Costs budgeting in the multi-track: is the game worth the candle?

Posted 23 September 2022

Article by Colin Campbell, Costs Consultant at Kain Knight.

*J.P.I. Law 184…who asked that?

The answer is Sir Rupert Jackson in his Review of Civil Litigation Costs: Final Report (”the Report”) published in December 2009.¹

Cast your mind back to that Report and to its predecessor, the Preliminary Report dated 8 May 2009. To Sir Rupert, the idea that parties in civil litigation could fight cases over many years, often to the death in court, without having any idea about what it was costing in terms of “what will I recover in costs if I win” and “what will I be in for if I lose”, was extraordinary. Something needed to be done about it. In his foreword to the Report, Sir Rupert wrote:

”In some areas of civil litigation, costs are disproportionate and impede access to justice. I therefore propose a coherent package of interlocking reforms, designed to control costs and promote access to justice.”

Costs management by the courts was the solution where the case in question was not already subject to the fixed costs regime under Civil Procedure Rule (CPR) 45. To that end, in his Executive Summary, Sir Rupert wrote:

”Costs management is an adjunct to case management, whereby the court, with input from the parties, actively attempts to control the costs of cases before it. The primary means by which costs management is effected is for the parties to provide budgets of their own costs, with those budgets being updated from time to time and submitted for approval to the court. The court then formulates the directions and orders which it makes with a view to ensuring that costs do not become disproportionate.”

It followed that through the implementation of costs budgeting, at each stage in the case, the disputing parties would know what their likely outlay would be in costs if they lost, and their probable recovery in the event of success.

In this context, the key to controlling the costs lay with the court: through effective costs management, only reasonable, necessary and proportionate costs would be authorised. Those parties who were profligate in their expenditure would have to finance their profligacy out of their own resources. Where the judge made a costs management order (CMO) at a Case or Costs Management Conference ((C)CMC), the court would thereafter take responsibility for controlling the costs of the action.

The mechanics of costs budgeting

These were and are to be found in s.II of CPR 3 implemented on 1 April 2013. They apply to CPR Part 7 claims in the multi-track up to £10m (excluding litigants in person) although the court can now impose budgeting in higher cases under CPR 3.13(3)(a) in force from 1 October 2020.

Under CPR 3.13, parties must: *J.P.I. Law 185

• file and exchange budgets not later than 21 days before the first CMC where claim exceeds £50,000,² in default of which the offending party’s budget will comprise only the applicable court fees unless relief from sanctions is given under CPR 3.9.
• Use Precedent H to present their budgets.³
• File an agreed Budget Discussion Report (BDR) using Precedent R—(the timing depends on when the case was commenced)—6 April 2016 onwards, not less than seven days before the first CMC.⁴
• Indicate those figures which are agreed for each phase, those not agreed and a brief summary of the grounds of dispute.

The advantages of costs budgeting

Sir Rupert expected multiple costs controlling advantages would flow from the implementation of section II of CPR 3.

First, the awareness and knowledge of the financial position of both sides would give clarity as to what they could expect to recover on a win and what their liability would be in costs on a loss. Such information would be of obvious benefit to those making decisions about the future conduct of litigation, in particular insurers who would find budgets useful when setting reserves. For claimants, knowing in advance what their liability would be if they lost, would thereby prevent late ambushes and the imposition of crushing costs burdens on a loss.

Next, budgeting would encourage early settlement because awareness of the potential exposure in costs, would focus the mind. Put another way, knowing how much was at stake would compel parties to see sense, especially in cases where the outlay in costs was likely to outweigh the sums in issue. Compromise rather than “having your day in court” thereby would become the norm, bringing certainty and costs savings all round.

Third, the involvement of the court at an early stage in costs management would bring down the cost of the litigation, by cutting down to size any over-elaborate case plans or excessive budgets: that way, the amount payable by a losing party would generally be reduced because the budgeting judge would apply a test of proportionality under in CPR 44.3(5), and would approve only those costs proportionate to resolving the matters in issue.

Fourth, if all parties knew where they were costs-wise as the litigation proceeded, there would be no need for a detailed assessment at the end of the case in respect of any of the costs which the court had already approved through budgeting. Instead of a minute item-by-item analysis of expenditure, budgeted costs would be ticked through where the successful party had completed the case within budget. Indeed, as Jacobs J subsequently observed in Yirenkyi v Ministry of Defence [2018] 5 Costs L.R. 1177:

”… since the parties [will] know where they stand at the start, it increases the probability that a detailed assessment with all its complexities and possible cost is avoided.” [17]

Finally, in virtually all aspects of life involving major expenditure, before any commitment is made to a commercial project, whether it be a new kitchen or house extension, anyone embarking upon such a venture will obtain a budget. Why on earth, Sir Rupert mused, should it be any different so far as paying lawyers for conducting an action would be concerned? Clarity and certainty would be of benefit to everyone involved: to the lawyers doing the work, to the clients paying them, and to the opponents who might be picking up the tab (or at least some of it) at the end of the day. *J.P.I. Law 186

So far, so logical, but alas, what looks good in theory does not always work out in practice and costs budgeting is a case in point.

The disadvantages of costs budgeting

Detractors point to the following:

The idea that before the implementation of the budgeting regime, no one had a clue about what cases were costing, is fanciful. The allocation questionnaire to be filed in accordance with the Practice Direction about costs supplementing CPR 43 –48 in force until 31 March 2013, required parties to provide in a Form H, an estimate of the costs (spent and to be incurred) where their recovery was to be sought if the case be won. If that budget were to be exceeded by over 20%, the receiving party would need to explain to the court why that was the case. Thus, even in the pre-budget world, there could be no nasty surprises when the day of reckoning arrived.

Secondly, even its proponents have acknowledged that budgeting adds another layer to the costs of litigation as well as taking up court time and resources. Given that very few cases actually go to trial, what is the point, detractors ask rhetorically, in arguing about how much leading counsel’s brief fee should be for a trial which, in reality, will never take place? Working out hypothetically what a case might cost, simply fronts loads rather than saves costs.

Third, most defendants’ budgets are agreed or are academic where Qualified One Way Costs Shifting applies (when costs are generally irrecoverable from claimants who lose), so the obligation to make those parties file and serve budgets is a waste of time, costs and valuable court resources.

Fourth, in order to avoid the constraints of budgeting, claimants do as much work as possible in advance of the first (C)CMC to prevent their expenditure being throttled back by the budgeting judge. Put another way, budgeting leads to the deliberate front loading of costs in order to put them beyond the reach of the judge who is supposed to be controlling what they can spend.

Fifth what happens if you are dissatisfied with what you get at the budgeting hearing? Tough luck appears to be the order of the day. The skills and abilities of the judges who deal with budgeting vary and the prospects of putting things right on appeal are slim. In Gray v Commissioner of Police of the Metropolis,⁵ the court below had reduced the budget sought from £91,000–£44,000 for future costs at “an informal and relatively discursive 20 minute hearing”. On appeal, the claimant’s entreaty to Lambert J “Please my Lady, can I have some more?” fell on unsympathetic ears. The decision below had not been generous, but it had fallen within the wide ambit of the judge’s discretion, so that the claimant would need to cut his coat according to the £44,000 allowed for his cloth going forward. Result, either the work would not be done, or the solicitors would have to do it for nothing or the client’s damages would be depleted by the amount of the shortfall, or a combination of all three. What justice is that, is the question claimants ask?

Sixth, much of budgeting turns on the old maxim: how long is a piece of string? Cases change and develop so budgets need to be varied under CPR 3.15A(1) where a CMO has been made and there have been “significant developments” in the litigation. In the absence of anything in the rules which gives guidance about what constitutes “significant developments”, whether or not further expenditure will be authorised is a judicial lottery. Mandatory variation, requiring budgets to be revised upwards and downwards, has added another element of expense to the budgeting process since its implementation on 1 October 2020. Even if the application is turned down as a “significant development”, the disappointed applicant can have another bite of the same cherry at the detailed assessment if a “good reason” under CPR 3.18 (c) for doing so can be advanced the costs judge. *J.P.I. Law 187 ⁶

What is the justice in that, paying defendants ask, when it was their reasonable belief that the decision of the budgeting judge had already brought finality on that point.

Seventh, the idea that costs budgeting circumvents the need for detailed assessment has, quite simply, proved to be fanciful. Consider the following:

• (i)  costs incurred before the CMC cannot be budgeted by the court and must be assessed if they are not agreed; see CPR 3.17(3)A). Thus, an assessment of those costs, if unagreed, is inevitable.
• (ii)  where the court has made an issue-based costs order, or where there are costs of claim and counterclaim, or costs of discontinuance, those costs of the issues to which the receiving party is not entitled, will need to be separated out of the budgeted costs. That process is possible only by detailed assessment.
• (iii)  The “tick through” only works where the work has been completed within budget. If the action goes short, e.g. where there is a settlement, there will need to be an assessment to decide how much to allow for each phase of the job where not all the tasks authorised have been carried out. An example would be where a brief on trial has been delivered, but the case then settles. What proportion of the fee should be paid? Absent any agreement, it will need a costs judge to decide.
• (iv)  An order for indemnity basis costs is a good reason to depart from the last approved or agreed costs budget and the receiving party is not constrained by it; see Denton v White ⁷ and Lejonvarn v Burgess.⁸ However, if the receiving party has undertaken the work within budget and is anticipating a “tick through”, the indemnity basis order can be used by the paying party to contend that the costs should be less than those approved. That, again, is a matter for argument and deployment only at a detailed assessment.
• (v)  Even costs (not being indemnity) which have been budgeted and/or subject to an item-by-item assessment are susceptible on detailed assessment to a final “proportionality” health check. Although those costs will have already been judicially vetted and the court cannot depart from the last agreed or approved costs budget without “good reason” under CPR 3.18(b), at the end of the assessment they must still be aggregated with the pre-budget costs (as assessed) and the proportionality test under CPR 44.3(5) applied to the total amount; see Harrison v University Hospitals Coventry and Warwickshire NHS Trust.⁹ By that process, the budgeted costs suffer double jeopardy. Approval after scrutiny by the budgeting judge: re-appraisal by the costs judge at the detailed assessment and if the latter considers that the costs as assessed item-by-item are still out of proportion, a whimsical further reduction will follow. How can that be predictable or just, argue receiving parties who have a reasonable expectation that if they have done the work within budget, it will be allowed? Taken together, these factors have made detailed assessment more rather than less likely to happen.

How has case law dealt with a decade of costs budgeting?

A journey through the case law concerning these competing arguments since budgeting was introduced nearly ten years ago, have brought these issues into sharp focus. Instead of certainty, predictability and the control of the costs of the civil litigation, a snapshot of these cases suggest that budgeting has not achieved Sir Rupert Jackson’s aims. There is a lot that can go wrong. *J.P.I. Law 188

Let us start the requirement to file and exchange budgets under CPR 3.13. Failure to comply with the rule results in an automatic sanction (costs budget deemed to cover applicable court fees only-CPR 3.14) and if, and only if, relief is given under CPR 3.9 will costs exceeding these sums be recoverable from an opponent on a win.

In “Plebgate”,¹⁰ Andrew Mitchell MP ’s budget was seven days late and relief was refused (that did not matter in the end as he lost the action), but one day late by NGN in the same case was trifling and held to be covered by the Latin maxim de minimis non curat lex; the law is not concerned with little things, so NGN got away with its default.

Such a Latin maxim, however, did not impress Daniel Alexander QC in Lakhani v Mahmud.¹¹ He held that one day late in serving the budget during Christmas was a serious breach of CPR 3.13, so relief was refused, but that can be contrasted with the approach of Warren J in Intellimedia Systems Ltd v Richards.¹² The budget had been late because the claimant’s solicitor had fallen ill, but he had failed to delegate his case load. Warren J held that refusing relief would be a disproportionate penalty, so the claimant would not be restricted to applicable court fees going forward. Contrast that with the hapless Mr Lakhani who would not recover any costs save those incurred before the budget if he won, and who might reasonably ask-where is the justice in that?

What of hourly expense rates for solicitors? These are “big ticket” items when it comes to detailed assessment, but the Practice Direction at PD3E.12 provides that:

”When reviewing costs budgets, the court will not undertake a detailed assessment in advance, but rather will not consider whether the budgeted costs fall within the range of reasonable and proportionate costs.”

In Yirenki, Jacobs J held that the Master below had been wrong to hold over argument about rates to the detailed assessment: the ultimate goal of the costs budgeting exercise was:

”… for there to be a figure which is given for the costs of each phase of the proceedings … since the parties [will] know where they stand at the start, it increases the probability that a detailed assessment with all its complexities and possible cost is avoided [17].”

Compare and contrast that with the judgment of Warby J in Arcadia Group Ltd v Telegraph Media Group Ltd [2019] 1 Costs L.O. 169 in which the he did the opposite and fixed the hourly rates:

”Although budgeting is not the same as detailed assessment, it is almost inescapable for the court to give some thought to the hours and hourly rates that are justified for the work in question. The hourly rates claimed by the claimants range from £190 (for a Grade D lawyer, a trainee) to £690 (for a Grade A lawyer, a partner)… I do not consider that hourly rates in excess of £550 can be justified and proportionate reductions should be made in the lower partner’s rates.”

Other judges have been of the same persuasion in actions in which rates at the budgeting stage have been considered and set: see for example: The Capital Markets Co (UK) Ltd v Traver, Budgeted rates reduced by 20% (Michael Furniss QC), Group Seven Ltd v Nasir ¹³ and GSK Project Management Ltd v QPR Holdings Ltd,¹⁴  Yeo v Times Newspapers Ltd ¹⁵ and JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev. *J.P.I. Law 189 ¹⁶

The upshot of these contrasting approaches has led to uncertainty for parties. If the trial judge fixes the hourly rates, does that bind the costs judge to allow the same in respect of the incurred costs? If not, then those rates are at large and in the absence of agreement, the only way they will be decided is at a detailed assessment: more argument: more costs.

What happens if the trial overruns? Can the trial judge vary a costs budget? Here again the jury is out. Some say yes, others say no.

In Elvanite Full Circle Ltd v AMEC,¹⁷ Coulson J’s view was:

”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 of the costs incurred far beyond the level of the approved costs management order.”

That was the course followed by Mr Stephen Furst QC in Car Giant Ltd v Mayor and Burgesses of the London Borough of Hammersmith ¹⁸ who declined “… to trammel the costs judge’s discretion, particularly where the costs judge has much greater experience of such matters than I have” [34].

However, in Thomas Pink Ltd v Victoria’s Secret UK Ltd,¹⁹ Birss J increased the costs budget by £58,000 after he had circulated his draft reserved judgment to the parties but before formal handing down and in Ohpen Operations UK Ltd v Invesco Fund Managers Ltd,²⁰ O’Farrell J did the same so far as the costs of an adjournment including counsel’s fees were concerned. All other costs issues were for the costs judge.

With different judges doing different things, it is nigh impossible for parties to know which way the judiciary will jump, thereby leading to the increased uncertainty which Sir Rupert Jackson hoped that his reforms would avoid. That leads to …

The key question: Does budgeting actually control the costs of civil litigation?

The acid test: has costs budgeting achieved the goal of ensuring that costs do not become disproportionate?

In terms of facts and figures, there are no comparators to indicate that pre 1 April 2013, a particular case would have cost £X but under costs budgeting, it has cost £Y. That said, reported cases in which budgets have been set, have produced startling figures.

In Harrison, for example, the claim was limited to £50,000, with the claimant’s budget being approved at £197,000. The action later settled for £20,000 at which point the claimant presented her bill for £467,000 (including a success fee and after-the-event insurance premium), which the court assessed at £420,000. Hazarding £467,000 to recover £20,000, it might be thought, would have raised a Lord Justice’s eyebrow, but not a comment was passed about the proportionality of such expenditure.

No judicial eyebrow raising occurred either in Salmon v Bart’s Health NHS Trust,²¹ another budgeted case. In that action, the value of the claim had been put at £10,000–15,000, with a budget approved of £155,673. The matter had then settled for £7,000, about 5% of the authorised expenditure.

If the Man in the Moon were to be looking down on a costs budgeting hearing, he would think that the earth had gone mad if, in its role of controlling the costs, the court had endorsed (as it had) a budget of £155,000 in a case worth £15,000 at most. The inescapable conclusion must be that in a good number of claims (if these are representative examples), costs budgeting, far from controlling costs, has led in some instances to costs being approved at significantly higher levels than would have been the case in the pre-budgeting era. *J.P.I. Law 190

What next for costs budgeting?

It is against this background, that, with the tenth anniversary of the introduction costs budgeting approaching, it has not come as any surprise that the entire regime is now under scrutiny by both government and senior judiciary alike, to the extent that the question being asked is: is the game worth the Candle?

Particularly apposite to that question have been the following developments. First, there is a threat to costs budgeting by a side wind. It is the government’s intention to extend Fixed Costs in the Fast Track to cases worth up to £100,000 with effect from April 2023. That will require CPR Part 45 to be re-written, with the consequence the obligation to file and exchange costs budgets in those cases will be removed, leaving costs budgeting to apply only in multi-track cases claiming over £100,000.

There is then the raising of judicial concern at the process itself. Although in the end, he retained costs budgeting, in Genius Sports Technologies Ltd v Soft Construct (Malta) Ltd ²² Marcus Smith J had:

”… on a previous occasion, expressed a purely provisional view that, given the somewhat unusual nature of these proceedings … costs budgeting might be more trouble than it was worth.”

That is a sentiment previously articulated by Master Davison in Smith v W Ford & Sons (Contractors) Ltd ²³ on an application to disapply the convention that budgeting is generally dispensed within the Asbestos List in the Queen’s Bench Division. In refusing the application, the Master in making his general observations, had this to say:

• 9.  “… there is no evidence that the process of detailed assessment is not adequately controlling costs in asbestos cases. If the costs of asbestos cases were placed against the costs incurred in other cases of industrial disease, which have been costs budgeted, I would be surprised if there were much, if indeed any, difference. … QB Masters, Chancery Masters and Costs Judges do not necessarily share this defendant’s expressed confidence that costs budgeting controls costs better, or more effectively, than detailed assessment. This is a large topic and a complex and somewhat sensitive issue.”

Lastly, we have had the intervention of Sir Geoffrey Vos, the Master of the Rolls himself. In early 2022, he asked the Civil Justice Council (CJC) to take a strategic and holistic look at costs. The CJC’s response was to approve the setting up of a Costs Working Group to be overseen by a Steering Group chaired by Lord Justice Birss. The Working Group, will liaise with a wider working group composed of representative interests and has launched a public consultation, which will run for three months until Friday 30 September 2022. A consultation paper has now been published which asks:

• (i)  whether costs budgeting should continue in its current form;
• (ii)  whether it should be restricted in scope and if so how;
• (iii)  whether it should be abolished altogether; and
• (iv)  if costs budgeting is to be restricted or abolished, how an early focus on costs could nevertheless be maintained.

The battle lines are thus clearly drawn. The parameters are: get rid of budgeting altogether: it has proved to be a steam roller to crack a nut and has increased rather than controlled the costs of civil litigation: or alternatively, more budgeting and the earlier the better, since if the court can get to grips with the costs sooner, the incurred costs will not be permitted run away with themselves, as happens now.

For anyone with views about whether there should be more budgeting, less budgeting or no budgeting at all, comments on a postcard to the CJC by noon on 30 September 2022. *J.P.I. Law 191

The Prediction

In his Harbour Lecture entitled “Confronting Costs Management” delivered on 13 May 2015, Sir Rupert made a prediction:

”I predict that within ten years costs management will be accepted as an entirely normal discipline and people will wonder what all the fuss was about.”

With under three years to go, will that prediction be fulfilled? Whichever way the Civil Justice Committee jumps when it concludes its consultation, the temptation to tinker will not be resisted, so that, in one form or another, there will be rule changes.

And what happens when there are rule changes? The CPR become longer and more complex, so that the ability to challenge them rises thereby increasing the likelihood of satellite litigation about what they mean and how they should be applied. Well intentioned though the Jackson recommendations were in his Report, the placing of the smart money must be on the likelihood that people will continue to fuss about costs budgeting, unless after a decade of experiment, the CJC decides that the Game is not worth the Candle after all and abolishes it altogether.

Colin Campbell