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Costs Orders by the Back Door
“Costs orders by the back door” or an essential aspect of the assessment of needs?
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. 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 Azarmi-
Movafagh 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.” 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
There are interesting passages in the Judgment which consider the question of whether a finding of litigation misconduct is required before the court will refuse the recipient of a needs award a sum to discharge their costs debts. Plainly that discussion ties in with the clear statutory intention in the separate but parallel context of inter partes costs orders in financial remedy: FPR PD 28A r 4.4 provides that when considering litigation conduct for the purposes of making an award of costs pursuant to rule 28.3(6) and (7) , “the court will take a broad view of conduct and will generally conclude that to refuse openly to negotiate reasonably and responsibly will amount to conduct in respect of which the court will consider making an order for costs. This includes in a ‘needs’ case where the applicant litigates unreasonably resulting in the costs incurred by each party becoming disproportionate to the award made by the court.”
In the case of Azarmi-Movafagh v BassiriDezfouli [2021] EWCA Civ 1184, the Court of Appeal consisting of King, Moylan and Newey LJJ allowed a second appeal in a case marked by “extreme positions and a degree of bitterness”, leading the parties to engage in a course of litigation “which became an exercise in self-destruction,” the Court noting that the parties’ costs had become so disproportionate relative to the assets that it had become “hard to achieve an outcome in this uncomplicated needs case which will not leave each of the parties profoundly discontented.”
The Judge at first instance had made an order providing the husband with funds sufficient to buy a modest property and to pay off the majority of his costs debts. That decision was appealed by the wife on the basis inter alia that the husband should bear his own costs debt. The first appeal was heard by Judd J who allowed the appeal and substituted the outright payment of a lump sum for the husband’s costs with an order that a charge in favour of the wife for the same sum must be secured on the property the husband would in due course purchase.
The issue before the Court of Appeal related solely to the approach to the issue of the appropriate treatment of any outstanding costs incurred by the recipient of a needs award.
The wife was a barrister and had been the breadwinner during the marriage, but derived much of her income from renting out properties she had owned prior to the marriage. The wife also owned the former matrimonial home. The total value of the assets was £2,347,000 or £1,781,389 after deduction of the wife's debts of £300,000 and the husband's debts of £257,000. The husband had no assets, was in receipt of universal credit and living in a rented one bedroom flat. There was a child who spent time with both of his parents. The first instance Judge concluded that this was a 'needs' case and that the husband needed £400,000 to buy himself a property which would be suitable for the child to come and stay. The Judge ordered payment of a further £25,000 to cover costs of purchase and the purchase of a car plus an additional sum of £200,000 towards his costs making a total lump sum of £625,000. The costs included costs relating to the financial remedy proceedings but also criminal and children act proceedings costs. The Judge at first instance found that it would be wrong to say that the costs of the criminal proceedings and perhaps some of the costs of the children proceedings should not be the husband’s responsibility from his own resources and awarded the sum of £200,000 towards his costs which, it was held, would “go a long way to dealing with them” although would not, as was recognised by the Judge, fully discharge all his litigation debts in their entirety.
The appeal of the first instance decision came before Judd J. The final ground of appeal was that the first instance Judge had been wrong to have added the sum of £200,000 for the husband's debts, which award was “tantamount to an order that she pay most of his unassessed costs”. Judd J concluded that there was force in that point. As would be expected, there were no orders as to costs in the Children Act proceedings and there were no proper grounds upon which a costs order could have been made at the end of the financial remedy proceedings. Whilst the Judge acknowledged that it would be wrong to say that the costs of the criminal and some of the children proceedings should not be his responsibility from his own resources, the order he made in fact allowed the husband to recover very much the lion's share of his costs from all the proceedings.
Judd J therefore allowed the appeal to a limited extent. She did not interfere with the overall award of £625,000, which sum should still be paid so that the husband would not be forced to live in unsuitable accommodation and could repay both the litigation loan and the bulk of the money owing to his sister. However Judd J held that the £200,000 referrable to his costs should form a charge on the property bought by the husband 'repayable to the wife on the husband's death, remarriage or permanent cohabitation'.
The Court of Appeal considered the proper approach to costs in needs cases. Whilst the 'no order' principle is the starting, and usually the end, point, the court does retain the jurisdiction to make costs orders in financial remedy proceedings pursuant to FPR r 28.3(6) 'because of the conduct of a party in relation to the proceedings (whether before or during them)'. However the Court of Appeal held that it is undoubtedly the case that there is no requirement for the first instance judge to carry out an analysis by reference to the principles applicable to costs orders when making a needs-based award: such an approach would not be compatible with the wide discretion of the judge to determine the extent of a party's needs and the extent to which they should be met. In cases where it is argued that an order substantially in excess of the sum required to meet a party's assessed needs is sought in order to settle the outstanding costs (or debts referrable to costs) of that party, the judge should: • Consider whether in any event the case is one in which consideration should be given as to the making of an order for costs under FPR 28(6) and (7) in particular by reference to FPR PD 28 para 4.4; • Whilst not carrying out a full costs analysis, the judge should have firmly in mind what the order which they propose to make by way of additional lump sum to meet a party's costs would represent if expressed in terms of an order for costs. To do this would act as a cross check of the fairness of the proposed order. • The fact that the proposed award might on the facts of a case amount to the equivalent of an indemnity costs award may be a powerful argument and is undoubtedly a matter which the judge should take into consideration, but it is not a cap on the judge's discretionary power to make such award as he or she determines will meet the needs of one of the parties. • Similarly, the fact that one or other party has run up unreasonable costs will be taken into account, but does not act as an absolute prohibition on the making of an enhanced lump sum.
The Court of Appeal allowed the second appeal, overturning the decision of Judd J on the first appeal, and holding that the order made at first instance which allowed the parties to achieve a clean break could not be regarded as being outside the wide discretion of the first instance Judge.
This decision will, it is anticipated, put firmly to bed the argument that making provision to discharge outstanding costs debts in a needs case is a “costs order by the back door.” The approach is far more nuanced than that. The litigation conduct of the recipient in particular is likely to be a highly relevant consideration. But these cases clearly signify that it is not permissible for costs liabilities in needs cases to be ignored such that the housing budget of a party – or a child of the family – ends up being significantly impacted by the existence of these unmet liabilities.
Juliet Allen
www.st-philips.com
