Kerry Underwood

COSTS MANAGEMENT ORDERS AND COSTS BUDGETING INCLUDING THE NEW CPR

with 9 comments


Costs Management Orders have been introduced following a pilot that ran in the Technology and Construction Courts and the Mercantile Courts from 1 October 2011 to 31 March 2013. See here for Costs Management Pilot Final Report of 1 May 2013.

Costs Management Orders were to apply to all multi-track cases commenced on or after 1 April 2013 in the County Court, Chancery Division and Queen’s Bench Division, except the Admiralty and Commercial Courts, unless the proceedings are the subject of fixed costs or scale costs or the court orders otherwise, and to any other proceedings where the court so orders (CPR3.12(1)).

However even before the new rules came in they were amended so that they do not now apply to cases in the Chancery Division or Technology and Construction Court or the Mercantile Courts where the amount in dispute is greater than £2 million, excluding interest and costs. This decision has been described as “unnecessary and inappropriate” by a sub-group of the Civil Procedure Rule Committee and in less polite terms by many others. The Senior judiciary are reported to be very unhappy with the decision and have indicated that on appeal they may consider whether the opted-out courts have erred in the exercise of their discretion in failing to order costs budgets in any given case.

It is unquestionably the most divisive and politically-charged of the Jackson Reforms, with Lord Dyson, MR, stating that he is anxious for the exemptions to be reconsidered and Mr Justice Ramsey, who is now in charge of the Jackson Reforms, publicly expressing his personal view that the exemptions should be removed. A Civil Procedure Rules sub-committee, chaired by Mr Justice Coulson, said that its preliminary view was that the exemptions are “unnecessary and inappropriate.” – See Consultation Paper – Costs Budgeting and Costs Management.

The City of London Law Society (Litigation Committee response to the Civil Procedure Rule Committee’s consultation on costs budgeting and costs management) defending the exemptions, referred to “significant practical differences “between the Commercial Court and all other courts and claimed that costs management could threaten the competitiveness of England and Wales as a jurisdiction for hearing international disputes, arguably one of the most economically illiterate claims of all time.

The Society’s response stated:-

“It is often difficult to predict at the outset what shape complex commercial litigation will take.”

It also said that costs budgets for high-value cases will take up considerable time at case management conferences, and may pose difficult tactical questions for the parties and their lawyers, who may not wish to reveal details to the other side at an early stage in the proceedings. It also questioned whether judges are better able than commercial clients to determine appropriate rates for lawyers.

Quite why the City of London Law Society thinks that none of these matters applies to all other litigation, which is subject to costs management, is unclear.

All references to CPR are to the CPR as amended by The Civil Procedure (Amendment) Rules 2013, and by The Civil Procedure (Amendment No 2) Rules 2013, which excluded all of the big cases.

This followed the 18 February 2013 statement of the President of the Queen’s Bench Division and the Chancellor the High Court:

“Costs Management is being introduced as an important part of the reforms arising from Lord Justice Jackson’s Review of Civil Litigation Costs.  He identified a general view that costs management would not be appropriate for the high value cases which generally pass through the Commercial Court.  He therefore considered that whether costs management should be adopted in Commercial Court litigation should be left to the discretion of judges in individual cases but said he encouraged judges actively to adopt costs management in any lower value cases which are brought in the Commercial Court.  This led to the Admiralty and Commercial Courts being exempted from the costs management rules by the version of rule 3.12(1) which was included in The Civil Procedure (Amendment) Rules 2013 to come into effect in April 2013.

On further reflection, it has been recognised that it is undesirable for an exception from automatic costs management to apply only to the Admiralty and Commercial Courts, when in many commercial cases there is an element of concurrent jurisdiction between that court, the Chancery Division, the Technology and Construction Court and the London Mercantile Court, all of which function in the Rolls Building.  Equally, outside London, he Chancery Division, Technology and Construction Court and Mercantile Courts have a similar concurrent jurisdiction.

Given these concurrent jurisdictions, the Civil Procedure Rule Committee at its meeting on 8 February 2013 approved the following amended rule 3.12(1) to allow for a similar exemption from automatic costs management in all of those jurisdictions;

(1)    This Section and Practice Direction 3E apply to all multi-track cases commenced on or after 1 April 2013, except –

(a)    cases in the Admiralty and Commercial Courts;

(b)   such cases in the Chancer Division as the Chancellor of the High Court man direct; and

(c)    such cases in the Technology and Construction Court and the Mercantile Courts as the President of the Queen’s Bench Division may direct,

unless the proceedings are the subject of fixed costs or scale costs or the court otherwise orders.  This Section and the Practice Direction 3E will apply to any other proceedings (including applications) where the court so orders.

This rule will be included in a further Statutory Instrument which it is intended will be made so as to come into force on 1 April 2013.

At the same time a direction will be made under the amended CPR 3.12(1) in these terms:

Pursuant to CPR rule 3.12(1)(b) and (c), the Chancellor of the High Court directs that in the Chancery Division and the President of the Queen’s Bench Division directs that in the Technology and Construction Court and Mercantile Courts, Section II of CPR 3 and Practice Direction 3E shall not apply to cases where at the date of the first case management conference the sums in dispute in the proceedings exceed £2,000,000, excluding interest and costs, except where the court so orders.

The Master of the Rolls has been consulted on and agrees with this direction.  Parity of approach in relation to Costs Management between these Courts is considered to be important to avoid any inappropriate forum shopping as parties get used to the new rules.  The revised rule is an interim measure, as it is thought that the case for any exception should be re-visited, given that under the rules there is a discretion which might be exercised in particular cases not to make a costs management order, which could deal with any remaining concerns as to the appropriateness of costs management in high value cases.  Also, after that review of the position, it will be desirable for the principle finally decided on to be incorporated in rule 3.12(1) itself rather than in a direction.

Subject to the limited exceptions which will be dealt with in the direction, it is envisaged that costs management orders would be made in all cases except where there is good reason not to do so.  Even when the exceptions in the rule and the direction apply, the use of costs management should always be considered.”

CPR3 is divided in to sections, the first containing current rules on case management (CPR3.1 to 3.11) the second containing new rules on costs management (CPR3.12 to 3.18) and the third containing rules on costs capping (CPR3.19 to 3.21).

This is achieved by Rule 5(a) to (c) and (h) of The Civil Procedure (Amendment) Rules 2013.

I set out at the end of this piece the new CPR3.12 to 3.18 dealing with Costs Management, together with supporting Costs Practice Directions at CPD 3E and CPD 6.

The proposed scheme, which has been piloted successfully, is based on Lord Justice Jackson’s proposals, which themselves were based on the recommendations in the Woolf Report, a fact recognized by Lord Justice Jackson who said “The present project is essentially a matter of building upon Lord Woolf’s work and proposing reforms where, (after ten years’ experience) these appear to be appropriate.

Mrs Justice Gloster, speaking at the Bar Conference 2012, said that the scheme may lead to “ill-informed” decisions on costs and that judges must be realistic about legal fees and what it costs to bring a case and that there was a tendency for judges who had made a good living as barristers to become “kind of mean” when it comes to the assessment of costs.

Mrs Justice Gloster also said that she had “won the battle” to ensure that the Commercial Court was exempt from costs management. Now the Mercantile Court, Technology and Construction Court and Chancery Divisions have largely exempted themselves from Costs Management.

Many of the rest of us feel that these are the courts where costs management is most necessary; it is those courts more than any other which bring the legal system in to disrepute as far as high levels of costs are concerned.

Where no Costs Management Order has been made, whether that be a fast-track matter or in the Commercial Court, an amended version of CPR 6.5(a) states that where the costs claimed are more than 20% over budget, the court may limit the costs to “such sum as is reasonable for the paying party to pay in light of that reliance, notwithstanding that such sum is less than…………the costs reasonably and proportionately incurred”.

CPR3.12(2) states that the “purpose of costs management is that the court should manage both the steps to be taken and the costs to be incurred by the parties to any proceedings so as to further the overriding objective”.

Under the pilot scheme solicitors were expected to liaise monthly to check that their respective budgets are not being exceeded (paragraph 5.5).

Unless the court orders otherwise, all parties except litigants in person must file and exchange costs budgets in precedent H within 28 days of the date specified in the court notice, or no later than seven days before the case management conference (CPR 3.13).

Budgets must be on new Precedent H, a self-calculating spreadsheet and verified by a Statement of Truth. From 1 October 2013 there will be a yet further new Precedent H. This is achieved by the 66th Update – Practice Direction Amendments.

In Civil Recovery Proceedings Precedent H is no longer to be used. It is replaced by the Precedent for Estimate of Costs in Relation to Civil Recovery (Precedent Q). See Practice Direction – Civil Recovery Proceedings

Unless the court orders otherwise, any party which fails to file a budget despite being required to do so will be treated as having filed a budget comprising only the applicable court fees.  This draconian approach has been approved by the Court of Appeal in Mitchell v News Group Newspapers Limited [2013] EWCA Civ 1526, 27 November 2013 – see below. See my blog Grim Day for Justice: Mitchell considered.

The court may at any time make a Costs Management Order to control the parties’ budgets in respect of recoverable costs.  The order will record the extent to which the budgets are agreed, and, where not agreed, record the court’s approval after making appropriate revisions.  It will be kept under review throughout the case. (CPR3.16(1)).

Any hearing which is convened solely for the purpose of costs management, for example, to approve a revised budget, is referred to as a costs management conference (CPR3.16(1).

Where practicable, costs management conferences should be conducted by telephone or in writing. (CPR3.16(2)).

The court may order an amended budget to be filed and serviced (Practice Direction 3E, paragraph 2.7) and set a review timetable.  Amended budgets must be submitted where there are significant developments in the litigation (Practice Direction 3E, paragraph 2.6).  An approved budget can only be varied with court approval.

The presumption is in favour of the court making an order, but even where this does not happen the court, in making any case management decision, will have regard to any available budgets of the parties and will take in to account the costs involved in each procedural step. (CPR3.17).

CPR 3.13 states:

“Unless the court otherwise orders, all parties except litigants in person must file and exchange budgets as required by the rules or as the court otherwise directs. Each party must do so by the date specified in the notice served under rule 26.3(1) or, if no such date is specified, seven days before the first case management conference.”

The new Directions Questionnaire, Section H, states:

“I confirm Precedent H is attached” and “If your claim is likely to be allocated to the Multi-Track Precedent H must be filed in accordance with CPR 3.13.”

The notice being sent out with the Questionnaires states:

“Each questionnaire has different and specific questions the judge requires answering in relation to the type of claim. Therefore the correct form must be used.”

There has been some debate as to whether the Directions Questionnaire is therefore wrong as Precedent H does not need to be attached to it, or rather if no date is specified then it does not need to be filed or exchanged until seven days before the first case management conference.

Another interpretation is that the court is making a specific order in the Questionnaire requiring parties to file and exchange at the same time as completing the Questionnaire.

PD 3E, paragraph 2.3 states:

“If the budgets or parts of the budgets are agreed between all parties, the court will record the extent of such agreement. In so far as the budgets are not agreed, the court will review them and, after making any appropriate revisions, record its approval of those budgets. The court’s approval will relate only to the total figures for each phase of the proceedings, although in the course of its review the court may have regard to the constituent elements of each total figure. When reviewing budgets, the court will not undertake a detailed assessment in advance, but rather will consider whether the budgeted costs fall within the range of reasonable and proportionate costs.”

It is unclear as to how and when the court establishes the agreement, or otherwise, of all parties. Is this before or after the first Costs Management Conference?

Simon Gibbs, in his 5 September 2013 blog on the subject, refers to two cases where he was instructed to challenge the other side’s budgets. In each case the court approved the directions without dealing with the budgets, and appeared to have no intention of making a Costs Management Order. I have had exactly the same experience. NO court has yet made a Costs Management Order in a case that my firm is dealing with.

The courts are not obliged to make Costs Management Orders but it was assumed that they would.

The cases that Simon Gibbs refers to , and the two that we have had, involve very substantial costs. I have heard the same from those attending my lectures.

As Simon Gibbs says:

“If courts are not bothering to make Costs Management Orders in cases of this size (and £2 million cases are exempt in the Chancery Division, Technology and Construction Court, and Mercantile Court) where can we expect them to be made?”

In any case where a costs management order has been made, when assessing costs on the standard basis, the court will

(a)    have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings; and

(b)   not depart from such approved or agreed budget unless satisfied that there is a good reason to do so. (CPR3.18).

Costs Judge Master Haworth has stated, correctly in my view, that if costs budgeting is done properly:

“detailed assessment will become redundant and I will be able to spend my time fishing.”

By Rule 22(14) The Civil Procedure (Amendment) Rules 2013, dealing with transitional provisions, any proceedings in the Mercantile Courts and the Construction Courts commenced before 1 April 2013 that are within the scope of the Costs Management in Mercantile Courts and Construction Courts Pilot Scheme provided for by Practice Direction 51G supporting CPR51 will proceed and be completed in accordance with that scheme.

New Form H, effective 1 October 2013, is an Excel Spreadsheet nine pages long and Lord Justice Jackson estimates that it will take two hours to complete. However if the estimated costs do not exceed £25,000.00 then only the first page needs completing and the matter will then be dealt with by way of provisional assessment at the end of the case. In all other cases the parties are required to break down the costs in each of the following stages of litigation:

  • pre-action costs;
  • issue of proceedings and pleadings;
  • Case Management Conference;
  • disclosure;
  • witness statements;
  • experts’ reports;
  • pre-trial review;
  • trial preparation;
  • trial;
  • settlement discussions and ADR; and
  • a provision for contingencies.

The short-form budget for claims of £25,000 or less dovetailed with the proposals for provisional assessment of all bills of £25,000 or less.  Unexpectedly the provisional assessment limit has now been raised to £75,000, that is all bills of £75,000 or less submitted since 1 April 2013 are subject to paper only assessment in the first instance.  It remains to be seen whether the short-form budget limit will also be raised from £25,000 to £75,000 in due course.

It is most important to bear in mind that the budget relates to recoverable costs; it does not in any shape or form limit the amount chargeable to ones own client, that sum being governed by the solicitor and own client retainer, which need bear no relation to recoverable costs.

Typically the arrangement with the client will provide for a greater sum to be charged to the client than is recovered, that being the difference between the solicitor and own client hourly rate and the between the parties hourly rate. This difference may or may not be capped by reference to damages, but unless the solicitor is stupid enough to have a lower charge to the client than appears in the budget, the indemnity principle has no application whatsoever to the budget.

True it is that an overspend on one part of the budget cannot be absorbed by an under spend on another part of the budget, but that is nothing at all to do with the indemnity principle, but rather because of CPR 3.18:

“In any case where a costs management order has been made, when assessing costs on the standard basis, the court will –

(a)    have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings; and

(b)   not depart from such approved or agreed budget unless satisfied that there is good reason to do so.”

Thus the budget creates a cap on recoverability for each phase of the proceedings, not just a global cap, but none of this prevents the solicitor charging the client whatever has been agreed.

Obviously if the budget provides for 20 hours work, but only 15 hours is done, then the solicitor can only recover 15 hours work from the other side and only 15 hours from the client. That is nothing to do with the indemnity principle; rather it is the law against fraud.

Any problems with the indemnity principle are solved by the simple, standard, practice of having a solicitor and own client indemnity rate well above the between-the-parties recoverable rate.

Many commentators have got this wrong in the sense that they correctly state that you cannot operate a “swings and roundabouts” policy, but incorrectly ascribe this to the indemnity principle.

I am very happy that the esteemed Simon Gibbs – simon.gibbs@gwslaw.co.uk – shares this view.

As we will see below a losing party which is ordered to pay costs on an indemnity basis, for example because a claimant has matched or beaten at trial its Part 36 offer, is in for a nasty over-budget shock, especially if the claimant is represented in a commercial case under a Damages-Based Agreement.

The phase by phase approach also fails to recognize that law is an art and not a science. Lord Woolf, with his fixing of costs by reference to the stage reached, realised this.

The budget method is by reference to the type of work, not the stage reached. There is enormous scope for allocating vague, continuing activities such as consideration of quantum, to any phase which has an apparent underspend.

The recoverable costs for preparing the budget are the higher of £1,000 or 1% of the approved budget and for dealing with all budgetary matters through the life of the case, but not assessment, 2% of the approved budget.

The estimate must deal with both costs and disbursements, both incurred and anticipated. As well as considering whether the amount of time spent by lawyers is necessary the courts are expected to subject to specific scrutiny the need for experts and their fees and the volume of documents.  Professor Dominic Regan advises:

“If you are looking to involve expensive experts you ought to consider seeking tenders. Let them pitch for and give quotations.”

In Smales v Lea and Others, the Court of Appeal again drew attention to CPR 52 Practice Direction emphasising the need to include only those documents specifically required with all extraneous material to be excluded. The Court of Appeal said that in future it would consider imposing sanctions on solicitors who failed to exclude irrelevant documents. Very few documents now need to be supplied on provisional assessment, just the bill, points of dispute, replies, costs orders and fee notes.

The judge will consider the budgets and may make a Cost Management Order approving the budget, or a revised version of it. If it turns out to be no longer accurate the parties must produce a revised budget showing the departures from budget and the reasons for such departures.

Detailed assessment still occurs at the end of such a case provided that the bill for assessment exceeds £75,000. If it does not exceed that sum, then it will be subject to paper assessment in the first instance. The Costs Management Order cannot approve costs incurred up to that point, but can make comments on them. In regard to costs incurred in accordance with an approval budget the court, on detailed assessment, will not depart from the budgeted figure unless for good reason.

It is not clear how this ties in with proportionality. The Costs management process implies that once the court has decided that certain steps in litigation re reasonable, the full cost of undertaking that work will be recoverable.  This is because the judge on assessment will not normally depart from the approved budget.

The new proportionality test means that a judge on detailed assessment may determine that, despite a certain step within the litigation being deemed reasonable, the full cost of that work may not be recovered once the ‘global basis’ test is applied.

If the total figures are not proportionate, then the judge will only approve budget figures for each party which are proportionate.  Thereafter if the parties choose to press on and incur costs in excess of the budget, they will be litigating in part at their own expense.  It will be important for judges to apply the test consistently and for parties and their lawyers to be aware of the impact on recoverable costs.

However, there will be those who wonder what the point is of expensive and time consuming costs management and detailed assessment hearings to determine what costs are reasonable, if at the end, the judge can then knock the figure down further, on an apparently arbitrary basis.

In the pilot such orders have been made in most cases. The pilot was introduced by Practice Direction 51G and applied in the Mercantile and Technology and Construction Courts. In Birmingham Mercantile Court a typical Costs Management hearing has lasted 45 minutes.

The Costs Management Order will be based on the party’s budget, but the court can make appropriate revisions at the Case Management Conference and as the case progresses.

  

THE FIRST CASES

In Willis v (1) MRJ Rondell and Associates Ltd and (2) Grovecourt Ltd [2013] EWHC 2923 (TCC)

the Queen’s Bench Division of the High Court, Technology and Construction Court (Mr Justice Coulson) held the costs budgets of both parties, which were very similar in total, to be disproportionate and unreasonable and expressly declined to approve either budget.

This was a claim for £1.1 million and the claimant’s costs budget was £821,000 and the defendant’s costs budget was £616,000 but as the defendant was not liable for VAT, causing its budget not to have VAT in, the true figures were much closer to one another.

This was a case to which Practice Direction 51G (Costs Management in the TCC applied) and the judge said:

“I apprehend that the outcome will not be uncommon under either PD51G, or the new costs budget rules which came into force in April 2013”. (Paragraph 1).

The judge noted that the total costs of both parties exceeded the value of the claim and held that on that basis alone the costs in both budgets were both disproportionate and unreasonable.

The judge also said that “……to allow a proper analysis, in order for the court to make a costs management order, the costs which have been incurred (and which therefore cannot be the subject of an order) must be separated out from those which are estimated (which can be the subject of an order)”. (Paragraph 19).

The judge said that the experts’ fees should be half those estimated; “unhappily, my recent experience is that the amount of experts’ fees in cases like this is often out of all proportion to the assistance provided”. (Paragraph 20).

The judge also had this to say about contingencies:

“…….whilst budgets of this sort can include contingent sums, it needs to be made very clear what those contingency sums are for and how they have been calculated.  For example, it may be appropriate to put in, as a contingency sum, the estimated additional costs of written submissions, if the original budget assumed that oral submissions would be made at the end of the trial.  Another example would be a contingency sum for any application for security for costs”. (Paragraph 21).

“It is not appropriate ………….to put in a single lump sum by way of a contingency figure and leave it at that.  ……….such items ought to be included in the relevant line items as a cost incurred.  For example, it is said that there is an additional cost because of the need to amend the pleadings.  That ought to be shown as an additional cost under the relevant line item within the costs budget”.  (Paragraph 22).

Generally the judge said:

“Of course in an ideal world, the court would be able to provide alternative figures for those estimated items in a costs budget which the court considers to be too high.  The alternative figures could then be included in an approved costs budget and a costs management order could be made.  But as I have already noted, I have nothing on which I could rely in order to come up with reasonably accurate alternative figures.  I do not consider that it is appropriate for the court to impose its own figures without notice and without any supporting material”.

In his conclusion, the judge said (paragraph 25):

“In all those circumstances, I expressly decline to approve either party’s costs budget.  For the reasons I have given, I consider them to be disproportionate and unreasonable.  I therefore have no option but to decline to make a costs management order”.

It appeared to be becoming clear that the courts intended to take a very hard line in relation to Costs Management Orders, with the first decision being given by the Senior Costs Judge Peter Hurst in

Henry v News Group International Ltd [2012] EWHC 90218

This was a defamation action and as such was caught by an early budgeting pilot scheme applying only to defamation cases issued in the Royal Courts of Justice or Manchester District Registry on or after 1 October 2009. Here the Claimant submitted a bill which was 18 times higher than budgeted for in relation to witness statements and eight times higher for disclosure. Overall, the extra costs were nearly £300,000.

The Senior Courts Costs Office “reluctantly” held that there was “no good reason to depart” from the court approved budget where the claimant’s costs had exceeded that budget, even though the court recognized that the claimant could probably “make out a very good case on detailed assessment for the costs being claimed”. It found that the claimant had “largely ignored” the mandatory provisions of the Defamation Costs Management Scheme set out in CPR PD 51D, although recognizing that the issue was important and needed a definitive and binding decision, the SCCO indicated that it would be prepared to grant permission to appeal under CPR 52.3(6)(b).

Professor Dominic Regan, commenting on the decision, said

“What, one might ask, is the point of imposing a budget only to ignore it? The lesson is blindingly clear. If the approved budget, for whatever reason, seems to be no longer accurate then get back to court and seek approval for revised figures.”

Speaking at the LexisNexis Costs and Litigation Forum on 31 October 2012 SCCO Master Haworth said

“I can’t imagine that the Court of Appeal is going to row back from Costs Management and Costs budgeting.”

However that is exactly what they have done, unanimously allowing the appeal and remitting the matter to the SCCO.

In Henry v News Group Newspapers Ltd [2013] EWCA Civ 19

the Court of Appeal found that that was good reason to depart from the budget, which is precisely the same test in the new CPR3.18(b) inserted by The Civil Procedure (Amendment) Rules 2013.

In relation to the future, the Court of Appeal had this to say in two paragraphs which they headed “The future”:

“ 27.       The practice direction with which this appeal is concerned applies only to proceedings for defamation. It was the first pilot scheme introduced by the Civil Procedure Rule Committee (“the Rule Committee”) and was intended both to control the costs of defamation proceedings and to provide experience of how costs management would work in practice. A similar costs management pilot scheme which reflected developments in the understanding of how costs management could most usefully be applied was subsequently introduced in the Mercantile Courts and the Technology and Construction Courts (see Practice Direction 51G).

28.          In the light of the experience gained from those pilots the Rule Committee decided to adopt Sir Rupert Jackson’s recommendation that the management of costs by the court should in future form an integral part of the ordinary procedure governing claims allocated to the multi-track. Those rules, which will become effective from 1st April 2013, differ in some important respects from the practice direction with which this appeal is concerned. In particular, they impose greater responsibility on the court for the management of the costs of proceedings and greater responsibility on the parties for keeping budgets under review as the proceedings progress. Read as a whole they lay greater emphasis on the importance of the approved or agreed budget as providing a prima facie limit on the amount of recoverable costs. In those circumstances, although the court will still have the power to depart from the approved or agreed budget if it is satisfied that there is good reason to do so, and may for that purpose take into consideration all the circumstances of the case, I should expect it to place particular emphasis on the function of the budget as imposing a limit on recoverable costs. The primary function of the budget is to ensure that the costs incurred are not only reasonable but proportionate to what is at stake in the proceedings. If, as is the intention of the rule, budgets are approved by the court and revised at regular intervals, the receiving party is unlikely to persuade the court that costs incurred in excess of the budget are reasonable and proportionate to what is at stake.”

Nevertheless it remains a fact that the Court of Appeal allowed the claimant to proceed with the full costs claim in the absence of any revised budget being submitted to the court and in the absence of any notification to the other side’s solicitors of the amount of costs being incurred.

The judge at first instance said (paragraph 67):

“……the fact is that the budget has been exceeded by a very significant amount, and there has been no attempt by the Claimant to pass this information on.  The fact that both sides exceeded their budgets does not assist the Claimant.  The Defendant kept the Claimant informed, but the Claimant gave no indication to the Defendant”.

In paragraph 28 of the Court of Appeal decision dealing with the future the court made it clear that under the post-1April 2013 regime the court has the power to depart from the approved or agreed budget if it is satisfied that there is good reason to do so, precisely the finding here.

It is clear that faced with these facts under the new regime the Court of Appeal would have made the same decision.

However in another recent case –

Ryder Plc v Dominic James Beever [2012] EWCA Civ 1737

the Court of Appeal upheld a Circuit Judge’s overturning of a Deputy District Judge’s Order striking out the claimant’s claim for failing to comply with an unless order in relation to a costs estimate.

At paragraph 53 of that Judgment the Court of Appeal said that here…….

“the delay in providing the costs schedule had not caused any real prejudice of which the defendant complained.  Nor had it delayed the progress of the action.  That is not to say that a costs schedule is not important.  It has two main purposes.  One is to enable the parties to make fully-informed decisions on Part 36 offers.  However, the powers of the court on making a costs order are wide and allowance can be made at that stage for any prejudice that a party has suffered as the result of the delayed service of a costs schedule.  The costs schedule also enables a defendant’s insurer to estimate an appropriate reserve and thereby manage its financial affairs.  However, I do not think that, in the absence of evidence, it should be assumed that the delay in service of a costs schedule could have a seriously prejudicial effect on a defendant”.

In personal injury cases – and Ryder was such a case – this will always be a one-way argument in the sense that Qualified One Way Costs Shifting means that unless and until a Defendant’s Part 36 Offer is not beaten a Claimant will generally not have to pay costs, but a Defendant will still have to provide a costs budget at a Costs Management Conference, as there are in fact many circumstances in which a claimant may be liable for the defendant’s costs, even in a Qualified One Way Costs Shifting case. (See http://kerryunderwood.wordpress.com/2013/05/17/qualified-one-way-costs-shifting-qocs/).

Consequently insurance companies, not always the most punctual of people in relation to court timetables, will mercilessly attack claimants’ costs budgets and any failure to supply them on time. They will have nothing to lose.

The Court of Appeal, in the two decisions, and in many ways Ryder is more significant that Henry, are making it clear that there will be no gauleiter approach by Judges to the Jackson Reforms.

Henry has been seen as a blow to the Jackson Reforms, and in some sense it is, but it is also a brave and heartwarming decision; courts are there to do justice, not to obey Government diktats.

The other side of that coin is shown in the decision of HH Judge Simon Brown in

Safetynet Security Ltd v Coppage [2012] EWHC B11 (Mercantile)

After giving judgment for the claimant the Judge decided that as the spend was within the court-approved budget a detailed assessment would be an expensive and futile exercise.

Consequently a final costs order was made within minutes of the substantive judgment being delivered.

 

Varying a Budget

In Murray and Stokes v Neil Dowlman Architecture Limited [2013] EWHC 872 (TCC)

the Technology and Construction Court considered “a potentially important question about the circumstances in which a costs budget, which has been approved by the court as part of a costs management order, can subsequently be revised or rectified. It comes at a critical time, as the CPR is radically amended to introduce costs budgeting and costs management for most types of civil litigation.” (Paragraph 1 of the judgment).

Although this case was conducted under the pilot costs management scheme the new provisions are very similar, a point made here by the court.

Here the claimant had failed to make it clear that their approved costs budget excluded a recoverable success fee and ATE premium, although the defendants were well aware of their existence as Form N251 had been served.

The defendant wrote to the claimant stating that it would object to recovery of these additional liabilities and the claimant made an old CPR 3.9 application for relief from sanctions.

The court said that that was not the appropriate application and treated it as an application for revision or certification or clarification of the approved budget.

Here, the court allowed the application partly on the ground that the defendant was well aware of the additional liabilities and suffered no prejudice, and partly because of the tick box nature of the old Form HB budget and partly because the new Form H specifically provides that the estimate excludes success fees and ATE insurance premiums.

This case is significant for the court’s warning in relation to post 1 April 2013 cases:

“…in an ordinary case, it will be extremely difficult to persuade a court that inadequacies or mistakes in the preparation of a costs budget, which is then approved by the court, should be subsequently revised or rectified…The courts will expect parties to undertake the costs budgeting exercise properly first time around, and will be slow to revise approved budgets merely because, after the event, it is said that particular items had been omitted or under-valued…any other approach could make a nonsense of the whole costs management regime.” (Paragraph 17).

In Elvanite Full Circle Ltd v AMEC Earth and Environmental (UK) Ltd [2013] EWHC 1643

the High Court refused to allow retrospective budget variation, after the trial had taken place, and placed tight constraints on what would constitute good reason to depart from a budget. In this case the court’s decision could cost the successful defendant £267,000.

Although the Defendant had, in advance of the trial, filed at Court and served on the Claimant a revised budget, it did not make a formal application to vary the Costs Management Order until the trial was concluded.  Coulson J held that the application was made too late, and warned that any such application should be made as soon as it becomes apparent that the budgeted costs have been significantly exceeded.

Pursuant to a CMO the Defendant’s budget had been set initially in Spring 2012 and then increased slightly in January 2013 to £268,488.  In February 2013, the Defendant revised its budget by almost doubling it to £531,946 to account for increased experts’ and counsel’s fees,  and sent it to the Claimant and the Court but did not apply to amend the CMO.  The trial took place in March 2013 and the successful Defendant sought costs of £497,593.

Coulson J held that the Defendant should have sought formal court approval of the revised budget and that such an application “ought to be made immediately it becomes apparent that the original budget costs have been exceeded by a more than minimal amount”.  He described an application to amend an approved budget after judgment at trial as a contradiction in terms:

First, it would mean that the exercise would no longer be a budgeting exercise, and would instead be based on the actual costs that have been incurred.  Secondly, it would encourage parties to ‘wait and see’; only applying to increase the budget costs if it was in their interests.  Thirdly, it would make a nonsense of the costs management regime if, at the end of the trial, a party could apply to double the amount of its costs budget.  The certainty provided by the new rules would be lost entirely if the parties thought that, after the trial, the successful party could seek retrospective approval for costs incurred far beyond the level approved in the costs management order.

He added that if he was wrong that an application to amend the CMO should not be entertained after judgment, then at the very least the Defendant would need to demonstrate a good reason why the application was made so late, and in this case the Defendant has failed to do so.

He went on to consider whether in any event there was a good reason to depart from the budget in this case, stating that there was not good reason because the case was not one “which somehow lurched off track after its commencement, or where the issues ended up being very different to those which had originally been canvassed in the pleadings.  Everything went pretty much as it might have been expected to go.  In those circumstances, it seems to me that the general scope for alleging in this case that there is good reason now to depart from the costs management order is relatively limited.

Coulson J also considered, obiter, whether the CMO would have been rendered irrelevant if he had made an order for indemnity costs:

Prima facie, whether under PD 51G paragraph 8, or CPR 3.18, the costs management order (with its approval of the costs budget) is expressed to be relevant only to an assessment of costs on a standard basis.  However, as a matter of logical analysis, it seems to me that the costs management order should also be the starting point of an assessment of costs on an indemnity basis, even if the ‘good reasons’ to depart from it are likely to be more numerous and extensive if the indemnity basis is applied.”

The judge’s point was that the approved budget should be the starting point for assessment even where indemnity costs are awarded, so as to eliminate unhelpful uncertainty.

In The Board of Trustees of National Museums and Galleries On Merseyside v AEW Architects and Designers Ltd and Others [2013] EWHC 3025 (TCC) the court adopted the same approach as in Elvanite.

In Mitchell v News Group Newspapers Limited [2013] EWCA Civ 1526, 27 November 2013

the Court of Appeal dismissed the appeal of Mr Mitchell against the refusal of Master McCloud to grant relief from sanctions.

Strictly the appeal was against two decisions, the first being the Master’s decision that as Mr Mitchell had failed to file his costs budget in time he was to be treated as having filed a costs budget comprising only the relevant court fees (CPR 3.14) and the second being the Master’s refusal to grant relief from that sanction.

The costs budget in question totalled £506,425.00 and so, apart from the court fee element, that is the amount potentially lost by Mr Mitchell as a result of this decision. Given that the defendant’s budget was for £589,558.00, this appears to be a realistic figure.

This was the first time the Court of Appeal has ruled “on the correct approach to the revised version of CPR 3.9 which came in to force on 1 April 2013 to give effect to the reforms recommended by Sir Rupert Jackson.”

At paragraph 1 the Court of Appeal said:

“The question at the heart of this appeal is: how strictly should the courts now enforce compliance with rules, practice directions and courts orders?”

Thus the Court of Appeal made no distinction between court orders and rules and practice directions, even though practice directions do not have the force of law and in many instances are hopelessly drafted, as indeed are many of the Jackson-related Civil Procedure Rules.

The Court of Appeal also accepted that the traditional approach of the courts was to excuse non-compliance if any prejudice caused to the other party could be remedied, usually by an appropriate costs order.

Here the budget was filed one day before the Case Management and Costs Budget hearing, that is six days late.

Master McCloud imposed what she described as “a mandatory sanction” of deeming the budget to comprise court fees only.

Master McCloud then dismissed the subsequent application for relief from that sanction.

The Court of Appeal dismissed the technical grounds of appeal, that is whether CPR 3.14 applied by analogy to a pre-1 April 2013 case and whether there was a difference between filing a budget late and not filing one at all.

Thus the issue is the key one set out by the Court of Appeal in paragraph 1 of its decision and which I have set out above.

The Court of Appeal held, correctly and sensibly in my view, that “the considerations to which the court should have regard when deciding whether it should “otherwise order” (CPR 3.14) – “unless the court otherwise orders”) are likely to be the same as those which are relevant to a decision whether to grant relief under CPR 3.9. “In each case, in deciding whether to “otherwise order”, the court must give effect to the overriding objective: see rule 1.2(a)” (Paragraph 32 of the judgment).

The Court of Appeal pointed out (paragraphs 34 and 35) that Sir Rupert Jackson had softened his approach between writing his Preliminary and Final Reports:

“However, I do not advocate the extreme course which was canvassed as one possibility in [the Preliminary Report] paragraph 43.4.21 or any approach of that nature.”

The “extreme course” was that non-compliance would no longer be tolerated, save in “exceptional circumstances”. Instead he recommended that sub-paragraphs (a) to (i) of CPR 3.9 be repealed and replaced by the wording which is now in the new rule, saying that the new form of words:

“does not preclude the court taking into account all of the matters listed in the current paragraphs (a) to (i). However, it simplifies the rule and avoids the need for judges to embark upon a lengthy recitation of factors. It also signals the change of balance which I am advocating.”

In a deeply worrying part of the judgment the Court of Appeal, at paragraph 39, specifically endorsed the approach – “We endorse this approach.” – set out in paragraphs 25 to 27 of the 18th implementation lecture on the Jackson reforms delivered on 22 March 2013 by the Master of the Rolls.

Before considering what approach has now been endorsed let us look at the genesis of this approach:

  • The Court of Appeal, of its own motion and without reference to , or the permission of, Parliament decides to
  • A judge, Sir Rupert Jackson, immediately elevated to the very same Court of Appeal, is appointed to prepare the report.
  • Jackson LJ’s Preliminary and Final Reports are published. The Final Report provokes a storm of criticism unmatched in recent history in relation to any report by a member of the judiciary.
  •  The Master of the Rolls makes a speech saying how these extremely controversial and socially devisive reforms are to be implemented.
  • The Court of Appeal, comprising the Master of the Rolls and two other judges endorses that approach.

As Mandy Rice-Davies would have put it “They would, wouldn’t they?”

Thus the Court of Appeal has decided upon a review of the civil justice system, a Court of Appeal judge has produced a report subject to the most bitter criticism and controversy imaginable, a Court of Appeal Judge gives an implementation speech and the Court of Appeal endorses that speech.

That is not, and never should be, the way we do things in the United Kingdom.

So what approach did the Court of Appeal endorse? The following are quotes from the 18th implementation speech; and are extensively quoted in the Court of Appeal judgment.

“…Jackson reforms were and are not intended to render the overriding objective, or rule 3.9, subject to an overarching consideration of securing justice in the individual case. If that had been the intention, a tough application to compliance would have been difficult to justify and even more problematic to apply in practice.”

“…the relationship between justice and procedure has changed.”

So, procedure now triumphs over justice, although the Court of Appeal, entirely unconvincingly, denies that.

“The tougher, more robust approach to rule-compliance and relief from sanctions is intended to ensure that justice can be done in the majority of cases. This requires an acknowledgement that the achievement of justice means something different now.”

The Court of Appeal may as well have quoted Alice Through the Looking Glass.

“When I use a word, it means just what I choose it to mean.”

Justice is not a concept that should be changed by diktat of an unelected Court of Appeal judge, or indeed anyone else.

Of the tough approach and the rules and obligations

“…more importantly they serve the wider public interest of ensuring that other litigants can obtain justice efficiently and proportionately, and that the court enables them to do so.”

Given the issues raised in the Mitchell/press/police/Parliament cases it is breathtakingly Orwellian to conceive of depriving Mr Mitchell of the prospect of any costs as in “the wider public interest.”

At paragraphs 40 to 43 the Court of Appeal sets out guidance as to how the new approach should be applied in practice, although this writer takes the view that in this decision the Court of Appeal has NOT followed that guidance.

I set out those paragraphs at the end of this piece.

The court should grant relief if the non-compliance is trivial AND an application is made promptly.

The court should “usually grant relief if there has been no more than an insignificant failure to comply…failure of form rather than substance; or where the party has narrowly missed the deadline imposed by the order, but has otherwise fully complied with its terms.”

Isn’t that what happened here?

The Court of Appeal accepted that the need for solicitors to take on less work “may seem harsh especially at a time when some solicitors are facing serious financial pressures. But the need to comply with rules, practice directions and court orders is essential if litigation is to be conducted in an efficient manner. If departures are tolerated, then the relaxed approach to civil litigation which the Jackson reforms were intended to change will continue.”

The type of acceptable reason may be “that the party or his solicitor suffered from a debilitating illness or was involved in an accident.”

Entirely at odds with logic of its decision the Court of Appeal said:

“We should add that applications for an extension of time made before time has expired will be looked upon more favourably than applications for relief from sanction made after the event.”

I fail to see how that has any relevance to anything. What is the qualitative difference between an application made 6 hours before the deadline and one made 12 hours later?

That is indeed a triumph of procedure over substance, of technicality over justice, of systems over freedom, of rules over liberty.

This is demonstrated by the Court of Appeal’s criticism of Mr Justice Smith for allowing an extension of two days, yes two days, for the service of Particulars of Claim. The Judge had said:

“Nor do I accept that the change in the Rule or a change in the attitude or approach of the courts to applications of this kind means that relief from sanctions will be refused even where injustice would result.”

The Court of Appeal quoted that statement and rejected it:

“51. It seems to us that, in making this observation, the judge was focusing exclusively on doing justice between the parties in the individual case and not applying the new approach which seeks to have regard to a wide range of interests.”

Thus Mr Justice Smith is criticized for making a ruling that avoided injustice in a case of trivial breach.

The terms of the Judicial Oath are

“I do swear by Almighty God that I will well and truly serve our Sovereign Lady Queen Elizabeth the Second…and I will do right to all manner of people after the laws and usages of this realm, without fear or favour, affection or ill will.”

Right has not been done to Mr Mitchell. Right will not be done to many other fellow citizens if this wholly punitive, disproportionate and unjust decision is followed.

Shame on you.

“40. We hope that it may be useful to give some guidance as to how the new approach should be applied in practice. It will usually be appropriate to start by considering the nature of the non-compliance with the relevant rule, practice direction or court order. If this can properly be regarded as trivial, the court will usually grant relief provided that an application is made promptly. The principle “de minimis non curat lex” (the law is not concerned with trivial things) applies here as it applies in most areas of the law. Thus, the court will usually grant relief if there has been no more than an insignificant failure to comply with an order: for example, where there has been a failure of form rather than substance; or where the party has narrowly missed the deadline imposed by the order, but has otherwise fully complied with its terms. We acknowledge that even the question of whether a default is insignificant may give rise to dispute and therefore to contested applications. But that possibility cannot be entirely excluded from any regime which does not impose rigid rules from which no departure, however minor, is permitted.

If the non-compliance cannot be characterised as trivial, then the burden is on the defaulting party to persuade the court to grant relief. The court will want to consider why the default occurred. If there is a good reason for it, the court will be likely to decide that relief should be granted. For example, if the reason why a document was not filed with the court was that the party or his solicitor suffered from a debilitating illness or was involved in an accident, then, depending on the circumstances, that may constitute a good reason. Later developments in the course of the litigation process are likely to be a good reason if they show that the period for compliance originally imposed was unreasonable, although the period seemed to be reasonable at the time and could not realistically have been the subject of an appeal. But mere overlooking a deadline, whether on account of overwork or otherwise, is unlikely to be a good reason. We understand that solicitors may be under pressure and have too much work. It may be that this is what occurred in the present case. But that will rarely be a good reason. Solicitors cannot take on too much work and expect to be able to persuade a court that this is a good reason for their failure to meet deadlines. They should either delegate the work to others in their firm or, if they are unable to do this, they should not take on the work at all. This may seem harsh especially at a time when some solicitors are facing serious financial pressures. But the need to comply with rules, practice directions and court orders is essential if litigation is to be conducted in an efficient manner. If departures are tolerated, then the relaxed approach to civil litigation which the Jackson reforms were intended to change will continue. We should add that applications for an extension of time made before time has expired will be looked upon more favourably than applications for relief from sanction made after the event.

42. A similar approach to that which we have just described has been adopted in relation to applications for an extension to the period of validity of a claim form under CPR

7.6. In Hashtroodi v Hancock [2004] EWCA Civ 652, [2004] 1 WLR 3206, this court said that (i) the discretion to extend time should be exercised in accordance with the overriding objective and (ii) the reason for the failure to serve the claim form in time is highly material. At para 19, the court said:

“If there is a very good reason for the failure to serve the claim form within the specified period, then an extension of time will usually be granted….The weaker the reason, the more likely the court will be to refuse to grant the extension.”

43. This approach should also be adopted in relation to CPR 3.9. In short, good reasons are likely to arise from circumstances outside the control of the party in default: see the useful discussion in Blackstone’s Guide to The Civil Justice Reforms 2013 (Stuart Syme and Derek French, OUP 2013) at paras 5.85 to 5.91 and the article by Professor Zuckerman “The revised CPR 3.9: a coded message demanding articulation” in Civil Justice Quarterly 2013 at pp 9 to 11.”

 

Costs Protection / Costs Capping Orders

PATENTS COUNTY COURT – CAPS

Patents County Court cases are subject to costs caps of £50,000 on the final determination of liability and £25,000 on an inquiry as to damages or account of profits.

In Azzuri Communications Limited v International Telecommunications Equipment Limited trading as SOS Communications [2013] EWPCC 22, 16 April 2013

the successful claimant argued that as the trial included a determination of liability and a decision on quantum he was entitled to £75,000, being the sum of both caps.

The court disagreed, holding that where there was only one set of proceedings with one trial then only one cap, that of £50,000 applied.  The rules only contemplated separate caps if there were separate proceedings.

 

PATENTS COUNTY COURT – CONDITIONAL FEE AGREEMENTS

In Jodie Henderson v All Around The World Recordings Limited [2013] EWPCC 19, 27 March 2013

the claimant had entered into a conditional fee agreement with her solicitor and had taken out after-the-event insurance.

The issue was whether those recoverable additional liabilities came within the cap, or were in addition to it.

The court held that “costs” included additional liabilities, both within the cap and by reference to scale costs and therefore no additional liabilities were recoverable.

 

Costs Free Zones

In The Manchester College v Hazel and another [2013] EWCA Civ 281

the Court of Appeal held that the claimants, who were resisting an appeal from their win in both the Employment Tribunal and the Employment Appeal Tribunal, were entitled to a costs protection order, that is an order that whatever the outcome of the appeal there be no order for costs.

Generally the Court of Appeal is free to impose such an order as a condition of granting leave to appeal (CPR 52.3(7)).  However, here the application was retrospective, that is after leave to appeal had been given, and in those circumstances, in a pre-Jackson application there had to be a “compelling reason” to so order.

That was old CPR 52. The new CPR 52.9, in force from 1 April 2013, provides that where justice so requires the court could exclude or limit costs recovery where a case has passed from a “no costs” or “low costs” jurisdiction to a court with full costs-shifting powers.

Lord Justice Jackson decided the case under the old law and found that there was a compelling reason, but part of his reason for so finding was that the claimants could simply have waited until 1 April 2013 and made a fresh application which was bound to succeed under the new rule, designed precisely for cases such as this.

The Court of Appeal made it clear that the new rule has a wider application than just appeals from the Employment Appeal Tribunal to the Court of Appeal (paragraph 33).

At paragraph 30 the court said:

“Many individuals of modest means who litigate in “no costs” jurisdictions are often without legal representation.  It is usually unjust to subject such litigants to a risk of adverse costs when they proceed to a higher level. This is particularly so if they win at first instance and are dragged unwillingly into an appeal.  It may also be unjust to impost a costs risk if the litigant loses at first instance, but has proper grounds for bringing an appeal.”

 

New CPR 52.9A

“(1)        In any proceedings in which costs recovery is normally limited or excluded at first instance, an appeal court may make an order that the recoverable costs of an appeal will be limited to the extent which the court specifies.

(2)          In making such an order the court will have regard to –

(a)          the means of both parties;

(b)          all the circumstances of the case; and

(c)           the need to facilitate access to justice.

(3)          If the appeal raises an issue of principle or practice upon which substantial sums may turn, it may not be appropriate to make an order under paragraph (1).

(4)          An application for such an order must be made as soon as practicable and will be determined without a hearing unless the court otherwise orders.

Below is the text of the new CPR3.12 to 3.18 which came in to force on 1 April 2013 in relation to proceedings commenced on or after that date.  These are completely new provisions and not just a re-numbering of existing Rules.

In the process of costs management the court has no power to reduce the hourly rate that has been agreed by the client.  That can only be done on a Solicitors Act 1974 assessment, and indeed there is a body of opinion that holds that the court has no power at all, even on a Solicitors Act 1974 assessment, to reduce the hourly rate, but rather can only restrict the number of hours claimed for to that which is no unreasonable.  I disagree;  my view is that the court has a free-standing jurisdiction as part of its supervisory role of solicitors in their capacity as Officers of the Court.

Thus a court has no costs management power to reduce the amount that may be charged to one’s own client.  Obviously the court does have power to reduce the amount to be charged to the other side; indeed that is the whole point of costs management, but any such decision will not affect the hourly rate chargeable on a solicitor and own client basis.

However that does beg the question as to what rate should go in the budget.  As the budget is to determine recoverability from the other side there is no need to put the full solicitor and own client rate in.  Although the judge cannot interfere with that rate as between solicitor and client he or she can reduce it insofar as it is a potential charge to the other side and a high solicitor and own client may alienate the judge.

Clearly the rate should be well above guideline hourly rates, both to reflect the fact that guideline hourly rates are only suitable for summary assessment and also to provide an additional award as specifically sanctioned by Parliament, if you achieve indemnity costs, normally because you have matched or beaten your own Part 36 offer at trial.

With no particular magic I suggest a figure of £350 per hour plus VAT.  Although guideline hourly rates have no application, this rate can be defended on the basis of the traditional expectation that a winning client would recover approximately two thirds of costs from the other side.  Thus taking a guideline hourly rate of £220, this procures a solicitor and own client rate of £330 which I have rounded up.

This is not the whole story as of course the guideline rate of £220 is for an eight year qualified solicitor and I am suggesting that the rate be applied as a single blended rate.

There has been much discussion as to whether one even needs to put that indemnity rate in the costs budget, or can simply put the ordinary between the parties’ rate, and as yet there has been no definitive answer, but no doubt we will have one soon.

Thus my advice is as follows:-

  1. Maintain a single rate of say £400 per hour plus VAT for the client.
  2. Insert in the costs budget a blended rate of £350 plus VAT and explain that is a rate that you consider reasonable, and is not the indemnity rate.  In my view there is no need to state what the indemnity rate is.

In fact, because of the restriction on the sum that solicitors normally will be charging to the client – 25% of damages in personal injury matters, say 40% in commercial matters – the true hourly rate charged to the client will almost never be anything like £400 per hour.

In my experience, generally it will work out at around £200 per hour including costs recovered from the other side, in cases that are subject to portal costs or Fixed Recoverable Costs.

 

DBAs AND COSTS BUDGETING: CURIOUSER AND CURIOUSER

The Civil Procedure Rules dealing with costs management and costs budgeting are entirely silent on the interplay with Damages-Based Agreements (DBAs).

I simply have no idea how a solicitor acting under a DBA is meant to prepare a costs budget.

There are at least three options, the apportionment one and the ordinary one, and the fixed fee one.

Let us take a case worth £100,000 with a DBA with a figure of 50% of damages recovered as the fee, that being the maximum allowed in a non-personal injury or non employment matter.

Thus the maximum fee is £50,000.  For simplicity’s sake let us assume ten relevant sections of Form H and where the solicitor estimates the costs of £10,000 for each stage, but knowing that, due to the indemnity principle, no more than £50,000 can ever be recovered.

One approach – the apportionment one – is for the solicitor to halve each component, so that although the court may have awarded £10,000 for pre-action work, the solicitor will only be able to claim £5,000.  That would be unwise as obviously the claim may settle before £50,000 worth of between the parties costs have been incurred, so why artificially limit yourself to less than that sum?

By putting in the full amount the solicitor will get paid the correct sum if the case settles within the first five stages.  Of course it means that if the case goes beyond Stage 5 the solicitor is earning nothing, but that is the reality anyway – once the solicitor has done work equal to half of the damages he or she is working pro bono.

Furthermore if the apportionment method is used one’s own client has an obvious complaint against the solicitor.  Let us assume that the case settles at the end of Stage 5 and thus the solicitor, limited by the costs budget, receives £25,000 from the losing side and charges the client the balance of £25,000.  The client has every right to point out that he is £25,000 out of pocket compared with the situation if the solicitor had put the full, arguably correct, sum in for each stage.

An alternative is to put the full sum in for each stage, accepting that however much that comes to the actual recoverable costs will never exceed £50,000.

Obviously it would be entirely wrong artificially to front load costs to ensure maximum between the parties costs whenever the matter settles……….

The third option is to state that whatever stage the case reaches the fee is a sum equivalent to 50% of the damages and that that is the sum sought from the other side.  I advise against this as generally the judiciary are wedded to hourly rates, in spite of the clear will of Parliament that other funding options should be available.  Strictly, in my view, this is the correct option.  The client is paying a fixed lump sum and the indemnity principle means that the claimant solicitor should neither seek £5,000 or £10,000 for any given stage as the client is not liable for any sum for any given stage.

What seems to me to be crystal clear is that a claimant who matches or beats its own Part 36 offer at trial gets the full 50% DBA fee, that is he or she gets costs on the indemnity basis.

The solicitor and own client costs are unquestionably 50% and thus costs on the indemnity basis are 50% of damages.

A paying party has no prospect of arguing that a method of payment approved by Parliament, with Parliament fixing the maximum percentage, is unreasonable.

A matter is approaching trial. The costs budget, regularly updated, shows that the winning claimant’s costs will be £300,000 on £1 million claim.

Can the claimant and solicitor switch to a 50% DBA, thus triggering costs of £500,000 if the claimant’s Part 36 offer is matched?

Yes, in my view, and there is nothing to stop parties entering in to a DBA at any stage. In all cases there will have been some investigative work before a DBA is entered in to.

Supposing, very early on in a DBA case a claimant succeeds in obtaining summary judgment with an order for indemnity costs. The same principle applies, that is a sum equal to 50% of damages for what may have been relatively little work, all fully recoverable.

Supposing, in a personal injury case funded by a DBA and with costs limited to 25%, including VAT, of damages, the claimant puts in a high costs budget and subsequently the defendant finds out that the matter is being conducted under a DBA and therefore the maximum that they would ever be liable for, including costs, is 125% of damages.

Could a defendant, having fought the matter to trial, argue that if it had known that the matter was conducted under a DBA it would have settled much earlier as it would know the limit of their costs?

Suppose in a DBA case the claimant has made an offer under Part 36 to settle the whole claim for, say £100,000, and that offer remains open; is it acceptable for the claimant to put in a budget of say, £75,000, knowing full well that s/he is valuing the claim at a sum which will result in far lower costs, a matter that the defendant cannot refer to at that stage because of the Without Prejudice nature of a Part 36 offer?

Can the defendant subsequently argue that if they had known that the claimant was acting under a DBA, then they would have accepted the Part 36 offer, knowing that the claimant’s costs would be limited to 25% in personal injury cases and 50% in all other cases, including VAT and counsel’s fees?

An obvious answer is to amend the Civil Procedure Rules to provide that a claimant should notify the defendant within seven days of the signing of a DBA that the matter is being conducted under a DBA.

Even these scenarios are not clear. A personal injury claimant, knowing full well that the full value of the claim is £100,000 may nevertheless want the costs budget to give a figure of well over £25,000 as the court might decide to make an award based on the claimant getting only 50% of budgeted costs because s/he has exaggerated.

Arguably the correct order is to still allow the claimant’s lawyer the full 25%. Thus damages are in fact £100,000 where the claim was for £500,000, and the court penalizes the claimant to the extent of 50% because of this exaggeration.

Let us assume that the agreed budget was £50,000. 50% of that is £25,000 and the claimant therefore recovers costs of £25,000, which is the maximum that s/he could have recovered in any event under a DBA.

These are all reasons why DBA means Don’t Touch with a Bargepole, although if you are a claimant you may fancy a late switch to a DBA.

Set out below is the new rule as created by The Civil Procedure (Amendment) Rules 2013, themselves amended by The Civil Procedure (Amendment No 2) Rules 2013 before they came in to force.

SECTION II

Costs Management

Application of this Section and the purpose of costs management

3.12.—(1) This Section and Practice Direction 3E apply to all multi-track cases commenced on or after 1st April 2013, except

(a)   cases in the Admiralty and Commercial Courts;

(b)   such cases in the Chancery Division as the Chancellor of the High Court may direct; and

(c)    such cases in the Technology and Construction Court and the Mercantile Court as the President of the Queen’s Bench Division may direct,

unless the proceedings are the subject of fixed costs or scale costs or the court otherwise orders. This Section and Practice Direction 3E shall apply to any other proceedings (including applications) where the court so orders.

(2) The purpose of costs management is that the court should manage both the steps to be taken and the costs to be incurred by the parties to any proceedings so as to further the overriding objective.

Filing and exchanging budgets

3.13. Unless the court otherwise orders, all parties except litigants in person must file and exchange budgets as required by the rules or as the court otherwise directs. Each party must do so by the date specified in the notice served under rule 26.3(1) or, if no such date is specified, seven days before the first case management conference.

Failure to file a budget

3.14. Unless the court otherwise orders, any party which fails to file a budget despite being required to do so will be treated as having filed a budget comprising only the applicable court fees.

Costs management orders

3.15.—(1) In addition to exercising its other powers, the court may manage the costs to be incurred by any party in any proceedings.

(2) The court may at any time make a “costs management order”. By such order the court will—

(a)   record the extent to which the budgets are agreed between the parties;

(b)   in respect of budgets or parts of budgets which are not agreed, record the court’s approval after making appropriate revisions.

(3) If a costs management order has been made, the court will thereafter control the parties’ budgets in respect of recoverable costs.

Costs management conferences

3.16.—(1) Any hearing which is convened solely for the purpose of costs management (for example, to approve a revised budget) is referred to as a “costs management conference”.

(2) Where practicable, costs management conferences should be conducted by telephone or in writing.

Court to have regard to budgets and to take account of costs

3.17.—(1) When making any case management decision, the court will have regard to any available budgets of the parties and will take into account the costs involved in each procedural step.

(2) Paragraph (1) applies whether or not the court has made a costs management order.

Assessing costs on the standard basis where a costs management order has been made

3.18. In any case where a costs management order has been made, when assessing costs on the standard basis, the court will—

(a)   have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings; and

(b)   not depart from such approved or agreed budget unless satisfied that there is good reason to do so.

(Attention is drawn to rule 44.3(2)(a) and rule 44.3(5), which concern proportionality of costs.)

 

New Practice Direction 3E and 3F

 ANNEX A – PRACTICE DIRECTION 3E – COSTS MANAGEMENT; PRACTICE DIRECTION 3F – COSTS CAPPING

PRACTICE DIRECTION 3E – COSTS MANAGEMENT

This Practice Direction supplements Section II of CPR Part 3

Contents   of this Practice Direction
Title   Number
Budget   format Para.1
Costs   management orders Para.2

 

Budget format

1              Unless the court otherwise orders, a budget must be in the form of Precedent H annexed to this Practice Direction. It must be in landscape format with an easily legible typeface. In substantial cases, the court may direct that budgets be limited initially to part only of the proceedings and subsequently extended to cover the whole proceedings. A budget must be dated and verified by a statement of truth signed by a senior legal representative of the party. In cases where a party’s budgeted costs do not exceed £25,000, there is no obligation on that party to complete more than the first page of Precedent H.

(The wording for a statement of truth verifying a budget is set out in Practice Direction 22.)

 

Costs management orders

2.1          If the court makes a costs management order under rule 3.15, the following paragraphs apply.

2.2          Save in exceptional circumstances-

(1) the recoverable costs of initially completing Precedent H shall not exceed the higher of £1,000 or 1% of the approved budget;

All other recoverable costs of the budgeting and costs management process shall not exceed 2% of the approved budget.

2.3          If the budgets or parts of the budgets are agreed between all parties, the court will record the extent of such agreement. In so far as the budgets are not agreed, the court will review them and, after making any appropriate revisions, record its approval of those budgets. The court’s approval will relate only to the total figures for each phase of the proceedings, although in the course of its review the court may have regard to the constituent elements of each total figure. When reviewing budgets, the court will not undertake a detailed assessment in advance, but rather will consider whether the budgeted costs fall within the range of reasonable and proportionate costs.

2.4          As part of the costs management process the court may not approve costs incurred before the date of any budget. The court may, however, record its comments on those costs and should take those costs into account when considering the reasonableness and proportionality of all subsequent costs.

2.5          The court may set a timetable or give other directions for future reviews of budgets.

2.6          Each party shall revise its budget in respect of future costs upwards or downwards, if significant developments in the litigation warrant such revisions. Such amended budgets shall be submitted to the other parties for agreement. In default of agreement, the amended budgets shall be submitted to the court, together with a note of (a) the changes made and the reasons for those changes and (b) the objections of any other party. The court may approve, vary or disapprove the revisions, having regard to any significant developments which have occurred since the date when the previous budget was approved or agreed.

2.7          After its budget has been approved, each party shall re-file and re-serve the budget in the form approved with re-cast figures, annexed to the order approving it.

2.8          A litigant in person, even though not required to prepare a budget, shall nevertheless be provided with a copy of the budget of any other party.

2.9          If interim applications are made which, reasonably, were not included in a budget, then the costs of such interim applications shall be treated as additional to the approved budgets.

 

PRACTICE DIRECTION 3F – COSTS CAPPING

This Practice Direction supplements Section III of CPR Part 3

Contents   of this Practice Direction
Title   Number
Section   I of this Practice Direction – General rules about costs Capping  
When   to make an application Para.1
Costs   budget Para.2
Schedule   of costs Para.3
Assessing   the quantum of the costs cap Para.4
Section   II of this Practice Direction – Costs capping in relation to trust funds  
Costs   capping orders in relation to trust funds Para.   5

SECTION I OF THIS PRACTICE DIRECTION – GENERAL RULES ABOUT COSTS CAPPING

When to make an application

1.1          The court will make a costs capping order only in exceptional circumstances.

1.2          An application for a costs capping order must be made as soon as possible, preferably before or at the first case management hearing or shortly afterwards. The stage which the proceedings have reached at the time of the application will be one of the factors the court will consider when deciding whether to make a costs capping order.

Costs budget

2              The budget required by rule 3.20 must be in the form of Precedent H annexed to this Practice Direction.

Schedule of costs

3              The schedule of costs referred to in rule 3.20(3)—

(a) must set out –

(i)            each sub-heading as it appears in the applicant’s budget (column 1);

(ii)           alongside each sub-heading, the amount claimed by the applicant in the applicant’s budget (column 2); and

(iii)          alongside the figures referred to in subparagraph (ii) the amount that the respondent proposes should be allowed under each sub-heading (column 3); and

(b) must be supported by a statement of truth.

Assessing the quantum of the costs cap

4.1          When assessing the quantum of a costs cap, the court will take into account the factors detailed in rule 44.5 and the relevant provisions supporting that rule in the Practice Direction supplementing Part 44. When considering a party’s budget of the costs they are likely to incur in the future conduct of the proceedings, the court may also take into account a reasonable allowance on costs for contingencies.

SECTION II OF THIS PRACTICE DIRECTION – COSTS CAPPING IN RELATION TO TRUST FUNDS

Costs capping orders in relation to trust funds

5.1          In this Section, “trust fund” means property which is the subject of a trust, and includes the estate of a deceased person.

5.2          This Section contains additional provisions to enable –

(a)          the parties to consider whether to apply for; and (b) the court to consider whether to make of its own initiative,

a costs capping order in proceedings relating to trust funds.

5.3          This Section supplements rules 3.19 to 3.21 and Section I of this Practice Direction.

5.4          Any party to such proceedings who intends to apply for an order for the payment of costs out of the trust fund must file and serve on all other parties written notice of that intention together with a budget of the costs likely to be incurred by that party.

5.5          The documents mentioned in paragraph 5.4 must be filed and served –

(a)          in a Part 7 claim, with the first statement of case; and

(b)          in a Part 8 claim, with the evidence (or, if a defendant does not intend to serve and file evidence, with the acknowledgement of service).

5.6          When proceedings first come before the court for directions the court may make a costs capping order of its own initiative whether or not any party has applied for such an order.

 

Problems with Precedent H

  • Simon Gibbs:
    “Why does Precedent H clearly state “This estimate excludes VAT (if applicable), Court fees, success fees and ATE Insurance premiums (if applicable), costs of detailed assessment, costs of any appeals, costs of enforcing and judgment and [complete as appropriate]” but on the next 4 pages have a row for “Court fees””.
  • The formulas across the document are inconsistent. This means that when additional information is provided in respect of fee earners time costs (which is something specifically asked for by the standard wording of the document) all formulas have to be readjusted. This can involve changing up to 52 separate formulas in order to have correct figures in the summary section if a number of different grades of fee earners are involved.
  • There are various formatting inconsistencies. Primarily with how cells are formatted to display numbers. This makes picking out individual entries from the pages of figures unnecessarily complicated.
  • The document is not programmed properly. Changes to the entries for the claim number, party’s names and the Court will change across all 5 pages if 1 page is changed. The information relating to fee earners, disbursements and details about counsel has to be changed manually on every page.
  • The document is colour coded in a way that is counter intuitive so it is not clear where figures for disbursements should be entered. This has to be dealt with by trial and error and further adjustment of formulas to ensure that the correct totals are arrived at.
  • The main problem being that these are administrative issues that add a significant amount of time to the task of preparing the costs budget which could have been avoided with a few more hours work of testing the document before making it available. Our estimate is that this added at least 1 hours work.
  • The categories are overly simplistic given they are meant to cover all aspects of a claim:
    For example medical records. Do they go under ‘experts reports’ or ‘disclosure’?
  • ‘Quantum’ does not feature anywhere in the guidance.
  • ‘Considering ADR, advising on settlement and Part 36 offers’ appears in both the pre-action phase and the settlement phase. The guidance note is contradictory.

 

APPENDICES

  1. Guidance Notes on Precedent H
  2. Precedent H
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Written by kerryunderwood

July 15, 2013 at 1:25 pm

Posted in Uncategorized

9 Responses

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  1. Kerry can you comment on the continued practice of Defendant’s filing Notices of Funding seeking success fees on CCFA’s entered as long as 2009. It would appear that they can charge inter partes a success fee despite the April changes forever more! That said so might trade unions and other commercial claimant organisations but the ability to charge a success fee would have to be budgeted appropriately.

    Peter Hall

    July 24, 2013 at 8:59 am

    • Not so.

      Section 44(4) LASPO inserts a new Section 58A(A)6 into the Courts and Legal Services Act , so that it now reads:
      (6) A costs order in proceedings may not include provision requiring the payment by one party of all or part of a success fee payable by another party under a conditional fee agreement.

      However Section 44(6) provides:

      The amendment made by subsection(4) does not prevent a costs order including provision in relation to a success fee payable by a person (“P”) under a conditional fee agreement entered into before the day on which that subsection comes into force (“the commencement day”) if –

      (a) the agreement was entered into specifically for the purposes of the provision to P of advocacy or litigation services in connection with the matter that is the subject of the proceedings in which the costs order is made, or

      (b) advocacy or litigation services were provided to P under the agreement IN CONNECTION WITH THAT MATTER (my capitals) before the commencement day.

      The commencement day was 1 April 2013.

      Few things about Jackson are clear, but this is.

      Kerry

      kerryunderwood

      July 24, 2013 at 2:30 pm

      • Can you clarify another matter with regard to DBA’s and budgets, if you are acting on a large commercial claim on a 50% DBA but you have a trial on liability, make a Pt 36 offer in respect of liability , say 75% but you achieve 100% at trial, so that you are entitled to indemnity costs – given that you were acting on a DBA, is the costs entitlement 50% of the damages to be assessed? I am sure you could secure an interim order for costs at that point but If the damages are subsequently agreed or assessed at £1M , are the applicable costs pursuant to the successful Pt 36 offer £500K? Also what would you say regarding costs budgetting when the issue is liability not damages on a DBA? Many Thanks

        Peter Hall

        July 25, 2013 at 4:46 pm

  2. Interesting point.

    I think this is all dealt with in my blog DBAs AND COSTS BUDGETING: CURIOUSER AND CURIOUSER – http://kerryunderwood.wordpress.com/2013/07/10/dbas-and-costs-budgeting-curiouser-and-curiouser/

    Kerry

    kerryunderwood

    July 25, 2013 at 4:57 pm

  3. Fantastic piece. I note that you state, “The Senior judiciary are reported to be very unhappy with the decision and have indicated that on appeal they may consider whether the opted-out courts have erred in the exercise of their discretion in failing to order costs budgets in any given case”. I wonder if you have a reference for this or could indicate when such a suggestion was made?

    Jack

    September 12, 2013 at 11:09 am

  4. Great piece as always Kerry (hope that doesn’t sound as sycophantic as I think it might). A basic question I think but one with which I keep going round and round in circles with without being sure of the same answer I keep logically (I think) coming to. Where does the fee/time go for preparing the Precedent H Form? (i.e. the 1% of budgeted costs allowed or £1,000). I can see no other way of correctly presenting it than under the CMC phase in the Form H. Is my reading of the same correct? If not, where do you suggest the fee/time goes? Thanks.

    Craig

    Craig S

    November 13, 2013 at 10:39 pm

  5. Kerry – have you had any cases which have been allocated from the fast track to the multi-track? What would the position be if the case gets re-allocated, no CMC in multi-track just directions issued on the Courts own motion and the next stage step is Trial. Without any Orders for budgeting, and no CMC in the multi-track when would the parties need to file budgets?

    J-P

    January 10, 2014 at 2:58 pm


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