“Costs orders by the back door” or an essential aspect of the assessment of needs? The approach to liabilities for costs in financial remedy
Juliet Allen
It is well established that the court’s award in financial remedy will be the higher of that reached by the application of the “sharing” principle and that reached by application of the “need” principle.
But where one party ends up with significant liabilities as a result of the cost of the proceedings, how are those to be treated in both needs and sharing cases in order to arrive at a fair result? In a “sharing” case this issue is not so vexed. Each party will by definition be left with sufficient resources to discharge their respective liabilities for costs from their postdivision share of the assets, and the “general rule” set out at FPR 2010, r.28.3(5) that “the court will not make an order requiring one party to pay the costs of another party” will apply. Each party will simply be expected to meet their costs liabilities from their postdivided share. There may of course need to be some re-balancing in those cases where one party was able to meet their legal costs as they went along from capital resources whilst the other had to have recourse to debt, particularly where that takes the form of expensive litigation loans at high interest rates. In SJ v RA [2014] EWHC 4054 (Fam) and J v J [2014] EWHC 3654 (Fam) it was held that where one party has to take on a litigation loan with high interest rates, those costs should be regarded as a debt of both parties to be discharged from matrimonial assets. Mr Nicholas Francis QC said: “Whilst the wife has had to borrow from Novitas at a cost of 18% pa, the husband has been able to borrow freely from XY to fund his own costs. This is hardly what one can call a level playing field and I say from the outset that I regard the wife's loan costs as a debt properly to be recorded as a debt for which she and the husband should both be responsible, at least until such time as anyone might persuade me that the general rule as to costs should, for some reason, not apply to this case. There may very well be cases where the husband should bear the cost of the high interest rates if he has forced his wife to borrow to fund her costs when he could have funded them himself.” However those types of issues in respect of litigation debts in sharing cases are readily adjusted for and thereby easily resolved within a sharing award.
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A far more thorny question is how to achieve fairness in a “needs” case where one party has accumulated significant liabilities as a result of the cost of the proceedings (whether in the form of commercial borrowings, litigation loans, credit cards or a large outstanding bill with their solicitors) and seeks a needsbased award which includes a capital sum to discharge those liabilities. That approach to liabilities for costs in “needs” cases has long appeared controversial in practice, with the argument often raised that allowing such additional capital provision would be tantamount to a “costs order by the back door” and should not be permitted. But to make no provision for liabilities for costs in a needs-based award will usually mean that the receiving party must use some of their housing budget to meet their costs debts, resulting in them having insufficient capital with which to re-house at the level found by the court to be required to meet their housing needs. What then is the fair approach? This was the issue considered in two recent Judgments: the Court of Appeal decision on 30 July 2021 in the case of AzarmiMovafagh v Bassiri-Dezfouli [2021] EWCA Civ 1184, and also during the summer of 2021, a Birmingham appeal heard by His Honour Judge Mark Rogers on 17 May 2021, in which I appeared for the appellant wife, reported sub nom LF v DF (Financial Remedy: Appeal: Costs Debts in a Needs Case) [2021] EWFC B50. Judgment was not handed down until 23 August 2021, enabling HHJ Rogers to refer to the decision of the Court of Appeal in the Azarmi-Movafagh case in a postscript to his Judgment. LF v DF (Financial Remedy: Appeal: Costs Debts in a Needs Case) [2021] EWFC B50 concerned an appeal by the wife against a financial remedy order. The District Judge had given the wife an award of £475,000 to meet her housing needs which were assessed at £450,000 for a home and £25,000 for “extras” such as costs of purchase, carpets, curtains, costs of moving etc. However the District Judge had declined to include any provision within his needs-based award to enable the wife to meet her liabilities for costs, which were significant and stood at c.£170,000, accepting the submission made on behalf of the husband that to make such award would be a “costs order by the back door.”
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Before HHJ Rogers on appeal, one of the grounds of appeal was that the Judge had been wrong to make no provision for the wife’s liabilities in his needs-based award, and indeed the appeal was allowed on that ground. HHJ Mark Rogers held that the effect of the Judge’s exclusion of the costs liability had been to reduce the capital available to the wife for housing by about 37%, contrary to his own assessment of her housing need. The Judge’s approach to the calculation of the needs-based lump sum had therefore been wrong in law. The appeal was allowed and the lump sum of £475,000 was set aside and replaced with an award of £600,000, giving the wife a sum of £125,000 towards her costs liabilities of £170,000. Rejecting the argument that this type of award is in effect a “costs order by the back door”, the Judge found “I am quite satisfied that an unmet costs liability on an asset schedule is not the same as an inter partes costs order. To suggest, as the Judge did confidently, that an award which incorporated the discharge of an existing liability was a backdoor costs order is, in my judgment, wrong. Costs orders are made in defined circumstances pursuant to the code to be found in Rule 28.3 of the Family Procedure Rules 2010. As everyone knows, the starting point is that there should be no order but that may be departed from appropriately where the conduct of the party justifies it…. A costs liability on a schedule, however, is simply an obligation to repay a debt and so falls for consideration under section 25 (2) (b) of the Act, as well as being one of the circumstances of the case in particular if that is bound to have an effect on the welfare of any relevant child.” The Judge also rejected the idea that this type of debt is “non-matrimonial” in nature, stating “In my judgment, a debt incurred in the inevitable process of unravelling a failed marriage has to be looked at carefully… … even if the Judge is right, he appears simply to have excluded the sums in question from consideration on the basis of their nonmatrimonial status. This is a needs case. Just as with non-matrimonial assets which may be “invaded” to produce a fair outcome in a needs based award, so may non-matrimonial liabilities be taken into account in a needs case if to exclude them would produce unfairness.” However HHJ Rogers also found that the wife had taken a disproportionate approach to the litigation and found that an award of £600,000 which would leave her c.£50,000 short of the
