Litigation focus | Encouraging beginnings for costs budgeting

By now, all lawyers who have multi-track cases should know the basic principles of costs budgeting and management introduced by the Jackson costs reforms on 1 April 2013. While the main rules are reasonably clear, there are risk areas, but there are ways to make the process easier and more efficient.

Agreeing budgets

With some exceptions, civil multi-track claims commenced on or after 1 April 2013 are subject to the new cost management regime in CPR 3. The exceptions are: claims in the Admiralty and Commercial Courts; claims valued at more than £2,000,000 in the Chancery Division, Technology and Construction Court and the Mercantile Courts; and claims where fixed costs or scale costs apply. The court can order costs management in other cases or disapply it.

Parties are required to provide cost budgets, in the prescribed form precedent H, to the court and other parties. The budgets must specify costs that will be, and have been, incurred in each of the prescribed stages of the litigation process. They must be filed at least seven days before the first case management conference, or such other date as specified by the court. The sanction for failing to file a budget on time is that the defaulting party's recoverable costs will be limited to court fees only.

If the parties have agreed their budgets before filing them at court, the court will record that agreement. If the parties have not agreed, the court will indicate what budget it will approve. There is therefore ?a strong incentive for the parties to agree each other's budgets. However, even if ?the parties agree, the court can reduce ?the costs by using case management directions, for example, reducing the number of expert witnesses or limiting evidence to specified issues.

It has been suggested that some judges may be reluctant to force the parties in more complex claims to prepare budgets for the whole case at the outset. Instead, they would consider budgets for earlier or specific parts of the case first and ask the parties to submit budgets for later phases at a subsequent costs management hearing. This makes some sense for complex, high value litigation. However, without seeing the overall budget at the start, there is a danger that the overall costs might become disproportionate.

Once a budget has been approved, a party will only be able to increase its budget if it obtains the consent of the other party, or the court's approval. Any decisions to revise a cost budget will usually be taken by the court on paper, or by way of telephone conference. However, approval will only be granted if there has been a significant development in the case which warrants such an increase: the court will not be sympathetic to a party which has simply underestimated its previous estimate. For example, in Murray and Anor v Neil Dowlman Architecture Ltd [2013] EWHC 872 (TCC), Coulson J said: "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"

At the conclusion of the matter, when assessing the costs that are to be paid by one party to the other on the standard basis, the court will have regard to the cost budget previously approved. As Moore-Bick LJ explained in Henry v News Group Newspapers Ltd [2013] EWCA Civ 19, he expected that the court would "place particular emphasis on the function of the budget as imposing ?a limit on recoverable costs". This effectively means that the parties' cost budgets will act as a "cap" on the amount of costs they are ultimately able to recover.

Good reason

The court will, however, have the power to depart from an agreed or approved budget if there is "good reason" to do so. As to what will constitute a "good reason", Moore-Bick LJ has stated that: "[t]he 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."

In Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd [2013] EWHC 1643 (TCC), Coulson J followed this view and stated that "unless the defendant can amend/revise upwards the costs management order or approved costs budget… or persuade the court that there are good reasons to depart from it… then the defendant's costs are going to be assessed by reference to the costs management order". He went on to state that if a party wanted the court to approve an amended cost budget, it was necessary for that party to formally seek the court's approval by making an application: simply filing a revised cost budget was not sufficient. Furthermore, such an application must be made as soon as it "becomes apparent that the original budget costs have been exceeded by a more than minimal amount". In this particular case the defendant had sought to increase its ?cost budget after judgment had been ?given. Unsurprisingly, the application ?was unsuccessful.

Reducing the time and money spent on detailed assessment at the conclusion of the litigation process was one of the objectives behind the new cost management regime. Indeed, in Slick Seating Systems and Ors v Adams and Ors [2013] EWHC B8 (Mercantile), HHJ Simon Brown QC, sitting in the Birmingham Mercantile Court, awarded the claimant the full amount of its costs, without the need for detailed assessment. The costs claimed fell within the claimant's approved cost budget. Also, the judge had been actively involved in managing the case throughout would therefore "know more about the costings of this case than any detailed costs judge would have".

Conversely, in Troy Foods Ltd v Manton [2013] EWCA Civ 615 Lord Justice Moore-Bick, recognising that cost budgeting was "still in its infancy", said: "I do not accept that costs judges should or will treat the court's approval of a budget as demonstrating, without further consideration, that the costs incurred by the receiving party are reasonable or proportionate simply because they fall within the scope of the approved budget".

Early experience

While it is too soon to see a strong pattern for how the courts set cost budgets, it is clear that some judges are keener than others to actively manage costs and impose directions to reduce costs. For example, we have found HHJ Havelock-Allan QC in the Bristol Mercantile Court costs management pilot was keen to manage costs and prepared to give helpful guidance on budgets which he did not feel able to approve first time. Having an approved and/or agreed budget has also helped us achieve swifter resolutions to costs negotiations with our opponents at the conclusion of the litigation.

For the production of budgets, and particularly for the on-going monitoring of actual costs against budget, we decided that we needed to change the way we record time on a file. We changed our litigation time recording policy, so that we now use stage or task-based UTBMS codes, slightly amended to correspond with the categories used in the costs form precedent H. UTBMS codes are used in the USA. The acronym stands for "uniform task-based management system". This allows us easily to compare actual costs with the budget at any stage of the process. As courts appear to be very unlikely to allow budgets to be amended unless the case develops in an entirely unforeseen direction, knowing when you are approaching budget limits ?is essential.

We have found that the preparation of costs budgets has become quicker with experience and the use of UTBMS codes in time recording has been very helpful. However, the allocation of time between ?the prescribed stages of a case is not ?always straightforward.

Costs budgeting allows more certainty and in our experience leads to lower costs overall, particularly in costs negotiations.

Phase, task and activity codes

Mr Justice Ramsay confirmed in May this year that a working party has been looking into producing a new format for bills of costs. We understand that the current proposal is to use phase, task and activity codes, similar to UTBMS codes. If implemented, this should provide significant savings in the few cases that reach detailed assessment.

Judges have made it abundantly clear that parties must keep to their budgets. Increasingly, as judgments add further interpretation to the rules, there should be more certainty for clients about their exposure to costs risk. There will no doubt, however, be a few more high profile costs disasters for some firms, before the message is universally received.

The big question is: will cost budgeting be extended to cases worth more than £2,000,000 in the Chancery Division, TCC and Mercantile Courts and to any cases in the Commercial Court? A sub-committee of the CPR Committee is due to give their recommendation on this in the autumn.