The court will control the parties’ budgets in respect of recoverable costs and will not allow them to depart from the agreed budget unless satisfied there is good reason. Two ‘post-April’ High Court cases, Venulum Property v Space Architecture and Fons HF v Corporal Ltd have shown that the Courts are prepared to adopt a hard line stance on this matter although it is likely that the approach of different courts and different judges may vary.
There is a new test of proportionality (CPR Rule 44.3(5)), which provides that costs incurred by a party are proportionate if they bear a reasonable relationship to:
(a) the sums in issue in the proceedings;
(b) the value of any non-monetary relief in issue in the proceedings;
(c) the complexity of the litigation;
(d) any additional work generated by the conduct of the paying party, and
(e) any wider factors involved in the proceedings, such as reputation or public importance.
At this early stage of the new rules, the new test of proportionality is likely to make life quite difficult for legal representatives as there is no guidance yet as to how this will be determined by the Courts. There is likely to be satellite litigation over the next couple of years on how the test is to be applied but, until then, the test is likely to be quite subjective depending on the Court and the Judge on the day.
CPR Rule 44.3(2)(a) also provides that the Court will “only allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred”.
There has also been an amendment to the “overriding objective” so that it enables the court to deal with cases justly “and at proportionate cost”.
Preventing costs management becoming a contentious part of the litigation – In order to prevent costs management becoming a contentious part of the litigation, the new Practice Direction 3E severely limits the costs of costs budgeting. Save in exceptional circumstances, the recoverable costs of completing Precedent H will be limited to the higher of 1% of the approved budget or £1,000. All other recoverable costs of the budgeting and costs management process (i.e. completing revised cost budgets and/or attending costs management conferences) will be limited to 2% of the approved budget. Engaging in substantial dispute about costs budgeting will only be worthwhile in particularly high value cases, or in those cases where it is hoped that the budgeting process can be used as a mean for tying your opponent’s hands.
- Prepare fully for the first CMD – unlike previously, there is unlikely to be any scope for costs arguments at the end of court proceedings. Costs arguments will inevitably now take place at the first CMC so you will need to be prepared to justify your costs budgets, including providing relevant documents if necessary to do so.
- Drafting Precedent H – as explained below, you will need to carry out an early substantive review of the case to enable you to accurately assess your costs as well as your client’s prospects of success as this is likely to have a bearing on the approach that you take to Precedent H and the tactics you employ. Run through the index to the court rules, think of all the things that could conceivably happen, and then put in a realistic estimate of the time and cost involved in dealing with those steps. Then add a little more to be on the safe side. The result is a rather frightening, but probably realistic, number at the end of the form.
- Greater costs at the outset – you will need to carry out a full review of all the evidence from the outset of the case in order to realistically calculate your costs budget and assess your client’s prospects of success. As a result, representatives are more likely to incur greater costs at the outset of the case than previously.
- Make sure your assumptions and contingent costs are carefully thought through – as you will be unable to revise your costs budget throughout the course of proceedings unless you have a good reason, you will need to make sure that you have drafted your assumptions widely so that you can revise your budget accordingly if the parameters in the case change. Similarly, think carefully about what contingent costs there are likely to be in the case and make sure that you include as many as possible in your Precedent H.
- Consider Counsel’s costs – you will need to consider Counsel’s costs at an early stage, particularly where the risk should fall if Counsel exceeds their budget. Review any retainer arrangement to ensure that Counsel is responsible for any excess. If this is not possible, make sure your assumptions are drafted on the basis that Counsel’s fees may change if there are unforeseen developments in the case which affect the nature of the advice and the preparation required by Counsel.
- Consider the implications of disclosing certain information on Precedent H – consider whether including certain costs in your budget might put you at a tactical disadvantage, e.g. including the cost of surveillance would tip the Claimant off that they were going to be watched. However, leaving it out of the budget would prevent the cost of the surveillance from being recovered if the Defendant wins. Therefore, you will need to consider these issues at an early stage, e.g. obtain video surveillance evidence early before the issue of proceedings and keep costs below £25,000 so that surveillance costs can be included as “pre-action costs” or alternatively, state that the budget excludes “costs the identification of which would reveal the nature of privileged material”, so that no figures would need to be given and the Claimant would be ignorant of whether surveillance had already taken place or was planned. Similarly, you will need to consider whether you should be obtaining your lay and expert evidence before or early on in the proceedings (before the first CMC) so that you do not have to reveal, and then potentially rely, upon unfavourable evidence.
- Be pro-active in your costs management – liaise on a monthly basis with your opponent regarding your respective budgets. If your budget changes during the course of the proceedings, you will need to revise Precedent H and submit it to your opponent to agree and resubmit to the Court. However, there may be tactical considerations that you will need to bear in mind – what if your opponent does not agree to the change, is there a tactical advantage to be gained from opposing your opponent’s request to amend the costs budget etc? The tactical approach to take is likely to depend on the case at hand but, as a general rule of thumb, it’s best to co-operate with your opponent in case you need a return favour further down the line…
- High or low costs – You will also need to consider whether you wish to take a tactical approach to costs depending on the likely outcome of the case. A very high costs budget could be deployed to intimidate the other side into mediation or settlement even if they have a strong case to avoid a potentially expensive costs liability. Also, if you think your client is likely to win the case, you may want to push your costs up to increase the chance of you recovering all your costs. If you think you are going to lose the case, you may want to push your costs down to force the other side to reduce their costs, thereby reducing your client’s costs liability. A lower budget may make the other side’s budget look overinflated and pressure them to cut costs, such as jettisoning expensive witnesses rather than risking a large legal costs bill. Whilst a court will not permit a budget to be used to frustrate the legal process and a statement of truth will have to be signed, there may be some creative leeway in ending up with a figure that still falls within a “reasonable bracket”, which will be the test to be applied at a CMC.
- Pushing costs down – if you’re looking to push your costs down, target your opponent’s costs budget in areas such as disclosure and witnesses. Also, look to target their hourly rate. In all cases, you will need to focus on proportionality, linking your arguments to one or more of the five factors set out above.
- Be prepared – when you attend the first CMC, be prepared to justify your costs budget as your opponent may try to argue that your costs are not proportionate. If necessary, take supporting documents with you that support the assertions and assumptions in your costs budget, particularly focusing on the factors set out in the proportionality test. For example, if your hourly rate is higher than your opponent’s, take evidence to justify this, e.g. if your firm carries out more complex and specialised work, then you will know the short-cuts and law at a more detailed level, hence the increased hourly rate, your rates are dependent on geographical location etc.
- Keep “proportionality” in mind – under new CPR Rule 44.3(2)(a) (as set out above), the court can disallow or reduce costs even if they were reasonably or necessarily incurred. This emphasises the need to have thought about your arguments on proportionality with supporting evidence where possible. When the Court looks at your costs budget and assesses the proportionality of such costs, your best arguments to justify your costs are going to be “the complexity of the litigation” and “any additional work generated by the conduct of the paying party”. Equally, your opponent is likely to point to these arguments to justify their own costs or try to push your costs down. Keep a paper trail to show that your conduct has been reasonable and where you have engaged in any opportunities to settle, particularly if your opponent did not engage or was not forthcoming in any such settlement negotiations. Obviously, you will not be able to rely on “any additional work generated by the conduct of the paying party” as an argument to push costs up or down at the initial CMC, so this argument is more likely to come into play when costs budgets are revised throughout proceedings.
- Think ahead – under the new regime, it’s going to be much harder to obtain relief from sanctions so you will need to make sure that you hit all deadlines or, if this is not going to be possible, make sure you ask for an extension of time as far as possible in advance of the deadline.
- Take your time – although it may seem a bit “over the top” in terms of preparation, it is worth spending the time and money getting Precedent H right – it will only save you money in the long-run. Remember, the Court will not depart from your approved or agreed budget unless there is good reason to do so and your client may not be able to recover all or part of its costs actually incurred. Although you can warn clients of this from the outset, a client is unlikely to be happy with the service provided if they have to personally pay significant costs because you failed to budget correctly. There may even be a question mark about whether you could even claim these costs back from the client as the client could ultimately be paying for your incompetence!
- Get it right – It is most likely going to be the solicitor on the case that deals with the costs budget at the first CMC as you will understand the costs position. You will need to know what you are talking about with your arguments on costs prepared beforehand. Most cases will not get to the actual hearing stage so this could be the most important hearing in the entire case. If you could win the CMC by not getting your budget restricted at this stage, it will give you a tactical advantage and put you in a strong position from the outset.