You wait ages for an interesting legal costs decision from the Court of Appeal and then two come along together. 

Both cases concerned a similar issue as to the extent of a costs judge’s discretion to limit costs in a manner that appears to go beyond a strict reading of the final costs order.
In Drew v Whitbread [2010] EWCA Civ 53 the claim had been allocated to the multi track on the basis of the claimant’s schedule of special damages.  At trial the matter went into a second day and the judge limited the claimant’s damages to an amount within the fast track limit.  The final order was that costs were to be assessed on the standard basis. 
The District Judge ruled on commencement of the detailed assessment that costs would be assessed as if the matter had been allocated to the fast-track.  This restricted the level of costs recoverable. 
The Court of Appeal recognised that the case raised a number of points of principle:
“Where the trial judge has in a multi-track case ordered costs to be paid on the standard basis, to what extent is a costs judge free to rule that the case was in reality a fast track case and assess trial costs on a fast track basis?  Is this a matter which a paying party has to raise before the trial judge or be precluded from raising the point thereafter?  In particular should a party obtain a ruling from the trial judge as to whether a case should have been disposed of within a day when in fact it was not?  If the costs judge is free to consider whether a case should have been allocated to the fast track, how should he or she approach assessment thereafter; can he or she simply say I am going to assess the costs of trial as if it was a fast track case or is it simply something to be taken into account when assessing the costs?”
The Claimant argued by reference to Aaron v Shelton [2004] EWHC 1162 that if a party wishes to argue that a case was, in reality, a fast-track case, and in particular that it was a case that should only have lasted a day, that must be raised with the trial judge, and if not raised with the trial judge cannot be raised with the costs judge.  
The Court of Appeal rejected that approach:
“in fulfilling their different functions, the trial judge under 44.3 and the costs judge under 44.5 are enjoined to take into account many similar factors.  That may mean that if a factor has been raised before the trial judge and the trial judge has ruled on that factor, that will bind the costs judge but (and it is important to emphasise this) more often than not the costs judge has material which the trial judge did not have, and thus will not be bound.  But the notion that if a party has not raised a matter under 44.3 he should be precluded from raising it under 44.5 does not sit easily with the express provisions. … In my view it would not be consistent with the express provisions of 44.3 and 44.5 and with the court's duty to see that costs are proportionate and reasonable to preclude a party raising a point highly material to that question because it had not been raised before the judge under 44.3.”
It was doubtful that Aaron v Shelton (see previous post) ever represented good law but it now entirely clear it does not.  The Aaron Principle has not survived. 
The following guidance was given by the Court:
“In my view 44.3 and 44.5 are intended to work in harmony and it is intended that the parties' conduct (for example) may have to be considered under both. If what is sought is a special order as to costs which a costs judge should follow that obviously should be sought from the trial judge. If it is clear that a costs judge would be assisted in the assessment of costs by some indication from the trial judge about the way in which a trial has been conducted, a request for that indication should be sought. But none of this needs a rule as per Henderson v Henderson that a failure to raise a point before the trial judge will preclude the raising of a point before the costs judge.
In this case the question of exaggeration was raised before the trial judge. He was expressly enjoined to take the possibility of exaggeration into account under 44.3(5)(d). That might have led to a special order for costs, e.g. that the claimant should only get 50% of his costs. But the fact that no special order has been made does not preclude the costs judge in assessing costs considering whether the conduct of a party should preclude an award of costs for some particular item. I can see no reason why the costs judge should not consider the effect of such conduct unless some specific finding of the trial judge binds him. Thus a view expressed that exaggeration was not such as to lead to a special order, ought not it seems to me to prevent a costs judge who must have regard to all the circumstances of the case, being entitled to assess what would have happened if a claimant had instructed his lawyers properly.
… in my view the costs judge was not entitled simply to rule that she was going to assess the costs of trial as if the case were on the fast track. To so rule does seem to me to rescind the Recorder's order. I cannot accept that in ruling as she did it can be said she was simply “assessing costs on the standard basis taking into account that the case should have been allocated to the fast track” which in my view is the permissible approach. It may in some cases be a distinction without a major difference, i.e. where a case has finished within a day and the sums awarded have fallen well within the fast track limits, but that was not on the face of it this case. This case had run into a second day due at least very arguably to the fact that liability was fought hard. Simply ruling that costs of the trial should be on a fast track basis may have meant that the costs judge gave no separate consideration to the question whether it was a trial that would always have been likely to run into a second day.
I accept that, if appreciating that the case had run into a second day, she had given reasons as to why it should not have done so, and that on that basis fast track trial costs was all it was reasonable for the paying party to have to pay, she could not have been faulted.”
So Aaron is completely dead and we now have the Drew Principle which allows conduct to be taken fully into account on assessment even where it has not been raised before the judge making the final order.  Further, even where conduct has been raised before the trial judge, it can also be raised on assessment unless this would conflict with a specific finding by the trial judge.  This is a very useful decision from a defendant’s perspective but I anticipate that it may create some practical difficulties for judges on assessment who will not now be able to avoid considering issues of conduct.
The case of O'Beirne v Hudson [2010] EWCA Civ 52 concerned the question of whether, where a case has been settled before any allocation by a consent order ordering costs to be paid on the standard basis, the costs judge is entitled to take the view that the case would have been allocated to the small claims track and thus that the paying party should only pay costs on the small claims track basis.  This was a very similar issue to Drew as it concerned the extent to which a judge on assessment can go behind a strict interpretation of the costs order.
The Court of Appeal ruled:
“This was a consent order providing for costs to be assessed on the standard basis; the addition of the words reasonable to my mind adds nothing to the order that costs were to be assessed on that basis. It certainly follows from that that the costs judge was not free to rule that the costs would be assessed on the small claims track basis and if and in so far as Judge Stewart might be understood to be saying that he was in my view wrong. But, and this is the critical point, in making an assessment the Costs Judge is entitled to take account of all circumstances (see CPR 44.5(1)), including the fact that the case would almost certainly have been allocated to a small claims track if it had been allocated. In so doing she would have regard to what could or could not be recovered if the case had been so allocated.
At that stage the Costs Judge must question whether, if it could have been fought on the small track, it is reasonable that the paying party should pay the costs of a lawyer. The Costs Judge would not be bound (as I think Mr Morgan's formulation would suggest) only to allow the costs as per a case on the small claims track but it would be a highly material circumstance in considering what by way of assessment should be payable.
I also accept that as Judge Stewart noted, a costs judge has no power to alter the order for costs made by the a judge, and thus make a direction from the outset where costs have been awarded on the standard basis that costs will be assessed on a small track basis. But what lay behind what Judge LJ said reflects what Lord Woolf was saying in Lownds and provided the Costs Judge does not purport to vary the original order or tie himself to assessing by reference to the small claims track it is quite legitimate to give effect as far as possible to the philosophy which lies behind the above statements. There is a real distinction between directing at the outset that nothing but small claims costs will be awarded and giving items on a bill very anxious scrutiny to see whether costs were necessarily or reasonably incurred, and thus whether it is reasonable for the paying party to pay more than would have been recoverable in a case that should have been allocated to the small claims track. Was it for example necessary to have had lawyers and is it reasonable for the paying party to have to pay for lawyers are questions that should arise where a claim should have been allocated to the small claims track.”
This might be thought to create something of an artificial distinction.  A judge cannot simply apply the small claims track costs regime where the costs order is for costs on the standard basis.  However, as part of the assessment process, the judge can disallow all the solicitor’s costs as being unreasonably incurred and thus limit the costs to what would have been recovered in the small claims track.  Artificial or not, this is another good decision from a defendant perspective. 
Taken together, these decisions considerably widen the scope for challenges on detailed assessment where the final costs order was not ideal and where issues of conduct had not been raised before the trial judge or incorporated into a final consent order. 

Three recent Court of Appeal decisions have done much to clarify the powers of a costs judge, during detailed assessment, in relation to disallowing costs on the grounds of the conduct of the receiving party.

The difficulties in this area were largely caused by a High Court decision, Aaron v Shelton [2004] EWHC 1162. That authority seemed to indicate that if a paying party were going to rely on the conduct or misconduct of the non-paying party in order to seek a reduction in the costs to be paid, the time to raise that factor was at the end of the trial, or at the time of the making of the consent order, and not before the costs judge at the time of assessment.

This decision has caused particular difficulty for defendants. Often, little or no consideration is given to the conduct of the other party, or the extent to which they have abandoned heads of claim, when the final order is made. This is not entirely surprising in the eagerness to settle the substantive claim. The application of Aaron, which was largely followed by the judiciary, and leapt on by claimants, precluded defendants from raising conduct issues at detailed assessment even where the conduct of the claimant cried out for some reduction of costs.

The judgment in Ultraframe (UK) Ltd v Fielding [2006] EWCA Civ 1660 has now overturned the principle formulated in Aaron on the basis that it was too broadly stated. The correct approach was held to be, as per Waller LJ:

“34. It seems to me that consideration of a party’s conduct should normally take place both at the stage when the judge is considering what order for costs he should make, and then during assessment. But the court will want to ensure that dishonesty is penalised but that the party is not placed in double jeopardy. Ultimately, the question is one of the proper construction of the order made by the judge. Thus it will be important for the judge, who is asked to take dishonesty into account at the end of a trial when considering the order as to costs, to consider what is likely to occur on assessment. Where dishonest conduct is being reflected in an order made by the trial judge, it must be wise for the future for judges to make clear whether they are making the order on the basis that, on the assessment, the paying party will still be entitled to raise the dishonesty in arguing that costs incurred in supporting the particular dishonesty were unreasonably incurred. Judges may also want to consider whether to make an order under rule 44.14 and it would be wise to do that before considering precisely what order to make in relation to the costs of a trial generally.”

Although the case concerned a positive finding by the trial judge of serious dishonesty by the successful party to the litigation, the principle has wider application to other issues of conduct.

A second decision that touched upon this issue is that of Jackson v Ministry of Defence [2006] EWCA Civ 46. This case concerned a claimant who had abandoned significant heads of claim pre-trial and was found to have exaggerated his injuries during the trial. The Court of Appeal approved the trial judge’s view as to the powers of the costs judge:

“15. …What is more, the judge made it clear that it was open to the defendant to challenge specific items relating to the abandoned claims, such as the costs of the experts which were not relied on at trial, at the detailed assessment, where of course the claimant will only be able to recover costs which were reasonably incurred. This is in fact what has happened here, as can be seen from the defendant’s points of dispute to the large bill of costs filed on behalf of the claimant.

16. The reduction which the judge made — and the reduction which we can anticipate the costs judge is likely to make — must act as a considerable disincentive to claimants and their advisers against making exaggerated claims…”

In Lahey v Pirelli Tyres Ltd [2007] EWCA Civ 91 the Court was concerned with a case where the Defendant, before proceedings were issued, made an offer of £5,000 to settle which was rejected. Proceedings were issued and the claim was quantified at approximately £150,000. The Defendant made a Part 36 payment of £4,000 which was accepted and therefore gave the Claimant an automatic order for costs up to the date of serving the notice of acceptance. At the detailed assessment the Defendant asked the judge, as a preliminary issue, to award the Claimant only 25% of the assessed costs. The Court of Appeal held that the judge was correct to conclude that he did not have the power to make such an order.

However, and importantly, the Court held that such an order was not necessary to produce a just result:

“24. It is, in fact, quite unnecessary to give the costs judge the jurisdiction for which Miss Ayling contends. The premise on which her argument is based is that, without such a power, the costs judge cannot arrive at a fair result in certain situations. Mr Roussak concedes (rightly) that in an appropriate case, the costs judge can disallow entire sections of a bill of costs. If the costs judge considers that the claimant acted unreasonably in refusing an offer to settle made before proceedings were issued, he is entitled to disallow all the costs post-issue on the footing that they were costs “unreasonably incurred”: rule 44.4(1). Similarly, where he decides that a party was unreasonable to raise and pursue an issue, the costs judge is entitled to disallow the costs relating to that issue on the grounds that they were unreasonably incurred.”

Further, the Court held that the words “unnecessary” and “unreasonable”, as they appear in CPR 44.4(1) do not have to be given the narrow meaning of being categorised as “misconduct”, unlike “unreasonable” in CPR 44.14. This is a crucial distinction as it hopefully clarifies the powers of a judge on assessment as to whether a party must have deliberately exaggerated the claim to have the associated costs disallowed. This appears to extend to detailed assessment the courts’ powers that exist when making an order for costs under CPR 44.3, as per Potter LJ in Dudley Fleming v Chief Constable of Sussex [2004] EWCA Civ 643:

“36. The principles are too well known to require to be set out in detail. The pre-CPR working rule to be found in the judgment of Nourse LJ in Re Elgindata Ltd (No 2) 1 WLR 1207 was modified by the observations of Woolf Lord in AEI Rediffusion Music Ltd v Phonographic Performance Ltd to the effect that it is no longer necessary for a party to have acted unreasonably or improperly to be deprived of his costs on a particular issue on which he has failed.”

This would certainly seem to suggest that a claimant who has failed on, or discontinued, a head of claim, in whole or in part, can have such costs disallowed on detailed assessment even in the absence of a specific costs order to that effect and regardless of the reason for the failure/abandonment.

These cases, when taken together, considerably strengthen the armory of defendants when seeking to reduce third party costs.

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