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Costs Budgeting – Update
Generally
The issue of costs budgeting is one which had its genesis in Jackson LJ’s Final Report of December 2009 and, it is fair to say, has remained a hot topic ever since. Furthermore, due to very considerable inconsistencies in approach to the same by both practitioners and the judiciary since its inception in April 2013, and the numerous amendments to the rules since, very many inconsistencies still remain as “Heffalump traps” for the unwary. Only one thing is certain however, at least for now, that whether you are a proponent or a dissenter in respect of the costs budgeting regime, it is here to stay.
The courts have, over the last almost 4 years, endeavoured with varying degrees of success to bring some clarity and consistency in their approach to the regime, although on occasions such decisions have led to additional concerns, for example, as to the intended extent of costs budgeting and whether or not a budget can be varied after trial and, if so, for what reasons.
Scope & Limitations
With regard to the intended extent of costs budgeting, CPR 3.12 would appear to put the scope of the regime beyond any doubt, such that it will apply to all Part 7 multi-track cases with the exception of claims commenced after 22 April 2014 where either the monetary value is, or in the case of a non-monetary claim the claim form contains a statement that the claim is valued at more than £10 million, in proceedings commenced on or after 6 April 2016 where the claimant is a minor (with the exception continuing to apply after the child subsequently reaches majority, unless the court otherwise orders), where fixed or scale costs apply or, where the court order is otherwise.
The scope therefore appears straightforward, especially in relation to the monetary value of the claim.
It was therefore of very considerable surprise when Chief Master Marsh, sitting in the Chancery Division of the High Court in the matter of Signia Wealth Ltd v Marlborough Trust Company Ltd & Anor [2016] EWHC 2141 found that there were “…positive reasons why cost management is desirable…” in a matter with a value of £13 million, demonstrating for the first time that the court could exercise its discretion (albeit in certain circumstances) to apply the regime the matters outside of the apparently strict scope of the rules. In this particular instance, such discretion was applied despite initial uncertainty as to whether it should “…because neither the claim form nor the additional claim mentioned the value of £13m, which is said to be the value of the shares which were held by the first defendant.
“Had the figure been mentioned in the additional claim form, then the costs management regime would not have applied.”
Furthermore, the Chief Master observed, in applying the test in CPR 3.15(2), “…a claim which may be conducted through to a trial lasting ten days with a total cost of £4.14m is an expensive piece of litigation.” and that it “…cannot be said that the court’s ability to control costs would be entirely wasted or largely wasted with such figures involved…”, and having regard both to the disparities between the budgets and the apparent inequality of arms between the parties concluded
“It is not possible for me to be satisfied here that this litigation can be conducted justly and at proportionate cost without costs management. Although a cost management order will be made at a later stage of the claim than is generally desirable, there are significant future costs to be incurred.”
Whilst surprising as an exception from the apparently previously rigid provisions of CPR 3.12, readers could be excused for understanding that exception, on the basis that it had been made due to a failure by the claimant to mention the value of the claim either on the claim form or the additional claim. Thus, despite this “blip”, the profession continued to assume that, absent such specific or equivalent failure, the provisions remained intact and therefore any matter worth over £10 million would escape the clutches of costs budgeting.
However, this discretion has now been considerably broadened by Foskett J in the matter of Simpkin v Berkeley Group Holdings plc [2017] 1 Costs LO 13, in which it was held that in a claim likely to exceed £10 million where, rather than the normal circumstances of two equally matched large corporations being at considerable odds with each other, the litigation was being pursued between a private individual and such a corporation, the making of a Costs Management Order and undertaking costs budgeting would “…help to keep the playing field between the parties and keep everyone focused on what they are spending on this litigation.” notwithstanding the apparent rigidity of CPR 3.12.
This, of course, considerably broadens the discretion afforded to the judiciary in determining whether cases which exceed the threshold under CPR 3.12 should be budgeted, and therefore it can no longer be safely assumed that, simply because a matter has a value greater than that threshold, it will automatically be excluded from the scheme.
At least for now, until such time as there is any change to the rules which would fetter this increasingly discretionary approach, it would appear that the only way to be assured of avoiding any given matter being budgeted would be for parties to agree each other’s budgets, in which instance the only action which the court can take is to “record” the agreement pursuant to art. 7.3, PD3E.
Varying Costs Budgets
There have been many warnings, both through reported case law and even more apocryphal in nature, as to the necessity to ensure that costs budgets are maintained as “current” as possible. By this method, an ultimately receiving party can be assured (absent, of course, any reasonably unforeseen cost being incurred) that their Bill of Costs will not, on a phase by phase basis (CPR 3.18), exceed the last either agreed or approved budget.
So if, and for whatever reason even having assumed all due diligence throughout the conduct of the litigation, the ultimately successful party is found to have exceeded their budget in either a phase or phases, what can be done?
There may well be a number of instances, for example
Unexpected interim applications
In the early days of costs budgeting, it was generally thought throughout the practice that it was an expectation that, as part and parcel of preparing any budget, the parties were expected to anticipate every possible permutation which could be applied to the litigation. This, unfortunately, led to many early budgets, on the part of both claimants and defendants alike, being assessed at sums vastly different to those which had been claimed, and garnering some criticism both from the courts undertaking CCMC’s and also from practitioners as evidence that costs budgeting was “not working”.
This was especially true in the area of interim applications which could not be anticipated, with many parties on CCMC’s advocating for a greater level of costs as a precaution against such applications.
Fortunately, the Practice Direction was subsequently revised (art. 7.9, PD3E) to provide that
“If interim applications are made which, reasonably, were not included in a budget, then the costs of such interim applications shall be treated as additional to the approved budgets.”
making it almost entirely clear that, in fact, unexpected interim applications fall outside the budgetary framework.
However, it still remains that practitioners should be wary of the fact that this direction includes the word “reasonably”, and thus there is the possibility that if an opposing party can show, or the court is of the opinion that such an interim application could have been “reasonably” anticipated then it will not fall outside of the ambit of the budget, and those costs would, potentially, be liable to be lost.
Significant Developments
Of all of the reasons for seeking to revise a budget, at any stage, this is perhaps the most frequently utilised basis upon which a party or parties could seek to vary or amend. Art. 7.6, PD3E provides that
“Each party shall revise its budget in respect of future costs upwards or downwards, if significant developments in the litigation warrant such revisions. Such amended budgets shall be submitted to the other parties for agreement. In default of agreement, the amended budgets shall be submitted to the court, together with a note of (a) the changes made and the reasons for those changes and (b) the objections of any other party. The court may approve, vary or disapprove the revisions, having regard to any significant developments which have occurred since the date when the previous budget was approved or agreed.”
however, and again, it is important to have regard to the use of the word “significant” and the fact that the same has not been provided with any definition as to what would constitute significance, such that the approach taken by the court is likely to be one which is both objective and subjective, in turn making the outcome of any such application to be highly uncertain.
It is therefore very pleasing that, recently, a leading District Judge has taken the opportunity to provide some guidance and assistance as to what might constitute “significant” developments in the litigation which would justify amending a budget.
In the matter of Warner v The Pennine Acute Hospital NHS Trust, District Judge Hovington (until recently a member of the Rule Committee) opined that in order to satisfy a test of significant developments in the litigation which would warrant an amendment to the budget, the case would have to have “…gone off in a different direction in some manner or other, that it has taken a turn that was not reasonably foreseeable or envisaged at the time of the original exercise.” observing that
“Every case evolves. Evidence comes forward that is not available at the time of the original case management conference but the whole essence of budgeting is to endeavour to anticipate that and set a framework within which the case is then to be conducted.”
In that matter, the claimant sought to amend and already significant (£277,000.00) budget on the basis that her previous diagnosis had worsened, contending that this would lead to an increase in the value of the claim and an application for periodical payments as a consequence thereof, thus the matter had become significantly more complicated and thus costly.
In developing his “significant development” test, the District Judge noted
“At its very simplest level, and I appreciate I am over-simplifying, this was a clinical negligence claim against a doctor in a hospital by a lady who had suffered very, very serious and debilitating injury where there was a perceived risk of future deterioration.
“I appreciate that the precise nature and extent of that deterioration may not have been entirely clear in October 2015 [when he approved the budget] and that is why I gave permission for further experts; but what has changed in terms of the essence of the case?
“I still have a lady who is suffering serious and debilitating symptoms from her injuries and with the risk of future deterioration. I made provision in the directions for the parties to address the question of periodical payments. To that extent, I am not sure that that becoming now a significant feature in the case can properly be characterised as a significant development…
thus concluding that the fact the expert evidence “…tells us something that we had not totally anticipated…” was not sufficient, of itself, to pass that test.
The District Judge therefore dismissed the application, although noted that the claimant could still expend the further sums which she sought to do, however warned that if she did so and in the event that her claim was successful, and sought an indemnity for her costs, upon any assessment she should be prepared to demonstrate that it was both reasonable and proportionate to have exceeded the budget.
Amendment at Trial
It has long been thought that leaving an application to vary or amend a cost budget until conclusion of the trial would be fatal to any such application, and indeed that was very much the indication provided by Coulson J in the matter of Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd [2013] EWHC 1643 (TCC) wherein he ruled (at [39])
“…in my judgment, an application to amend an approved costs budget after judgment is a contradiction in terms. First, it would mean that the exercise would no longer be a budgeting exercise, and would instead be based on the actual costs that have been incurred. Secondly, it would encourage parties to ‘wait and see’; only applying to increase the budget costs if it was in their interests. Thirdly, it would make a nonsense of the costs management regime if, at the end of the trial, a party could apply to double the amount of its costs budget. The certainty provided by the new rules would be lost entirely if the parties thought that, after the trial, the successful party could seek retrospective approval for costs incurred far beyond the level approved in the costs management order.”
further opining, in the alternative (at [42])
“If I am wrong to conclude that an application to amend the costs management order should not be entertained after judgment, then I consider that, at the very least, the defendant would need to demonstrate good reason why the application was made so late. In my judgment, the defendant has not done that here. Indeed, there is no explanation in the witness statement of Mr Loveday, the defendant’s solicitor, as to why the application was not made in early February, or at the outset of the trial, which I consider to be a significant omission. Although Ms Day submitted that the preparation of the trial took precedence over the making of such an application, not only was there no evidence to that effect but, on these facts, I find that that was not a good reason for not making the application.”
and thus it would appear that the door was very truly and firmly closed.
And as such it remained, until more recently, in two matters.
The first of these, by Birss J in the matter of Thomas Pink Ltd v Victoria’s Secret UK Ltd [2014] EWHC 3258 (Ch), was a matter in which there was an approved budget for the successful party of £678,009.10 and in which the claimant sought an interim payment of approximately £644,000.00, reflecting in the mind of the Judge, a reasonable sum despite the budget, due to the additional expenditure to which the claimant had been put at the hands of the defendant, such that a departure from the budget was warranted.
The second, more recent matter, of Barkhuysen v Hamilton [2016] EWHC 3371 (QB) supported this approach, with Warby J noting (at [13]) that
“I have accepted her [counsel’s] argument so far as the following points are concerned: (1) a 2-hour PTR hearing, when the budget assumed a telephone hearing; (2) causing the 5-day trial estimate to overrun, such that closing submissions had to be put in writing, and additional work had to be done dealing with post-hearing evidence submitted by the defendant; (3) the preparation and lodging of a fifth witness statement of Mr Dolan, the claimant’s solicitor. I have also formed the view that the recoverable costs should not be limited to the budgeted figures in two further ways: (4) the trial was held in Exeter not Truro; (5) the adjourned hearing. These points may not result from unreasonable conduct on the part of the defendant, but they were reasonably not budgeted for.”
and thus it can be seen that the previously apparently and almost entirely inflexible approach proposed by Coulson J has been somewhat tempered to take into account instances where either a party could not reasonably have foreseen certain circumstances, or has been the victim of a difficult opponent.
A “good reason”
The rules, once more, appear to be entirely clear, noting at CPR 3.18(b) that the court upon any assessment will not depart from any phase of the budget unless there is some “good reason” to do so. The rules do not, however, define what would constitute a “good reason” and this has been left to the courts to provide that guidance. It is fortunate indeed then that the courts have now sought to provide some up-to-date guidance.
In the matter of Sony Communications International AB v SSH Communications Security Corporation [2016] EWHC 2985 (Pat), Mr Roger Wyand QC sitting as a Deputy High Court Judge was asked by the parties at the end of the trial, unusually, to carry out a summary assessment rather than defer the matter to a detailed assessment, based upon the costs budgets which had been approved.
The claimant was found to have overspent on 3 phases and “…failed in its duty to seek to vary its costs budget when it became aware of the overspend…” and thus the judge looked for guidance once more to Coulson J in the matter of Elvanite and the question posed therein as to “When should an application to revise/amend a costs management order be made?” to which Coulson J answered (at [37])
“…In my judgment, it ought to be made immediately it becomes apparent that the original budget costs have been exceeded by a more than minimal amount…it seems to me that the defendant was taking a significant risk in continuing to incur costs which were so far outside the approved costs budget, without doing anything about the existing costs management order. I note that there is no evidence from the defendant explaining why an application was not made in February or at the start of the trial.”
and thus, adopting this approach, it would appear that the claimant’s attempts to depart from their budget would be fatally flawed.
However, this was not to be, as Mr Wyand QC took into account that there had been no suggestion that the defendant had been, in any way, taken by surprise by the overspend, especially having regard to the fact that their own budget for the same phase was higher than that of the claimant, and thus he was persuaded to increase the claimant’s budget from £215,425.00 to £323,270.00.
Therefore, taking into account these most recent decisions in relation to cost budgeting, it can be seen that the courts now appear to be taking a less rigid approach toward budgeting, to take into account the various twists and turns of litigation. The previously immovable barriers which appeared to be set by the rules, and the often draconian sanctions imposed as a consequence, appear to have become more flexible to take account of circumstances as both the rules and case law surrounding them has evolved.
That is not, however, to say that any less care should be taken both in relation to the preparation of any cost budget and the subsequent monitoring of the various phases therein to ensure that, unless absolutely necessary, overspends are not incurred, and it is far from the case that any softening or greater flexibility in approach in the implementation of the regime means that the rules can be ignored either in whole or in part.
Indeed, great care is still required. However, and at least for the time being, parties with legitimate and genuine reasons for departing from their budget in respect of any phase or phases, and who can provide the court with compelling reasons to do so, can at least rest a little easier in the current climate.