A cornerstone of our justice system is the principle that a party, who vindicates his rights through the court process, is entitled to have his legal costs of the action compensated by the losing party – this is what lawyers refer to as the indemnity principle.
However the winner’s right to have his legal costs paid is not unqualified. The court does not allow a victor to simply pass the losing party their legal bill for payment in full. It is in this knowledge that the losing party usually challenges the victor’s costs and consequently a whole area of law has developed which governs the amounts and types of costs that a winning party is entitled to have paid by a losing party (referred to as the recoverable costs).
When considering what costs the losing party should pay, the court applies a two stage test considering, in turn, whether the victor’s legal bill is (a) reasonable and (b) proportionate.
This means that the court first reviews the streams of work that the victor’s lawyers undertook in respect of the action and considers whether it was reasonable and/or necessary to undertake that work stream in the amounts claimed. Then, having reduced the bill through this exercise, the court then steps back to consider whether the total sum of theses reduced costs is proportionate when compared to the value of the dispute. This second stage test of proportionality was significantly altered in April 2013 such that judges now have far greater powers to dramatically reduce the costs awarded to the winner if he deems those costs to be disproportionate to the case.
As Brian May (the guitarist in Queen) found out, this new approach can lead to successful parties being awarded a far smaller proportion of their legal costs than they may have anticipated being able to recover. In the case of Brian May v Wavell Group, Brian May brought a claim against his neighbour under the law of private nuisance in relation to noise occasioned by basement refurbishments. He then accepted an offer made by the Defendants at an early stage in the proceedings (well before trial) to settle the dispute for £25,000 which, on the evidence before the Court, was found to be well within the contemplation of Brian May as an acceptable valuation of the damage caused by the noise nuisance. By the time this settlement was reached, Brian May had spent £208,236.54 in legal fees.
Applying the first part of the above test the court found that £99,655.74 was a reasonable figure for costs. The Court then looked at this reasonable figure and compared it against the £25,000 that the case settled for and found that a proportionate legal costs figure was £35,000. Consequently the Defendants were ordered to pay Brian May a total of £60,000 (£25,000 for the settlement offer and £35,000 for costs), leaving him with an irrecoverable legal bill of circa £173,000.
As commercial litigators a key part of our advice to clients is undertaking a cost-benefit analysis at each relevant stage of a matter to weigh up the merits and costs risks of going through the court process.
The court process can be a roller coaster ride. Before buying your ticket and getting on board, you should receive clear advice on both the substantive merits of the case and the costs implications. As can be seen from the Brian May case, failure to undertake risk analyses can render Pyrrhic a hard-fought legal victory.