The game is on

Readers of this blog will know that one of the issues that I have considered from time to time is the principle of proportionality and how in practical terms this can affect considerations of costs management and the assessment of costs.

The prospect of a division of the Court of Appeal anxiously considering and explaining the principle for the illumination of lawyers, has proved as elusive as a sighting of Moby Dick, in the years since 2013.

Indeed various cases which might have touched upon proportionality have either been dealt with in accordance with the time honoured judicial principle that when determining a case, a court will go as far as it needs to go and no further, or have simply failed to receive permission to appeal.

In the absence of a Practice Direction providing clarification, or an appellate exegesis, the courts have been left to muddle through in formulating or reformulating practical approaches to the application of the principle of proportionality.

The results have been mixed, to say the least, with numerous questions left unanswered or half answered, or simply fudged. Two examples will suffice.

First, when assessing costs does consideration of the principle of proportionality require that the court takes into account the market rates for instructing solicitors and counsel to provide access to justice to our sophisticated body of law?

Secondly, when assessing budgeted costs and incurred costs, how much scope does a court have to reduce the assessed total on the grounds of proportionality, noting that the budgeted costs might already deemed to be proportionate?

There are deeper concerns. I wrote about some of them in a post I published last year here:

Those concerns remain, and so it is of interest when a case on proportionality reaches the High Court: because decisions of High Court judges are binding on the County Court where still the vast bulk of litigation is conducted and so must be anxiously scrutinised to determine if they establish principles of general application or are really decisions concerned with their own particular facts.

One such case is that of Malmsten v Bohinc [2019] EWHC 1386 (Ch) a decision of Marcus Smith J, whose excellent book on the law of assignment, written when he was but Marcus Smith QC, proved of such sterling service in the assignment wars which largely came to an end in the case of Budana v Leeds Teaching Hospitals NHS Trust 3KH000905. The context of the case was stated to be as follows:

1. The Appellant, Mr Malmsten, and the Respondent, Ms Bohinc, were the shareholders in a small company which carried on business as an on-line jewellery business. Ms Bohinc was the majority shareholder, holding 60% of the shares, and Mr Malmsten held the remaining 40%. Both were directors of the company, and there were no other

2. In time, the relationship between the parties broke down. The detail is immaterial, but they fundamentally disagreed about the future of the business, and Ms Bohinc considered that Mr Malmsten had acted in breach of his duties as director. She wanted him out of the company. To this end, Ms Bohinc sought to convene a meeting of the
shareholders which, as majority shareholder, she would control. Mr Malmsten did not attend this meeting, thereby thwarting it.

3. Ms Bohinc went to solicitors, who instructed counsel. In his written submissions, Mr Benson, counsel for Mr Malmsten, described the conduct of Ms Bohinc’s former legal advisers as follows:

“The solicitors do not appear to have been au fait with the principles involved (or, indeed, much of ordinary litigation – they had to learn (and billed for learning) how to use the online filing system and failed properly to assemble the pack to be served with a Part 8 claim form): they instructed experienced counsel not less than 26 times and spent some 230 hours of solicitor’s time on it. Witness evidence was duly assembled, there was a bit of correspondence with [Mr Malmsten] and he failed to attend a meeting, the application was issued, further evidence was produced and the hearing led to the inevitable order. Counsel’s skeleton argument for the hearing was, properly, pithy and short.”

4. Although put with the forensic force of an advocate acting for Mr Malmsten, this was a factually accurate description of the conduct of the litigation. The application by Ms Bohinc was made under section 306 of the Companies Act 2006: Ms Bohinc sought an order for a shareholders’ meeting with a quorum of one, so that even if Mr Malmsten failed to appear again, the meeting could go ahead. However, that was not the only remedy considered by Ms Bohinc’s legal advisers: the documents show that other remedies under the Companies Act – notably section 168 (resolution to remove a director) and sections 292-293 (circulation of a written resolution) – were considered, in the context of advising Ms Bohinc generally as to her rights in relation to the conduct of the affairs of the company.

5. However, Ms Bohinc’s application, when made, was only under section 306. The Part 8 claim form making the application indicated a time estimate of 30 minutes, and was supported by a witness statement of Ms Bohinc (running to some 16 pages, and setting out the background in considerable detail) and a far shorter statement from a Mr John Banks, Ms Bohinc’s accountant.

The costs order made on the conclusion of the application was described as follows:

10. The order, as sealed by the court, provided (in paragraph 3) that “[t]he costs of and incidental to this application shall be paid by [Mr Malmsten], such costs to be assessed if not agreed”. The words “and incidental to” in paragraph 3 of the order are important for two reasons:

(1) First, because Mr Malmsten contends (although not before me) that these words were improperly included in the order; and

(2) Secondly, because these words broaden the costs recoverable from Mr Malmsten by Ms Bohinc, the question being the extent to which they serve to do so. That is a question that I will have to deal with in the course of this appeal.

When the costs went off to assessment, before Master Whalan matters unfolded as follows:

11. Costs were not agreed between Ms Bohinc and Mr Malmsten, and the matter proceeded
to a detailed assessment before Master Whalan. As to this:

(1) A bill of costs was drawn on behalf of Ms Bohinc. Total profit costs, net of VAT, were £42,197.10. Counsel’s fees, net of VAT, were £17,500. Other disbursements – notably the costs of personal service on Mr Malmsten, again net of VAT – were £2,823.00. The total bill, inclusive of VAT was £74,968.12. The total net of VAT was £62,520.10.

(2) Points of dispute were served by Mr Malmsten, which were replied to by Ms Bohinc, and provisionally ruled upon by Master Whalan in a series of handwritten annotations to the points of dispute dated 2 March 2018. There was then an oral hearing – at which Mr Malmsten appeared by Mr Benson – where various points were made in relation to Master Whalan’s provisional rulings, and where the Master made a final ruling. That hearing took place on 11 October

(3) The final costs certificate was in the amount of £78,598.24, but this included £12,129.18 in respect of the costs of the detailed assessment itself. Thus, the costs of and incidental to the application were £66,469.06, of which £13,293.81 was VAT. The net figure was £53,175.25. However, this figure included various additional items arising out of the detailed assessment process. In terms of the costs of the section 306 application before the Registrar, the Master came to a final figure of £47,500 net of VAT.

Although a number of grounds of appeal were argued in respect of that decision by the Master, the two that matter for the purposes of this blog, are grounds 6 and 7:

(6) Ground 6. The Master erred in law in finding that, when applying the proportionality test, it was appropriate to exclude VAT and the costs of drawing the bill.

(7) Ground 7. The Master exceeded the discretion properly open to him and/or went wrong and/or in light of Grounds 1-6 took into account irrelevant or wrong factors in finding that a proportionate sum was £60,426.46 (or approximately £47,500 + VAT + costs of drawing the bill) in a dispute about organising a shareholders meeting which was litigated for less than 3 weeks and was listed for and resolved in a 30 minute hearing.

So what did the High Court judge decide in relation to this plea that the costs were disproportionate? His starting point was to recite such orthodoxy as there is:

53. It is already clear from Lord Woolf’s analysis in Lownds that proportionality is essentially a tool that controls the overall bill of costs. That is confirmed by the definition of proportionate in CPR 43.3(5). The five factors listed there are only meaningful when considered in relation to the overall bill of costs, rather than in relation to a specific item of costs. What the new rules require is for the judge, having completed a detailed assessment of costs, to take a step back, look at the assessed bill, and ask whether a further reduction is required on grounds of proportionality.

54. Although I have reached this conclusion on the basis of the wording of the rules, my conclusion is consistent with the views expressed by others extra-judicially. I quote the following passage from Friston, which quotes a speech from Senior Master GordonSaker, himself quoting Jackson LJ:

“In the editor’s view, the starting point is a keynote speech given in 2014, in which Senior Master Gordon Saker (speaking extrajudicially) said the following:

“It is said that we will need guidance on how to apply the new test. I disagree. The guidance is already there. It is likely that somebody will in some case or other seek to appeal the approach that has been taken. But I would suggest that there is no reason to suppose that the court hearing the appeal will do other than restate the guidance that has already been given by Jackson LJ in his final report.

“…I propose that in an assessment of costs on the standard basis, proportionality should prevail over reasonableness and the proportionality test should be applied on a global basis. The court should first make an assessment of reasonable costs, having regard to the individual items in the bill, the time reasonably spent on those items and the other factors listed in CPR 44.5(3). The court should then stand back and consider whether the total figure is proportionate. If the total figure is not proportionate, the court should make an appropriate reduction. There is already a precedent for this approach in relation to the assessment of legal aid costs in criminal proceedings: see R v. Supreme Court Taxing Office, ex parte John Singh and Co [1997] 1 Costs LR 49.”

In the 15th implementation lecture on 29 May 2012 – the lecture entitled “Proportionate Costs” – Lord Neuberger, then MR, quoted that passage and said that it seems likely that the courts will develop the approach to proportionality “as Sir Rupert described it” in that paragraph.”

Thus, if Master Gordon-Saker is right, it would seem that proportionality will now revive “the Singh adjustment”. This is noteworthy, because this was precisely the test that was urged upon the Court of Appeal by the paying party in Lownds more than 15 years ago.”

Ground 6 went nowhere:

60. In my judgment, the Master was entirely right to leave both VAT and the costs of drawing the bill out of account when considering the question of proportionality. These are no more than distorting factors, when considering the overall proportionality of costs. The fact is that, when consideration proportionality, one is seeking to determine whether there is a proper – a proportionate – relationship between the overall costs and the action or the application giving rise to those costs. Self-evidently, the costs of any detailed assessment – which are costs entirely unrelated to the nature of the action or application whose costs are being assessed – must be left out of account. I do not consider the contrary to be seriously arguable, given the definition of “proportionality” in CPR 44.3(5)

But ground 7 proved successful:

64. Having well in mind the injunctions that I have set out in Section E above, I have nevertheless concluded that the Master’s decision to entertain no further proportionality reduction is one that cannot be sustained:

(1) The Master attached too much weight to the fact that Mr Malmsten resisted Ms Bohinc’s application. It may very well be right to say that Mr Malmsten should have attended the shareholders’ meeting that had been called and so avoided the need for a section 306 application altogether. It may also be right to say that Mr Malmsten had no good grounds for resisting the application when it was made. I am quite prepared to consider the matter on that basis, for the fact is that (by themselves) these matters say nothing about the quantum of costs that it was appropriate for Mr Malmsten to pay in this case. Of course, these factors strongly point to the incidence of costs resting on Mr Malmsten. But that is precisely what the Registrar ordered. The question before the Master was not the incidence of costs, but their amount.

(2) What is more, the Registrar ordered costs on the standard basis. He clearly did not consider that there was anything, in Mr Malmsten’s conduct, that made this a matter for assessment on the indemnity basis.

(3) In these circumstances, faced with what was undoubtedly a narrow and straightforward application, if the Master was going to use factor (d) (any additional work generated by the conduct of the paying party) as the reason for effecting no proportionality deduction, he needed to identify how Mr Malmsten’s conduct resulted in additional costs to Ms Bohinc.

(4) The point can be put in the following way: there can be no doubt that Ms Bohinc was entitled to her proportionate costs, both because Mr Malmsten should not have fought her application and because he lost. To that extent, there is a clear nexus between the Registrar’s costs order and Mr Malmsten’s conduct. But, as a starting point, given the narrowness and straightforwardness of the application – resulting in a clearly correct outcome after a hearing of half-an-hour (including a ruling and submissions on costs) – costs of £47,500 require some justification, and pretty cogent justification at that. The costs are – simply by reason of the narrowness and straightforwardness of the application in relation to which they were incurred – prima facie disproportionate.

(5) If it could have been shown that – for example – the frequent reference of questions to counsel by Ms Bohinc’s solicitors was in some way caused by Mr Malmsten’s conduct, that would be a matter to take into account. But the fact is that Mr Malmsten’s acknowledgement of service (with an accompanying witness statement) occurred late in the day: on 2 August 2017, the day before the hearing. The frequent resort to counsel cannot be explained on this basis, nor indeed any of the disproportionate costs arising between instruction of Ms Bohinc’s legal team and 2 August 2017. I conclude that the Master’s reliance on factor (d) was not justified by the circumstances before him and that the Master’s decision on proportionality is, for this reason, wrong in law.

(6) I do not consider that factor (b) is particularly relevant in the present case. Of course, the application was of importance to Ms Bohinc, as it affected the fate of the company she was very much interested in. As a result, no doubt, her solicitors instructed very experienced company law counsel, and I would not regard that as inappropriate. However, this cannot justify the considerable number of hours spent on what was, I reiterate, a narrow and straightforward application.

So the Master’s decision was flawed: but the case was not remitted, instead it was decided by the High Court Judge who knocked off 2/3 of the assessed bill:

69. I consider that the sum of £47,500 should be reduced to a sum of £15,000 (plus, obviously, VAT). My reasons for reaching this figure or – to put it another way – for reducing the sum of £47,500 by some £32,500 are as follow:

(1) I consider that the approach a court must take when considering proportionality is well-put in Friston:
“What still remains a relative mystery, however, is how the adjustment ought to be made. Whilst no more than his own thoughts on the matter (which could well be wrong), the editor believes that it is no coincidence that those factors that are listed in CPR 44.3(5) are precisely those factors that would be of especial importance to clients of legal services providers. Clients do not care about reasonableness, necessity, time spent and other such niceties; indeed, they are often aghast at the so-called reasonable fees that their legal services providers charge. They care about more fundamental – usually commercial – matters, such as the amount at stake, how difficult the litigation is, how badly (or well) their opponents are behaving, etc. These are the factors that are listed in CPR 44.3(5) and are the factors that will tend to govern the extent to which clients are prepared to put their hands in their pockets. If this is right, then – by analogy with other tests that govern the amount of costs – the test could well be the amount that a hypothetical reasonable litigant of adequate but not extravagant means would, in all the relevant circumstances, regards as bearing a “reasonable relationship” to the factors in CPR 44.3(5). Conceptually, this is not a difficult test to apply because – whilst an oversimplification – it boils down to a very simple question: “Focusing on what really mattered to the litigants, what would a reasonable client have been prepared to pay in all of the relevant circumstances?””

(2) It is, however, necessary to sound a warning against too client-centric an approach to proportionality. The law is, unfortunately, both complex and complex to navigate: that is why clients need lawyers in the first place, and it is necessary to appreciate that the costs figure arising out of a detailed assessment or even in a summary assessment cannot simply be disregarded. The costs appearing in such an assessment have been professionally compiled and must be given due weight. The position is a fortiori when there is an approved or agreed costs budget in place.

(3) So, as it seems to me, the starting point for the proportionality assessment will be the figure put forward by the legal representative, after an item-by-item review if this has occurred. Thereafter, it is a question of the extent to which – knowing the way lawyers charge, and the fact that, to at least some extent, the client will have been informed of this – this figure fails the proportionality test. A judge assessing such figures may have regard to “like” cases and to what the other side has charged its client, but at the end of the day the application of the proportionality criterion is intended not as a test for ensuring that the costs are indeed reasonable or even necessary, but as a separate and self-standing control.

(4) The costs for the section 306 application made by Ms Bohinc are, without any doubt, excessive. That is, no doubt, in part because the Master included as recoverable costs which, so I have found, fell outwith the costs order made by the Registrar. It may well be that such costs represent services to Ms Bohinc that were valuable to her in terms of general advice regarding the company of which she was majority shareholder, but these were certainly not costs that Mr Malmsten should pay, as I have found. Aside from that, I find that there is no justification for the extent to which counsel was consulted nor for the number of hours spent by Ms Bohinc’s solicitors. These costs were entirely disproportionate given the nature and complexity of the application.

(5) I accept that these proceedings were of importance to Ms Bohinc and, to be clear, I am certainly not envisaging any discount because her solicitors went to experienced (and expensive) counsel versed in corporate law. I also accept that Mr Malmsten was not a co-operative litigant: partly, that may be due to his status as a litigant in person, but I am also quite prepared to accept the Master’s finding that Mr Malmsten was trying to be awkward. Indeed, that conclusion is rather supported by the very late attempt by Mr Malmsten to re-open the Registrar’s order, a matter I have described in Section C above. However, I consider that – perhaps more by luck than judgment – Mr Malmsten’s conduct in this case did not actually have an effect on the level of costs, as I have already noted.

(6) In reaching a figure of £15,000, I have been cautious to err on the side of generosity to Ms Bohinc. My initial reaction to the costs for the section 306 application was that it would be difficult to justify costs in excess of £12,000 inclusive of VAT. But I am conscious that I am applying a broad-brush test at the end of a detailed assessment which I have not carried out, and have therefore concluded that the sum of £15,000 plus VAT is the appropriate figure to set.

The full judgment is worth reading: not least because it contains dicta in footnotes, which I have not reproduced here. It is well written and a carefully considered piece of work.

It also opens the floodgates to any amount of proportionality challenges on detailed assessment. A figure of reasonably assessed costs of £47,500 reduced to £15,000 on the basis of what a hypothetical reasonable litigant might be willing to pay positively encourages proportionality challenges. Who could have predicted before the appeal, that that result would ensue? As opposed to £12,000? Or £20,000? Or £25,000 ?

My analysis of the case is that the High Court judge has adopted a very wide discretion, which will have seismic consequences, in terms of the range of outcomes possible before different judges. A huge amount of uncertainty is now injected into the process, with the result that predictability of outcomes is greatly reduced.

It is also interesting to note, that he has given credence as a tool to gauge the proportionality of costs, not a simplistic damages v costs analysis, inappropriate for this case anyway, but the market costs of what it would take (or should have taken) to litigate the case.

This judgment is excellent news for costs lawyers: it is potentially disastrous for litigants, and litigation generally, if this approach is adopted systemically. Litigants will simply not be able to predict what are “proportionate” costs, and cases will fight which should settle, to the detriment of all.  But make no mistake about it. In terms of the assessment of costs and satellite challenges thereto, the game is on!

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