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Client Alert: The approach to costs management and its effect upon detailed assessment

17/03/2016

Parties to litigation covered by the costs management regime are required to provide each other and the court with costs budgets in good time before the first case management conference (CMC). The budgets are required to be set out in the Precedent H format which provides for costs of the case in phases. Each phase is comprised of costs already incurred and an estimate of the costs to be incurred through to the end of trial.

The costs management rules provide the court with the power to manage the costs to be incurred by any party in any proceedings and allows the court to make a ‘costs management order’.

CPR 3.18 deals with how the court should assess costs where a costs management order has been made. It provides:

“In any case where a costs management order has been made, when assessing costs on the standard basis, the court will:

(a) have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings; and

(b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so.”

There has been much debate as to what is approved by the court and the extent to which the court can depart from it, irrespective of whether there is a good reason to do so.

Take for example, the CMC phase of a budget which sets out that costs of £5,000 have been incurred and estimates future costs of £10,000, where the hourly rate used in calculating the costs is very high. Let’s say the court approves the phase at £12,000.

Following settlement of the claim, the costs claimed for the phase amount to £12,500. The defendant raises points of dispute in relation to exceeding the budget, unreasonably high hourly rates, an unreasonable amount of hours claimed and number of fee earners involved in attendance at the costs and case management hearing.

How should the court approach the assessment? The approach was considered in Sarpd Oil International Limited v Addax Energy SA & another [2016] EWCA Civ 120 where the Court of Appeal was determining an appeal over an application for security for costs.

The Court was asked to consider the amount of the security by reference to the approved costs budgets provided by the parties. The claimant asked the Court to assess the sum to be provided as security for costs by reference to the defendant’s approved costs budget.

The defendant argued that the Court should go behind the figures that had already been approved and see if the incurred sums in the budget were reasonable and proportionate costs.

The Court of Appeal held that:

“…although a costs budget sets out the incurred costs element and the estimated costs element…the court does not formally approve the incurred costs element but only the estimated costs element; and it is only in relation to that approved estimated costs element that the specific rule of assessment in Part 3.18(b) applies, namely that the court will not depart from the approved budget “unless satisfied that there is good reason to do so”.”

Using the above example, upon detailed assessment, it follows that the court may assess the £5,000 costs incurred but may only depart from the £7,000 approved costs incurred and assess them downwards if there is a good reason to do so.

But what is the approach if the parties had agreed the CMC phase at £12,000? The Court of Appeal said that, “….in a case where the parties agree a costs budget in whole or in part and that is recorded in the relevant costs management order, the rule in Part 3.18(b) applies both to the agreed incurred costs element and to the agreed estimated costs element.”

This means that the court may not depart from the £12,000 and assess them downwards unless there is good reason to do so.

The costs management rules allow the court to record comments on the incurred costs (in particular, regarding the court’s view whether they are reasonable and proportionate) as well as take them into account when considering the reasonableness and proportionality of the estimated costs element of the phase. But what weight will a recorded comment have when the court comes to assessment of costs at the end of the case?

The Court of Appeal considered this situation and said by way of example that, “… if a court has commented that incurred costs in a costs budget appear to be reasonable and proportionate, it would usually require good reason to be shown why such costs should not be included in an award of costs on the standard basis at the end of the trial.”

In practice, this may lead to incurred costs being awarded in full at trial or upon assessment unless there is good reason to depart from the approved budget.

It follows that if the court commented that the £5,000 incurred costs appear unreasonable and disproportionate then that should be given significant weight when the court comes to exercise its general discretion as to costs at an assessment hearing.

Keoghs Comment

This decision of the Court of Appeal highlights the importance of the paying parties going fully prepared to oppose opponents’ budgets. The Court said, “….this is the appropriate occasion on which to contest the costs items in those budgets, both in relation to the incurred costs elements in their respective budgets and in relation to the estimated costs elements.”

In practical terms, it means the CMC may be the only opportunity a defendant has to reduce an opponent’s costs.

The consequences of agreeing an opponent’s budget must be carefully considered to ensure that the opportunity to reduce costs at a later date is not lost. Defendants need to be very alive as to the effect of judicial comments on budgets as this may mean the defendant will have to show “good reason” for the court to depart downwards from the budget upon detailed assessment.

Howard Dean
Author

Howard Dean
Partner
Head of Costs

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