14 November 2017Print This Post

High Court: proportionality is about more than ‘damages v costs’

Proportionality: Not just a calculation of costs to damages

Proportionality involves more than simply comparing budgets with the size of the damages claimed, a High Court judge has made clear in deciding that costs management should be applied in a case worth £350m.

Ruling in the group litigation brought by thousands of investors against former directors of Lloyds Bank over its takeover of HBOS in 2008, Mr Justice Nugee said the defendants’ costs budgets, at £24m, amounted to only about 7% of the claim.

The defendants said that this meant proportionality did not need to be considered, but the judge disagreed.

He said this was only one test of proportionality and judges should look beyond “the overall cost of the proceedings compared to the overall amounts at stake and the complexity of the issues and the like [to] whether the proposed spending of money of that level is proportionate to the work that was involved”.

Nugee J went on: “So I am not satisfied that it is simply an answer to the proportionality challenges to say that the overall budget is not out of line with the amounts at stake”.

He said the application by the claimants for a costs management order (CMO) should not be determined on a “narrow textual construction” of CPR 3.15(2), but on whether litigation could be “conducted justly” and in accordance with the overriding objective, without an order being made.

In Sharp v Blank and others [2017] EWHC 141 (Ch) – a decision from January that has only just been published – Nugee J had previously ordered the production of budgets but not costs management.

He said it became “quite difficult” to distinguish reasonableness from proportionality, but he accepted that something could be reasonable, without being proportionate.

He said the claimants’ application should be determined on “whether the making of a costs management order would be something that is likely overall to save expense and thereby enable the court to deal with the case more justly and more in accordance with the overriding objective or whether it would really be a waste of money and not achieve anything that was worth the money that had to be spent on it”.

Nugee J said both parties agreed that the risk of the claimants having to pay the costs of the defendants, which “may well come in” at more than the £14.75m covered by the claimants’ after-the-event insurance, should be dealt with.

Otherwise, the individual claimants were exposed to the risk of having to contribute to the uninsured costs, while the defendants would be left with having to collect what could be relatively small sums from a very large number of individual claimants, given the terms of the group litigation order said they were not jointly liable for costs but only severally liable proportionate to their shareholdings.

Nugee J said the “real question” he had to grapple with was whether the claimants’ desire “to bring more certainty to the quantification of that risk” outweighed the inevitable cost of making a CMO, which could be around £250,000.

“I accept that that is a real and substantial cost… which would be avoided if the costs management order was not made.”

But Nugee J said a CMO could bring “much greater clarity” to the exposure the claimants faced, with a current costs budget of £24m, of which £14.9m was still to be incurred.

The judge acceded to the claimant’s application and directed that a costs management process should be undertaken by the Chief Master.

By Nick Hilborne

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