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Costs: Reassessing the Starting Point

Mark Ablett, pupil barrister, 1 Garden Court Family Law Chambers considers the perennial problem of high levels of costs in financial remedies cases and proposes a new approach to help mitigate the problem.

Mark Ablett, pupil barrister 1 Garden Court Family Law Chambers

Since April 2006, courtesy of FPR rule 28.3 (previously r.2.71 FPR 1991), the usual order for costs in financial remedy proceedings has been that there shall be no order. This is markedly different from civil proceedings, where the usual order is that costs shall follow the event. In part because of this in-built costs liability, the civil courts introduced costs capping as a way of controlling spiralling costs. In civil proceedings costs budgets must be filed and if a party exceeds that budget then generally they will not be allowed to claim those extra costs. It is not suggested in this article that cost capping is an appropriate response to high costs in family proceedings; financial remedy cases in particular are inherently unpredictable. 

The issue
The amount of costs are a real concern in the family courts, particularly in financial remedies cases. Infamously, in J v J [2014] EWHC 3654 (Fam), by the FDR stage the costs had reached 8% of the total assets. Tellingly, as Mostyn J noted: "costs of this scale… are not uncommon, disproportionate though they are." By trial the total costs were £920k, in the context of total assets of £2.885m. Mostyn J cited Munby J (as he then was) in KSO v MJO & Ors [2009] 1 FLR 1036:

"Something must be done about the problems highlighted by this and by too many similar cases. We simply cannot go on as we are. The expenditure of costs on the scale exemplified by this and by too many other such cases is a scandal which must somehow be brought under control."

Mostyn J went on to note: "Although the mantra "something must be done" is repeated time and again, nothing ever is."

The status quo
Part of the reasoning behind the introduction of the no order principle was that there was insufficient protection in relation to costs orders against the party receiving funds, which would drive their allocated provision below their financial needs. In theory, the no order principle is also supposed to encourage parties to negotiate and settle cases, in the knowledge that pursuing their case will be likely to mean that they have to bear the brunt of their own ever-increasing legal fees. However, arguably the standard approach in the family court runs contrary to this objective.

Generally, on asset division (see for example GS v L [2013] 1 FLR 300), the approach of the courts is to clarify what assets are in the matrimonial pot, deduct the parties' respective liabilities and divide the net assets according to the court's overall analysis of what constitutes a fair result. However, liabilities, particularly in small to medium money cases, often include loans for legal fees, whether soft loans from family or commercial loans from well-known providers, frequently secured on property.

In deducting all liabilities before asset division, the parties do not actually bear the cost of their own fees; the total costs are pooled and are then top-sliced from the matrimonial assets. In the event that one party's fees are significantly higher than the other's, absent a costs order, (which courts are generally reluctant to make) the more frugal party still in part bears the cost of the other's profligacy. It is acknowledged, of course that litigation misconduct can result in inflated fees, however this can be dealt with by way of a suitable costs order.

A different approach
This article proposes that the starting point on asset division should be to deduct liabilities from the matrimonial pot, save for those connected with legal fees. Assets already diminished through payment of legal fees would also be added back. The assets should then be divided and each party would deduct their own costs bill from the monies they receive. Naturally this would have to be subject to the usual considerations as to 'needs'. This, it is submitted, would more effectively achieve the intention behind the no order principle, because the parties' costs would be deducted after they received their share, not before. Psychologically to a litigant, this could prove significant because if the costs are coming out of their share of the pot, it might focus the mind on trying to achieve settlement. If "something must be done", this achievable, subtle shift could be the starting point for the courts pending a legislative sea change.

In a recent case in which the author was involved , the district judge took precisely this approach to the entire debt position. Both parties had run up enormous liabilities and whilst the gross asset position looked healthy, in reality the bottom line was a different story. Before deduction of debts and liabilities the assets after substantial mortgages were c.£2m: £1.2m in favour of W, £800k in favour H. After a 5 day hearing, the district judge looked at this position and ordered a balancing payment to achieve equality.

Whilst the debts were broadly comparable (including those paid off by W through a sale of property), H's legal fees were significantly higher than W's. Notably, the district judge refused to consider H's secured commercial legal fees loan in calculating the equity in his investment property, instead insisting it be treated as a liability. In ignoring the debts whilst dividing the assets the judge achieved a fair split of the matrimonial pot and left the parties to deal with their post-separation debt themselves. Each party therefore had to take responsibility for their own actions, thus obviating the need to deal in detail with the merits of their respective debt positions which would undoubtedly have caused the hearing to go part-heard.

Prior to the introduction of the no order principle, there have been arguments on this point where there have been excessive costs. In Leadbeater v Leadbeater [1985] FLR 789, Balcombe J held that when dealing with the impact of costs on the parties' assets and liabilities (where neither side was legally aided), sums paid by each party on account of costs should be added back into the assets of that party, less any part of that figure that would never in any event be recoverable, e.g. the difference between a figure for solicitor and client costs and what might be recovered on taxation by way of an order for party and party costs. This was also subject to a further deduction of any part of the allowed element which might nevertheless be deemed to have been incurred unreasonably. Any future liability for costs should also be omitted from the parties' liabilities, subject to the same caveats.

In Currey v Currey [2006] EWCA Civ 1338 Wilson LJ provided some guidance on the issue (the appeal was heard under the old costs regime but with awareness of the forthcoming amendments):

"The proper treatment of liabilities for costs thereunder will generally be that they are debts to which the judge should have regard in making his substantive award."

RH v RH (decision on capital) [2007] EWHC 396 (Fam)), was a decision of Singer J which was also made under the old costs regime. W had spent £265k on costs and H had spent £486k. His Lordship added back £225k of H's costs into the assets so as to achieve parity on costs, on the basis that H had overspent. Singer J then went on to hear submissions on costs and made a separate costs order. In the course of his judgment on costs, Singer J noted at [16]:

"The converse argument is that if one party profligately runs up for him or herself a grossly disproportionate costs liability, then, if it is fully taken into account, the effect (in a case resolved by equal or other proportional redistribution) is to saddle the party who has expended less with an automatic contribution of half the disparity."

However, it has to be noted the Leadbeater approach was disapproved by Coleridge J in R v R (Financial Remedies: Needs and Practicalities) [2011] EWHC 3093 (Fam), although Leadbeater was not specifically referred to. The Judge had been asked to add back a substantial sum on the basis that W had overspent on her legal costs. He held at [32]:

"As a matter of principle…I would discourage the pursuit of this addback approach which inevitably leads to a quasi-taxation of the costs during the hearing but without the material which would be available to a costs judge. It rather flies in the face of the no-order starting point and leads to debates about costs by the back door which the new rules were designed to try and prevent."

An argument could be made that the Court of Appeal endorsed Coleridge J's approach in R v R in Ezair v Ezair [2012] EWCA Civ 893 which was an appeal against an order providing that W's lump sum be inflated by a substantial sum by way of a costs penalty for H's litigation misconduct as a litigant in person. The Court of Appeal, allowing H's appeal in part, confirmed that the correct approach was to award a lump sum with reference to the s.25 factors then make a separate costs order, which the Court put in place. However, this was not a case where add-back arguments were being run; the costs were in relation to litigation misconduct. It is well-established and accepted that litigation misconduct should be penalised by a costs order but there could still be arguments in the context of wanton dissipation as a result of an overly aggressive or unreasonable litigation approach.

In a situation where costs are unreasonably high, the approach of the court in Leadbeater would seem to be an appropriate response. This was an issue in the case of GS v L [2011] EWHC 1759 (Fam) where W submitted that it would be unfair to include the costs as simply liabilities on the asset schedule; having used her own money to pay her costs, she would effectively be paying for H's costs if that approach was taken. H's Counsel argued that W's position amounted to asking for an add-back "which would require an examination in detail as to what the husband was spending his money on at the time when he was incurring the costs liability and that the court would have to find a 'wanton' element in his spending before the court should do other than prepare the asset Schedule on the basis of a simple reflection of current outstanding liabilities." The Judge accepted this and held that the costs should remain on the asset schedule.

The suggestion from the case law therefore is that if a party wishes to adopt the approach in Leadbeater, they will have to formally run an add-back argument with a detailed examination of expenditure, bearing in mind the high bar set by the various authorities (see for example Vaughan v Vaughan [2010] EWCA Civ 349).  Of course, there is a distinction to be drawn between where there are outstanding liabilities at trial connected to legal fees, and where assets have already been diminished due to payment of legal fees pre-trial (a more formal 'add-back' situation). For the purposes of this article, it is suggested that legal fees which have already been paid are indeed added back to the pot. Having this as the general rule for both parties would negate the need for detailed examination.

Add-back might suggest a punitive element towards one party. However, the question has to be, does it amount to a punitive add-back if both parties consistently receive equal treatment? In the author's submission, this would simply mean that each party is solely responsible, from their share of the family assets, to pay their costs and to account for those already paid. If they choose to run their case in such a way or pay for significantly expensive representation, that is that party's prerogative but they will be left to foot their bill and deal with assets already diminished by payment of fees. In doing so, continuing to run a case instead of settling would not be diminishing the family assets per se, which the author submits would result in unfairness and a lack of accountability, instead it would be diminishing one party's uncrystallised share of the assets. It is suggested that this would be a greater incentive to early settlement and would be a truer interpretation of the no order principle. Any imbalance arising from the conduct of the litigation could be rightly corrected by an order for costs if a party's litigation conduct merited such an order, similar to the approach of Singer J in RH v RH. Equality of treatment would therefore obviate the high hurdle of add-back which one would usually have to surmount.

It has to be acknowledged that this approach is not a perfect solution; there are counter-arguments. Most notably where a case involves a litigant in person, as in Ezair v Ezair. Whilst one could reasonably argue that a person who has chosen to economise should not contribute to the costs by the backdoor of the represented party, commonly in cases involving litigants in person the represented party's costs can be inflated as a result. Is it then a fair result for the represented party to be solely liable for their costs when a portion, likely unquantifiable, could be attributed to the other party's lack of representation and the increased work that therefore falls on the represented party's shoulders, e.g. preparation of the bundle as required by the Practice Direction?

Whilst perhaps not suitable for every situation, such a changed starting point would mean that each party would truly bear their own costs and would feel the impact of the legal fees bill. Not only would this be a fairer way to deal with deduction of legal fees, it might incentivise parties to litigate in a more restrained manner and ultimately start the process of reigning in the costs of financial remedy proceedings.