Wednesday, October 9, 2013

"Costs management: to exempt, or not to exempt, that is the question"

Costs management: to exempt, or not to exempt, that is the question

One of the issues that has caused the most discussion, is whether the new costs regime is suitable for the largest cases - a discussion provoked by the different approaches adopted by the courts. Claire King outlines some of the arguments for and against opting out of costs management.

On 18 February 2013 an Amendment Notice issued by the President of the Queen’s Bench Division and the Chancellor of the High Court amended CPR rule 3.12(1) to allow for further exemptions from automatic costs management (the “Amendment Notice”). Previously only the Admiralty and Commercial Courts had been subject to an exemption. The reason for this according to LJ Jackson when he first proposed the reforms, was that the large commercial businesses that litigate in the Commercial Court had informed him that they were ‘unconcerned’ about the level of legal costs. The new amendments also allowed exemptions to such cases in the Chancery Division as the Chancellor of the High Court may direct; and such cases in the TCC and Mercantile Court as the President of the Queen’s Bench Division may direct. A direction made at the same time within the Amendment Notice exempted cases in the Chancery, TCC and Mercantile Courts from costs management where the sums in dispute exceed £2,000,000, excluding interest and costs, except where the court so orders.

The Amendment Notice justified this decision on the grounds 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…”.

They therefore wanted “to avoid any inappropriate forum shopping”.

The exemptions have been the subject of much debate since they were announced. In the Costs Management Final Research Report we noted that there was disappointment from judges at these last minute exemptions. Feedback received in telephone interviews with TCC, Mercantile and High Court judges during the Pilot indicated that:

“many judges share the feeling that there is no principle for the exemption of the Commercial Court from the costs management regime, and that they find this very unsatisfactory”.1

However, the report also noted “a sense of victory of the opponents of costs management”.

The overriding objective has of course been amended so that Judges must deal with cases “justly” and “at proportionate cost”. This means that even if costs are incurred reasonably and are necessary they may be disallowed if the court considers them to be disproportionate.

The Amendment Notice made it clear that the exemptions were in any event an interim measure. On 14 June 2013 a Consultation Paper was published by a Sub-Committee of the Civil Procedure Rule Committee (the “CPRC”) tasked with advising on:

(a) the desirability of retaining the Admiralty and Commercial Courts’ blanket exception to the costs management rules; and
(b) the current value-based exceptions for the TCC, Chancery Division and Mercantile Courts (the “Consultation Paper”). The Chairman of the Sub-Committee is Coulson J.

The Consultation Paper described the last minute introduction of the £2 million exception as “something of an emergency solution”.2 It expressed the view that the blanket view for the Admiralty and Commercial Courts “may be unnecessary and inappropriate”, noting the successful pilot scheme run in the Mercantile and TCC.3 It went on to state that “depending on its conclusion on the future of the Admiralty and Commercial Courts’ exception”, the value-based exception elsewhere would need to be considered. If these were to remain, should they be framed by reference to financial value? If so, at what level? Alternatively, should the parameters be different?4

Consultation meetings were held on 10 and 16 July 2013. Written responses were accepted until 20 July 2013. The results of this consultation have not yet been published and it remains to be seen what the final recommendation of the Sub-Committee is. However, the written responses of the two key institutions representing construction lawyers (TeCSA and the SLC) are interesting.

The SCL does not comment on the blanket exemption of the Commercial Court save to state that the various specialist courts should have the same system to avoid forum shopping. However, it is unhesitating in its support for the exceptions already in place. The reasons given include the fact that international users may be put off using the TCC as the costs regimes in other jurisdictions are more favourable. It also notes anecdotal evidence that parties are choosing arbitration instead of the courts due to the costs regime. Indeed the tone of the response is generally anti-costs management. It notes the additional costs imposed by the system (which it believes will be in the region of £3,000 to £4,000), the front-loading of costs and the fact that accurate estimates in complex cases are difficult.

TeCSA’s position is primarily that there should be a blanket exemption for mandatory costs management for the specialist courts sitting within the Rolls Building. This would avoid forum shopping. Indeed the TeCSA submission appears to be generally opposed to costs management in high value cases within the London TCC in any event, given the difficulties with accurately predicting costs in such cases.

The TeCSA submission notes:

“If costs are to be recoverable, our commercial clients can live with a new 50% instead of the 70% broad rule on recoverables …. But greatly depreciate being in effect told they cannot or should not run cases with their specialist lawyers the way they wish …. To win. There is a feeling at the moment (and Members have had some experience of this) that if you have to increase the budget because things have changed that could not have been predicted, you get ‘told off’ and one is told off by someone who knows very little about predicting and estimating costs.”

It is perhaps unsurprising that in light of this, TeCSA have suggested that the limit for the costs management scheme applying should be lowered to £250,000, being the limit below which the London TCC will decline to deal with cases in any event.5

Conclusion

What happens in the future remains to be seen. Before any final decision is made on the exemptions, there must be a proper investigation into whether the clients in these high-value and complex cases actually want their legal costs to be subject to the rigours of costs budgeting, or not.

What is interesting is that practitioners focussing on cases within the London TCC based in the Rolls Building only now seem to be fully waking up to the implications of costs management and they do not seem to be convinced by the benefits judges in the TCC elsewhere espoused during the Pilot.

What the sub-committee is no doubt aware of, is the risk that if users do not like the system they will start opting out of the court system and using arbitration instead. This argument has already been used rather successfully by the London Litigation Solicitors’ Association who argued that high value disputes such as Berezosky v Abromovich would simply not use the Commercial Court if costs management was applied there.

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  • 1. See Page 52 of the Costs Management Final Research report
  • 2. See paragraph 2.3 of the Consultation Paper
  • 3. See paragraph 4.1 of the Consultation Paper
  • 4. See Paragraph 5.2 of the Consultation Paper
  • 5. West Country Renovations Ltd v McDowell & Anor (Rev 1) [2012] EWHC 307 (TCC)