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11 February 2014
Litigation is expensive; professional indemnity disputes especially so. Various costs considerations impact on both the proportion of claims settled commercially, rather than litigated on their merits, and rising insurance premiums. The value of understanding the tactical options and regulatory pressures regarding costs has never been higher.
The starting point to keep costs reasonable is efficient case management, but the judiciary has also developed important tools. In May 2004, Lord Justice Brooke summarised the costs containment opportunities in King v Telegraph Group Ltd  as follows: “There are three main weapons available to a party who is concerned about… extravagance. The first is a prospective costs capping order… The second is a retrospective assessment of costs conducted toughly… The third is a wasted costs order against another party’s lawyers…”
Traditionally, the primary, if not only, avenue used in most cases has been the second option, albeit the tactics and considerations of the end game deserve careful heed from the outset of any dispute. Prospective managerial direction by the courts and sometimes the Law Society is nevertheless acquiring more support, especially where, as in King, costs estimates are high.
Costs – protective offers
After the issue of proceedings, for a defendant to be sure of obtaining cost protection under Civil Procedure Rules (CPR) Part 36, an offer must be effected by a payment into court because, as Lord Justice Simon Brown stated in Amber v Stacey : “That way lies clarity and certainty.” However, in Crouch v King’s Healthcare NHS Trust , the Court of Appeal opened a potentially important tactical door for defendants by upholding the court’s discretion to take, “without prejudice save as to costs”, offers into account, even if money has not been paid in. The paying NHS Trust maintained it was indubitably good for the money, but it was better used for public benefit until accepted by the receiving party, rather than tied up in court. In principle, there is no reason why other financially sound defendants, particularly insurance companies, should not make similar arguments, especially if there are other defendants with whom the value of the claim cannot be agreed.
On the other foot, in Read v Edmed, liability was apportioned 50:50 in a liability-only trial, thus matching the split offered by the claimant pre-issue. The claimant did not beat her offer, so Part 36 did not strictly apply, but the court claimed and exercised its discretion to award indemnity costs nonetheless.
ADR: costs penalties for unreasonable refusal
In Halsey v Milton Keynes NHS Trust , the Court of Appeal upheld the principle of costs sanctions where parties unreasonably refused mediation. The court gave non-exhaustive examples where refusal might be reasonable, but made it clear that mediation will be reasonable in most situations.
Allocation questionnaires costs estimates
The relevance of costs estimates provided to the court, particularly with allocation questionnaires (AQ), has recently gathered momentum. In Leigh v Michelin Tyres , the Court of Appeal emphasised that parties who file radical under or over-estimates risk being penalised later on costs, but the AQ estimate should not be treated as a strict guarantee if costs reasonably exceed it, especially if case management decisions of other parties or the court are affected. The decision has been applied in Burns v Novartis Grimsby Limited , where departure from early estimates was justified by unforeseen later complications, and in Tee-Hillman v Heppenstalls , where the successful defendant’s early under-estimate was disregarded because the claimant could not show reliance upon it.
In Lynch v Taylor , a costs estimate provided by solicitors to the court for summary inter-party assessment proved well below the amount allowed on detailed assessment of their own client bill, but the award was nevertheless approved on appeal because estimates driving inter-party summary awards could not undermine solicitors’ entitlements to recoup reasonable costs from their own clients pursuant to Section 74(3) of the Solicitors Act 1974.
Conditional fee arrangements
Conditional fee arrangements (CFAs) are justifiably a central plank of modern litigation funding, but since their introduction there have been challenges – sometimes highly technical – to receiving parties’ entitlements to recover costs, insurance premiums or success fees. While less frequent since the Court of Appeal’s broad review in Hollins v Russell , the obligation to observe carefully the CFA Regulations 2000 and to stray from the Law Society’s recommended format at peril has been underlined in Bowen v Bridgend County Borough Council  where a successful claimant’s excessive costs were disallowed for disproportionality and procedural non-compliance.
Issue-based costs orders
The courts have been increasingly disposed to make costs orders reflecting parties’ successes and failures, not just in respect of overall claims or counterclaims, but also to respond to victories and defeats in subsidiary issues, depending on their timing, complexity and impact on total costs expenditure.
The court has other powers to influence parties’ conduct and costs provision before expenditure is incurred. It can level the playing field of resources, speed up progress, or accommodate justice or public policy by imposing costs caps. Costs capping orders have so far been considered primarily in substantial group litigation, but in AB v Leeds Teaching Hospital NHS Trust , Mr Justice Gage recognised they will sometimes be appropriate elsewhere and the range of cases likely to be considered appropriate for court intervention seems set to increase.
Solicitors practice rule 15
An important reminder was given in Hollins that professional rules have civil legal force as if statutory. Solicitors must keep clients informed and updated properly about costs.
The Court of Appeal recognised in Ridehalgh v Horsefield , and the law lords have confirmed in Medcalf v Mardell , that an often conclusively obstructive evidential problem arises if production of relevant material is disallowed by the client party to whom rights of privilege are reserved. However, legal advisers nevertheless can never ignore the risk of being penalised personally for costs incurred wastefully through their wrongful conduct.
It is rarely possible to manage a professional negligence action with rigorous adherence to a fixed-cost plan, but there is increasing pressure to try. The courts, assisted by other governing institutions, are showing a developing inclination to provide the judicial tools to facilitate that approach, which practitioners disregard at their peril.
Mike Willis is a professional risks partner at Beachcroft Wansbroughs