Post-Jackson proportionality rule can prevent full recovery of 'reasonable' costs, says senior judge

Master Gordon-Saker ruled that "no more than one half" of costs including success fees and an after-the-event (ATE) insurance premium could be considered proportionate in a recent privacy case, regardless of the fact that he had already found those costs to be reasonable following a line-by-line assessment.

In his written judgment, Master Gordon-Saker said that the proportionality rule, which came into force on 1 April 2013, was "intended to bring about a real change in the assessment of costs".

"This claim settled at a relatively early stage, a year after the issue of proceedings and 16 months after solicitors were first instructed, before the first case management hearing, before disclosure of documents or exchange of witness statements, before any hearing other than the application for an anonymity order," he said. "The scope of the evidence would be very limited and the case was neither factually nor legally complex."

"In these circumstances base profit costs of £46,000 and base counsel's fee of £14,000 must be disproportionate under the new test, being over three times the amount of agreed damages, and covering work which fell far short of trial. In my judgment costs of about one half of those figures would be proportionate. The ATE premium of £58,000 excluding tax is also disproportionate," he said.

Changes to the Civil Procedure Rules (CPRs) from 1 April 2013 resulted in the introduction of a new civil court costs and funding regime, following the recommendations of Lord Justice Jackson in his review of civil litigation in England and Wales. The courts will now only allow costs which are "proportionate to the matters in issue", defined as those that bear a reasonable relationship to the sums and non-monetary relief at issue in the proceedings as well as the complexity of the litigation, any additional work generated by the conduct of the paying party and any "wider factors" involved in the proceedings.

The claim in this case had been brought by a primary school teacher who had had a relationship with a Premier League footballer, against the Sunday People. In March 2011 the teacher had lost her mobile phone, which contained "private and personal information", and which was supplied to the newspaper by a third party. After a journalist approached the teacher, her father filed a complaint with the newspaper which led to the return of the phone without any details of the relationship being published.

Two years later, the teacher engaged a law firm with experience of privacy claims under a conditional fee agreement (CFA), which provided for a success fee of 100% which would be discounted if the claim was settled before trial. The firm entered into a similar CFA with counsel. The teacher also purchased an ATE insurance policy to indemnify her against the newspaper's costs and her own disbursements.

The case was settled before trial for damages of £20,000 plus costs. The teacher claimed £241,817 in costs including success fees, ATE premium and insurance premium tax. The judge allowed success fees at 33%, as well as the ATE premium in full, before applying the proportionality test. The premium itself was not unreasonable, and its purchase by the teacher was in fact necessary, the judge ruled.

However, the CPRs explicitly state that costs "may be disproportionate even though they were necessary", the judge said. A premium of £58,000 at the stage that the claim settled, which could have potentially doubled, "[could not] be said to bear a reasonable relationship to a claim which settles for £20,000, where there was no substantial claim for non-monetary relief, which was not particularly complex, where no significant additional work was generated by the conduct of the paying party and where there were no wider factors involved", he said.

Legal costs expert Keith Levene of Pinsent Masons, the law firm behind Out-Law.com, said that the case marked "the start of how the court will deal with costs and proportionality in detailed assessment proceedings in 2016 and beyond".

"Hold your breath for a bumpy ride in the next year," he said. "Lawyers need certainty as to how proportionality and recoverable costs should be determined, and this will probably only come from a Court of Appeal decision."

"Two years after the changes to CPR, the court is grappling with how to determine proportionate costs. Notwithstanding the case relates to a libel claim, which is rarely just about money, can it really be said that allowing £84,000 in a claim that settled for £20,000 damages at a relatively early stage is reasonable and proportionate?" he said.