One of the cornerstones of Lord Justice Jackson’s costs reforms is that costs should be proportionate to the matter at issue. In a rare High Court decision examining this test, Marcus Smith J has given guidance on how it is to be applied. The decision confirms a two-step approach involving an assessment of what sum is “reasonable” followed by a further review of proportionality.
In Malmsten v Bohinc  EWHC 1386, Mr Malmsten and Ms Bohinc were the shareholders in a small company. Their working relationship broke down, and Ms Bohinc successfully applied for an order allowing her to hold a shareholders’ meeting with a quorum of one. At the initial assessment, she claimed costs of £62,500 in respect of the 30-minute hearing. The costs judge reduced this to £47,500. Mr Malmsten appealed on a number of grounds, including an argument that the costs judge had taken into account irrelevant factors in his assessment of proportionality.
The approach of the court to costs appeals
Smith J reiterated that judges have a very wide discretion as to costs. The courts should discourage appeals against costs decisions, particularly where the issue was the amount of the costs rather than which party should pay them. He cited with approval a statement by Buckley J in Mealing-McLeod v Common Professional Examination Board  2 Costs LR 223 that such appeals should only be allowed where there was “some sensible and significant complaint” and that the appeal court should not “trawl through the bill” to “add a little here or knock off a little there”.
The proportionality test
Smith J gave the following guidance on proportionality:
- The factors the court should take into account in assessing proportionality are those set out in CPR 44.3(5), namely:
- the parties’ conduct;
- the amount at stake;
- the importance of the matter to the parties;
- the complexity, difficulty or novelty of the issues;
- the skill, effort, specialist knowledge and responsibility involved;
- the time spent on the case;
- the place and circumstances in which the work was done;
- the receiving party’s costs budget.
- These factors can be seen as describing what a hypothetical reasonable litigant of adequate, but not extravagant means would be prepared to pay. However, the approach to proportionality must not become “too client-centric”; due weight must be given to the approved or agreed costs budget and to the professional assessment that has gone into compiling the bill of costs.
- If the court considers that the conduct of the paying party has increased costs beyond what would otherwise be proportionate, it should identify specifically how the conduct caused the additional costs.
- The court should assess proportionality at the end of the process of considering costs, after it has decided whether not any disputed items were reasonably incurred. This reverses the approach taken before the Jackson reforms.
- There is no longer any distinction between costs that are “reasonable” and those that are “necessary”. Proportionality is an additional and independent test, and the court can disallow both “reasonable” and “necessary” costs if they are disproportionate.
- This approach applies to summary assessments as well as to detailed assessments. The only difference between the two is that on a summary assessment, the court does not conduct the assessment of reasonableness on a line-by-line basis.
- VAT and the costs of preparing the bill should be excluded from the proportionality assessment.
On the facts, Smith J found that the costs judge’s decision on proportionality in this case lay outside even the very wide discretion afforded to him. He made a further reduction of £32,500, leading to a final costs order of £15,000.
This judgment confirms that the proportionality test can be used to achieve significant broad-brush reductions to a bill of costs. It is consistent with the earlier decision in BNM v MGN Ltd  EWCA Civ 1767, which held that the costs of funding arrangements are to be left out of account when considering proportionality. Like May v Wavell Group plc  EWHC B16 (Costs), it also emphasises the importance of the factors set out in CPR44.3(5). However, while HHJ Dight in May v Wavell had left open the question of whether proportionality should be assessed after reasonableness or at the same time, Smith J’s approach clearly requires a two-stage assessment.
For further information, please email the authors or your usual CMS contact.
The authors would like to acknowledge the assistance of Daniel Saul in preparing this article.