When it comes to settling your finances following a divorce, where possible people want to avoid spending significant amounts on long drawn out Court battles. In some cases however, this is unavoidable, and so it is important to consider the fact that these costs will reduce the amount of money available to the parties at the end of the litigation process.

Who pays the costs?

The general rule is that each party should pay their own costs in respect of their legal fees when litigating a divorce and the court has to consider what to do when the costs incurred are significant when compared to the assets available.

In recent years, there has been an increasing willingness by judges to impose costs orders in matrimonial finance cases, though they remain the exception. A more common problem is that parties often incur significant liabilities during the proceedings, in the form of costs owed to their legal teams. These are hard debts that cannot simply be ignored, but pose a problem in cases where one (or both) parties have incurred significant and possibly disproportionate costs, which mean that their needs will not be met without these debts being taken into account. The question for the court is whether these liabilities should be taken into account when considering how to divide the assets.

The cost of paying costs

In the past arguments have been made that taking into account these debts means that in essence, one party is paying a costs order by the back door, as the party with significant costs liabilities may receive a greater sum to enable them to pay these costs as well as meet their needs, which can seem unfair. However, in needs cases, i.e. where all of the assets will be required to meet the parties’ needs, if these costs are simply ignored, then one party will be left in the difficult situation where they are unable to meet their needs after paying their costs. This could arise for example if they are awarded a lump sum to help them buy a house, but they have to pay their legal costs first and so do not have enough left for a house purchase.

Recent case law

There has been a growing body of cases looking at scenarios where one party has incurred significant costs, often disproportionate to the issues in the case. In WG and HG [2018], Francis J made it clear that people cannot simply litigate on the assumption that they will be reimbursed all of their costs at the end of it and so have no regard to their spending. He stated that ‘no one enters litigation simply expecting a blank cheque’. In this case there were more than enough assets to meet the parties’ needs, and so he was able to make an award that took into account some of the wife’s legal costs (awarding her an extra £400,000 towards those costs which had reached an eye watering £900,000). Given the costs were so high, she did not receive an additional award to cover the total amount. However, as that case was one where there was more than enough to meet needs, while it provides a helpful steer, it does not address the issue of what to do when one party’s costs means they will not be able to meet their needs if no award is made factoring in the costs.

This has been looked at in the recent case of LF and DF [2021], where on appeal the judge made it clear that it is often necessary for the court to take into account costs incurred in needs cases, to avoid the risk of a party’s needs not being met. While costs being disproportionate to the case would be a relevant factor, it is within the discretion of the judge how much that impacts on the award.

Latest clarification from the Court of Appeal

This has been helpfully further clarified in the recent Court of Appeal case of Azarmi-Movafagh v Bassiri-Dezfouli [2021] EWCA Civ 1184, which considered how to deal with cases where significant costs have been incurred in proportion to the assets in question, and how this impacts on needs.

In this case, the Court explained that “the costs have become so disproportionate relative to the assets that it is now hard to achieve an outcome in this uncomplicated needs case which will not leave each of the parties profoundly discontented.”

The Court highlighted that while in previous cases such as WG and HG the Court had declined to make an award covering all of the parties’ costs, those were cases where the parties would be able to rehouse even if they had to cover some of the costs themselves, and that even in those cases where the costs were unjustified, some award was still made. This makes it clear that the situation is different where it is purely a needs case and the parties will need their liabilities covered to make sure they can meet their needs.

The Court of Appeal has helpfully clarified that when taking into account a party’s cost liabilities, the Court does not need to use the same principles as if it were making a cost order and they have a wide discretion. However, in cases where one party is seeking a sum significantly above their needs in order to meet their outstanding costs, the Court should consider if a cost order is appropriate, and should also consider what this extra lump sum would be if it was a costs order.

Ultimately when a lump sum for cost liabilities is larger than a cost order, the Court could consider this when deciding if a lump sum should be made, but this does not prevent a judge from making that order if it is within their discretion.

Whether costs are unreasonable will be a factor to consider, but will not prevent the Court from including provision for paying those liabilities in the award if it is appropriate. Parties should not litigate unreasonably and run up disproportionate costs, but in cases where paying those costs is necessary to ensure the party is able to rehouse, then the judge may still make an order.