Costs — SQE1 FLK1 Dispute Resolution

A debt claim worth £60,000. Tried in a day and a half, no real complexity, and the claimant wins outright. Their solicitors serve a bill of £210,000. The costs judge works through it and finds every hour reasonably spent, every rate reasonable. Does the claimant get that £210,000? No. And nothing on that bill was unreasonable.

This is Costs, the topic where clients get the shock of their lives. Costs can easily exceed the amount in dispute. The rules decide who pays, how much, and when. Winning is only the first question. Keep that bill in mind. We come back to it at the end, and you will know exactly why it fails.

Here is the route. The general rule first, and why it is a discretion rather than a promise. Then costs budgeting, Precedent H, and what an approved budget really binds. Then the orders themselves, including orders against people who are not parties. Then Part 36, where most of the marks are. Then security for costs, fixed costs, assessment, and the two bases.

Start with the rule everyone knows. CPR 44.2: the unsuccessful party will be ordered to pay the costs of the successful party. Loser pays. Now the part people forget. The same rule gives the court a discretion as to whether costs are payable, by whom, and in what amount.

So the general rule is where the court starts, not where it finishes. Our winner in the debt claim has the order. What they do not have is £210,000. Between the order and the money sits assessment, and that is where most of a bill is lost.

Costs budgeting first. CPR 3.12: the court will manage the costs to be incurred by the parties on the multi-track. Budgeting is not something a party applies for. On a Part 7 multi-track claim it is the default, and disapplication is what needs a reason.

Two automatic exceptions matter. Claims where the amount stated on the claim form is £10 million or more, and claims brought by or on behalf of a child. So try one. A commercial fraud claim, stated at £12 million, allocated to the multi-track. Precedent H, or no Precedent H?

No Precedent H. It is over the ceiling, and value works the opposite way from what people expect. There is no minimum below which budgeting stops. The court does keep a discretion to order it anyway.

Precedent H is the budget itself, filed and exchanged before the first case management conference and broken down by phase, from pre-action to trial. Now the distinction that decides exam questions.

It separates incurred costs, already spent, from future costs, still estimated. Approval attaches to the future costs only. Incurred costs are not approved, and they are not disallowed either. They are left to be assessed at the end. A judge who remarks that the disclosure spend looks high has approved nothing. That comment follows the bill into the assessment.

Where the parties cannot agree the figures, every party other than a litigant in person files a budget discussion report. That is Precedent R, filed not later than seven days before the case management conference. The court then marks each phase agreed, budgeted or unbudgeted, and makes a costs management order. Budgeted figures are not rigid caps. They are presumptive limits.

Now the pair you must not confuse. Varying a budget is CPR 3.15A. Departing from one at assessment is CPR 3.18. If disclosure balloons, you serve particulars of the variation on every other party promptly, seek their written agreement, and submit those particulars to the court whether they agree or not.

Do not simply spend the money and argue later. At assessment the court will not depart from the last approved budgeted figure without good reason, as the Court of Appeal has confirmed. Every item being individually reasonable is not a good reason. That is the point of a budget.

Now the orders. Inter-partes costs are what the court orders one party to pay another, and they are not the same as solicitor-client costs, which are what your own client owes you.

CPR 44.2 tells the court to have regard to all the circumstances. The conduct of the parties. Whether a party succeeded on part of its case. Any admissible offer to settle. Whether costs were proportionately incurred. Missing directions, prolonging the litigation, refusing mediation: all of it can reduce what a winner recovers.

Partial success is the one to practise. A claimant sues for £80,000 in personal injury, wins on liability, and is awarded £15,000, the two largest heads of loss having failed. Two of the four days of trial went on those failed heads. Does the claimant get all its costs?

No. It is still the successful party, so it receives costs. But CPR 44.2(4)(b) makes the court look at the parts that failed. And CPR 44.2(7) says that rather than an issue-based order, it should order a proportion of the costs where that is practicable. Expect a percentage cut.

You do not have to wait for the end of the case. Win an interim application, get an order for the costs of it, and CPR 44.2(8) does something clients never expect. Where the court orders costs subject to detailed assessment, it will order a reasonable sum on account, unless there is good reason not to.

Read that again. A payment on account is the default, and the burden sits on the paying party to show why one should not be made. Hardship is not a condition. What triggers it is the costs order itself.

For short hearings the court often orders no assessment at all. It assesses summarily, from the statement of costs each side files not less than 24 hours beforehand. Practice Direction 44 expects it at the end of any hearing lasting not more than a day. Broad brush, on submissions.

And sometimes the person who ought to pay is not a party at all. Section 51 of the Senior Courts Act 1981, with CPR 46.2, lets the court reach a non-party who funded the litigation, controlled it, and stood to benefit. A parent company that pays every bill and picks the solicitors is the standard example. Shareholding alone is not enough.

Part 36 now. This is where the marks are. A Part 36 offer is a creature of the rules, and it carries automatic costs consequences that an ordinary offer does not.

CPR 36.5(1) sets the formalities. In writing. It must make clear that it is made pursuant to Part 36. It must specify a relevant period of not less than 21 days. It must say whether it relates to the whole of the claim, to part of it, or to an issue. And it must state whether it takes any counterclaim into account.

Two things it need not do. It need not say whether it includes costs. And it need not be labelled without prejudice except as to costs, because CPR 36.16 gives it that character automatically. Miss the reference to Part 36, or miss the 21 days, and you have an ordinary offer. Nothing follows automatically.

Accept inside the relevant period and the claim ends on those terms. Accept late and the position splits. Under CPR 36.13 the claimant gets its costs to the day the relevant period expired, and pays the offeror's costs from then until acceptance, unless the court thinks that unjust.

Now the big one. A claimant offers to accept £600,000. The defendant fights on. At trial the claimant is awarded £700,000, beating its own offer. Enhanced interest on how much of that award?

All of it. CPR 36.17(4) gives interest on the whole or part of the sum awarded, at up to 10% above base rate, from expiry of the relevant period. There is no cap on the sum it is calculated on. Then indemnity costs from that same date, and interest on those costs too.

And then an additional amount, and this is where £500,000 belongs. Ten per cent of the first £500,000 awarded, plus five per cent of anything above it, capped overall at £75,000. On a £700,000 award that is £50,000 plus £10,000, so £60,000. Not £70,000. The £500,000 limits the additional amount, never the interest.

Personal injury carries its own overlay. Qualified one-way costs shifting protects a claimant who loses: a costs order can be enforced only up to a cap. The protection goes only in defined cases, chiefly strike out on specified grounds and a finding of fundamental dishonesty. A judge who simply disbelieves a claimant has not made that finding.

For claims issued on or after 6 April 2023, CPR 44.14 fixes the cap at the aggregate of damages, interest, and costs orders in the claimant's favour. Set-off is allowed against all of it. That reversed Ho v Adelekun, where the Supreme Court had confined set-off to damages alone.

So a claimant who recovers £18,000 of damages and £20,000 of costs, but fails to beat a Part 36 offer, can have £38,000 of the defendant's order enforced against them. Losing does not remove the protection. The cap does the work.

Security for costs protects a defendant who expects to win and doubts it will ever be paid. CPR 25.27 asks two questions. Is it just to make the order, and is one of the specified conditions met?

The commonest condition is residence out of the jurisdiction. But watch the carve-out. A German distributor sues here for £500,000, solvent, with substantial assets at home. Does the residence ground work?

No. The condition excludes a claimant resident in a state bound by the 2005 Hague Convention on Choice of Court Agreements, and Germany is bound by it. The defendant would need another condition, most obviously a company that cannot pay, and the solvency evidence kills that. And note what residence does not require: nothing at all about ability to pay.

Fixed costs next, and this changed on 1 October 2023. The extended fixed recoverable costs regime in CPR Part 45 now covers most claims on the fast track, £10,000 to £25,000, and on the new intermediate track, £25,000 to £100,000.

On allocation the court also assigns the claim to one of four complexity bands, band 1 the simplest to band 4 the most complex, under CPR 26.14. The figure is then read off the table by band and by the stage reached. No bill. No detailed assessment. That is the point of it.

The regime has its own conduct valve. Under CPR 45.13, where a party has behaved unreasonably the court may order it to pay 50% more than the fixed costs otherwise payable. It can cut an unreasonable receiving party's entitlement by the same 50%.

Small claims are different. Each side generally bears its own costs. The list in CPR 27.14 is short. Court fees. Witnesses' travel and subsistence. Up to £95 a day per person for loss of earnings in attending. And an expert's fee up to £750 where the court gave permission. Nothing for a litigant's own time.

Assessment, then. Three routes to a figure: detailed assessment, summary assessment, or agreement. Detailed assessment under Part 47 is document-led. A notice of commencement with the bill, 21 days for the paying party's points of dispute, then an optional reply. Either side may then ask for a hearing before a costs officer.

Below a threshold the paperwork does the work. Where the costs claimed do not exceed £75,000, CPR 47.15 provides for provisional assessment on the papers. That is a single national limit, with no higher London figure, and either party may then ask for an oral hearing within 21 days.

Last, the two bases, and the answer to that £210,000 bill. The standard basis is the default: costs must be proportionate and reasonable, and doubt is resolved in favour of the paying party. The indemnity basis is more generous: proportionality drops out, and doubt is resolved in favour of the receiving party.

Proportionality is the whole answer to the cold open. CPR 44.3(2)(a) says it in terms. On the standard basis, costs which are disproportionate in amount may be disallowed or reduced even where they were reasonably or necessarily incurred. Every line of the bill can be reasonable and the total can still be cut.

It is judged against the sums in issue, the complexity, extra work caused by the paying party's conduct, and wider factors. £210,000 on a simple £60,000 debt claim invites exactly that global cut. In practice the standard basis returns 60 to 80% of a bill. The indemnity basis, 80 to 100%.

So when is the indemnity basis ordered? The Excelsior test. Is there something in the conduct of the action, or in the circumstances of the case, that takes it out of the norm? Dishonesty is not required. But hard-fought litigation is not enough either.

Abandoned allegations of fraud, abuse of process, serious breaches of orders: those are the examples. And one point the examiners like. An indemnity costs order is not a punishment. Its purpose is to give the receiving party a fuller measure of recovery, not to fine the payer. A claimant who beats its own Part 36 offer gets indemnity costs too, but by CPR 36.17(4)(b).

A word on how this is tested. SQE1 will not ask you to recite a rule number. You get a scenario, five answers, and one instruction: pick the best. So learn what the rules do. The numbers here are pegs to hang them on.

If you keep only three. CPR 44.2, because the general rule is a discretion, and conduct and partial success move it. CPR 36.5, because the formalities are what turn a letter into a Part 36 offer. And the Excelsior test, out of the norm, because that is the gateway to the indemnity basis.

Four traps. One: never spend past a budgeted phase and argue about it afterwards. At assessment the court will not depart from the last approved figure without good reason, and each item being reasonable is not one. Apply to vary, and apply early.

Two: the Part 36 gamble runs both ways. Reject a reasonable offer and lose, and you may face indemnity costs and enhanced interest from the day the relevant period expired. That can add tens of thousands to a bill that was already going to hurt.

Three: security for costs rewards the early application. The closer to trial you leave it, the less willing the court is to order it. By then the money has been spent.

Four: after a provisional assessment, asking for an oral hearing is not free. Request one and you bear its costs unless you improve your own position by 20 per cent or more. The costs of the provisional assessment itself are capped at £1,500 plus VAT and the court fee.

Quick check. A defendant in a £150,000 contract claim wants to make an offer that carries the costs consequences of Part 36. There is no counterclaim. The solicitor writes a letter offering £100,000, heads it without prejudice, and gives the claimant 14 days to accept. The letter says nothing about the rule it is made under, nor whether it covers the whole of the claim.

Three candidate answers. One: yes, because it is a written offer to settle, which is all that Part 36 requires. Two: yes, because it is marked without prejudice, which is the label Part 36 requires. Three: no, because it neither makes clear that it is made under Part 36 nor allows 21 days. Pause here if you want a moment.

The answer is three. CPR 36.5(1) is a checklist, and this letter fails at least two items on it. It never says it is made under Part 36, and 14 days falls short of the 21 the rule demands. It is a perfectly good offer to settle. It is not a Part 36 offer, and none of the automatic consequences follows.

Why the others fail. Writing is necessary but nowhere near sufficient. And the without prejudice heading is the trap: CPR 36.16 gives a Part 36 offer that character automatically, so marking a letter that way supplies nothing. What the letter does get is CPR 44.2(4)(c), which lets the court take an admissible offer into account.

Five things to take away. One: loser pays is where the court starts, not where it finishes, because CPR 44.2 is a discretion as to whether costs are payable, by whom and in what amount. Two: on the multi-track, budgeting is the default, approval attaches to future costs only, and you vary a budget before you spend, not after.

Three: a Part 36 offer says it is a Part 36 offer and gives 21 days, or it is just a letter. Four: beat your own offer and the interest is uncapped, while £500,000 belongs to the additional amount. Five: on the standard basis, disproportionate costs go even when every hour was reasonable. Which is why our winner never sees £210,000. Next time, Appeals.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.