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The principles that apply when a court has to decide whether one of the parties involved in litigation should pay or contribute to the costs of the proceedings

Spring 2020

We are acutely conscious that litigation should be a last resort – it says so, in the Practice Direction: Pre-Action Conduct & Protocols, which explains the conduct and sets out the steps that the court normally expects parties to take before commencing proceedings for particular types of civil claims.  That includes the exchange of documents and consideration of alternative forms of dispute resolution (including mediation), to try to avoid the costs that might otherwise be involved in litigation.

Sometimes, however, litigation is inevitable, and, it is not possible to settle a claim without having to go to trial.  We discuss the principles that the court will consider, when deciding whether costs are payable by one party to another, the amount of those costs and when they are to be paid. 

That Court has a discretion: a discretion, however, that has to be exercised judicially, in accordance with legal principles that are set out in the Civil Procedure Rules, and applied with reference to previous decisions of the Court.

Clients often wish to know what their costs exposure might be if they go to trial: and it is important to bear in mind at all times that, even if you win on the merits (on one or more of the arguments advanced), you might not necessarily get an order for the payment of your costs, or, indeed all of your costs.  There are some cases where, even if you win on the merits, you might have to pay or contribute to the other side’s costs.  It is, therefore, important to bear in mind the principles that the Court would consider, as any case strategy is developed, or adapted, as the matter progresses.

The principles were helpfully summarised and set out by Mrs Justice O’Farrell in a decision of the Technology and Construction Court (Queen’s Bench Division), in Triumph Controls UK Limited -v- Primus International Holding Company [2019] EWHC 2722 (TCC). 

We anticipate that it might be helpful to set out that analysis here, in full.

The Relevant Principles

As Mrs Justice O’Farrell said, the Court has discretion as to whether costs are payable by one party to another, the amount of those costs and when they are to be paid: CPR 44.2(1).

The general rule is that the unsuccessful party will be ordered to pay the costs of the successful party.  The Court may, however, make a different order: CPR 44.2(2).
CPR 44.2(4) provides that in deciding what (if any) order to make about costs, the Court will have regard to all circumstances, including:

  1. The conduct of all the parties;
  2. Whether a party has succeeded on part of its case, even if that party has not been wholly successful; and
  3. Any admissible offer to settle made by a party which is drawn to the court’s attention, and which is not an offer to which costs consequences under Part 36 apply.

CPR 44.2(5) provides that the conduct of the parties includes:

  1. Conduct before, as well as during, the proceedings and in particular the extent to which the parties followed the Practice Direction: Pre-Action Conduct or any relevant pre-action protocol;
  2. Whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;
  3. The manner in which a party has pursued or defended its case or a particular allegation or issue; and
  4. Whether a claimant who has succeeded in the claim, in whole or in part, exaggerated its claim.

The Court may make an issues-based costs order but, before doing so, will consider whether it is practicable to make an order limiting the costs payable to a proportion of the overall costs: CPR 44.2(6) & (7)

In Straker v Tudor Rose [2007] EWCA 368 (CA) the approach to be adopted was set out by Waller LJ:

[11] The court must first decide whether it is case where it should make an order as to costs, and have at the forefront of its mind that the general rule is that the unsuccessful party will pay the costs of the successful party. In deciding what order to make it must take into account all the circumstances including (a) the parties’ conduct, (b) whether a party has succeeded on part even if not the whole, and (c) any payment into court.

[12]   Having regard to the general rule, the first task must be to decide who is the successful party. The court should then apply the general rule unless there are circumstances which lead to a different result. The circumstances which may lead to a different result include (a) a failure to follow a pre-action protocol; (b) whether a party has unreasonably pursued or contested an allegation or an issue; (c) the manner in which someone has pursued an allegation or an issue; and (d) whether a successful party has exaggerated his claim in whole or in part.

[13]   Where, particularly in a commercial context, the claim is for money, in deciding who is the successful party, I agree with Longmore LJ when he said in Barnes v Time Talk (UK) Ltd[2003] EWCA Civ 402 para 28 that “the most important thing is to identify the party who is to pay money to the other”. In considering whether factors militate against the general rule applying, clear findings are necessary of factors which led to a disapplication of the general rule, e.g. if it is to be said that a successful party “unreasonably” pursued an allegation so as to deprive that party of what would normally be his order for costs, there must be a clear finding of which allegation was unreasonably pursued”.

The following principles were set out by Jackson J in Multiplex Constructions (UK) Limited v Cleveland Bridge UK Limited (No.7) [2008] EWHC 2280 (TCC) at [72]:

(i)    In commercial litigation where each party has claims and asserts that a balance is owing in its own favour, the party which ends up receiving payment should generally be characterised as the overall winner of the entire action.

(ii)     In considering how to exercise its discretion the court should take as its starting point the general rule that the successful party is entitled to an order for costs.

(iii)    The judge must then consider what departures are required from that starting point, having regard to all the circumstances of the case.

(iv)    Where the circumstances of the case require an issue-based costs order, that is what the judge should make. However, the judge should hesitate before doing so, because of the practical difficulties which this causes and because of the steer given by rule 44.3(7).

(v)     In many cases the judge can and should reflect the relative success of the parties on different issues by making a proportionate costs order.

(vi)    In considering the circumstances of the case the judge will have regard not only to any part 36 offers made but also to each party’s approach to negotiations (insofar as admissible) and general conduct of the litigation.

(vii) If (a) one party makes an order offer under part 36 or an admissible offer within rule 44.3(4)(c) which is nearly but not quite sufficient, and (b) the other party rejects that offer outright without any attempt to negotiate, then it might be appropriate to penalise the second party in costs.

(viii) In assessing a proportionate costs order the judge should consider what costs are referable to each issue and what costs are common to several issues. It will often be reasonable for the overall winner to recover not only the costs specific to the issues which he has won but also the common costs”.

  1. In F&C Investments (Holdings) Ltd v Barthelemy [2011] EWHC 2807 (Ch) Sales J provided further guidance:

[16] It is frequently a feature of litigation (particularly of complex, hard fought commercial litigation such as in this case) that arguments or factual disputes may be relevant to a number of underlying issues which have to be addressed in the proceedings. It is also frequently the case that a party may rely on a number of grounds to support his claim that he was entitled to take some particular action, and succeed in showing his entitlement so to act (i.e. on one or more of the grounds advanced as justification for the action) while at the same time losing the argument that certain other grounds relied on by him provided a proper basis to justify the action taken …

[19]  In exercising its discretion as to costs, a court will be cautious before concluding that an award of costs in favour of the party who has won overall should be limited in either of these cases. This is a function of the general approach that courts should avoid an unduly finely detailed division of issues and sub-issues when deciding what costs orders to make.

[20]   The general rule is that the unsuccessful party will be ordered to pay the costs of the successful party: CPR Part 44.3(2)(a). Often it will be appropriate that the winner should get an order that the loser should pay his costs even where there have been issues on which the overall winner has lost: see e.g. Actavis v Merck [2007] EWHC 1625 (Pat), at [25]; Fleming v Chief Constable of Sussex Police Force [2004] EWCA Civ 643[2005] 1 Costs LR 1, at [43]; HLB Kidsons v Lloyds Underwriters [2007] EWHC 2699 (Comm)[2008] 3 Costs LR 427, at [11]. In commercial litigation, the starting point in working out who the winner is for the purposes of making costs orders will usually be to look at what money has been ordered to be paid: see Fiona Trust & Holding Corporation v Privalov [2011] EWHC 664 (Comm) at [36] per Andrew Smith J (“At least in commercial litigation, the party ‘who ends up receiving payment’ is generally characterised as ‘the overall winner of the entire action’, citing Multiplex Constructions (UK) v Cleveland Bridge [2008] EWHC 2280 (TCC)[2009] 1 Costs LR 55 at [72] per Jackson J).

[21]   Parties should be afforded a reasonable degree of latitude in formulating claims, including pleading alternative bases for the same basic claim. That is a normal and reasonable way to conduct litigation (where the parties are operating under conditions of uncertainty about how the court might ultimately react to the arguments and evidence to be heard in support of the claim) and may be a good way of ensuring that the court has before it the full circumstances of the case so that it is in a position to get to the true heart of the dispute and arrive at what it regards as the just outcome. Therefore, where that is done and the party proceeding in that way has won on his claim and has acted reasonably, it will often be appropriate for a simple costs order to be made in his favour”.

In Sycamore Bidco Ltd v Breslin [2013] EWHC 583 (Ch), having referred to the principles set out by Jackson J in Multiplex, Mann J identified the following additional matters at [12]:

(i)    The fact that a party has not won on every issue is not, of itself, a reason for depriving that party of part of its costs. There is no automatic rule requiring reduction of a successful party’s costs if he loses on one or more issues. In any litigation, especially complex litigation such as the present case, any winning party is likely to fail on one or more issues in the case. As Simon Brown LJ said in Budgen v Andrew Gardner Partnership [2002] EWCA Civ 1125 at paragraph 35: “the court can properly have regard to the fact that in almost every case even the winner is likely to fail on some issues”. (Gloster J in Kidsons v Lloyds Underwriters [2007] EWHC 2699 (Comm)).

(ii)     The reasonableness of taking a failed point can be taken into account (Antonelli v Allen The Times 8th December 2000 per Neuberger J, as he then was)

(iii)    The extra costs associated with the failed points should be considered (Antonelli)

(iv)    One still has to stand back and look at the matter globally, and consider the extent, if any, to which it is just to deprive the successful party of costs (Antonelli).

(v)     The conduct of the parties, both before and during the proceedings, is capable of being relevant (CPR 44.3(5))”.

Costs may then be awarded on what is known as the standard basis, or the more generous indemnity basis.  A discussion of the difference between those 2 bases is, however, beyond the scope of this article.

Application of the Principles

In making any costs order, the Court will then consider the particular facts of the case, and apply these principles, as appropriate.

On the facts, the Claimant in the Triumph case had won on the merits of some issues, and failed on others.  After discussing and taking account of the various points made in submission, Mrs Justice O’Farrell concluded that the circumstances of this case did not require the making of an issues-based order; but that a proportional costs order was appropriate to reflect Primus’ success on one of the claims, that it had been able to defeat. 

Ultimately, Mrs Justice O’Farrell decided that Primus should pay 85% of Triumph’s costs.  The parties then agreed that, in working out how much that equated to in terms of actual money to be paid, the costs should be subject to a detailed assessment on the standard basis (rather than the indemnity basis).

Concluding Comments

There are many risks in litigation – legal risks on the merits and on the allocation of any costs award that might be made, as much as commercial risks in considering funding of the litigation to trial, and the ability of the parties to pay their own costs, and any adverse costs order that might be made against them. 

It is, therefore, important to consider each of these risks at all times through the dispute process, from the time of the initial exchange of correspondence in accordance with the applicable Protocols and mediation, as much as during the process to trial and judgment

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