Costs in English law
In English civil litigation, costs are the lawyers' fees and other disbursements of the parties that a judge has the power to order after judgment has been given. The law of costs defines how such allocation is to take place.
- 1 "Costs Follow the Event"
- 1.1 Costs orders
- 1.2 Wasted costs
- 1.3 Security for costs
- 1.4 Comparison with other countries
- 1.5 What can be claimed?
- 1.6 The indemnity principle
- 1.7 Exceptions
- 1.8 Who can claim costs?
- 2 Assessment of Costs
- 2.1 Reasonableness
- 2.2 Basis of costs assessment
- 2.3 Proportionality
- 2.4 Costs estimates
- 2.5 Costs budgets
- 2.6 Inter partes costs
- 2.7 Solicitor/Own client costs
- 3 Specific Types of Funding
- 3.1 Conditional Fee Agreements (CFAs)
- 3.2 Collective Conditional Fee Agreements (CCFAs)
- 3.3 Insurance policies
- 3.4 Damages-Based Agreements (DBAs)
- 4 Costs against Other Parties
- 5 Criminal proceedings
- 6 References
- 7 Bibliography
- 8 External links
"Costs Follow the Event"
In the small fraction of cases that do not settle and instead proceed to a judgment, generally "costs follow the event" so that the successful party is entitled to seek an order that the unsuccessful party pay his or her costs. Should a case settle, then the parties can seek to agree costs, with the general rule that the losing party pays costs.
The order that a judge gives as to costs determines who will be the paying and who the receiving party. The amount of costs remains to be determined by assessment. Common costs orders, other than on the Small Claims Track, include the following.
|Costs (in any event)||Costs to receiving party no matter what happens subsequently|
|Costs in the case/application||Costs of this proceedings awarded|
|Costs reserved||Costs of the issue in question to be decided at the end of trial (costs in the case if no other order made then)|
|Costs thrown-away||Costs of the applicant in, for example, a successful application to set aside an order|
|Costs of and caused by||Costs of other parties when a party, for example, amends a case – costs of attending the hearing and own consequential amendments|
|Costs here and below||Includes costs in inferior courts (but appeal from Divisional Court cannot award costs below Divisional Court)|
|No order as to costs/ Each party to pay his own costs||Parties bear their own costs relating to that issue|
As a general rule, after judgment has been handed down, the Court "will" order one party to make an advance payment towards the other side's costs. This will be done even before the costs claim has been finalised.
The amount that will be ordered is based upon the parties' disclosed costs estimates, and will take into account the percentage of costs that have been ordered to be paid; any order for Indemnity Basis costs, if relevant, and any costs that are due to the paying party.
These are defined as "costs incurred by a party—
- (a) as a result of any improper, unreasonable or negligent act or omission on the part of any legal or other representative or any employee of such a representative; or
- (b) which, in the light of any such act or omission occurring after they were incurred, the court considers it is unreasonable to expect that party to pay"
These costs will include the situation in which a party has incurred unnecessarily due to the other side's conduct. For example, if a Court hearing is postponed due to one party not turning up at Court. As a result, the other party had to pay a Brief fee for a Barrister, for a hearing that ultimately did not take place.
Security for costs
Security for costs is a common law legal concept of application only in costs jurisdictions, and is an order sought from a court in litigation. The general rule in costs jurisdiction is that "costs follow the event". In other words, the loser in legal proceedings must pay the legal costs of the successful party. Where a defendant has a reasonable apprehension that its legal costs will not be paid for by the claimant if the defendant is successful, the defendant can apply to the court for an order that the claimant provide security for costs. Furthermore, the amount that is ordered by the Judge is in direct correlation to the strength or weakness of the claimant's case brought herewith.The weaker the probability of the claimant prevailing, the higher the security order. Typically a claimant will be outside the jurisdiction of the court: the law of security for costs recognises that orders of the court relating to payment of a party's legal costs can be very difficult to enforce in non-common law jurisdictions, and so will order security to be provided. Security can also be ordered where a claimant is insolvent, or prone to vexatious litigation. Security is usually provided in the form of a bank cheque paid into the court, or held in a trust account operated jointly by both the claimant's and defendant's lawyers. If the defendant is successful, the money can be applied against the costs order. If the claimant is successful, the security is returned to the claimant.
Comparison with other countries
The law of costs is often known as the English rule.
The situation contrasts with that in the U.S. where legal fees may be sought only if the parties agree by contract before the litigation, or if some special act or statute allows the successful party to seek such fees, the American rule. Federal district court and Court of Appeals judges award costs to the prevailing party under Federal Rules of Civil Procedure.
Generally, state court judges have no common law right to award such fees against the losing party. It has been suggested that the American rule contributes to making the U.S. a litigious society. Individuals have little to lose beyond filing fees and a retainer to start a lawsuit, and they are not at risk of having to pay their opponent's fees if they lose.
Conversely, the English rule has been criticised. It is sometimes pointed out that the English approach potentially hinders access to justice by increasing the risks of litigation, both by setting up the risk of having to pay both parties' full costs in the event of losing, and by creating incentives for parties to sink ever increasing resources into their respective cases in order to win the action and avoid paying any fees, a strategy that cannot succeed under the American rule, thereby increasing the overall cost-risk of litigation.
The German costs rule, which allows for fixed recoverable costs, avoids this unfortunate consequence of full-fees recovery.
What can be claimed?
Recoverable costs are limited to:
- Fees and charges of the solicitor (attorney), which may be hourly, daily or an agreed sum;
- Disbursements, including barrister/(Counsel)s' fees;
- Witness allowances (conduct money), including fees paid to expert witnesses;
- Some professional fees for non-witnesses;
- VAT (where chargeable);
- Lawyers' "success fees" allowable by the court under a valid conditional fee agreement (CFA); and
- After-the-Event insurance premium.
The indemnity principle
The indemnity principle, a term unrelated to the concept of indemnity costs, stipulates that a paying party cannot be ordered to pay more than the receiving party has already agreed to pay his solicitor, the retainer.
The principle causes anomalies for pro bono representation where, because the lawyers have agreed to represent the party for no cost, they cannot subsequently ask the court for a costs award when they win. However, s. 194 Legal Services Act 2007 allows the court to order a party who loses against pro bono representation to make an appropriate charitable donation in lieu of costs. These provisions come into force progressively from 30 June to 1 October 2008.
There are also specific exceptions to the principle for:
The rule that "costs follow the event" is observed on the Multi- and Fast Tracks.
However, the judge has considerable discretion to apply or disapply these rules if the result would otherwise be unjust. The paying party can appeal against the costs order by the usual routes of appeal.
Small Claims Track
Fixed costs and fees
In addition, where both the current CPR 48 and old CPR 45 apply, there are fixed success fees in personal injury claims arising from RTAs; injuries at work; and industrial disease claims. These range from 12.5% in RTAs to 100%, in each type of case, if a trial occurs.
In certain Fast-Track or Multi-Track cases, a successful party's costs claim will be limited.
Formal offers to settle
The Court will take account of the conduct of the parties and may vary the usual costs order in the event of misguided or dishonest behaviour. In particular, the Claimant is expected to give the Defendant an opportunity to settle, and the parties are expected to exchange essential information and details before starting a claim. The Court will especially be aware of any formal offers to settle made under Part 36 of the Civil Procedure Rules. Such offers are withheld from the judge during the trial but, during assessment of costs, the judge will compare them with the final damages awarded.
Acceptance of offers
If a Part 36 offer is accepted, or if the Claimant discontinues, the unsuccessful party is usually liable for both parties' costs to that date.
Rejection of offers
If offers are rejected, and the case goes to trial, then one of the following situations can apply.
- If the Defendant rejected the Claimant's Part 36 offer to settle, then:
- If the Claimant is awarded a sum that is "at least as advantageous" as that offer, then the Claimant is entitled to each of the following:
- Indemnity Basis costs (defined in a separate section further below) from the date the offer expires;
- Punitive interest, up to 10% above base rate, on the whole or part of any sum awarded, for some or all of the time at issue; and
- An "additional amount" of up to £75,000.00 (only if the Part 36 offer dates from 1 April 2013).
- If there is a judgment for the Claimant that is less than the offer, then the general rules apply: the Claimant is entitled to standard-basis costs plus interest.
- If there is a judgment for the Defendant that is less than the offer, then the general rules apply: the Defendant is entitled to standard-basis costs plus interest.
- If the Claimant rejected the Defendant's offer to settle, then:
- If the Claimant failed 'to obtain a judgment that is more advantageous' than that offer at trial, then the Defendant is entitled to, from the date that the offer expired:
- Standard Basis costs;
- Interest on the costs.
- If there is a judgment for the claimant that exceeds the offer, then the general rules apply: the Claimant is entitled to Standard Basis costs plus interest.
The unsuccessful party is generally also liable for both parties' costs up to the date that the Part 36 offer expires, on the Standard Basis, plus interest.
If the Claimant discontinues, they are usually liable for both parties' costs to the date of discontinuance, on the Standard Basis.
Qualified One-Way Costs-Shifting
In personal injury or fatal accident cases since 1 April 2013, there is a further exception to the costs-shifting rules known as "Qualified One-Way Costs-Shifting".
If this applies then orders for costs against the Claimant can normally only be enforced by a Defendant if they total doesn't exceed the amount of damages and costs which a Defendant has to pay out.
However, it can be enforced in full without the Court's permission if the claim was struck-out because:
- (a) the claimant has disclosed no reasonable grounds for bringing the proceedings;
- (b) the proceedings are an abuse of the court’s process; or
- (c) the conduct of –
- (i) the claimant; or
- (ii) a person acting on the claimant’s behalf and with the claimant’s knowledge of such conduct,
- is likely to obstruct the just disposal of the proceedings.
The Court's permission to enforce in full is required if the claim was found at trial to be "fundamentally dishonest". If the claim was discontinued, the court can order a hearing to determine whether it was "fundamentally dishonest" to bring it.
Other exceptions to the general rules include:
- Applications to extend time limits, usually paid by the applicant;
- Amendments to statements of case, usually paid by the amending party, including the costs of the other side's resulting amendments; and
- Failure to respond to a notice to admit where the receiving party will usually pay the costs of proving the facts alleged.
Who can claim costs?
As a general rules, the losing party pays the costs of the winning party, but the court can order otherwise.
The rule also covers in-house corporate legal teams that conduct litigation and have rights of audience. They can claim the remuneration and expenses of the lawyers involved at the rates that external solicitors could claim, even though their fees would be paid as part of the company's overheads.
Litigants in person
The costs awarded to a litigant in person cannot exceed two-thirds of what could be claimed by a professional lawyer.
Assessment of Costs
All claims for costs must be "reasonably incurred" or "reasonable in amount". if costs are specified as being paid as part of a contract, they are presumed to be reasonable, unless the contract says otherwise Reasonableness is assessed against "all the circumstances" and in particular the "seven pillars of wisdom":
- Conduct of the parties:
- Before as well as during proceedings;
- Efforts made to resolve the dispute;
- Value of the property at issue;
- Importance of the matter to the parties;
- Complexity, difficulty or novelty of the case;
- Skill, effort, specialised knowledge or responsibility required;
- Time spent on the case;
- Geographical location where the work was done.
Basis of costs assessment
There are two basic ways in which the Court will assess a claim for costs: the Standard Basis and the Indemnity Basis. However, in each situation, the claim must be reasonable.
The manner in that they are assessed goes a long way in determining the overall percentage that will be allowed.
Costs awarded on the Standard Basis must be "proportionate to the matters in issue". Any doubt as to the costs is resolved in favour of the paying party.
Costs awarded on the Indemnity Basis need not be "proportionate". Any doubt as to the costs is resolved in favour of the receiving party.
As a whole, an award for costs on the Indemnity Basis is much more favourable to the receiving party than an award of the Standard Basis.
In considering whether or not a party's claim for costs is "proportionate", the court has to apply one of two different tests.
The old test
This applies where work is done before 1 April 2013, or to the whole of the costs in "cases commenced", i.e. if proceedings are issued, before 1 April 2013.
In these situations, the court should have regard to the seven pillars of wisdom. The court should adopt a two-stage approach:
- Compare the total costs claimed against the total benefits gained by the successful party:
- If the total costs are proportionate to the total benefits:
- a) Perform an item by item test of reasonableness;
— if they are not proportionate:
- b) Perform an item by item test of necessity.
The new test
If the work was done since 1 April 2013, and relates to a case that either does not involve court proceedings, or was issued since 1 April 2013, then a different test applies.
In these situations, the court will hold that costs "are proportionate if they bear a reasonable relationship to –
- (a) the sums in issue in the proceedings;
- (b) the value of any non-monetary relief in issue in the proceedings;
- (c) the complexity of the litigation;
- (d) any additional work generated by the conduct of the paying party; and
- (e) any wider factors involved in the proceedings, such as reputation or public importance"
In addition, the "necessity" of the costs is not relevant.
In cases issued before 1 April 2013, parties have to give estimates of their likely costs should the case reach a trial. They are used to give each side and the Court an idea of what the likely costs burden would be.
These are submitted at the allocation and listing stage, and at any time that the Court orders them.
A party that has costs awarded in their favour will not be limited to their estimate, but if the costs claimed exceed the estimate by 20% they will need to provide reasons. If the paying party has shown that they relied on the estimated, the Court can use the estimate as evidence that the claim is disproportionate.
If a case is issued since 1 April 2013, and is allocated to the Multi-track, the parties can be forced to submit a budget for their costs, which the Court can then approve. They do not apply to proceedings in the Admiralty; Chancery Division; or Commercial Court; or to cases in the Mercantile Court or Technology & Construction Court where damages exceed £2 million.
Impact and effect
The rules relating to costs budgets are more stringent than those relating to estimates.
All parties must file a budget, unless they are a litigant in person. If a party does not file a budget, it "will be treated" as only budgeting for the costs of any appropriate Court fees. The costs of preparing a budget can be claimed, up to a maximum of £1,000 or 1% of the budget's total, whichever is greater.
Should a party exceed its budget, their costs will be limited to their last approved budget unless there is a "good reason". It has been held that "good reasons" include the fact that the costs were otherwise "reasonable and proportionate"; and where there was a simple "tick-box" error. Costs exceeding the budget have been disallowed where a party has not applied to have its budget increased during the proceedings.
If the Court has not been able to approve a party's budget, for example, due to the case settling before it was able to do so, then different rules apply. However, these rules are similar to those relating to estimates: if a party's costs claim exceeds its budget by 20%, then the difference must be explained. The paying party must also show how they have relied on the estimate. If the Court agrees with the paying party, it can limit the costs to the budget; and if it disagrees with the receiving party it can use the difference as evidence the costs are "unreasonable or disproportionate".
However, should a party ultimately be awarded costs on the Indemnity Basis, then the budget is not relevant in relation to those costs.
Inter partes costs
Where a party is awarded costs against another they are known as inter partes costs or between party costs.
Such costs are usually assessed on the standard basis. The successful party may not be awarded the entirety of their legal costs, as the costs incurred will be assessed by an officer of the court. This can be done in one of two ways.
The simplified procedure is known as summary assessment under which the court will consider a schedule of the costs incurred which will usually be no more than two pages long and is often only a single page. This is the usual method on the Fast Track, for hearings lasting no longer than a single day, for certain appeal hearings and for the costs of the paying party in detailed assessment hearings.
However, summary assessment is not permitted for claims:
- On behalf of children or mental patients; or
- Funded by the Legal Services Commission;
— or where:
- Paying party can raise substantial grounds; or
- Costs have been agreed by the parties.
For more complex cases a process, formerly called a taxation of costs, now known as detailed assessment, is used. It is unrelated to "tax" in the sense of a method of raising government revenue. The successful party must file with the court (unless the other party fails to respond to the notice of assessment) a detailed breakdown of the costs and disbursements incurred, known as a bill of costs which sets out the successful party's claim. The bill is usually prepared by a law costs draftsman, whose skill is often as essential to successful recovery of costs as the skill of a solicitor or barrister is essential to success on the principal issues of the litigation. An officer of the court, Costs Judge or District Judge will then assess the reasonableness of the costs (unless the potential paying party failed to respond to the notice of assessment) with reference to a statutory schedule of limits of entitlements of costs, together with legal precedents, unless the costs can be agreed between the parties. The level of reduction can mean that the bill is reduced in some instances substantially, but in most cases at least 80% of the costs originally sought will be allowed. A court order for costs is enforceable as a debt against the unsuccessful party.
Either party can appeal against a detailed assessment, to a Costs Judge or District Judge of the High Court if the assessment was made by a court officer, or by the usual routes of appeal if the assessment was made by a judge.
If a Bill of Costs of under £75,000.00 is sent for a detailed assessment since 1 April 2013, it will at first be assessed via a new "Provisional assessment" procedure (unless the potential paying party failed to respond to the notice of assessment).
This involves an assessment by the Judge on paper, without the parties being present, and the costs of it are limited to £1,500.00.
If either party disagrees with the outcome they can apply for an oral hearing, but unless they beat the provisional figure by 20%, they will be liable for the costs of the hearing.
Solicitor/Own client costs
The other type of costs, aside from inter partes costs, is called solicitor-client costs and are usually assessed on the indemnity basis. However, costs are presumed to be reasonably incurred and reasonable in amount if the client gave their express or implied approval, but are presumed to be unreasonably incurred if the client was not told they would be recovered from the other side and if they are unusual.
Unless instructed under a Damages-Based Agreement, lawyers in England and Wales are not permitted to work for a share of damages awarded as this would amount to champerty. A client who is unhappy with a lawyer's invoice for services can apply to the court for an order or invoke a statutory procedure whereby the costs are assessed for their reasonableness by an officer of the court, for example a judge. This is also a detailed assessment. If the client does not pay the lawyer, the lawyer has a cause of action if the client does not elect to arbitrate the bill.
There is a statutory time limit on applying for such a procedure, of a year. The frequent result is that the lawyer's invoice is decreased. If the bill is reduced by one fifth or more the solicitor will pay for the process of assessment, but otherwise the client will pay. The client can alternatively apply to the Law Society for a remuneration certificate in respect of costs arising from other than litigation.
Specific Types of Funding
Any case can be funded by a standard retainer agreement, i.e. where the solicitor agrees to act and the client pays as the case carries on.
There are also other ways in which a case can be funded, as long as certain requirements are met.
Conditional Fee Agreements (CFAs)
These are commonly referred to as "No win, No fee" agreements. Under this type of agreement, the solicitor and/or barrister agrees not to charge the client unless the case succeeds.
If the client does win their case, then the solicitor and/or barrister is entitled to claim a percentage bonus (a "success fee") on top of their usual fees.
In order to be valid, there are certain requirements that the CFA agreement must comply with, namely that all CFAs "must:
- (a) be in writing;
- (b) not relate to proceedings which cannot be the subject of an enforceable conditional fee agreement; and
- (c) comply with such requirements (if any) as may be prescribed by the Lord Chancellor"
However, what can be claimed under it, and other additional requirements that may have to be met for the CFA to be valid, depend upon the date of the CFA.
CFAs dated from 1 April 2000 to 31 October 2005
If the CFA was entered into between these dates, the Conditional Fee Agreements Regulations 2000 must also be complied with.
The main requirement is that before entering into the CFA the solicitor must advise the client, amongst other things, as to its effect; of alternative funding methods; and whether he has any interest in nay particular insurance policy.
If these regulations are not complied with, the CFA will not be valid.
If they are complied with, it will be valid and a success fee can be claimed from the other side, as long as they are informed of its existence.
CFAs dated from 1 November 2005 to 31 March 2013
Only the requirements of s. 58 Courts and Legal Services Act 1990 need to be complied with.
If so, then it will be valid and a success fee can be claimed from the other side, as long as they are informed of its existence.
CFAs dated from 1 April 2013
If a CFA is entered into from this date then, unless the claim is for defamation; breach of privacy; diffuse mesothelioma, or is in a set of insolvency proceedings, a success fee cannot be claimed from the other side.
It can still be claimed from the client, but in personal injury claims is subject to a 25% limit of the client's damages.
The solicitors' or barrister's normal fees can still be claimed from the other side.
Collective Conditional Fee Agreements (CCFAs)
A CCFA is CFA that covers numerous people, for example, members of a trade union, in relation to different claims, which could occur at different times.
The rules relating to CFAs generally apply to CCFAs, but, in relation to success fees, the following rules apply to CCFAs:
- If the CCFA dates from 1st April 2013, then a success fee cannot be recovered from the other side;
- If the CCFA pre-dates 1st April 2013, then a success fee can only be recovered from the other side if work was done before 1st April 2013
Most litigants will have the benefit of some form of insurance will cover both their legal costs, and those of the other side.
However, both types will be subject to an upper limit on the amount of costs covered.
Before-the-Event (BTE) policies
The premium for this type of policy cannot be claimed from the other side.
After-the-Event (ATE) policies
If a litigation does not have a BTE policy, they can purchase after-the-event (ATE) legal expenses insurance at the start of litigation.
If the policy was taken out before 1 April 2013, the premium can be claimed from the other side as part of a normal claim for costs.
However, if it was taken out since 1 April 2013, it can only be recovered if it was taken out to cover the costs of an expert's report in a claim for clinical negligence.
Damages-Based Agreements (DBAs)
These are a type of contingency fee, i.e. the solicitor and barrister agree to take a percentage of the client's damages if the claim succeeds.
They generally have to comply with the Damages-Based Agreements Regulations 2013, and there is a maximum percentage that can be claimed varies depending on the type of claim and the level of court that the DBA relates to. The solicitors' disbursements can also be claimed.
If a DBA pre-dates 1 April 2013, then the Damages-Based Agreements Regulations 2010 apply. If not, then the 2013 Regulations apply.
However, there is no significant difference between the two sets, because in both situations, the solicitors and barristers' fees are limited to 35% of the client's damages.
In addition, before entering into the DBA, the client must be given information relating to funding, mediation, and when the fee becomes payable.
Different rules apply to non-employment cases funded by a DBA: specifically, the client does not have to be provided the information needed in employment cases, and the percentage fee varies.
If the DBA is entered into in a personal injury claim, then up to 25% of the client's damages plus Counsel's fees can be claimed.
In other cases, up to 50% of the client's damages, including Counsel's fees can be claimed.
If the DBA relates to an appeal, then up to 100% of the client's damages can be charged as the fee.
Costs against Other Parties
Costs in third-party claims
Sometimes a defendant brings a claim, for a contribution or an indemnity towards damages, against a third party. For example, a diner claims against a restaurant for a dose of food poisoning and the restaurant claims against their supplier of shellfish. Again, "costs follow the event". If the restaurant successfully defends the claim, they pay the supplier's costs and recover the same amount from the unsuccessful claimant. This can cause injustice when the unsuccessful claimant is insolvent and the successful defendant is still liable for third-party costs. The courts will only rarely allow a "cut through" of the third-party's costs to the claimant but the interests of justice prevail.
Costs against non-parties
If a Defendant is found to be innocent of a crime, then they are also entitled to claim their incurred legal costs, but the costs are payable out of money raised through taxes.
A Bill of Costs is submitted in the normal way, but the costs are assessed by the National Taxing Team in a manner similar to a claim for costs in a civil case.
Costs assessed in this way do not require a formal Detailed Assessment, but any amount awarded can be appealed in the usual way.
Proceedings commenced before October 2012
If a prosecution started before October 2012, then the costs will be assessed with no general restrictions on what can be claimed.
Proceedings commenced since October 2012
If a prosecution has started since 1 October 2012, then the amount that can be claimed is much lower. Effectively, the costs are limited to legal aid rates.
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