Proportionality wipes ￡2 trillion off the stock market

Was it Britain’s exit from the EU that wiped ￡2 trillion off the stock market, or the cumulative effect of decisions on proportionality devaluing the worth of work in progress across the country?

Realistically, it’s probably the EU result, but when proportionality is slicing off half the real value of your work in progress, you could be forgiven for having it at the forefront of your mind when considering the cause of all ills. I’m apprehensive about what Brexit has in store for us over the next few years and beyond, but more immediately concerned with recent decisions on proportionality, and what they mean for ‘the market’ for legal services.

On Friday 24th June we had the first reports of a decision concerning costs capping in the Competition Appeals Tribunal in Socrates Training Limited – v – The Law Society of England and Wales [2016] CAT 10, in which the claimant alleges an abuse of dominant position by the Law Society in requiring members of its Conveyancing Quality Scheme to use the Law Society’s own training scheme in order to maintain accreditation.

Allocated to the fast-track procedure by Rule 58 of the Competition Appeal Tribunal Rules 2015, the Tribunal was required to cap the recoverable costs of the parties, and to that end, the parties provided budgets; ￡220,000.00 for the claimant (who is conducting the solicitors’ work in-house with limited external solicitor assistance), and a little over ￡637,000.00 for the defendant Law Society.

A substantial driver of the disparity between the budgets was the Law Society’s recent instruction of specialist City of London firm Norton Rose Fulbright, a decision which the Tribunal described as ‘not remotely unreasonable’. Their instruction came with concomitantly high hourly rates, though rates which the Tribunal accepted were less than the solicitors’ usual commercial rate, i.e. less than it would appear the Tribunal accepted would be dictated by ‘the market’.

The Honourable Mr Justice Roth decided that although the decision to instruct specialist London solicitors could not be described as unreasonable, it did not follow that such increased costs would be recoverable on an inter partes basis, and referred to the oft-repeated comments of Leggatt J in Kazakhstan Kagazy Plc & Ors – v – Zhunus [2015] EWHC 404 (Comm) that the touchstone of proportionality ‘is not the amount of costs which it was in a party’s best interests to incur but the lowest amount which it could reasonably have been expected to spend in order to have its case conducted and presented proficiently…’

So far so good; whilst the comments of Legatt J may have struck fear into the heart at the time, they now serve only as a Proustian trigger for reminiscences of ‘better’ times now past, perhaps only a slightly harsher expression of the ‘old’ pre-April 2013 test of proportionality. The ‘minimum’ presumably sits on some tier beneath ‘necessary’ and conceptually the two can be understood as ‘necessity’ still retaining some element that could be done without if we had to be particularly frugal, so as to achieve the bare minimum. But in a decision which could have far-reaching implications for ‘the market’, we are jolted back to the present day and what proportionality means now in these more uncertain times.

In Roth J’s view, a hypothetical standard basis assessment would likely reduce the Law Society’s costs to ‘well below ￡0.5 million’, but that was ‘still an enormous potential liability to face a small company’. Where the parties were of disparate means, of importance was the need to strike ‘a fair balance between enabling access to justice for the claimant and providing a measure of protection to the defendant’, and which may therefore mean that ‘in some cases the amount is not the sum required to achieve justice’ but ‘a limited contribution’ to the costs. The means of the parties would be taken into account, and the cap imposed on the Law Society’s costs would therefore be ￡350,000.00.

Determining a costs cap in a Competition Appeals Tribunal case on the fast-track procedure may well import public policy considerations as to the financial risk those bringing and defending claims should be exposed to that do not necessarily feature in the same way in other types of litigation, but it is very much proportionality which informs this decision.

It is debateable whether the same approach to the application of proportionality could be applied on an assessment of costs at conclusion of the case; in making a costs capping order, the court can pray in aid the overriding objective, the need to ensure that the parties are on an equal footing and the need to have regard to the financial position of each party in a way it possibly can’t at conclusion of the matter when the order for costs has already been made. It is however a very clear indication of how the court may seek to apply proportionality when capping or budgeting costs.

We ought, however, to be honest about what is actually happening in these decisions. The costs aren’t being ‘assessed’. With this concept of proportionality something else is being determined; what is ‘fair’, not for the work, but for the litigants. Determining what the costs may reasonably be is only a subordinate function of applying the overall test of what it is ‘fair’ for the opponent to pay, it would appear.

But what does this mean for ‘the market’? Certainly in the spheres of litigation commonly pursued under no win no fee agreements often excluding any recovery of the shortfall in costs from the client, these decisions may well herald significant changes, and bring to the fore with much greater urgency the need to re-evaluate the substantially risk-free position of such clients vis a vis the base costs.

I would also speculate however that much larger institutions, well-used to picking up the shortfall in inter partes recovery or having a much more limited expectation of it in the first place, will likely come to question with much greater vigour why the costs they are liable for are not closer to those that may be recovered from their opponent.

And how to produce proportionate costs without undermining the price of services? The key may be in the approach of Socrates Limited in this case whose costs were capped at only 10% or so less than sought; to keep conduct in-house and use outside resources sparingly. Rather a different proposition for a company such as Socrates than for your average litigant in person, but nonetheless a possible way of achieving justice ‘at’ proportionate cost, a hybrid litigant whose case is not conducted by solicitors but rather furthered with their assistance.

It may be an imperfect answer, but in smaller claims especially, if solicitors’ charges aren’t to be radically de-valued, or the damages eaten away entirely by the irrecoverable costs, the hybrid litigant may become much more common in far more areas of litigation, and that too would have a substantial impact on the market.

I’ll end with a question, because I have so many at the moment; if you were selling ‘unbundled’ services, just providing advice on final disclosure lists and the resulting documents obtained, say, or reviewing and advising on expert evidence, how would that affect the way you offered those services?