Costs: the duty to negotiate openly and reasonably

Thereafter, there are two general regimes that apply to costs within the Family Court (a) clean sheet (the general FPR 2010 regime) and (b) no order (the financial remedy regime – as per FPR 2010, r 28.3).

Written by Hannah Whitehouse.

Rule 28.3 creates a distinct procedure for costs in financial remedy proceedings. Rules 28.3(5) – (7) provide the approach to be taken by the Court in main financial remedy hearings. Any interim application or hearing which is made or heard as separate from the main proceedings do not follow the no order rule. The approach taken by the court will then be the “clean sheet regime”. Whilst this regime purports to begin with no presumption as to a general rule, it has been held that in financial remedy proceedings costs should normally follow the event (Gojkovic v Gojkovic (No 2) [1992] 2 FLR 233, CA, Baker v Rowe [2009] EWCA Civ 1162, KS v ND (Schedule 1: appeal: costs) [2013] EWHC 464 (Fam)).

Within main financial remedy hearings, the Court can depart from the general no order principle and makes a costs order where it considers appropriate to do so based on a party’s conduct (r. 28.3(7)). Practice Direction 28A paragraph 4.4 provides that conduct can encompass the failure of a party to negotiate openly and reasonably.

The practice direction was amended in May 2019 following the Family Procedure Rule Committee expressing concern that insufficient emphasis had been given to encouraging parties to engage reasonably and responsibly in negotiations. It was felt that little positive guidance was given in Practice Direction 28A to help parties to understand costs consequences when failing to litigate sensibly and engage in sensible negotiations (Family Procedure Rule Committee Costs Working Group). Since its amendment, the Court has set out clear reminders to parties of their obligation to litigate sensibly and to engage in reasonably negotiations.

In MB v EB [2019] EWHC 3676 (Fam) Cohen J looked at the application of the practice direction at the conclusion of financial remedy proceedings. The Court took the view that it had been a straightforward needs case which should not have cost each side more than £100,000 (the costs totalled a staggering £1.25 million). The Court looked to r. 28.3 and, in particular, r. 28.3(7). The Court noted that the rule had been amplified by PD 28A, paragraph 4.4. Cohen J held that whilst the wife’s offer had been light, had “there been a sensible (or any response), there could have been a quick resolution” (paragraph 34). The Court held that the husband’s conduct in the litigation had been irresponsible and unreasonable and that the wife should not be responsible for costs incurred as such. Therefore, the wife’s liability for the husband’s costs was capped.

The principle was reiterated by Mostyn J in OG v AG [2020] EWFC 52. Again, the parties in this case had run up a high costs bill which exceeded £1 million between them. The Court held that following the PTR, the wife had been in a position to negotiate reasonably, yet she had not done so. Mostyn J turned to the practice direction, noting that it required the parties to negotiate in an open and reasonable way. It was held that the wife’s approach had been unreasonable. As a result, the Court ordered a discount of £50,000 in the wife’s costs which were to be paid by the husband. This was as a direct result of the wife’s unreasonable and untenable open negotiation stance. Mostyn J was clear in his judgment, “It is important that I enunciate this principle loud and clear: if, once the financial landscape is clear, you do not openly negotiate reasonably, then you will likely suffer a penalty in costs. This applies whether the case is big or small, or whether it is being decided by reference to needs or sharing” (paragraph 31).

Most recently, the Court in LM v DM [2021] EWFC 28 looked at the application of the practice direction in proceedings for maintenance pending suit, interim periodical payments for the children, and for a legal services payment order. Mostyn J determined that pursuant to FPR r. 28.3(5) these proceedings were not governed by the usual no order rule, but by a “soft costs-follow-the-event principle”.

When making an order for costs, Mostyn J considered the applicant’s failure to negotiate openly and reasonably within the proceedings. The Court noted that whilst PD 28A paragraph 4.4 technically only applied to r. 28.3 cases, the obligation to negotiate openly and reasonably clearly applied to interim proceedings also. Mostyn J took the view that it was very important that parties adhere to this obligation in such proceedings.

The Court held that the applicant had obtained a result closer to her position than that of the respondent and that she had succeeded on issues of principle. As a result, the Court’s starting point was that the applicant be awarded her standard costs of the application. However, Mostyn J also noted that because of the applicant’s failure to attempt to negotiate openly and reasonably, she ought to be deprived of 50% of the award that would have otherwise been made in her favour. Therefore, the respondent was only ordered to pay 50% of the applicant’s costs.

This judgment demonstrated a wider application of the practice direction within interim proceedings, setting out the Court’s clear expectation of litigants and their obligation to negotiate openly and reasonably beyond r 28.3 cases. Mostyn J was clear that, “Litigants must learn that they will suffer a costs penalty if they do not negotiate openly and reasonably” (paragraph 4).

Since its introduction in May 2019, the Court has been clear in its expectation that parties will openly and reasonably negotiate within financial proceedings. Where parties fail to do so, there will be a costs penalty. The case of LM v DM has demonstrated that this principle equally applies to interim applications and hearings as it does to main financial remedy proceedings.

This article is written by Hannah Whitehouse, a member of our Family: Property and Finance team.