New cost budgeting rules will change the perception of 'reasonableness'

Costs budgeting will be introduced to all multi-track cases commenced on or after 1 April 2013 in a county court, the Chancery or Queen’s Bench Division (except the Admiralty and Commercial Courts) unless the court otherwise orders, and to any other proceedings where the court so orders.

This should have a dramatic effect on the way that litigation is conducted and the costs that successful parties can ultimately recover. There is one interesting end result of these reforms that is worth exploring further.

The current method of controlling costs is by the route of the retrospective detailed assessment process. Costs are incurred at whatever rate a party, or more likely their legal representatives, considers appropriate. At the end of the case the successful party submits their claim for costs to the other side and, if the costs cannot be agreed, the matter goes before a judge to determine whether they are reasonable.

Detailed assessment flaws

There are a number of weak-nesses with the detailed assess-ment process as a method of controlling costs but one of them is the very nature of the cases that proceed to a detailed assessment hearing. Those of us who act for paying parties and see the claim for costs produced by large numbers of different firms up and down the country will recognise the enormous variation in the amounts that are claimed. Whereas an efficient firm may be able to successfully pursue a claim to trial and will then submit a claim for costs for £50,000, a firm at the other end of the efficiency spectrum will submit a claim for £200,000 on exactly the same facts.

Unsurprisingly, paying parties will rarely press the claim for £50,000 to a detailed assessment hearing. The matter will be settled by negotiation long before that stage. The cases that do tend to proceed to detailed assessment are those where the costs are at their most excessive. However, this means that judges – and particularly costs judges – only see before them the cases where the most is wrong with the amounts being claimed. They simply never see the cost claims produced by the most efficient firms. Inevitably, judges’ perception as to what is normal is based on what they see most often. Prolonged exposure to cost claims from the most inefficient firms tends to influence judges as to what is the norm and the amounts that are allowed are influenced accordingly.

There is already a requirement for parties to file costs estimates with the courts, but experience teaches us that that the judiciary take little or no notice of these (perhaps a good thing for receiving parties given how inaccurate these tend to be) and there is no requirement for judges to make any specific orders in light of these estimates.

All change

This will all change come April 2013. Judges will be under a ?positive duty to consider the cost budgets submitted and will generally be expected to approve the figures – or not as the case may be.

Assuming that parties start to submit reasonably accurate estimates (although this may take some time) judges will quickly recognise the huge discrepancy in the figures put forward by different firms for identical types of work.

It will be very difficult for a judge to approve a budget of £100,000 if only the week before they saw a budget in an identical matter for £50,000. Judges’ perception as to what is typical or reasonable will rapidly change. It is hard to see how this cannot exert a strong downward pressure on costs.

If this does happen, the costs that inefficient firms can expect to recover are likely to significantly reduce from current levels. Inefficient firms will need to rapidly change if they are to survive. This can only be welcomed.