Litigation can be a costly endeavor, often leading to substantial financial burdens for individuals or businesses involved in legal disputes. In England and Wales, the recovery of litigation costs is governed by legal principles that aim to ensure fairness while encouraging efficiency in the legal process.

The general rule is that “costs follow the event” in civil cases. However, there are several important nuances to understand.

ARC Costs can assist in the recovery and negotiation of legal costs by preparing costs budgets, bills of costs, points of dispute, replies to points of dispute. Our costs lawyers can also represent clients in Detailed Assessment hearings.

What are litigation costs?

Litigation costs are the expenses incurred by parties as they engage in the legal process. These costs can include:

• Solicitors’ fees: The charges for legal advice and representation by solicitors.
• Barristers’ fees: If barristers are instructed for court advocacy or specialist advice, their fees are also part of the litigation costs.
• Disbursements: These are expenses incurred by the legal representatives on behalf of the client, such as court fees, expert witness fees, and travel expenses.
• Court fees: Payments made to the court for filing claims, hearing fees, or other procedural steps.
• Other costs: This can include costs related to obtaining documents, serving process, or obtaining mediation services.

These costs can accumulate quickly, and parties often seek to recover them from their opponent, particularly if they have succeeded in their claim or defense.

The general rule: Costs follow the event

The standard rule in civil litigation in England and Wales is that “costs follow the event.” This means that the losing party is usually ordered to pay the legal costs of the successful party. This principle is primarily intended to ensure that the party who has successfully pursued or defended a claim is not financially disadvantaged by the process.

However, this rule is not absolute. The court retains discretion in awarding costs and can depart from the general principle based on various factors, including the conduct of the parties and the circumstances of the case.

The Court’s discretion in awarding litigation costs

The Civil Procedure Rules (CPR), specifically Part 44, outline the court’s approach to awarding costs. While the general rule is that the losing party pays, the court has broad discretion to make different cost orders based on what is fair and just in the circumstances. The key factors the court considers include:

• Conduct of the parties: This covers both pre-litigation conduct (such as efforts to settle the dispute) and behavior during the litigation process. A party that has acted unreasonably, for example, by failing to comply with court orders or refusing to engage in settlement discussions, may be penalised in costs.
• Offers of settlement: The existence of a formal settlement offer, particularly under Part 36 of the CPR, can heavily influence costs orders. If a party refuses a reasonable settlement offer and then fails to achieve a better result at trial, they may be penalised in costs.
• Success on specific issues: In complex cases, where one party succeeds on some issues and loses on others, the court may make a split costs order, requiring each party to pay a proportion of the other’s costs.
• Proportionality: Costs must be proportionate to the issues at stake. The court may limit the recoverable costs if they are deemed disproportionate to the value of the claim or the complexity of the case.

Types of Costs Orders

The court in England and Wales has several options when it comes to awarding costs. Some of the most common types of costs orders include:

• Standard Basis: This is the default basis on which costs are assessed. Under a standard basis assessment, only reasonable and proportionate costs are recoverable, with any doubts resolved in favor of the paying party (usually the losing side). The receiving party (usually the winner) must prove that the costs were reasonably incurred and proportionate to the case.
• Indemnity Basis: Costs assessed on an indemnity basis are more generous than those on a standard basis. Under this assessment, any doubt is resolved in favor of the receiving party (the winning party). The test of proportionality does not apply as strictly here, and the court may award indemnity costs where a party has acted unreasonably or abusively.
• No Order as to Costs: In some situations, the court may decide that neither party should pay the other’s costs. This may occur where both parties have had some measure of success, or where the court feels that it is fair for each party to bear their own costs.

Part 36 Offers and their impact on litigation costs

A critical feature of the Civil Procedure Rules in England and Wales is the system of Part 36 offers, which are formal offers to settle a claim. Part 36 is designed to encourage parties to settle disputes early and avoid unnecessary litigation. These offers can have a significant impact on costs if they are rejected.

If a party makes a Part 36 offer that is not accepted, and the opponent fails to obtain a better result at trial, the court may impose substantial cost penalties. For example:

• A claimant who makes a successful Part 36 offer may be entitled to additional interest on damages, an enhanced recovery of costs, and interest on those costs, potentially on an indemnity basis.
• A defendant who makes a successful Part 36 offer may limit their liability for the claimant’s costs, and the claimant could be ordered to pay the defendant’s costs from the date the offer was rejected.

Part 36 offers serve as a powerful tool to promote settlement and encourage parties to consider the financial risks of proceeding to trial.

Proportionality of costs

One of the core principles governing costs in litigation is proportionality. The court will assess whether the costs incurred are proportionate to the matters in dispute. Under the CPR, particularly Rule 44.3, the court must ensure that costs are proportionate to:

• The amount of money involved in the dispute.
• The importance of the case to the parties.
• The complexity of the issues.
• The conduct of the parties.
• The relationship between the parties and the wider public interest, if relevant.

Even if costs are necessary, they may not be fully recoverable if they are deemed disproportionate to the value or complexity of the case. This approach ensures that parties cannot recover excessive costs simply because they have spent more than necessary to win the case.

Cost management

In larger or more complex cases, the courts in England and Wales may adopt cost management procedures. Parties are required to submit detailed budgets outlining their estimated costs, and the court will approve or modify these budgets. This system aims to keep costs under control and ensure that parties are aware of the potential financial risks involved in litigation.

Cost management hearings are conducted to review and approve these budgets, and parties are expected to stay within the approved budget unless there are good reasons for any overspend. If a party exceeds its budget without court approval, they may be prevented from recovering the additional costs, even if they win the case.

Recovering litigation costs

When a party has been awarded litigation costs, they must prepare a bill of costs. This document sets out in detail the legal fees, disbursements, and other expenses incurred during the litigation process.

The bill of costs is served on the paying party (usually the losing side), alongside a Notice of Commencement. The paying party then has the opportunity to challenge the claimed costs by serving points of dispute.

Points of dispute allow the paying party to identify specific items in the bill they consider excessive or unreasonable, offering their reasons for contesting them. If the parties cannot agree on the costs after exchanging points of dispute and replies, the matter proceeds to a detailed assessment.

This is a formal court process where a costs judge reviews the bill of costs and the points of dispute, ultimately deciding what amounts are reasonable and should be paid. The judge may reduce the claimed costs, ensuring that only reasonable and proportionate expenses are recoverable. Detailed assessment is a critical step in ensuring fairness and preventing inflated or unnecessary costs in litigation.

How can ARC Costs assist?

ARC Costs provide a professional cost drafting and advocacy service. We can assist by drafting a Precedent H Costs Budget, ensuring that all future costs are anticipated correctly, maximising your costs recovery. We can also assist in the preparation of a Precedent R, to correctly negotiate a Costs Budget. If your budget cannot be agreed, we can provide advocacy services at Costs and Case Management (CCMC) hearing.

We can be contacted by email at info@arccosts.co.uk, or by telephone on 01204 397302. For more information on legal costs, please find out more about our speciality areas of expertise and our services on our legal costs page.

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