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The bottom line – divorce, money and legal costs

If you are involved in a civil court case – like an action for breach of contract – you will probably have to pay some or all of the other party’s legal costs if you lose. In family law, the situation is different. Apart from some specific types of case, each party generally pays their own costs regardless of the outcome. There are many reasons for this, including the fact that it is difficult to determine objectively who has “won” or “lost” in circumstances where judges are asked to find an outcome that is “fair” (in financial cases) or lay down living arrangements that are in a child’s best interests.

If a couple going through a divorce cannot agree a financial settlement, they can ask a judge to decide instead via a somewhat lengthy process of evidence gathering and inquiry. They will be encouraged to settle as early as possible to avoid the stress and expense of arguing their case at a contested final hearing. However, a minority of cases do not settle and a judge will have to make a decision after hearing each party’s arguments in favour of their preferred outcome, listening to relevant witnesses and taking evidence from experts such as business valuers or pensions experts. Unless someone has behaved particularly badly in the court case (e.g. withholding information, failing to attend court without a valid explanation), each party will pay their own legal costs, no matter what the outcome.

It hasn’t always been this way. Until 2006, it was possible to make an offer to settle a financial dispute associated with a divorce and mark it “without prejudice save as to costs”, (sometimes known as Calderbank offers, named after the case in which they were recognised). Without prejudice means that the judge deciding the case is not allowed to look at the offer because knowing what the “offeror” would be prepared to accept might influence their final decision. Without prejudice offers are still a vital part of the process today. It’s a sort of “off the record” offer.

When someone makes an offer “off the record”, they have greater freedom to be pragmatic and reveal something close to their real bottom line for the sake of bringing the case to an early conclusion and save legal costs in the process. However, the difference was that before 2006 if an offer was “without prejudice save as to costs”, the judge could look at it after the case had been decided in order to assess whether either party should make a contribution towards the other’s costs. Broadly speaking, if someone rejected an offer and did not do any better at a final hearing, they would have to pay the other party’s legal costs from a defined date after the offer was made.

Sound complicated? In a way, it was. In a family case, you might have made a Calderbank offer to accept 50% of the combined pension pot and 40% of the value of the house. If this offer was rejected and you went on to get 40% of the combined pensions and 50% of the house, did you do better or worse? Theoretically, if someone rejected a Calderbank offer to receive £100,000 and they received £99,999 from the judge, they could be ordered to pay months’, even years’ worth of their ex’s legal costs. If they received £100,001 (£2 more) then no order for costs would be made. These are extreme examples but they make the point that the Calderbank regime did not always produce fair outcomes.

Another problem was that in cases where money was tight, as is the case for so many couples who are asked to make the resources of one household stretch to fund two, a costs order made on the back of a Calderbank offer could – in theory – send the paying party from a position of financial fragility into complete ruin.

However, there is another side to all this. When the rules changed in 2006, some would argue, “off the record” or without prejudice offers stopped putting pressure on people to settle. They could reject an offer and, whilst they might be disappointed if they rejected an offer and failed to beat it in court, they didn’t face any costs consequences other than paying their own legal fees.

The Family Procedure Rules Committee – a body made up of various levels of judge, legal professionals and others – has asked whether it is now time to think again about offers made without prejudice save as to costs. The Committee says it does not want to return to a “winner takes all” approach whereby if someone fails to beat an offer they rejected, they have to pay all their ex’s costs from a certain date. However, they are asking whether Calderbank offers should be admissible once again to help judges decide whether it is appropriate for one side to pay some of the other’s costs if they fail to beat a reasonable offer made earlier in the process. In most cases, the outcome will still be that each party pays their own legal fees. It is appreciated that there are diverse views within the legal profession, hence the consultation and its request for ideas about how Calderbanks could be brought back without causing injustice.

Provided there is no possibility of the “cliff edge” described above (£100,001 no order for costs; £99,999 large costs order), this seems like something to be encouraged. While it is occasionally unavoidable, taking a case all the way to a final hearing is immensely expensive and stressful and in certain cases, the prospect of a costs order would really focus clients’ minds and encourage reasonable settlement offers to be taken very seriously. There have been a number of recent family law consultations, on gender recognition, surrogacy and no-fault divorce. Reform is in the air so it seems likely that there will be a change in this area, subject to the consultation response, especially as it would not require an Act of Parliament to make it happen.

In the meantime, the vast majority of clients reach a financial agreement with minimal input from the court system. However, for those that cannot (or will not) a partial return of Calderbank offers would surely be a welcome development.

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