Success fees and proportionality - what happens now?

Under the new proportionality test, introduced in April last year: 'Costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred' (CPR 44.3(2)(a)).

Practitioners are currently passing through an unusual period. Costs are being incurred without any real idea as to what level of costs will be deemed proportionate and be recoverable from the other side. The higher courts have yet to give any real guidance as to how the new test is to be interpreted.

Transitional provisions

The problem is compounded by the issue of recoverable additional liabilities and the transitional provisions. The general rule is that success fees and after-the-event insurance premiums will remain recoverable where the conditional fee agreement or ATE policy were entered into or obtained prior to 1 April 2013. The transitional provisions (CPR 44.3(7)) for the new proportionality test means it does not apply in relation to cases commenced before 1 April 2013 or costs incurred in respect of work done before 1 April 2013.

To take a hypothetical example, suppose a CFA is entered into before 1 April 2013 but no work of a substantive nature is undertaken until after that date. Under the transitional provision all costs would appear to be subject to the new test and can be reduced even if they were reasonably or necessarily incurred. However, because the CFA was entered into pre-1st April 2013 the success fee remains recoverable from the other side.

Additional liabilities

The difficulty arises from the pre-April approach to proportionality where there are additional liabilities claimed. The old Costs Practice Direction 11.5 provided: 'In deciding whether the costs claimed are reasonable and (on a standard basis assessment) proportionate, the court will consider the amount of any additional liability separately from the base costs.'

CPR 48.1(1), dealing with the application of the old rules to additional liabilities provides: 'The provisions of CPR Parts 43 to 48 relating to funding arrangements, and the attendant provisions of the Costs Practice Direction, will apply in relation to a pre-commencement funding arrangement as they were in force immediately before 1 April 2013, with such modifications (if any) as may be made by a practice direction on or after that date.'

That would appear to mean that Costs Practice Direction 11.5 survives for CFAs entered into pre-1 April 2013 and the proportionality of any success fee on work done after that date will be considered separately from the base costs. If that is correct, this means there are actually two transitional provisions governing proportionality on success fees (CPR 44.3(7) and CPR 48.1(1)).

Very difficult

It is very difficult to see how the courts are meant to assess costs in this situation. Pre-April 2013 the court would consider whether the work done (the base costs) was reasonable and necessary. Having done that, the court would then assess the reasonableness of the success fee to reflect the risks at the time the CFA was entered into. Having arrived at a reasonable percentage uplift, that would be applied to the base costs.

This was a simple mathematical exercise and consideration of the proportionality of the success fee to the damages was never part of the judicial process. How does this now work in the context of the transitional provisions? In our hypothetical example above, does the court have the power to reduce the success fee to a figure below that which reflects the true risks of the claim to ensure the amount payable is proportionate?

Does the apparent survival of Costs Practice Direction 11.5 mean the court must continue to look at the proportionality of base costs and success fee separately? If so, despite the claim appearing to be subject to the new proportionality test (CPR 44.3(2)(a)), the total that the court may allow on assessment (ie the total of the base costs plus additional liabilities) might still be disproportionate to the value of the claim. Curious.