fought at trial, save in so far as the judge thought it right to deprive them of costs on issues on which they failed. He was plainly entitled to deprive the claimants of issues on which they had failed and which ought never to have been advanced. But there is, as it seems to me, a strong inference that, in reaching the figure of 60% as the appropriate percentage by which to discount the claimants’ costs, the judge went further than that; and took account of costs which had been incurred in relation to issues which had been abandoned. The costs of issues abandoned, or not pursued at trial, ought, prima facie, to be disallowed against the party incurring them on an assessment of the costs of that party by the costs judge because, again prima facie, they are costs which have been unnecessarily incurred in the litigation. To take them into account in making a special costs order carries the risk that the claimants will be doubly penalised. They will be deprived of costs under the order; and again deprived of the same costs on an assessment or taxation.
Although decisions of County Court judgments are not binding, and not even to be cited in court in many instances, given the terms of the Practice Direction (Citation of Authorities) [2001] 1 WLR 1001 there are a number of County Court judgments which illustrate the approach.
In the case of Trevena and Others v Venova Community Interest Company Limited (Liverpool CC HHJ Wood KC 20th May 2022) the court dismissed an appeal against a ruling by the Regional Costs Judge that costs were not limited to the Small Claims track, despite the very modest settlement awards which were made. An interesting paragraph deals with the approach that a costs judge should take, which in this judgment can be seen as largely impressionistic:
60. First of all, I make some general observations. Although the court has been presented with elaborate arguments from counsel in respect of the interplay between CPR 46.13 and the CPR 26.8 and the principles which might apply when considering the allocation of a claim to track, it seems to me that the judge’s task in this case boiled down to a balancing exercise where he was arriving at an overall assessment after taking into account those matters which might be relevant had the claims proceeded beyond the early settlement stage. This in itself could not be detailed for reasons of proportionality not least because at a stage where formal proceedings had not been issued on the claims (as opposed to costs proceedings) the basis of those claim would only be known in outline and is bound to involve a degree of speculation and hypothesis. In this respect I am unable to accept a criticism that the judge was wrong to “speculate”, if that implies that he was considering the likely course the litigation would have taken without a settlement. There was no alternative but to do this. Further, the process is a somewhat unusual one and there is an implicit broad discretion.
Later that year the court heard an appeal in the case of AX v Hampton Wick Surgery (Liverpool CC HHJ Wood KC 25th October 2022) from a different Regional Costs Judge, who had limited the costs to the Small Claims track. In that case the appeal was allowed with the judge further observing:
69. Whilst the term “speculating” could be misinterpreted as implying guesswork without any real substance, or “shooting in the dark”, I make it clear that the approach of the hypothetical allocating judge should be one that is based upon more than just supposition or assertion, although it does not require a high bar or threshold. My concern when reading the judgment of the learned district judge in this case is that he was seeking a threshold of proof or substance which it is inevitable could not be achieved when a case settled at an early stage. I refer in particular to those aspects of his judgment which I have highlighted earlier in this judgment; he refers in paragraph 12 of his judgment to the shared difficulty of both counsel and himself in being satisfied as to the likelihood of any personal injury claim, that a personal injury claim was only being considered as opposed to being intimated to be a likely part of the claim, (paragraph 21), and the lack of any concrete information that a personal injury claim will be included in matters going forward (paragraph 24). On two or three occasions the learned district judge describes the high point of the Claimant’s argument being the potential for a personal injuries claim and that the very best that could be said was that the Claimant was speculating that this might have been put forward.
70. I have no doubt that the learned judge was entitled to come to the conclusion at the written stage that “nothing had been raised to justify or even assert a personal injury element in excess of £1000 in any event”. However, at the time of the oral review there had been a shift, if not of seismic proportion, nevertheless a significant one in that there were papers now available to the judge, including attendance notes and counsel’s advice as well as a clear indication that a medical agency had been instructed. There was no objection from the paying party to the judge having sight of these papers, and whilst there may have been a degree of equivocality in the letter of claim which was capable of interpretation one way or the other as to whether a personal injury claim was being advanced, nevertheless the balance of the material was highly supportive of such a claim being pursued in the event that the matter had not compromised with the receipt of a suitable offer. It seems to me that the learned judge was not only setting too high a threshold for what had to be established at the hypothetical allocation stage, but also limiting himself to the material that was in existence, rather than considering prospectively what might have happened or what might have come into existence.
In summary, settlement below the Small Claims track limit opens the door to the argument, that only Small Claims track costs should be allowed: but it is not determinative of the point. Instead the arguments should be tested against a multitude of factors, including particularly the viability of the pleaded cases but also the reasons for the claimant taking the settlement, and in particular the advice given to the claimant. Often this material is not disclosed, but that simply means the paying party will point to (a) the fact that this decision takes place in the context of a standard basis assessment and (b) the fact of a low settlement raises, if not an evidential burden upon the receiving party, an onus of persuasion that they must address.