COST BITES 82: WHEN THE SIZE OF THE COSTS STARTS TO SWAMP THE SIZE OF THE ESTATE: AN EXHORTATION TO PARTIES INVOLVED IN INHERITANCE CLAIMS

The judgment of Master Brightwell in  Amnir & Ors v Bala & Ors [2023] EWHC 1054 (Ch) contains a warning to many, if not all, litigants, particularly those involved in Inheritance Act claims.  The size of the costs in the action meant that none of the parties could be provided for satisfactorily.  It is not always a safe assumption that the costs of a claim will be met from the estate itself.

 

What follows below may be seen as an exhortation to parties embarking on litigation under the Inheritance (Provision for Family and Dependants) Act 1975 (“the 1975 Act”) to consider in advance the potentially devastating consequences of fighting points of marginal relevance at inordinate cost with the effect of depleting a significant estate so that none of the competing claims on it can be fully met. It may also highlight the difficulties in determining claims before the value of the net estate has been established, and the futility of pursuing through to the end of trial claims of a magnitude which the net estate is on any view not large enough to meet.”

 

THE CASE

The court was considering an Inheritance Act claim. The value of the estate was not determined but lay somewhere between £2,543.172 at best and £1,087.046 at worst.  However the costs of the parties amounted to £703,000.

THE JUDGMENT ON COSTS
    1. The represented parties were agreed at trial that the parties’ litigation costs should be paid out of the estate first, i.e. before the court considers what award to make to each of the parties. The agreement in this regard was caveated by Mr Reed to the extent that he submitted that some reduction should be made to MN’s claimed costs (of £319,000), to take account of the fact that Ms Rauf changed solicitors in the months before the trial, which will have led to some duplication of costs, and because of the attacks on Shama contained within Ms Rauf’s written evidence. I am told that Shama’s costs stand at some £282,000 and those of AB and CD at £102,000.
    1. I have been given little assistance on the legal principles said to justify the payment of legal costs in this way. Mr Briggs referred me to Hirachand v Hirachand [2022] 1 WLR 1162. The question in that case was whether a success fee could be recovered as part of a maintenance-based award. At [58], King LJ said that it could be:
’58 In a financial remedy case, outstanding costs which could not otherwise be recovered as a consequence of the “no order principle” are capable of being a debt, the repayment of which is a “financial need” pursuant to s25(2)(b) MCA 1973. In my judgment a success fee, which cannot be recovered by way of a costs order by virtue of section 58A(6) CLSA 1990, is equally capable of being a debt, the satisfaction of which is in whole or part a “financial need” for which the court may in its discretion make provision in its needs based calculation.’
    1. Mr Briggs’ submission was that a party’s liability for their own legal costs of the proceedings is part of their financial needs and resources for the purposes of the 1975 Act and that it is legitimate to include a sum to pay that liability. What King LJ said was that the satisfaction of debt was a legal liability which may be treated as a financial need. As I have mentioned, the evidence does not reveal whether the parties do have a current debt for the full extent of their legal costs (either to their solicitors or to others from whom they have borrowed for the purpose).
    1. It is a persistent myth that the costs of the parties, or possibly the costs of the claimant(s), are invariably paid out of the estate in a 1975 Act claim. That may have been the practice of the courts in the earlier days of the 1975 Act and its predecessor, but the practice was deprecated in In re Fullard (Deceased) [1982] Fam 42, especially in cases where the claim failed.
    1. That proceedings under the 1975 Act follow the general rules as to costs in civil litigation, and not the rules in matrimonial financial relief proceedings, is clear. As Briggs J, as he then was, said in Lilleyman v Lilleyman (No.2) [2012] 1 WLR 2801 at [26]:
’26 I must in concluding express a real sense of unease at the remarkable disparity between the costs regimes enforced, on the one hand for Inheritance Act cases (whether in the Chancery or Family Divisions) and, on the other hand, in financial relief proceedings arising from divorce. In the latter, my understanding is that the emphasis is all on the making of open offers, and that there is limited scope for costs shifting, so that the court is enabled to make financial provision which properly takes into account the parties’ costs liabilities. In sharp contrast, the modern emphasis in Inheritance Act claims, like other ordinary civil litigation, is to encourage without prejudice negotiation and to provide for very substantial costs shifting in favour of the successful party. Yet at their root, both types of proceedings (at least where the claimant is a surviving spouse under the Inheritance Act) are directed towards the same fundamental goal, albeit that the relevant considerations are different, and that there is the important difference that one of the spouses has died, so that his estate stands in his (or her) shoes.’
    1. The real difficulty in applying this costs regime is that if I make awards without directing that the parties’ costs be paid out of the estate first, either the entire estate will be exhausted in so doing (and especially if the estate turns out to be worth less than I have estimated), or there will be insufficient sums left within the estate to meet the costs of the parties, either to allow an order that costs come from the estate, or that there be an indemnity for such costs if not recovered pursuant to any inter partes costs orders that may be made.
    1. Even though Arman addressed me briefly at the trial, he was not defined as an active party following the case management hearing on 28 July 2022. There was no active defence of the claim by any person on behalf of the estate after that date and I surmise that the bulk of the costs are likely to have been incurred since then. Because the only active parties are claimants, it is likely that there will be no defendant against whom to seek a costs order, at least for the period since there was an active defence of the claims by a beneficiary of the estate. In practice, the trial was a dispute between competing claimants.
    1. In principle, there is no reason why the various claimants could not seek orders for costs against the other claimants following the handing down of this judgment. That may generally be justified where offers of settlement have been made (the issue as it arose in Lilleyman). But this is a claim where as it seems to me there are two other contrary considerations. First, save (possibly) as to MN’s position in relation to AB and CD, it is accepted by each claimant that the Deceased’s will does not make reasonable provision for any other claimant. Even in relation to AB and CD, the thrust of Mr Briggs’ argument is that their maintenance needs are adequately met by Shama’s claim. While he did not make this point explicitly, he did not suggest that the will made adequate provision for them absent an award to Shama, at least in the circumstances as at the date of the hearing. Whether an award is made to Shama or to them directly, it will be in substance at least in part for their benefit.
    1. The second consideration is that, despite the point mentioned in the paragraph above, each claimant (no doubt with self-interest in mind) agrees that the other claimants’ costs can be paid out of the estate and that their claims will between them exhaust the net estate. I agree with the last of these propositions.
    1. For these reasons I am satisfied that it is appropriate to order that the costs of the claimants be paid out of the estate first, after payment of the Deceased’s testamentary expenses and the costs of administration. As matters have turned out, it is unfortunate that no costs management order was made. I do not consider that the costs should be paid in full without further consideration, but should be assessed on the indemnity basis unless agreed by Shama, in the case of MN, and by MN in the case of Shama and her children (in the event that MN’s maximum entitlement is otherwise not able to be met). The costs will be payable in the course of the administration of the estate, so the question of the timing of payments will, subject to the assessment process, be in the hands of Cripps.
    1. I am fortified in the view that it is permissible to make an order in this form, notwithstanding the general rule on costs in 1975 Act proceedings, by the comments of Black J in P v G on this subject. In that case, the defendants had by the date of the trial already paid their litigation costs out the estate and prepared estate accounts on that footing. The judge said this, at [247], after setting out the value of the net estate in light of those costs:
‘…it is, in my view, inappropriate that they should have taken their costs of this litigation from the estate without the consent of [the claimant] or reference to her. It does not necessarily follow in litigation of this type that the defendants’ costs will be paid from the estate, particularly not where there is a beneficiary in P3’s position [i.e. the child of the claimant] who has not been a defendant in the proceedings and has not had a say in (and may not agree with) the way in which the defence to the claim has been run.’
    1. Black J’s comments in this regard were, of course, premised on the usual costs-shifting approach to costs in 1975 Act claims. But she indicated that the position may be different where the claimant consents; the court can always depart from the usual approach to costs where the parties agree. It is relevant that I have formed the clear view that the entire net estate will be consumed in meeting the competing claims upon it. The consent of all those who will benefit from the estate has therefore been given to the payment of costs from the estate before the parties’ claims are satisfied. It would not be fair to leave the claimants only to the prospect of recovery of costs inter partes when such orders may well prove to be inappropriate. On that footing, I do not need to determine whether there is a present financial need for those costs to be paid; as I have indicated the evidence before the court would not enable such a determination to be made.
    1. The combined litigation costs of the parties are said to be just below £700,000, but will inevitably have increased once this judgment is handed down and matters consequential on it are dealt with. Based on the estimate I have reached above, and if (say) 80% of the costs or £560,000 are agreed or allowed on assessment, this will leave the remaining estate at around £1,050,000 to £1,150,000. These figures are a little higher than, but broadly consistent with those I ventilated with counsel during their closing submissions, without an apparent suggestion that they are unrealistic.
    1. The assumption of the parties was that the amount paid out of the estate in costs would be treated as an award in favour of the party in question, read back to the date of death under section 19(1) of the 1975 Act, and thus treated as a testamentary disposition to that party for inheritance tax purposes. Given my decision below and the ultimate size of the estate, it may not be a material point.
  1. I am, however, not prepared as it was suggested that I might order Shama to pay all the parties’ costs and then to make an award in her favour in order to enable her to do so. The court takes into account the parties’ financial needs, including their debts, in making an award under the 1975. I consider that the proposition that the court can, let alone should, artificially create new debts owing by a surviving spouse in order to justify a larger award to her, with the sole purpose of reducing the inheritance tax payable on an estate, seeks to stretch the discretion of the court too far.

 

THE IMPACT ON THE OVERALL DECISION

In my view, none of the claimant parties fully recognised the limitations placed upon their claims and none of the parties adopted a realistic position. Once costs have been paid, the estate will not be large enough to meet the claimed financial needs of either Shama and her children, or of MN, let alone both of them.