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The costs-consequences pendulum shifts again

Posted: 02/08/2019

Rebecca Dziobon and Gemma Reading of the firm’s family department recentIy submitted a legal update to New Law Journal highlighting the recent changes to the costs rules in financial remedy proceedings. The piece explained the amendment to the relevant court rules which had opened the door a little wider to recover costs from the other party if their litigation conduct justified it. The change means that the family court will generally conclude that a refusal by one party to openly negotiate – reasonably and responsibly – will justify the making of a costs order.

No sooner has they submitted the article than the government announced a consultation into whether the Calderbank rules should be re-adopted when deciding upon costs at the conclusion of financial remedy proceedings. As explained in the article, prior to 2006, the court was able look at the “without prejudice save as to costs” positions put forward by the parties when deciding whether to make a costs order after substantive judgment had been given. The pros and cons of the current and pre-2006 rules are set out in the update below and the firm will be putting forward a response to the consultation before the deadline of 31 October 2019.

On 27 May 2019, there was a change made to the Family Procedure Rules 2010 (FPR) Practice Direction 28A para 4.4 as to the approach of the court when considering the conduct of the parties. This change went largely unnoticed, but its implications are that it is more likely that a court will make a costs order against a party who litigates unreasonably. This change will be welcomed by reasonable litigants and their legal advisers seeking to keep financial proceedings proportionate and on track for settlement.

The no order as to costs principle 

FPR rule 28.1 provides that the court may at any time make such an order as to costs as it thinks just.

The general stating point under FPR 28.3(5) is that in financial remedy proceedings the court will not make an order requiring one party to pay the other party’s costs. It should be remembered that under FPR rule 28.3 the court only has the power to make a costs order in financial remedy proceedings when this is justified by the litigation conduct of one of the parties. When determining whether and how to exercise this power, the court will be required to take into account the list of factors set out in that rule.

The amendment to FPR PD 28A has strengthened the power of the court to depart from the no order principle in relation to financial remedy proceedings. Now, the court can and will take a broad view of conduct and will generally conclude that to refuse openly to negotiate reasonably and responsibly will amount to conduct in respect of which the court will consider making an order for costs.

So what does this mean in reality? What could constitute conduct to justify making a costs order?

  • A litigant who makes a derisory open offer with no real intention of reaching a settlement?
  • An applicant who unreasonably turns down a reasonable open offer?
  • A party who fails to openly engage in making and responding to open proposals?
  • Litigating in such a way so that the costs become disproportionate to the award in a ‘needs’ case?

Answer: all of the above.

PD 28A 4.4 goes on to point out that where an order for costs is made at an interim stage, the court will not usually allow any resulting liability to be reckoned as a debt in the computation of the assets.

When does the no order as to costs principle apply?

Practitioners considering their client’s costs position (and their overall strategy) should think early on whether or not the proceedings in question are within the definition of ‘financial remedy proceedings’ under rule 28.3:

  • If they are: the no order as to costs presumption prevails. Without prejudice and without prejudice save as to costs communications will not be admissable when the court considers costs.
  • If they are not: it is possible that the court will make a costs order and without prejudice and without prejudice save as to costs communications will be admissable on the question of costs. Clients must be warned of the costs risks and possible costs protection afforded by Calderbank offers to settle.

Put simply, the no order principle applies to the substantive final hearing in a financial remedy proceedings (and an interim variation order). It does not apply to other sorts of order in the financial remedy proceedings such as:

  • maintenance pending suit;
  • maintenance pending outcome of proceedings;
  • interim periodical payments order;
  • order for payment in respect of legal services; or
  • other interim orders.

Proceedings falling outside of the no order as to costs principle are:

  • setting aside a financial remedy order;
  • varying a financial remedy order;
  • appeal of a financial remedy order (In WD v HD [2015] EWHC 1547 (Fam), [2015] All ER (D) 81 (Nov) Moor J stated that FPR 28.3 applied only to first instance proceedings so that applications to set aside, vary or appeal a financial remedy order are excluded from the no costs order principle);
  • Inheritance Act 1975;
  • TOLATA 1996;
  • orders under Children Act 1989, Sch 1; and
  • orders under Part III of the Matrimonial and Family Proceedings Act 1984.

Amendment is not a return to the Calderbank rules

Before 2006, the court was able to consider the position adopted by the parties in without prejudice (save as to costs) correspondence when deciding whether to make a costs award. The so-called ‘Calderbank rules’ emanated from the 1975 case of Calderbank v Calderbank [1975] 3 All ER 333 in which Mr Calderbank rejected an offer to settle from his wife that was more generous to him than the eventual award made by the court. Lord Justice Cairns proposed that although without prejudice negotiations should be conducted without prejudice to the legal issues, the positions adopted in those negotiations should be referred to following judgment when the issue of costs fell to be decided by the court.

The principle was that if a without prejudice save as to costs proposal was made and a party received less (or no better) than what was offered at trial, that party should be at risk of paying their own costs plus those that the other party had incurred since 28 days after the offer was made. The idea was that the parties’ minds focused on adopting early and reasonable settlement positions to avoid the risk of a costs order being made against them at a later final hearing.

But, the Calderbank regime came under increasing criticism. It was a blunt instrument: if a party ‘lost’ by a very narrow margin, they were still liable to pay all of the other party’s costs from 28 days after the Calderbank offer was made. Judges found that the costs consequences post-judgment could undermine a carefully crafted financial order designed to meet the needs of the parties resulting in unfair and unintended outcomes. Furthermore, it was felt that the Calderbank rules encouraged the parties to spread bet and gamble on the expected outcome of cases in a system with a high level of judicial discretion when deciding capital and income division. Most famously, Mostyn J stated: ‘It can be seen that vast sums can swing on even the smallest failure to guess accurately. And there is no premium for guessing really well’ (GW v RW (Financial Provision: Departure from Equality) [2003] EWHC 611, at para [88]).

As a result, the Calderbank regime has not applied to financial remedy (previously called ‘ancillary relief’) proceedings following divorce since new costs rules were introduced in April 2006. These rules (embodied in the Family Proceedings (Amendment) Rules 2006 and now in the FPR 2010) have not changed for 13 years. In contrast the legal landscape against which financial remedy cases are conducted has altered markedly: there has been a huge rise in litigants in person trying to navigate the law and legal procedure without the benefit of sensible legal advice and an ever increasing number of cases are being squeezed through our overburdened court system. Many believe that a return to the Calderbank costs regime would:

  • focus minds on negotiations early in the proceedings;
  • incentivise parties to adopt a sensible settlement position to avoid the potential costs consequences of ‘losing’ at trial;
  • encourage parties to settle rather than spending disproportionate levels of legal costs to go to a final hearing - which costs deplete the funds available to meet the family’s future needs;
  • mean fewer financial remedy cases proceeding beyond the FDR, thereby reducing the burden on HMCTS.

The recent changes to the practice direction do not mark a return to the Calderbank regime. For the time being at least, para 4.3 of PD 28A precludes the court taking into account any offers to settle expressed to be ‘without prejudice’ or ‘without prejudice save as to costs’ when deciding whether any costs order should be made. Whether the costs- consequences pendulum will swing back to enable the court to take into account without prejudice negotiations remains to be seen.

In the meantime, it will be interesting to see whether the increased focus on adopting a reasonable, open negotiating position results in more and earlier settlement. On the other hand, it may prove just as difficult for litigants in person, without the benefit of specialised legal advice, to ensure that any offer they make is ‘reasonable’ in order to stay on the right side of the litigation conduct tracks.

This article originally appeared in New Law Journal on 19 July 2019

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