The first High Court judge to give guidance on applying the proportionality test has overturned a costs master’s ruling and slashed the costs he allowed by more than two-thirds.
Mr Justice Marcus Smith – sitting with Master Rowley as assessor – said the test at heart was what a reasonable client would have been prepared to pay in all of the relevant circumstances.
Malmsten v Bohinc  EWHC 1386 (Ch) was a shareholders dispute in a small company, in which the majority shareholder, Lara Bohinc, made an application under section 306 of the Companies Act 2006 for a shareholders’ meeting with a quorum of one so that she could remove fellow director and minority shareholder Ernst Malmsten.
Ms Bohinc succeeded after a 30-minute hearing before Mr Registrar Briggs and was awarded the costs “of and incidental to” the application. She sought £62,520 plus VAT, which was cut on assessment by Master Whalan to £47,500.
He decided not to reduce the figure further on the basis of proportionality primarily because of Mr Malmsten’s conduct of the case (he represented himself), which turned what should have been a relatively straightforward application into a “more protracted and bitterly fought and undoubtedly therefore more expensive undertaking than it would otherwise have needed to be”.
In considering the five proportionality factors in rule 44.3(5), the master identified in order (d) (any additional work generated by the conduct of the paying party), (b) (the value of any non-monetary relief) and (c) (the complexity of the litigation) as the relevant ones in this case.
On appeal, Smith J said it was clear from the rules, and the extra-judicial views of others, that the proportionality test should occur at the end of the assessment process, whether a summary or detailed one.
He said the master was “entirely right” to leave both VAT and the costs of drawing the bill out of account when considering proportionality, describing them as “no more than distorting factors”.
However, Smith J said the master attached “too much weight” to the fact that Mr Malmsten resisted Ms Bohinc’s application. His actions in precipitating the hearing said “nothing about the quantum of costs it was appropriate for Mr Malmsten to pay”.
He continued: “What is more, the registrar ordered costs on the standard basis. He clearly did not consider that there was anything, in Mr Malmsten’s conduct, that made this a matter for assessment on the indemnity basis.
“In these circumstances, faced with what was undoubtedly a narrow and straightforward application, if the master was going to use factor (d) as the reason for effecting no proportionality deduction, he needed to identify how Mr Malmsten’s conduct resulted in additional costs to Ms Bohinc.”
The judge said that, given the “narrowness and straightforwardness of the application”, costs of £47,500 “require some justification, and pretty cogent justification at that”. The figure was prima facie disproportionate.
Ms Bohinc’s solicitors had instructed experienced counsel 26 times and spent 230 hours of solicitor’s time on it, and Smith J said this could not be explained by Mr Malmsten’s conduct.
“I conclude that the master’s reliance on factor (d) was not justified by the circumstances before him and that the master’s decision on proportionality is, for this reason, wrong in law.”
Factor (b) was not particularly relevant as the importance of the case to Ms Bohinc still did not justify the time spent.
“The master’s failure to make a deduction to reflect the disproportionality of the costs claimed by Ms Bohinc was a clear error of law, lying outwith the (very considerable) discretion afforded to him by the costs rules.”
The judge went on to conduct the test himself and reduced the costs to £15,000.
He cited with approval the approach to proportionality outlined in Friston on Costs, namely: “Focusing on what really mattered to the litigants, what would a reasonable client have been prepared to pay in all of the relevant circumstances?”
But he cautioned against having “too client-centric an approach to proportionality”.
Smith J said: “The law is, unfortunately, both complex and complex to navigate: that is why clients need lawyers in the first place, and it is necessary to appreciate that the costs figure arising out of a detailed assessment or even in a summary assessment cannot simply be disregarded.
“The costs appearing in such an assessment have been professionally compiled and must be given due weight. The position is a fortiori when there is an approved or agreed costs budget in place.”
He continued: “The starting point for the proportionality assessment will be the figure put forward by the legal representative, after an item-by-item review if this has occurred.
“Thereafter, it is a question of the extent to which – knowing the way lawyers charge, and the fact that, to at least some extent, the client will have been informed of this – this figure fails the proportionality test.
“A judge assessing such figures may have regard to ‘like’ cases and to what the other side has charged its client, but at the end of the day the application of the proportionality criterion is intended not as a test for ensuring that the costs are indeed reasonable or even necessary, but as a separate and self-standing control.”
Here, Smith J found that the master had included as recoverable costs that were not “of and incidental to” the application, while there was “no justification for the extent to which counsel was consulted nor for the number of hours spent by Ms Bohinc’s solicitors”.
The proceedings were important to Ms Bohinc and Mr Malmsten “was not a co-operative litigant”, but “perhaps more by luck than judgment” his conduct did not actually have an effect on the level of costs.
The judge concluded: “In reaching a figure of £15,000, I have been cautious to err on the side of generosity to Ms Bohinc. My initial reaction to the costs for the section 306 application was that it would be difficult to justify costs in excess of £12,000 inclusive of VAT.
“But I am conscious that I am applying a broad-brush test at the end of a detailed assessment which I have not carried out, and have therefore concluded that the sum of £15,000 plus VAT is the appropriate figure to set.”