Costs Budgeting

By Hugh Evans of 4 New Square'.

Introduction

Costs budgeting is plainly important, as I will amplify later, but it is rarely thought to be interesting. However, there is now a fair body of law and practice, and there is some craft in producing, developing and attacking budgets.

I will start at the beginning. Costs budgeting started, after some pilot schemes, in April 2013, and the rules have been revised since. They are now a familiar part of the litigation landscape. However, problems and issues remain, many of which are inherent in cost budgeting. There is a developing body of case law, much of it not well-known, and I will refer to some of the cases. The principal ones are summarised in the White Book. I will attempt give a broader view of some the problems and pitfalls which often arise in relation to costs management. I will not set out the rules in any detail, as they can be found in the CPR at rules 3.12 to 3.18, and PD3E.

The effect of budgets on assessment

The importance of costs budgeting is obvious to any lawyer. On any view, it is highly relevant to what will later happen in relation to assessment. CPR rule 3.18(a) states that when assessing costs on the standard basis, the Court will "have regard to the receiving party's last approved or agreed budget for each phase of the proceedings", and "will not depart from such approved or agreed budget unless satisfied that there is good reason to do so." In Harrison v University Hospital Coventry & Warwickshire NHS Trust [2017] EWCA Civ 792; [2018] 1 WLR 4456 the Court of Appeal held that there could only be a departure from the approved costs for a good reason, save that the requirement did not apply for costs incurred before the budget.

So far so good, but there is very little in the way of guidance as to what constitutes "good reason." Indemnity costs are one obvious issue, because proportionality is not relevant in such cases, unlike in budgeting. It is probably the case that costs budgets are not so important where indemnity costs are awarded, as Carr J made clear in Merrix v Heart of England NHS Foundation Trust [2017] EWHC 346 (QB); [2017] 1 Costs LR 91, and similarly see Kellie v Wheatley & Lloyd [2014] EWHC 2886 (TCC). A more cautious approach was considered, obiter, by Coulson J in Elvanite Full Circle v AMEC [2013] EWHC 1643 (TCC); [2013] 4 All ER 765. He suggested that the costs budget would be the starting point for an assessment, although an award of indemnity costs, which did not require any assessement of proportionality, might be a good reason to permit a departure from the budget. This judgment has been subject to some criticism, which may be well founded. CPR rule 3.18 makes clear that its provision only apply where assessing costs on the standard basis.

Where indemnity costs is not in issue, in Sony Communications v SSH Communications [2016] EWHC 2985 (Pat); [2016] 4 WLR 186 the Court did consider that there was a good reason to depart from the budget in two respects. For one, the expert phase, see [24] this was because there were more documents disclosed than might have been anticipated, and it would not be a surprise to the losing defendant whose own budget for that phase was much higher. And the Judge also allowed more costs in trial phase as post trial it was more expensive than foreseen, where difficult issues on assessment of costs developed [29].

The strong influence of costs budgeting over assessment does, though, have its own problems. First, there are the structural problems inherent in budgeting to which I will return. Secondly, at costs budgeting the Court is not supposed to rule on the hourly rate, which is generally the first issue addressed in any detailed assessment. Even if it turns out that the costs budget is not quite as much of a straightjacket as presently appears, the costs budget is likely to be highly relevant to any assessment at the very least in terms of being a guide. As a consequence there is likely to be a very significant effect on the litigation.

The practical consequences of costs budgeting for the dynamics of litigation are obvious. A claimant and his lawyers, and it is normally the claimant who has an excessive budget, and whose costs budget has been slashed, is likely to be greatly affected by that in terms of how the claim is run, and amenability of settlement. That, and desire to pay less in costs if lose the case, are the primary reasons for a defendant to fight costs budgets.

Spending money on budgeting

The costs permitted are set out in PD3E para 7.2. Save in exceptional circumstances, they cannot exceed the higher of £1,000 or 1% of the approved or agreed budget for completing precedent H, and a further 2% for other elements of the costs budgeting process. It is worth noting that the process includes budget discussions, which should produce a summary of grounds for what remains in dispute, see PD3E para 6A. My view is that it is worth spending money on budgeting in excess of this amount given its importance, if that is necessary. It is in particular worth thinking through the assumptions properly. Further, it may well be sensible to review the evidence and litigation thoroughly in order to come to sensible assumptions, which will frontload the claim.

There are number of reasons for that. One may find that that budgeted sum first thought of is too low, which would make a later recovery of a higher sum very difficult. One may find that it is too high, making the budget unnecessarily vulnerable to attack, and potentially assisting the other side's budget if that is similarly high for a particular phase. Further, for a phase where the costs look high, one needs to be able to articulate good reasons for the costs. And to the extent that such costs incurred in reviewing the case can be allocated to past costs, that is advantageous to the party, because past costs are less vulnerable to attack in costs budgeting, as we will see.

Costs budgets can be a hostage to fortune. One example is witness statements. Suppose a budget suggests that a party is likely to call three witnesses, and only then serves witness statements from two. If there is an obvious missing witness, that would assist the opposing party arguing at trial that he or she should have been called, bolstering the argument by the inference that the witness must have been thought likely at the time of the costs budget. The obvious solution is to have approached the potential witnesses before the CCMC, and formed a view as to whether it is likely that they will be used as witnesses. Alternatively, if the costs budget has included two witnesses only, and a further more detailed review shows that further witnesses are required, then this costs in relation to them won't be included in the approved budget.

It is also worth paying attention to the allocation questionnaire, which gives an estimate of costs incurred and to be incurred. If the costs in the subsequent budget are very different then this can cause a problem. If they have greatly increased, then this will assist the other party in attempting to reduce the costs budget, as it will need to be explained and justified, which is likely to be difficult. The increase in costs from the questionnaire to the budget was successfully used to reduce the budgets in CIP Properties v Galiford Try [2015] EWHC 481; [2015] BLR 285 (where it trebled) and Bloomberg v Sandberg [2016] EWHC 488 (TC)); [2017] 1 Costs LO 1 (where it went up by 50%). If, in contrast, the costs have greatly decreased, that may give rise to an inference that they have been massaged down in order to assist criticism of the opposing parties' budget.

Generally, costs budgets are...