Costs budgeting: the benefits of hindsight

Costs budgeting is intended to largely replace retrospective detailed assessment. The court will advise parties at the outset what they can expect to recover if successful and this figure will usually determine the amount recoverable on assessment.

CPR 3.18 stated: “In any case where a costs management order has been made, when assessing costs on the standard basis, the court will… not depart
from such approved or agreed budget unless satisfied that there is good reason to do so.”

Face value

Proportionality is at the heart of the Jackson reforms and is at the heart of costs management. The court will set budgets based on what is considered proportionate to the amount at stake.

Unfortunately, the amount genuinely in issue is a subjective matter. Many claims are pleaded at amounts well in excess,
often by many multiples, of
the amounts defendants value the claim to be, even if liability
is established.

How are courts to set budgets when faced with competing arguments as to the true value
of the claim?

The judicial training to date has been that the court should usually take at face value the pleaded amount. It is not for the court to pre-judge the claim.

No doubt judges would be live to the issue of totally spurious or widely optimistic valuations, but they are generally meant to base the budget on the claimant’s pleaded case.

This obviously creates a
serious problem for defendants
if a successful claimant can expect to recover ‘proportionate’ costs not based on the damages actually recovered, but on the claimant’s best-case scenario.

One line of thought is that
this problem is avoided by the proviso in the rules that the court can depart from the budget if there is a ‘good reason’. The argument is that it must be a good reason to depart from a budget if a claim, for example, was pleaded at £100,000 but subsequently settles for £25,000.

It is questionable whether this is correct. The courts have historically been very reluctant to apply hindsight to the issue
of costs.

When the Court of Appeal was laying down the, now revoked, pre-Jackson proportionally test in Home Office v Lownds [2002] EWCA Civ 365, it said: “Whether the costs incurred were proportionate should be decided having regard to what it was reasonable for the party in question to believe might
be recovered.”

No doubt the court would have no hesitation deciding to depart from a budget where a claim has settled for less than
the pleaded amount as a result
of a direct finding of fraud or deliberate exaggeration by
the trial judge.

Unfortunately, matters are rarely that clear cut. Where a claim pleaded at £100,000
settles for £25,000 as a result of acceptance of a part 36 offer made by the defendant, which,
if any of the following, would amount to a good reason to depart from the budget:

• Liability was in dispute and acceptance of the offer was to reflect the litigation risk.
• The claimant could no longer afford to fund the litigation.
• The claimant was desperate for the money.
• The claimant had become exhausted by the litigation.

Inflated claim

How does the court
determine whether the
reason for settlement at the reduced amount was because
of one of the above reasons
or because of an implicit acknowledgement the claim was unreasonably inflated?

Judges on detailed assessment are, understandably, inherently reluctant to start to retry the litigation. But how else could a determination be made as to the true value of the claim?

If the judge setting the budget has accepted a claim
has a potential value of £x, a judge on assessment will be very slow to conclude that
was not a proper decision.

This is not a limited theoretical problem. A huge proportion of claims settle for a fraction of the pleaded amount.

The courts have a dilemma. On the one hand, they can begin to introduce hindsight into the assessment process. This, in itself, will undermine much of the value of costs budgeting
as a large proportion of claims would therefore fall under the ‘good reason’ exception with the budget being departed from.

Alternatively, the level of ‘proportionate’ costs allowed will be based on prospective budgets that are largely unrelated to the damages eventually recovered. This
will inevitably mean the recoverable costs are routinely anything but proportionate
to the actual damages.

Indeed, the danger is
that costs will become more disproportionate under the new test than previously. Surely not what was intended. SJ

Simon Gibbs is a costs lawyer at Gibbs Wyatt Stone