Counting the cost of Woolf

The new Civil Procedure Rules, (known also as the Woolf reforms) could mean that recovering on a claim does not naturally lead to the recovery of costs – up until now the basic principle of English litigation.

Costs awards are currently decided by a process known as assessment (if not by agreement). Usually, the loser is responsible for 60-70% of the winner's costs. The principle remains under the Civil Procedure Rules. However, the court has a wider discretion to decide who should pay costs and in what amount, taking into account, among other things, the parties' conduct, reasonableness and proportionality.

Conduct is a wide-ranging test of how reasonable a party has been. This can include considering whether it was reasonable to pursue or contest an allegation, how that was done, and "whether a claimant … in whole or part, exaggerated his claim". Construction claims must be consistent with later court claims.

The court will only allow "costs which are proportionate to the matters in issue". Any doubt as to whether costs are proportionate is to be resolved in favour of the paying party.

The court is also to consider "the amount or value" involved in the dispute. It can consider the importance of the matter to a party and the complexity of the case – but these are considerations for special, not routine, cases.

Costs should not increase in direct proportion to the sums in issue – the practice direction states: "In a modest claim, the proportion of costs is likely to be higher than in a large claim." Whether that is realistic in construction cases remains to be seen.

Proportionality is not a new concept. The Construction Industry Model Arbitration Rules allow the parties to agree a cap on the percentage of costs recoverable, proportionate to the sums claimed.

English domestic arbitrations tend to follow the English courts in relation to costs; arbitrators are required to exercise their discretion judicially, and therefore the approaches noted above are likely to affect domestic arbitrations.

• Woolf will impact on costs awards in litigation and arbitration

• The effect can be foreseen by similar rules for international arbitration

A recent unpublished study of costs awards in International Chamber of Commerce arbitrations gives a clue as to how the new system may operate. It shows that ICC tribunals have already developed approaches similar to the new litigation rules. They take into account the proportions of sums claimed and recovered.

This suggests a general sea-change in the way costs are awarded. In an ICC arbitration, a party is only likely to recover all or most of the costs incurred when it wins all or most of its claims.

Where an ICC claimant recovers only half the claim, both parties are likely to bear their own costs. Recovering less than half the amount may mean that the claimant might have to bear its own legal costs and all the ICC and arbitrator(s) costs. Failure to beat an offer made and/or a very poor results can also leave a claimant paying the other party's costs.

The results of the study suggest that claimants would be well advised to claim only sums they are genuinely confident of recovering. To make such an assessment involves the same advance preparation that is required under the Civil Procedure Rules.

Effectively, this "front-loads" claim preparation (and costs) and, therefore, commitment to the dispute resolution process.

So, parties to disputes will have to become used to not automatically recovering some or all of their costs on a successful outcome. What constitutes a successful outcome is likely to be considered by the court or arbitral tribunal by a test of proportionality, either to the sums claimed or the sums awarded.