3 April 2006
Today (3 April) signals a major shift in the court's approach to making costs orders following contested financial applications in divorces. From now on, each divorcing spouse will have to use their own assets to pay their legal costs.
This is largely welcome news, as the old system was fundamentally flawed. Historically, judges had wide discretion in deciding who paid the costs of the proceedings, but often the wealthier party (usually the husband) was burdened with paying both parties' legal costs.
Closed or secret settlement offers, known as 'Calderbank' offers, which judges did not see until after they had made the financial award, played an important part in the adversarial process. They were a form of spread betting and the degree of procedural gamesmanship they introduced led to uncertainty. The increased risk, in turn, led to higher costs.
The problem was that, in many cases, especially those involving modest resources, the requirement for one party to pay the costs of the other could produce real financial hardship and undermine the court's division of the assets.
A further fault with the old system was a lack of uniformity in approach for the treatment of paid and unpaid costs at a final hearing. If treated as a liability of one of the parties, the court was prejudging the determination of the costs issue. If 'added back' to the asset schedule, the court was crediting a party with assets that were no longer available to meet their capital needs.
The system has become outdated now that the guiding principles are non-discrimination. Following an equal division of the assets it has become fairly commonplace to have no order as to costs.
The most radical change under the new rules is that Calderbank offers will be ignored by judges. The court will only consider open offers. The general rule will be that the court will make no order on costs in the absence of bad behaviour in the litigation. It is anticipated that this rule will not be departed from lightly by the judges.
As the court will be able to take the costs of the parties into account when considering the most appropriate order to make, there will be no need for costs to be determined after judgment. Accordingly, a judge will not be placed in the undesirable position of finding that their award is ambushed by the Calderbank offers.
Open offers will be important and a party who does not enter into negotiations at an early stage will run the risk of being penalised in the award.
Divorcing spouses and their advisers will need to construct their cases with care. Fishing expeditions to trace hidden bank accounts are expensive exercises to undertake. If costs are expended on pursuing an issue fruitlessly, the associated wasted costs may be added back as an asset and not treated as a liability of the party responsible. But this may also lead to a potential hazard. Divorce proceedings are already a frightening and distressing experience for many divorcing spouses. The most vulnerable may feel pressurised by the new rules into accepting a lower offer than they are entitled to because of spiralling legal fees.
Solicitors will need to manage their clients' cases skillfully to ensure a fair outcome for their clients in a cost-effective manner. On balance, the new openness will be good news for most - it will concentrate the minds of solicitors and clients alike in making sensible offers at as early a stage as possible - and it will expose the game players for what they are.