In Malmsten v Bohinc  EWHC 1386 (Ch) Marcus Smith J addressed the approach to be taken by a Judge when assessing proportionality test as per r.44.3. This is the first time that a higher court has given guidance and will therefore be of interest to litigators and cost lawyers alike.
The case concerned the costs awarded following a successful application under s.306 of the Companies Act 2006. The order provided that the “costs of and incidental to this application shall be paid by [the respondent]”. Those costs were assessed by Master Whalan in the SCCO who allowed costs of approximately £47,500+VAT plus the costs of drawing the bill.
The appeal concerned three broad areas:
- Whether the Master had applied too broad a definition to the “costs of and incidental to” provision in the order.
- Whether the Master had allowed too much time in respect of various line items of costs.
- Whether the Master had erred in his approach to proportionality.
The appeal failed in respect of the time allowed for the individual items but the costs assessed by the Master were substantially reduced in respect of the breadth of the order and proportionality. It is the latter of these points that will be of interest to most readers.
On proportionality, Marcus Smith J concluded that the five factors set out in r.44.3(5) “are only meaningful when considered in relation to the overall bill of costs, rather than in relation to a specific item of costs. What the new rules require is for the judge, having completed a detailed assessment of costs, to take a step back, look at the assessed bill, and ask whether a further reduction is required on grounds of proportionality.” This is consistent with the guidance in the White Book and in Friston on Costs, as well as being in accordance with the approach of the vast majority of judges around the country.
Marcus Smith J also found that the Master had adopted the correct approach when addressing the proportionality factors in r.44.3(5). The Master had discounted two factors as irrelevant in his ex tempore judgment whilst addressing in general terms the weight to be afforded to the other factors.
However, the Judge found that the Master erred however in the weight to be afforded to those factors. This was described by Marcus Smith J as being “a clear error of law, lying outwith the (very considerable) discretion afforded to him by the costs rules”. In particular the Master had failed to identify how the Appellant’s conduct had resulted in additional costs.
Although the judgment makes no express comment on it, the Appellant had invited the Court to adopt a mathematical approach to proportionality. Under the suggested approach, notional amounts were allowed as the proportionate amount for each phase of the litigation with the r.44.3(5) factors each permitted a 20% uplift insofar as each of them applied. It is therefore significant that Marcus Smith J adopted the orthodox response of weighing factors advanced by the Respondent. Indeed, a mathematical approach such as the one suggested by the Appellant is conspicuous by its absence.
It is, however, notable that no reference was made to the factors set out in r.44.4 which provides that the Court is to “have regard to all the circumstances” in reaching a view on proportionality and reasonableness as well as the additional factors set out at r.44.4(3).
In approving the approach of stepping back and weighing the r.44.3(5) factors in the balance, Marcus Smith J approved a passage in Friston in which proportionality is compared to a client’s view of the commerciality of the case. However, alongside this the Judge warned against adopting too client-centric an approach to proportionality, finding that it is necessary to give “due weight” to costs figures which have been professionally compiled. He went on to consider that costs judges should consider similar cases and the costs of the other side in assessing proportionality. In so doing he referred to his own earlier decision in Football Association Premier League Limited v Houghton where the Court had summarily assessed six virtually identical applications in intellectual property proceedings. The Court in Houghton adopted a comparative approach to assessing the costs in order to reach similar figures across each of the applications (allowing for the small differences between the applications as appropriate). It is submitted that a comparative approach will be difficult to adopt in practice and it is likely that costs judges will use this as part of a broad-brush assessment where their own experience of previous cases has a bearing on the proportionate sum arrived at.
Finally, the notion that the proportionality assessment should be applied to costs including VAT was also rejected by the Court as to do otherwise “simply distorts and confuses any proportionality assessment”.
Ultimately Marcus Smith J reduced the costs allowed by Master Whalan from £47,500+VAT to £15,000+VAT. It is important to note, however, that this was not done solely on the basis of proportionality. It was held that too broad an approach to the ambit of the Order had been taken such that sums that ought not to have been permitted as reasonably incurred had been. Rather than remit the case, Marcus Smith J took the approach of reaching the figure that would have satisfied both the ambit of the Order and proportionality. As a consequence, the reduction was greater than would have been ordered on the basis of proportionality alone.
This is an important decision that confirms a number of elements of the proportionality assessment:
- Firstly, it should be approached at the end of the costs assessment by stepping back and weighing the relevant factors.
- Secondly, a comparative element is permissible, although in the view of the author this is more likely to be in respect of the judge’s overall experience than in the production of direct comparators by the parties.
- Thirdly, it is important not to adopt too client-centric an approach and to give due weight to the costs that have been professionally compiled.
- Finally, VAT is not to be included in the proportionality assessment but to be added (if applicable) to the figure reached at the end of the exercise.
Martyn Griffiths represented the Respondent in Malmsten v Bohinc.
 Original emphasis
  EWHC 2567 (Ch)