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Calderbanks Pass Their Sell By Date: The New Costs Rules

New costs rules come into force on 3rd April 2006. David Hodson looks at the changes and assesses their impact on ancillary relief proceedings.

David Hodson

The much delayed – but not necessarily much awaited – new costs rules come into force on 3rd April 2006. They are mostly simple and clear to understand. They will make a big difference in the way lawyers deal with cases, tactics we use and the key element that costs have in a case, both as to the client's payment of our costs and the client's recovery of costs against the other party.

The headlines

The new law

The new law is embodied in the Family Proceedings (Amendment) Rules 2006 (No 352 (L1)). There is an accompanying President's Practice Direction "Ancillary Relief: Costs" dated 20 February 2006. The rules create new Rule 2.71 FPR. Rules 2.69, 2.69 B and 2.69 D are defunct when the new costs rules apply.

New Rule 2.71 starts: "CPR rule 44.3 (1) to (5) shall not apply to ancillary relief proceedings" (R 2.71 (1)). Ancillary relief is only ancillary to a suit such as divorce, nullity and judicial separation. Accordingly the new rules do not cover proceedings under TOLATA, Schedule 1 to the Children Act or Part III MFPA. In practice, it is highly likely that the new rules will become the norm for all family cases. Therefore, practitioners will ignore them in non-AR cases at their peril.

The new starting point is "The general rule in ancillary relief proceedings is that the court will not make an order requiring one party to pay the costs of another party; but…" (R 2.71 (4) (a)). No order as to costs becomes the norm. Each party in AR cases will have to take responsibility for the level of their own fees.

Having presented the norm, the rules then provide that the court may make a costs order: "(b)… at any stage of the proceedings where it considers it appropriate to do so because of the conduct of a party in relation to the proceedings (whether before or during them)" (R2.71 (4) (b)). This is not marital conduct or misconduct. Nor is it the "inequitable to disregard" test of s25(2) (g) MCA. This is conduct in the widest sense of actions, approach (as in the SFLA/Resolution Code and Law Society Protocol), attitude and accedence to orders, rules and good practice. It incorporates conduct before proceedings.

It is a low threshold. Courts will quickly go direct to the factors which must be taken into account before any costs orders are made.

The new rules also make clear that at a First Appointment, "(e) in considering whether to make a costs order under rule 2.71(4), [the court] must have particular regard to the extent to which each party has complied with the requirement to send documents with Form E" (new R2.61 D (2)(e)).

Factors for consideration on making any costs orders

In deciding what order (if any) to make under paragraph (4)(b), the court must have regard to—

(a) any failure by a party to comply with these Rules, any order of the court or any practice direction which the court considers relevant;
(b) any open offer to settle made by a party;
(c) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;
(d) the manner in which a party has pursued or responded to the application or a particular allegation or issue;
(e) any other aspect of a party's conduct in relation to the proceedings which the court considers relevant; and
(f) the financial effect on the parties of any costs order.
(R 2.71 (5))

The court can make an order for costs if either party (or each party) has failed to comply with

provided the court considers the failure to comply is relevant (factor (a) above).

This will be relevant where the failure has increased costs of the other party, delayed the proceedings, added to court time or caused other costs. It will incorporate failures to give disclosure such as failure to set out the full facts in the new Form E, and failure to update appropriately. It will include costs of extra questionnaires or investigations to overcome deficiencies in initial disclosure. This factor (a) will greatly help the party faced with a spouse who rides roughshod over the procedural requirements. Now costs orders should follow.

The court will consider open offers (factor (b) above). This will be the primary basis of whole-case costs orders (as distinct from costs orders on discrete issues); open offers replacing Calderbanks. They are dealt with below.

The court will now look at whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue (factor (c) above). 'Reasonable' is wider than succeeding or losing. This factor (c) is less likely to relate to the whole application than to discrete aspects of the case. Examples include:

Where the court makes a finding on issues in dispute, it is not difficult for the court also to make costs orders based on whether it was reasonable to pursue or contest the issue. This is better, fairer and more open than the court being only permitted to see secret Calderbank offers after the dispute is adjudicated.

It highlights the need for care in drafting the pre-First Appointment Statement of Issues. Why should an issue raised in that document which then fails at the final hearing not result in a costs order on that discrete aspect? Skeleton arguments are invaluable but will need care as to what they put in issue, and so need tighter drafting. A 'scatter gun' firing off of a host of issues may produce costs orders later in the case. Therefore factor (c) should result in some spurious arguments not even being run.

Well over twenty years ago John Cornwell and a few other leading solicitors formed the Solicitors Family Law Association (SFLA) and then produced its Code of Conduct which has had a hugely, beneficial impact throughout family law practice. Frustratingly, it had no teeth, direct enforcement nor consequences in law for breach. Now the courts are mandated to consider not only the steps taken in proceedings but their manner. The court must have regard to "the manner in which a party has pursued or responded to the application or a particular allegation or issue", factor (d) above. This excellent initiative is thoroughly within the Law Society Protocol (second edition) and the SFLA (now Resolution) Code.

Experience teaches us that the manner in which a case is conducted has a greater long term effect on the parties – and the wider family members, including children – than the detail of the outcome. In this respect lawyers are referred to the Protocol, the Code and the various Good Practice Guidances. Factor (d) helps to maintain the culture of practice of English family law, almost certainly the most conciliatory and settlement orientated regime in the world. But we must never be complacent.

The court can make a costs order based on any other aspect of a party's conduct in relation to the proceedings which the court considers relevant (factor (e) above). This does not refer to marital conduct but the way in which the proceedings have been conducted. It is not defined and seems now more of a catch-all clause. In time, particular aspects of conduct will be often included in this factor. There may be much variation around the country. The principle of this new factor is very laudable.

Finally the court must regard the financial effect on the parties of any costs order (factor (f) above): a response to the problem identified by Charles J in C v C (Costs : Ancillary Relief) 2004. How should the incidence of costs be treated in the s25 exercise? As an ordinary debt which has to be paid, any award would be gross of the costs liability. But this would be the same as ordering one party to pay some of the other side's costs. For example in a non- 'big money', sub White, case, based on needs, an award for lump sum which was just enough to rehouse the wife would prejudice her if she then had to bear her own costs. If all the assets were in the husband's name, will a court order him to provide for the housing needs of his wife and to pay her costs on top? This factor (f) now means that judges, when formulating their final judgment, must double check and cross reference the effect of any costs order they are minded to make on the parties' finances, especially in a basic needs case.

Implications for practice of these factors

Since costs will in future be argued during the hearing (and not after judgment) hearings will inevitable be longer. Time estimates will need to take account of this.

Despite no order as to costs being the norm, I anticipate more costs orders, and certainly many more costs arguments, founded on a wider range of circumstances, until the new law settles down.

It is good practice to give notice well in advance if costs are being sought at the final hearing, why they are being sought, under which factor and with some particularisation. At FDRs, it may be wise for special directions to be given to particularise what is being said on costs, what costs are being claimed and a chance for a response.

The judge and parties then know what costs are in issue and how much, and how those costs have been arrived at. Nevertheless it will still be incumbent on solicitors to be able to argue, or brief their counsel, how any costs were arrived at. Moreover solicitors may find themselves giving evidence on their costs or indeed on a particular action, approach or manner of dealing with the case. With the risk that the judge may demand costs information to disallow any paid costs or not allow as a debt, the lawyer must be ready at court to deal with the issue. The time recording and other costs information should be available on the file at the final hearing.

Certain aspects which may give rise to costs orders include:

At present, costs orders tend to be all or nothing: costs of the whole case or none at all. The new rules anticipate more costs orders on discrete issues, such as some of the R 2.71 (5) factors. This will require lawyers on both sides to know, or estimate accurately, what costs had been incurred on the discrete issues.

With a norm of no order as to costs, it is grossly unfair if one party has paid their costs from joint assets and the other still owes her lawyer. In future, it will be essential on Day 1 to resolve what costs are paid out to whom and when from the family's shared assets, especially joint assets. Beware more early pre-emptive withdrawals from joint assets for costs payments!

Open offers

Calderbank offers, and indeed any privileged offers, are inadmissible both in open proceedings and specifically on costs. There will be no point in writing Calderbank offers. Privileged letters will still have their place but simple privilege will apply and such letters cannot be referred to on issues of costs. They can be produced at an FDR when the court is entitled to look at privileged material. However they will not have costs implications at an FDR. Mediation and round table meetings will also be subject only to simple privilege.

Open offers have to be made. "No offer to settle which is not an open offer to settle shall be admissible at any stage of the proceedings, except as provided by rule 2.61E" (R 2.71 (6)).

Some of the present law relating to Calderbanks will continue to apply to open offers. The open offer should be precise, comprehensive, clear and capable of acceptance and of forming the basis of an order. An open offer can be made at any stage, and more offers will be made earlier in the proceedings. But costs risks for the offeree only arise when there has been disclosure. This is another imperative to the giving of early, clear and comprehensive disclosure.

Open offers do not have to be lodged at court. However the court at the final hearing will want to know not only what is each party's case for the outcome but also the various offers made throughout the case and the costs incurred at those stages. The judicial habits of a lifetime of making costs orders based on reasonable offers made or rejected will not suddenly die, nor should they. The problem with Calderbanks was not the inherent principle that a party whose reasonable offer had been rejected should have their costs but the fact that the judge did not know about this until after the final judgment. Hereafter the judge will know what open offers have been made, by whom and at which stage, and, just as crucially, which offers have been rejected or have had no response. There will be a bundle of offers. Many cases will continue to have whole-case costs orders made where it is clear from open offers that one party has taken a reasonable stance in endeavouring to settle and the other party has not.

Negotiating only behind privilege (therefore unknown to the court at any stage) will give the court the impression of an unreasonable party. Failure to make open offers, even after disclosure, and to attempt openly to narrow the issues in dispute in offers is likely to result in costs orders. The negotiation process will now be transparent and many more costs orders are likely to flow.

The major difference is that we were willing in Calderbank offers to make proposals which were literally prejudicial to our client's open position at court. We cannot therefore simply recast our previous Calderbank offers as open offers. There will be much debate about what is, and what is not, prejudicial to include in an open offer. There will be some clients, and perhaps quite a few lawyers, who will be (overly) cautious and protect their offers by simple privilege. However most specialist family court judges are robust, pragmatic and sensible and will not often allow a party to be prejudiced if they see that they have moved at trial from a stance in an earlier offer.

Treatment of costs

What will happen to the client's costs liability at trial? The amount paid by each party towards their legal costs should often be added back into their assets and their total costs shown as their liability.

This highlights any significant discrepancy between the levels of costs incurred. Some parties do have genuinely higher costs due to the work involved, eg a substantial amount of investigation into complex disclosure. However there are too many cases in which there is a huge difference in costs. One party instructs a lawyer charging a low rate and pays costs up to date, whilst her husband instructs a lawyer with a much higher rate and incurs many thousands of pounds more in costs, but then sees the judge make no real condemnation of the costs differential and even sometimes allows each enough to pay their own costs! In this sort of case, the 'no order as to costs' principle is a significant benefit as the party that has unreasonably incurred much higher costs will not have the comfort that their costs will come out of the pot before division. Nor will the costs frugal party be, or feel, penalised.

A judge can:

Commencement date of the new rules

(1) The 1991 Rules shall apply to

(a) an application for ancillary relief made in a petition or answer before these Rules come into force;
(b) an application for ancillary relief made in Form A before these Rules come into force (no such application having been made in the petition or answer); or
(c) an application under section 10(2) of the Matrimonial Causes Act 1973 or an application under section 48(2) of the Civil Partnership Act 2004 made in Form B before these Rules come into force,
as if these Rules had not been made.
(R2.71 (10)(1))

(2) The 1991 Rules shall also apply to an application of a kind mentioned in paragraph (1) which is made after these Rules come into force but is heard by the court at the same time as an application to which paragraph (1) applies, as if these Rules had not been made.

In summary, new rules only apply if there is no pre-3 April petition with AR prayers, no pre-3 April answer with AR prayers or no pre-3 April Form A. Where there are cross-Form A applications where one would attract the old rules and other the new rules, the old rules apply (R 2.71 (10) (2)).

It can take sometimes 18 months, occasionally even longer, from issue of a Form A (and longer still from the divorce petition) to a final trial. Over the next couple of years there will be many cases to which the old rules apply. Experience of earlier changes in the law suggests that many judges apply the principles of the new law to the older cases. It may be wise to accompany Calderbanks with open offers in old rules cases. The court can certainly be expected to apply the principles of the new rules.

Form H

Rule 2.61 F is amended. There is a new Form H. "Subject to paragraph (2), at every hearing or appointment each party must produce to the court an estimate in Form H of the costs incurred by him up to the date of that hearing or appointment". (R 2.61F (1)). The Form separates out costs before and after issue of Form A, any previous solicitors' costs, disbursements and counsel's fees and must state what has been paid to date by the client in order to show what is outstanding.

Moreover "not less than 14 days before the date fixed for the final hearing of an application for ancillary relief, each party must (unless the court directs otherwise) file with the court and serve on each other party a statement in Form H1 giving full particulars of all costs in respect of the proceedings which he has incurred or expects to incur, to enable the court to take account of the parties' liabilities for costs when deciding what order (if any) for ancillary relief to make" (New Rule 2.61F(2)).

This will be an important document on costs. It separates out costs:

A lot more time and information will be needed by the solicitor in preparation of this form. Estimating costs of post-trial work will be difficult, including pension sharing implementation and costs of real property transfers. The Form will give courts much more information about how the costs have developed during the case. It will highlight the iceberg effect where such a high proportion of the costs of a case are in the weeks before the final trial and the final hearing itself. All counsel's fees for the final hearing must be shown as incurred after the preparation of the Form H1.

The President's Practice Direction adds: "The purpose of this form is to enable the court to take account of the impact of each party's costs liability on their financial situations. Parties should ensure that the information contained in these forms is as full and accurate as possible and that any sums already paid in respect of a party's ancillary relief costs are clearly set out. Where relevant, any liability arising from the costs of other proceedings between the parties should continue to be referred to in the appropriate section of a party's Form E; any such costs should not be included in Forms H or H1."

Interim lump sums for costs

Australia has a similar "no costs" law to England. In my recent experience in New South Wales, there was an expectation that each party would be responsible for their own costs. This may occur here. However one fundamental difference is the court's power to order interim lump sums for costs. England's continued failure to introduce this power has worked much injustice in many cases over the years but will work even greater injustice with these new costs rules.

The power to grant interim lump sums funds the case as it goes along. It distributes available capital as lump sums to the parties in equal measure or according to their legal needs as determined by the court. Parliament has agreed that such a measure is appropriate in the Family Law Act 1996 but it fell with no fault divorce. We desperately need it now with the expectation that each party will be responsible for their own legal costs. There is no prejudice where ultimately each party will meet their own costs because the pot is reduced en route to the final hearing rather than being shown as liabilities at the final hearing. It will dramatically overcome the significant power imbalance that too often exists when the economically weaker applicant has to take on the financially stronger respondent.

The President's Practice Direction makes clear that maintenance pending suit is still available to include provision for legal costs.

Civil Proceedings Rules on costs

The provisions in CPR rule 44.3 (6)-(9) still apply. Moreover the CPR, statute and case law general provisions on costs still apply including

Conclusion

The anachronism which was the process of secret Calderbank offers is ending. No longer will we have cases in which a fair outcome is sunk by the secret negotiations and offers and counter-offers which are unknown to the judge who has made the final order. But the justice of sensible offers determining costs still prevails, although lawyers will need great care and wisdom in deciding what aspects of an offer are too prejudicial to be set out openly. Conduct costs and manner of approach costs may be a most useful weapon by the courts in their attempt to manage cases and to encourage a culture of better conduct of cases, provided final hearings do not become hijacked by investigations on what happened during the proceedings. The discrepancy between the level of legal costs of each party may in future rightly penalise the party who has incurred (or allowed) excessive costs. The omission of a power to grant interim lump sums will be even more keenly felt under the new regime than under the present law, and must be rectified quickly. Most of all it is a new culture of practice under these new rules which gives us an opportunity as a profession to improve the conduct of the litigation, to have lesser cases with ridiculously high costs and for more, and earlier, open offers of settlement to be made.

David Hodson is an English and Australian solicitor and mediator, an English family law arbitrator and a deputy District Judge of the PRFD, London. He can be contacted on dh@davidhodson.com. A fuller version of this article appears on his web site.