Wednesday, October 9, 2013

"Costs management: what you need to know"

Costs management: what you need to know

The Costs Management Pilot Scheme (the “Pilot”) was launched in all Technology and Construction Courts and Mercantile Courts on 1 October 2011 and ended on 31 March 2013. At the invitation of Lord Justice Jackson, the Centre of Construction Law at King’s College London was asked to monitor the Pilot by means of questionnaires and a follow-up telephone survey in order to evaluate how effective the Pilot was in terms of controlling costs, keeping clients informed about the overall costs position (not just their own budgeted costs) and the additional workload imposed on judges and court staff. The monitoring team consisted of Nicholas Gould, a Visiting Senior Lecturer at King’s College London and a partner in Fenwick Elliott LLP, Christina Lockwood, a lawyer and CEDR accredited mediator, and Claire King, an Associate of Fenwick Elliott LLP.

In this our first article on costs management within this Annual Review, we outline the key findings of the Costs Management Final Research Report and the case law governing the implementation of the Pilot to date. In our second article, we consider in more detail the recent hot topic as to the exemptions to case management implemented in the run-up to 1 April 2013.

Costs management is here to stay

From 1 April 2013 costs management has applied to most types of litigation, in accordance with CPR 3.12 – 3.18 and Practice Direction 3E, under the 60th update to the CPR (the “New Rules”). The amended CPR rule 3.12(1) allows for exemptions from automatic costs management. This includes the whole of the Admiralty and Commercial Court; such cases in the Chancery Division as the Chancellor of the High Court may direct; and such cases in the TCC and Mercantile Courts as the President of the Queen’s Bench Division may direct. A direction made under CPR 3.12(1) exempts 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.

Practice Direction 51G governed the Pilot and required each party to prepare a costs budget in the form of Precedent HB for consideration and approval by the court at the first Case Management Conference (“CMC”), and a revised costs budget at various stages of the proceedings thereafter. Within the costs budget (under the Pilot and also under the New Rules), reasonable allowances must be made for: (a) intended activities such as disclosure, preparation of witness statements and obtaining experts’ reports; (b) identifiable contingencies, for example specific disclosure applications; and (c) disbursements, in particular court fees, counsel’s fees and any mediator or expert fees.

When can an approved costs budget be revised or rectified?

The judgment in Henry v News Group Newspapers Ltd1 was the first indication of the approach the courts might take with regard to departing from approved costs budgets. The Court of Appeal had to consider whether there was a good reason in this case to depart from the appellant’s approved budget. The Court of Appeal’s decision to allow the appeal was published on 28 January 2013, but stated that failing to comply with costs management practice directions could have draconian consequences.

In essence, the Court of Appeal found that:

(i) both parties and the court failed to comply with PD 51D “to a greater or lesser degree”;
(ii) there was no inequality of arms;
(iii) the objects of PD 51D were not undermined;
(iv) a budget is not a cap; and
(v) the costs incurred by the appellant were reasonable and proportionate to what was at stake in the proceedings.

The Court of Appeal judgment concluded by highlighting important differences between the New Rules and the Pilot as well as the Defamation Proceedings Costs Management Scheme. Going forwards, a budget is much more likely to act as a limit on recoverable costs unless there is a very good reason for it not to do so. Getting a budget right (and revising it regularly) will therefore be more important under the New Rules than under the two pilot schemes.

This approach was confirmed by Mr Justice Coulson in Murray and another v Neil Dowlman Architecture Ltd.2 The case was running under the Pilot but also considered the position under the New Rules. The court gave guidance about the circumstances in which an approved costs budget can be revised or rectified. Coulson J held that it will normally be extremely difficult to persuade a court that mistakes in the preparation of a budget, which is then approved by the court, may subsequently be rectified. The courts will expect parties to submit accurate budgets in the first place. Trying to amend an inadequate (and approved) budget is, however, different from revising a budget upwards or downwards because of significant developments in the litigation (see PD 3E, paragraph 2.6).

In Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd,3 Mr Justice Coulson handed down another judgment relating to a case running under the Pilot and subject to a Costs Management Order. In that case a successful defendant was refused permission to revise its budget which it had submitted after judgment. Mr Justice Coulson made it clear that an approved budget can only be revised by making a formal application to the court not by simply filing a revised budget.

As stated in Murray v Neil Dowlman Architecture,4 a departure from the approved budget would only be allowed if there was good reason to do so. An application to revise an approved budget (even under the New Rules) should therefore be made as soon as it becomes apparent that the original budget has been exceeded by more than a minimal amount. There is no ability to make an application after trial due to the wording of paragraph 6 of PD 51G.

He further held (on an obiter basis) that even where costs are awarded on an indemnity basis (which they were not in this case) the:

“costs management order should also be the starting point of an assessment of costs on an indemnity basis, even if the ‘good reasons’ to depart from it are likely to be more numerous and extensive if the indemnity basis applies.”5

The overall message from the courts could not be clearer. If you want to be able to claim your costs make sure that your approved budget is updated as soon as you have any concerns it may be exceeded even if you are in the middle of preparing for trial.

Feedback from the Pilot

One of the concerns expressed by solicitors under the Pilot is that the costs management procedure increases costs due to the time taken to comply with it. Another concern is the difficulty of predicting costs accurately at the early stages of litigation because the work required to bring a case to trial can change as the case progresses, and costs also depend on the tactics and general approach taken by an opponent.

It has been argued that the analogy of costs management as “project management for litigation” does not take on board the fact that in litigation two parties are each trying to build their own case while destroying their opponents. A claimant tries to push its case forward while a defendant seeks to delay and develop every potential defence. This makes it much harder to budget for litigation than for a construction project, where at the commencement at least everyone is pulling in the same direction.

Solicitors interviewed seem to acknowledge that completing the budget form becomes easier once familiarity with it increases. The improvements made to Precedent H (the budget form to be used under the New Rules) and, in particular, the fact that it is in Excel may also assist the process. Most solicitors agreed that the Pilot did assist with early attention to costs and that it gave their clients a better understanding of their potential liabilities (including their potential liability to the other party if they did not win). As a result it could also facilitate settlement.

Feedback gathered under the Pilot indicates that transparency about costs is a most relevant factor. Even solicitors who disapproved of the Pilot, and particularly of Precedent HB, appreciated how important it is that clients know the potential liability they face if they lose.

  • In summary, the majority of solicitors who provided feedback under the Pilot acknowledged several benefits of costs management, namely that:
  • it makes the parties focus on the key issues in dispute early on, and more thoroughly analyse what is necessary to prosecute the action;
  • it helps to focus on the costs of the future conduct of the case;
  • it informs the parties about each other’s budgets for the litigation and provides an insight into the opponent’s tactics;
  • it introduces a degree of certainty to the planned amount of work and costs for the client, and provides a strong incentive to keep within the budget;
  • it may avoid lengthy detailed assessments of costs at the end of the litigation; and
  • it informs the parties about the cost of not settling at an early stage and thus can encourage settlement.

In relation to the judges’ views, they generally seem to believe that costs management encourages proportionality of costs to the value of the claim and that it aids case management as well as controlling future costs. Feedback received from judges towards the end of the Pilot was, however, more critical in that the extra burden on case managing judges had become clearer. Costs management adds significantly to the time required by judges for case management.

Moving forwards from 1 April 2013

Costs management is a new discipline that requires skill and practice but can be, and will have to be, learnt. The costs management procedure effectively shifts the focus of costs control from retrospective, as it used to be, to prospective, with the court focusing upfront on how much should be spent (or at least recovered) in the litigation. More certainty as to the other side’s costs and as to the likely overall costs at the beginning of the litigation seems to be widely regarded as a positive factor.

Costs management under the New Rules will introduce a new discipline in respect of incurring litigation costs where those rules apply. The findings of the Pilot suggest that it is likely that the overall effect of costs management will be to bring down the total costs of the litigation.

There could also be an important impact on costs assessment in the future. Detailed assessments might become a thing of the past if all litigation is subject to costs management. The final costs will be measured by the last agreed or approved budget rather than a detailed review of the costs incurred throughout the litigation.

The Costs Management Pilot Final Report has been published on the websites of the Judiciary, TeCSA and Fenwick Elliott LLP - www.fenwickelliott.com/costs-management-pilot-final-report.

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  • 1. [2013] EWCA Civ 19
  • 2. [2013] EWHC 872 (TCC)
  • 3. [2013] EWHC 1643 (TCC)
  • 4. Ibid.
  • 5. [2013] EWHC 1643 (TCC) at 28 to 31