The Threat of Adverse Costs Orders in Financial Remedy Cases Has Just Got Higher – Peel J in HO v TL
Published: 26/01/2024 14:42
Peel J’s substantive judgment in HO v TL  EWFC 215 is a compelling masterclass in addressing principle, guidance and the clear disposal of a smorgasbord of financial remedy issues within a must-read 27-page judgment for matrimonial finance practitioners.
However, it is the costs order which followed (see HO v TL  EWFC 216), and which condemned the wife applicant to a contribution of £100,000 towards the respondent husband’s costs, which not only repeats the warnings as to adverse costs orders following a lack of open negotiation as now well established by Mostyn J in OG v AG  EWFC 52 and Peel J’s own judgment in WC v HC  EWFC 40 as extended into needs awards (see Rothschild v de Souza  EWCA Civ 1215, Francis J in WG v HG  EWFC 84 and Cohen J in Trahrane v Limb  EWFC 27), but, arguably, widens those instances where parties following judgment may have to pay costs pursuant to the provisions of FPR 28.3(6) and, of course, Rule 4.4 of the Practice Direction stating:
‘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.’
In a case where the parties’ wealth inclusive of trust resources was found to be c.£22.4m, W’s financial remedy claim recovered ultimately £7.75m based on her ‘needs’ after her debts were paid off. She had previously claimed £17.2m, modified later in her s 25 statement to £12.3m and then reduced again to £10.9m in the month before the six-day final hearing. At trial, H’s position was £5.9m down from an earlier offer of £6.5m. The difference at trial was, therefore, c.£5m and the parties’ final combined costs were £1.55m.
Peel J, in addressing the costs issues raised before him pursuant to Part 28.3(6) and Rule 4.4, particularly highlighted as relevant to the circumstances of the case he was dealing with, the following factors from Part 28.3(6):
‘(b) any open offer to settle made by a party;
(c) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;
(d) the manner in which a party has pursued or responded to the application or a particular allegation or issue;
(e) any other aspect of a party's conduct in relation to proceedings which the court considers relevant; and
(f) the financial effect on the parties of any costs order.’
In addition, His Lordship emphasised that ‘sensible attempts to settle or unreasonable failure to make such attempts will ordinarily be a powerful factor one way or the other when considering costs’, and he repeated Mostyn J’s warning in OG v AG that ‘if, once the financial landscape is clear, you do not openly negotiate reasonably, then you will likely suffer a penalty in costs’.
In doing so, Peel J sought to highlight the risk in needs-based court awards of the payer being placed in the position of ‘the ultimate insurer’ of the payee spouse’s costs when the payee’s award also discharges all debt including the litigation costs. His Lordship suggested such an outcome provided no incentive on the payee to negotiate sensibly and even to use ‘needs’ as a shield against being subjected to an adverse costs order. Peel J’s warning was that ‘no litigant is automatically insulated from costs penalties, notwithstanding the possible impact on the intended needs award’.
Analysing W’s approach to negotiation, the court found she had until the September before the November 2023 final hearing maintained ‘an unrealistic and speculative approach’. Albeit sufficiently well informed of the case resources, she had known, according to Peel J, that her initial offer of December 2022 at £17.2m was unsustainable. Her failure to modify this position ‘for months’ was not ‘reasonable open negotiation’ and was unreasonable and running such an untenable case risked an adverse costs order.
His Lordship was also critical of H who he found had been ‘evasive and legalistic’ about a central issue in the case, namely his trust interests. This had taken up a significant amount of time and expense in the case and ‘ordinarily would justify an order for costs against him’.
However, Peel J further criticised W, who, whilst not formally raising conduct as an issue, had in her filed documentation made personal criticism of H. His Lordship condemned the ‘making of pejorative comments about the other party which have absolutely no relevance to the outcome of the financial remedy proceedings’. Such practice was unfair to the other party who had exercised restraint in such matters and it was not the court’s function when dealing with the parties’ finances to ‘pick over the bones of the marriage and attribute moral blame’. Although such personal attacks may not have added significantly to the costs, ‘ordinarily this too might justify a costs order’.
Peel J also had a word of warning for the lawyers engaged. They had a duty to advise their clients in respect of the costs risks in such circumstances and they must explain clearly to the client that a failure to negotiate reasonably on an open basis carries costs risks.
Peel J saw no reason why the court should not make a cost order if one party makes an unreasonable open offer and even where, particularly in big money case but also in more modest and smaller value cases, that reduces one party’s resources to meet their ‘needs’ as found by the court. His Lordship stated that:
‘The message must get across that although the starting point is no order as to costs, the courts are increasingly willing to depart from that so as to do justice to the party who has been put to unnecessary costs by the other party’s overstated proposals.’
In one sense there is nothing new in Peel J’s approach to the making of a costs order against W in this case where once she was aware of the broad financial position her first open offer (December 2022, £17.7m) had been pitched at well over double the amount she finally recovered (£7.75m) and indeed 76.6% of their combined wealth of £22.4m, as later found by the court. However, her filed s 25 statement (September 2023, £12.3m) had considerably moderated this approach to just over half of the parties’ combined wealth and by the month prior to the final hearing this position had been moderated to just under half thereof (£10.9m). Yet Peel J criticised her open negotiation approach as a failure to modify her original untenable position ‘for months’. He also said that H’s own December 2022 offer of £6.5m but payable over six years was ‘ambitious’.
This raises the clear signal to practitioners of the need to warn clients in writing at the time of making any open proposal of the need for realism and, where the proposal is clearly overly ambitious, of the high likelihood of adverse costs consequences unless amended to a more reasonable and sustainable level within a short time thereafter. In any busy office this type of review process is obviously difficult to maintain, especially where a trial date may well be at least several months away, and a client’s focus distracted by other non-legal work and family matters and office staff engaged on other more pressing casework.
However, Peel J’s judgment also suggests that the court’s post-trial analysis will also involve costs consequences for unnecessary personal commentary against the other spouse’s behaviour in non-conduct cases, which has no bearing on the financial issues, but is clearly intended to reduce the standing of the other spouse generally in the court’s eyes. Again, for practitioners, this is intended to rein in commentaries, particularly in s 25 statements, so frequently seen relating to childcare/arrangement-related problems or their general marital or post-separation behaviour short of inequitable conduct. It is also a warning which could include counsel’s position statements where such commentary is included. It should also be noted that Peel J’s condemnation of this was irrespective as to whether it could be shown to have increased the costs unnecessarily.
The level of legal costs in financial remedy cases which reach final hearings is an obvious area of concern for the profession. Too often the value of the real issues at stake bears an uncomfortable comparison with the costs incurred at that stage. In the instant case, those costs (£1.55m) represented 31% of the difference in issue value at trial (i.e. c.£5m). Of course, such hindsight case cost analysis is misleading in that a substantial part of those costs would have been incurred up to the Financial Dispute Resolution. However, the level of such costs is unarguably high in the process of divorce, which is an event which affects almost one in two marriages.
The rising tone of judicial admonition of parties in a post final hearing inquest of their approaches to that point is arguably looking at the problem through the wrong end of the telescope. First, there may be a need for a requirement for parties to make open offers immediately prior to the FDR as opposed to afterwards so that any ‘untenable’ stance is exposed to a judge’s warnings at an earlier stage. Second, of course, the ‘elephant in the room’ is and has been for a long time now the need for a reform of financial remedy law generally.
The public can no longer afford a process leading to bespoke division by individual judges in the majority of divorce cases. The law post-White has become impracticably academic in approach, with nuanced arguments promoted by the House of Lords/Supreme Court and Court of Appeal, endlessly extended by the High Court bench justifying a multitude of potential arguments for imbalanced division in what are principally ‘big money’ cases, but which undeniably continue to have some remaining relevance to the division in many of the more run of the mill ‘needs’ cases. It is this position which feeds over-ambitious targets by some clients and which the judges need to look in the mirror over when considering their own involvement. It is also one in which legislators need to stop using Brexit and Covid as an excuse and finally address the overdue need for reform where equal division becomes the statutory presumption and the man or woman in the street can read the Act and understand how their resources are likely on divorce to be divided without having to undergo a judicial process to achieve the same.