Costs is a term of art in civil litigation in English law (the law of England and Wales), and in other Commonwealth jurisdictions. After judgment has been given, the judge has the power to order who will pay the lawyers' fees and other disbursements of the parties (the costs). The law of costs defines how such allocation is to take place.
The law of costs in England and Wales is typical of common law jurisdictions, save that of the United States.[1] In general "costs follow the event" so that the successful party to litigation is entitled to seek an order that the unsuccessful party pay his or her costs. Recoverable costs are limited to:
"No win no fee" is the term used to describe the conditional fee agreement between a law firm and its client. In a personal injury claim, this is an agreement between the client and their lawyer, which will enable the lawyer to take on a personal injury case on the understanding that if they lose the case, the client will not have to pay their lawyer's costs.
In-house corporate legal teams can conduct litigation and have rights of audience. They can claim the remuneration and expenses of the lawyers involved. Litigants in person must prove their own financial loss in conducting the action or they will otherwise be awarded £18.00 per hour. The costs awarded to a litigant in person cannot exceed 2/3 of what could be claimed by a professional lawyer.
Litigants often benefit from before-the-event (BTE) legal expenses insurance against paying the other party's legal costs as part of their domestic or automobile insurance policies (although many are unaware of it). Otherwise, they can purchase after-the-event (ATE) legal expenses insurance at the start of litigation.
The law of costs is often known as the English rule. The situation contrasts with that in the U.S. where legal fees may be sought only if the parties agree by contract before the litigation, or if some special act or statute allows the successful party to seek such fees, the American rule. Federal district court and Court of Appeals judges award costs to the prevailing party under Federal Rules of Civil Procedure 54.[2] Generally, state court judges have no common law right to award such fees against the losing party. It has been suggested that the American rule contributes to making the U.S. a litigious society. Individuals have little to lose beyond filing fees and a retainer to start a lawsuit, and they are not at risk of having to pay their opponent's fees if they lose. Conversely, the English rule has been criticised. It is sometimes pointed out that the English approach potentially hinders access to justice by increasing the risks of litigation, both by setting up the risk of having to pay both parties' full costs in the event of losing, and by creating incentives for parties to sink ever increasing resources into their respective cases in order to win the action and avoid paying any fees, a strategy that cannot succeed under the American rule, thereby increasing the overall cost-risk of litigation. The German costs rule, which allows for fixed recoverable costs, avoids this unfortunate consequence of full-fees recovery.
Costs must be "reasonably incurred and reasonable in amount".[3] Costs must be reasonable, even if they are specified by contract,[4] save if contract expressly provides that they need not be reasonable.[5] Reasonableness is assessed against "all the circumstances" and in particular the "seven pillars of wisdom":
The rule that "costs follow the event" is observed on the Multi- and Fast Tracks. However, on the Small Claims Track, only specific limited costs such as fixed court fees are usually awarded. Further, on the Fast Track, the actual costs of the trial, as opposed to preparatory work, are fixed. There are also fixed costs for road traffic accident (RTA) claims that settle before they are issued, and fixed success fees for RTAs and employment claims.
The court will take account of the conduct of the parties and may vary the usual costs order in the event of misguided or dishonest behaviour. In particular, claimants are expected to give the defendant an opportunity to settle, and the parties are expected to exchange essential information and details before starting a claim. The court will especially be aware of any formal offers to settle made under Part 36 of the Civil Procedure Rules. Such offers are withheld from the judge during the trial but, during assessment of costs, the judge will compare them with the final damages awarded.
If the defendant rejects the claimant's Part 36 offer to settle and the claimant equals or betters that offer at trial, the judge can award:
— on:
If the claimant rejects the defendant's offer to settle and fails to better that offer at trial:
Other exceptions to the general rule include:
The judge has considerable discretion to apply or disapply these rules if the result would otherwise be unjust. The paying party can appeal against the costs order by the usual routes of appeal.
The indemnity principle, a term unrelated to the concept of indemnity costs, stipulates that a paying party cannot be ordered to pay more than the receiving party has already agreed to pay his solicitor, the retainer.[6]
The principle causes anomalies for pro bono representation where, because the lawyers have agreed to represent the party for no cost, they cannot subsequently ask the court for a costs award when they win. However, section 194 of the Legal Services Act 2007 allows the court to order a party who loses against pro bono representation to make an appropriate charitable donation in lieu of costs. These provisions come into force progressively from 30 June to 1 October 2008.[7]
There are specific exceptions to the principle for:
Costs awarded on the standard basis must be proportional. Any doubt as to the costs is resolved in favour of the paying party.
Costs awarded on the indemnity basis need not be proportional. Any doubt as to the costs is resolved in favour of the receiving party.
In considering proportionality, the court should have regard to the seven pillars of wisdom. The court should adopt a two-stage approach:[9]
— if they are not proportionate:
Where a party is awarded costs against another they are known as inter partes costs or between party costs. Such costs are usually assessed on the standard basis. The successful party may not be awarded the entirety of their legal costs, as the costs incurred will be assessed by an officer of the court. This can be done in one of two ways.
The simplified procedure is known as summary assessment under which the court will consider a schedule of the costs incurred which will usually be no more than two pages long and is often only a single page. This is the usual method on the Fast Track, for hearings lasting no longer than a single day, for certain appeal hearings and for the costs of the paying party in detailed assessment hearings.
However, summary assessment is not permitted for claims:
— or where:
For more complex cases a process, formerly called a taxation of costs, now known as detailed assessment, is used. It is unrelated to "tax" in the sense of a method of raising government revenue. The successful party must file with the court a detailed breakdown of the costs and disbursements incurred, known as a bill of costs which sets out the successful party's claim. The bill is usually prepared by a law costs draftsman, whose skill is often as essential to successful litigation as that of a solicitor or barrister. An officer of the court, Costs Judge or District Judge will then assess the reasonableness of the costs with reference to a statutory schedule of limits of entitlements of costs, together with legal precedents, unless the costs can be agreed between the parties. The level of reduction can mean that the bill is reduced in some instances substantially, but in most cases at least 80% of the costs originally sought will be allowed. A court order for costs is enforceable as a debt against the unsuccessful party.[10]
Either party can appeal against a detailed assessment, to a Costs Judge or District Judge of the High Court if the assessment was made by a court officer, or by the usual routes of appeal if the assessment was made by a judge.
The other type of costs, aside from inter partes costs, is called solicitor-client costs and are usually assessed on the indemnity basis. In general, lawyers in England and Wales are not permitted to work for a share of damages awarded as this would amount to champerty. A client who is unhappy with a lawyer's invoice for services can, in certain jurisdictions, apply to the court for an order or invoke a statutory procedure whereby the costs are assessed for their reasonableness by an officer of the court, for example a judge. This is also called detailed assessment. There are statutory time limits on applying for such a procedure. The frequent result is that the lawyer's invoice is decreased. If the bill is reduced by one fifth or more the solicitor will pay for the process of assessment, but otherwise the client will pay. In some jurisdictions if the client does not pay the lawyer, the lawyer has a cause of action for his own lawsuit if the client does not elect to arbitrate the attorney's bill. The client can alternatively apply to the Law Society for a remuneration certificate in respect of costs arising from other than litigation.
Sometimes a defendant brings a claim, for a contribution or an indemnity towards damages, against a third party. For example, a diner claims against a restaurant for a dose of food poisoning and the restaurant claims against their supplier of shellfish. Again, "costs follow the event". If the restaurant successfully defends the claim, they pay the supplier's costs and recover the same amount from the unsuccessful claimant. This can cause injustice when the unsuccessful claimant is insolvent and the successful defendant is still liable for third-party costs. The courts will only rarely allow a "cut through" of the third-party's costs to the claimant[11][12] but the interests of justice prevail.[13][14]
Section 51 of the Supreme Court Act 1981 gives the court wide discretion in awarding costs and non-parties are not immune.[15] This is particularly relevant in cases of champerty and maintenance.[16] BTE insurers are not liable for such costs.[17]
The order that a judge gives as to costs determines who will be the paying and who the receiving party. The amount of costs remains to be determined by assessment. Common costs Orders, other than on the Small Claims Track, are:[18]
| Order | Effect |
|---|---|
| Costs (in any event) | Costs to receiving party no matter what happens subsequently |
| Costs in the case/ application | Costs of this proceedings awarded |
| Costs reserved | For end of trial (costs in the case if no other order made then) |
| Costs thrown-away | Costs of the applicant in, for example, a successful application to set-aside an order |
| Costs of and caused by | Costs of other parties when a party, for example, amends a case – costs of attending hearing and own consequential amendments |
| Costs here and below | Includes costs in inferior courts (but appeal from Divisional Court cannot award costs below Divisional Court) |
| No order as to costs/ Each party to pay his own costs | — |
A Party has to pay the other Party's costs that have been incurred unnecessarily, for example, if a Court hearing is postponed due to a Party not turning up at Court and the other Party has had to pay a Brief fee for a Barrister.
This is likely to occur in the following situations:
one Party pays the other a sum up-front before costs have been finally assessed or agreed.