Question

The owner of the house next to our development claimed that he was suffering intolerable nuisance and demanded payment of substantial compensation. Negotiations broke down because of his unreasonable demands and he then sued for an injunction and/or damages. We were advised to make a settlement offer of £15,000 at a very early stage in order to protect ourselves, and did so. This offer was accepted. To our amazement, the neighbour is now trying to recover just over £100,000 in respect of his legal costs. Our legal costs were in the region of £10,000 and we expected the neighbour's costs to be similar: we cannot understand how the neighbour's costs could have reached £100,000. Will we have to pay this inflated amount?

Answer

Your settlement offer was made under Part 36 of the Civil Procedure Rules, and the rules provide that, if the offer is accepted, the claimant is entitled to recover his legal costs of the proceedings up to the date of acceptance. This does not mean that you must pay the amount demanded: if the legal costs cannot be agreed, then they will be assessed by a costs judge.

The assessment of costs is a detailed process under which each and every item on the claimant's legal bill will be scrutinised by the costs judge. Typically, the outcome of this process is that the claimant is entitled to recover about 75% of his costs, though where the costs are unreasonably high the recovery can be closer to 50%.

There is more good news for you: as part of reforms to the litigation process, a new rule has been introduced under which costs will only be recoverable to the extent they are "proportionate": the recoverable costs must bear a reasonable relationship to the sums in issue in the proceedings, taking account of other factors such as the complexity of the action, the conduct of the defendant, and the public importance of the dispute.

There have now been a number of recent judgments showing how the courts will apply this new rule. In BNM v MGN Limited, a libel case was settled for £20,000 plus costs. The claimant's costs totalled £241,817. Following assessment, this was cut to £167,389. The new "proportionality" rule was then applied, and the costs were further reduced to £84,855.

There has been another very recent and relevant judgment in proceedings which related to nuisance caused by the construction of a basement conversion. In the case of Dr Brian May and Mrs Anita May v Wavell Group Limited and Dr Bizarri, an offer under Part 36 to pay £25,000 was accepted by the celebrity couple, who then sought to recover costs of £208,236. This figure was cut to £99,655 by the costs judge on assessment, and then to £35,000 when the "proportionality" rule was applied.

The outcome of the detailed assessment and application of the proportionality rule in your case will depend on the particular facts of the case and the detail of your neighbour's legal bill. However, the facts of your case are not dissimilar to those in May v Wavell Group, and it would seem that you have the basis of a good argument that your neighbour's costs are not proportionate to the sums in dispute and should be very significantly reduced.