Payne Hicks Beach

Payne Hicks Beach

11 November 2020

Conduct yourself properly…or be penalised for litigation conduct

It is often said that London is the “divorce capital of the world”, the implication being that the English Courts are traditionally more favourable to the financially weaker party.  Historically, there has been nothing to prevent the financially weaker party litigating with a view to securing for themselves the best possible outcome and, in most cases, the financially stronger party would have been expected to pick up their legal bill.  This has led to parties engaging in speculative litigation and failing to negotiate sensibly in the hope that when the case comes before a court they will secure a higher award from the presiding judge with little or no consequences should their negotiating stance or their conduct of the litigation have been unreasonable. 

The insertion of a new paragraph 4.4 to Practice Direction 28A of the Family Procedure Rules (which deals with costs) has changed the landscape.  The relevant rule reads, In considering the conduct of the parties for the purposes of rule 28.3(6) and (7) (including any open offers to settle), the court will have regard to the obligation of the parties to help the court to further the overriding objective (see rules 1.1 and 1.3) and will take into account the nature, importance and complexity of the issues in the case. This may be of particular significance in applications for variation orders and interim variation orders or other cases where there is a risk of the costs becoming disproportionate to the amounts in dispute.  The court will take a broad view of conduct for the purposes of this rule 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” (emphasis added).

The insertion of this new paragraph means that claimants have to contemplate more carefully the position that they adopt in negotiations. The clear intention behind the rule is to encourage parties to negotiate sensibly and in the knowledge that the court has effective tools at its disposal that it can employ to impose financial consequences on a party who does not do so.  Historically the court has been reluctant to impose costs orders which might upset the balance of a carefully crafted order designed to meet a claimant’s reasonable financial needs and which would leave that party with insufficient financial resources to meet such needs..  This new rule represents a significant change in approach and requires the less wealthy party to scrutinise their negotiating stance far more carefully or risk being penalised financially.

Two recently reported cases demonstrate how the new rule operates in practice and should serve as a warning to those engaging in litigation to adopt a sensible stance and to be wary of incurring legal costs on a speculative position.

In MB v EB (No 2) [2019] EWHC 3676 the wife was the wealthier party with the husband describing himself as a struggling artist and part time model.  He also suffered from mental health issues that had been exacerbated by a head injury suffered in an accident.  The parties had entered into a separation agreement in 2011 but the court found that the agreement did not meet the husband’s reasonable income and capital needs.  That agreement had provided the husband with £245,000 to purchase a property and £35,000 by way of an additional lump sum.  The wife adopted the “millionaire’s defence” in the proceedings – claiming that whatever reasonable order the court might make in respect of the husband’s needs she had sufficient wealth to be able to meet the award (she claimed to have access to financial resources with a value in excess of £50M).

The court determined that the provision made for the husband in the separation agreement whilst meeting his reasonable housing need (the husband had received the apartment he had bargained for) did not meet his income needs and determined that he required a further award of £325,000 (a whole of life Duxbury lump sum based on an annual income need of £25,000) plus an additional £10,000 to purchase a new car. 

However, the husband was found by the Judge to have behaved unreasonably in the litigation.  In particular, he had failed to engage openly in settlement discussions that might have brought the case to an earlier conclusion without the need for protracted and costly litigation through the courts.  He had failed to respond to a first open offer made by the wife which could have led to the case being resolved prior to a final trial.   The wife had made a second increased open offer which the husband failed to respond to until a week before the trial when the vast majority of the costs had already been incurred.

The Judge found that the husband had behaved unreasonably in seeking to argue points that the marriage had lasted far longer than it had in fact endured and that he had been the “homemaker” – a claim that the same Judge, Cohen J., during an earlier Crossley (preliminary issues) hearing considered “risible”.  The husband had also sought to run a sharing claim when it was clear, and the Judge determined, there was no marital acquest and thus his claims ought properly to have been limited to his reasonable needs.  He had behaved unreasonably by adopting this stance and as a consequence had run up £650,000 in costs in respect of a case that should have been capable of an early settlement.  Such a large sum of costs completely outweighed his ultimate award and was disproportionate to the issues in the case.  To reflect this fact the judge disallowed in excess of 75% of the husband’s costs, much of which were unpaid and remained outstanding to his lawyers.  The judge concluded that, “…in my judgment, it is not for the wife to bankroll this litigation which I find to have been unreasonably conducted by the husband.”  The consequence was that the husband would have to use the greater part of his award to meet his liabilities to his lawyers.

In the second case of Rothschild v De Souza [2020] EWCA Civ 1215, the husband’s appeal from an order made in financial proceedings was dismissed.  The case has a long and complex litigation history and the parties’ separation and the ensuing litigation had been highly acrimonious.  By the time of the appeal the costs involved exceeded £1M and the judge agreed that the level of costs had been greatly exacerbated by the husband’s conduct during the litigation.  The husband was also accused of deliberate and wanton spending and dissipation of assets.  He had not been in employment in the three years prior to the trial and had instead lived a life of luxury traveling the world.

The husband’s objections to the first instance order centred around his contention that in making his award the judge had failed to take proper account of the husband’s needs and had unfairly prioritised the needs of the wife.  He argued that having said the case would be approached on the basis of needs and the husband having already been penalised in costs as a consequence of his litigation conduct, the Judge then took into account the husband’s litigation conduct in reaching his ultimate award.  The husband also objected on the basis that the judge had not quantified the financial effect of that conduct when making his award in favour of the wife.

The husband lost his appeal.  The Court of Appeal found that the judge at first instance had clearly taken into account the husband’s litigation conduct and was entitled to do so.  The first instance judge had commented, “There is no avoiding the fact that H is largely responsible for the situation that has arisen.  Since the breakdown of the marriage he has acted destructively and throughout the litigation without any regard to the normal rules.”  The judge had prioritised – quite rightly – the needs of the children and the wife as their primary carer.  If the value of the legal costs that could be said to have been incurred as a result of the husband’s litigation conduct were taken into account (75% of the wife’s total costs of £600,000) and if that value was added to the award the husband received, the actual disparity between the amount received by each party would be virtually nothing.  The Court made it clear that litigation conduct can justify an award, the effect of which is to provide the “guilty” party with less than their needs.  The rationale behind this justification is that without the ability to take litigation conduct into account it effectively gives litigants a charter to conduct their case unreasonably to the prejudice of the “innocent” party.

Conclusion

It is clear that parties now need to be aware of this change of approach and must consistently cross check their negotiating stance against the requirement to engage fully, reasonably and sensibly in negotiations.  They must bear in mind the potential costs consequences of a failure to do so and, in particular, be alive to the fact that if they do not engage properly in negotiations the resulting costs consequences could leave them with insufficient funds to meet their reasonable income and capital needs, going forward.  It is to be hoped that this will encourage litigants to adopt a more measured and constructive approach in the conduct of their litigation and will result in more cases being settled before they reach the door of the court.

Article by Kelly Gerrard, Senior Associate and Knowledge Development Lawyer in the Family Department. For further information, please contact Kelly Gerrard by email or your usual contact in the Family Department or, alternatively, telephone on 020 7465 4361.

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This publication is not intended to provide a comprehensive statement of the law and does not constitute legal advice and should not be considered as such. It is intended to highlight some issues current at the date of its preparation. Specific advice should always be taken in order to take account of individual circumstances and no person reading this article is regarded as a client of this firm in respect of any of its contents.

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