Fixed Recoverable Costs and Unreasonable Behaviour

Traditionally, a party in whose favour a costs order was made could seek those costs on the indemnity basis where the other party had behaved unreasonably during the litigation. In fixed costs matters, a party could seek to escape the fixed costs regime by showing there were “’exceptional circumstances”, which would most commonly be unreasonable behaviour by the other side.

The extension of Fixed Recoverable Costs changes all this for cases in the fast track or intermediate track.

There is now a fixed reward/penalty where a party is found to have “behaved unreasonably”.

CPR 45.13(1) deals with the situation where the receiving party has behaved unreasonably:

“Where, in a claim to which Section VI, Section VII or Section VIII of this Part applies, an order for costs is made in favour of a party whom the court considers has behaved unreasonably, the other party may apply for an order that those costs be reduced by an amount equivalent to 50% of the fixed recoverable costs which would otherwise be payable.”

The successful party may therefore have their fixed recoverable costs reduced by 50% if they have behaved unreasonably.

CPR 45.13(2) deals with the situation where the paying party has behaved unreasonably:

“Where, in a claim to which Section VI, Section VII or Section VIII of this Part applies, an order for costs is made against a party whom the court considers has behaved unreasonably, the other party may apply for an order that those costs be increased by an amount equivalent to 50% of the fixed recoverable costs which would otherwise be payable.”

The successful party may therefore have their fixed recoverable costs increased by 50% if the paying party has behaved unreasonably.

CPR 45.13(3) defines “unreasonable behaviour” and the fixed recoverable costs being referred to:

“(3) In this rule—

(a) unreasonable behaviour is conduct for which there is no reasonable explanation; and

(b) “fixed recoverable costs which would otherwise be payable” does not include –

(i) VAT;

(ii) any additional amounts under rules 36.17 or 36.24; or

(iii) any disbursements.”

I am grateful to Kerry Underwood for pointing out that it is unclear from 45.13(3) if any 50% uplift itself attracts VAT. In the example he gives:

“Let us say that the Fixed Costs are £20,000 plus VAT.

The uplift is £10,000.

Does that £10,000 include VAT or is VAT payable by the paying party on top?

In other words, does the paying party have to pay a further £10,000 or a further £12,000?

Likewise, the deduction.

The Fixed Costs are £20,000 plus VAT, that is £24,000 but reduced by £10,000 for the winning party’s unreasonable conduct.

Does the paying party have to pay £14,000 or is the reduction £10,000 plus VAT, that is £12,000, reducing the total payable to £12,000?”

It appears the 50% sanction is intended to be an all-or-nothing one. If the court finds there was unreasonable conduct, it may increase/decrease the costs by the full 50%. If not, no adjustment may be made. There is no scope, for example, to allow a 30% adjustment. Further, it appears that the 50% adjustment must be made to the full amount of the Fixed Recoverable Costs as opposed to the costs for any particular Stage. If this is correct, it may act as a significant disincentive to judges to award the uplift/reduction.

For example, if a party has clearly behaved unreasonably but that unreasonable behaviour was only in relation to limited issues which had little or no adverse impact on the costs of the other party, a 50% adjustment would be hard to justify. Unfortunately, the rules do not appear to allow for a smaller adjustment.

Equally, say a party has acted impeccably throughout a claim until the last day of a three day trial. During the final day that party behaves unreasonably. It would be understandable if the court decided to impose the sanction in respect of the Fixed Recoverable Costs for the advocacy fees for third day (Stage 11 in the intermediate track) and the fixed fee for the third day of attendance of a legal representative other than the trial advocate at trial (Stage 9). It would be less easy to see why the adjustment should also apply to all other stages of the case.

This, in turn, leads on to the issue of causation. The courts are well versed in the principle of adjusting a parties’ costs (whether by making an issue based order, a % based order or through the detailed assessment process) to reflect unreasonable conduct by a party. However, this is almost always on the basis that the adjustment should reflect the extent to which the unreasonable conduct has unnecessarily increased the other party’s costs. The new provisions in CPR 45.13 make no reference to causation. On the face of it, where a receiving party has behaved unreasonably they may have their costs reduced by 50% even though that conduct has had no impact on the work required by the other party. It will be interesting to see whether the courts interpret this in such a literal way or whether they require an element of causation to be established.