Costs management – is it delivering savings?

Director of Costs, Howard Dean, addresses the costs management regime and queries whether it is delivering savings in costs and court time.

Back in 2009 Lord Justice Jackson considered that successful costs management might have a part to play in avoiding detailed assessment hearings in all but the most exceptional cases.

Jackson recognised that all economic activity follows the most rewarding path and that unless lawyers were provided with an incentive to contain their costs then costs would continue to rise.

The costs management regime that was introduced allows a successful party to recover a maximum amount, absent good reason, for each phase of the litigation. This gave a successful party an interest in the costs that were being incurred in their name as they may have to meet those which were incurred in excess of an approved budget.

Jackson recognised that there were two negative factors against the introduction of a costs management regime – an extra layer of extra costs which then requires additional judicial time to administer.

However, he considered that there were two much more powerful reasons in favour of its introduction. Firstly, as the court already manages the case through direction, it made sense to manage the costs at the same time. Secondly, he came to the view that, if done properly, it would save substantially more costs and court time when it came to the assessment of costs than it would generate.

But is this what is happening in practice? 

Is costs management being done properly?

The constraints that the costs management regime sought to place on costs are driving claimant solicitor behaviours to maximise the budget that is approved and here is how they do it:

• Front loading – claimant solicitors recognise that the court cannot place any constraints upon costs that have been incurred, so seek to do as much of the work as possible before the costs management order is made. We see this in higher value and clinical negligence cases where over 30% of the total budget claimed has routinely been incurred.
• Exaggerated hourly rates – higher hourly rates than the claimant is or is ever likely to be liable to pay. We see this when wecompare the hourly rates claimed in the bill with those claimed in the budget.
• Exaggerated number of hours – The hours claimed are far more than are needed for the directions sought and allow for every conceivable eventuality in the case irrespective of how likely it is to arise.
• Exaggeration of the grade of fee earner – the fee earner who actually has done or is going to do the work is often of a lower grade than claimed within the budget. We see this regularly when we compare the grade of fee earner in the budget with those in the bill and remarkably with incurred costs.
• Exaggeration of expert’s fees – Higher experts fees are claimed in the budget than have been or are likely to be charged. Again we see this when we compare the budget with the bill.
• Inclusion of solicitor and own client costs in the budget – The time spent on solicitor and own client activities such as funding and administrative tasks are routinely claimed in the time in the budget when it is not recoverable between the parties. We frequently see this explanation in replies to objections taking issue with the accuracy of the budget and the bill. 

Claimant solicitor behaviour is incentivised to exaggerate their budgets by the knowledge that the court is restricted by time and by the rules as to the level of scrutiny that is applied.

At a Costs and Case Management Conference, the court does not have to determine hourly rates or conduct a detailed assessment nor should it, but this budget exaggeration cannot be allowed to continue.
However, the restrictions on the amount of time allowed for costs management prevent the court from:

• Considering the activities that have been completed and claimed as incurred costs; and
• Carrying out an appropriate review of the constituent elements of the budgeted costs by phase

As a result, the claimant invariably succeeds in obtaining approval of a budget which is lower than the inflated budget submitted but higher than an uninflated budget.

Claimant solicitors are incentivised further by the prospect of recovering budgeted costs without them being scrutinised. CPR 3.18 provides that the court may not depart from an approved budget unless there is good reason to do so.

In order to ensure that they obtain the benefits of CPR 3.18 we see opponents ensuring that they do not exceed the approved phase amounts and budget by:

• Transferring time from one phase to another to avoid exceeding the approved phase amount;
• Using a lower grade of fee earner to do the work that was approved for a higher grade fee earner to do;
• Applying a lower hourly rate in the bill than claimed in the budget;

Alternatively, where the amount of work actually incurred is significantly under the amount approved for a phase we see the following behaviours:

• Time transferred from a phase which has been exceeded into those which have not;
• Increasing the hourly rate from that claimed in the budget;
• Including solicitor and own client costs.

The evidence of these behaviours is increasing and being challenged on a daily basis in detailed assessment proceedings. These behaviours are clear evidence that the costs management regime is not working properly.

Does the costs management regime save more costs and court time than it generates?

Prior to the introduction of the costs management regime, a claimant submitted a costs estimate during the case and the costs were subject to detailed assessment at the end of the case.

The introduction of the cost management regime has created an extra layer of costs in preparing budgets and budget discussion reports.

However, very few budgets are capable of agreement because of the inherent incentives of the regime that drive budget exaggeration. As a direct consequence, the courts are increasingly called upon to determine budgets at, on average, over 36% lower than claimed. This exaggeration is stretching court resources to the extent that the CCMC hearing is often months after the filing of the defence.

Rather than obviate the need for a detailed assessment hearing, the costs management regime makes detailed assessment and the need for issues to be determined at a hearing significantly more likely. This is because:

• It does not obviate the need for detailed assessment of incurred costs as they remain subject to assessment without any need to show “good reason”;
• Absent “good reason”, the approved figure for budgeted costs will be allowed upon assessment. But given there is scant authority on what amounts to a “good reason” save for the indemnity principle, the parties have no alternative except to seek determination of the issue. For the paying party the budget exaggeration will always be a good reason;
• This is reinforced by the fact that receiving parties are steadfastly refusing to accept a reduction on budgeted costs where the paying party raises “good reason” for a departure;
• Hourly rates need to be determined and where allowed at a lower level than claimed, they may amount to a “good reason” for the court to depart from the amount approved for budgeted costs;
• The new proportionality test is only to be applied to the totality of the estimated costs allowed and the incurred costs as assessed. So where the costs claimed are disproportionate, the paying party has to proceed to a detailed assessment hearing to have the issue determined. 

For these reasons, it can be safely concluded that the current costs management regime causes more costs and court time to be incurred than it saves. It creates a series of incentives that encourage the potentially successful party to exaggerate costs budgets in order to maximise costs that can be made out of the claim.

These incentives were recognised by Lord Justice Jackson who quoted the comment of Professor Adrian Zuckerman of the University College Oxford on the Costs Management chapter of his Preliminary Report on costs management that:
“… economic activity follows the most rewarding path. Lawyers are paid by the hour and have an incentive to do more work at each stage of the action…..So the “ratcheting mechanism” forces costs ever upwards, unless incentives can be reversed.”

How can the incentives within the costs management regime be reversed?

The vertical and horizontal increase of fixed recoverable costs to all claims up to £100,000 cannot come soon enough to alleviate the incentivised ratcheting that we see on a daily basis for lower value multi track claims.

After implementation, these incentives will remain in claims in excess of £100,000 and for clinical negligence in claims in excess of £25,000 unless they can be reversed.

The current costs management regime needs to be reviewed so that it can meet the objectives of saving substantially more costs and more court time than it generates. In order to do so, it needs to control the costs being incurred throughout the life of the claim and provide incentives that would achieve the following objectives:

Abolition of recoverability of costs of the costs management process - Some practitioners view the fees that can be generated from the costs management process as another revenue stream to be maximised. Traditionally, providing the client with advice on costs was not recoverable between the parties and the sooner we return to this position the better in order to have a more efficient process.

We recommend that the rules are amended so that they no longer allow the recovery of fees for completion of the precedent H, costs budgeting and costs management process. In this way, the receiving party is not incentivised to exaggerate the budget to achieve a higher fee.

Incentivise agreement of budgets – In circumstances where a party fails to agree, but where the court approves a phase of or the total budget as claimed, the court should make no order as to that party’s costs of the costs and case management hearing.

Conversely, where a party’s budget is approved in an amount 20% lower than claimed then the court should make no order as to that party’s costs of the costs and case management hearing.

This will incentivise the submission and agreement of budgets and deter exaggeration. As a direct consequence, less judicial time will be needed on costs management.

Amendment to CPR 3.18 – Only the receiving party should be required to show “good reason” to depart from an approved or agreed budget.

It would remove the issue of whether agreement of a budget prevents the court from departing downwards even if good reason is shown. It will incentivise potential paying parties into agreeing phases or budgets on a global basis resulting in savings in costs and court resources.

It will remove the incentive to exaggerate budgets and to manipulate the time claimed in the bill to obtain CPR 3.18 protection from assessment.

It will allow receiving parties to object to and prevent receiving parties from claiming and recovering individual items that are solicitor and own client related; unreasonably incurred; or unreasonable in amount, that otherwise would be recoverable under the current operation of CPR 3.18.

It will avoid the wave of satellite litigation on what amounts to a “good reason” that is going to take up a significant amount of court time going forwards.

It will also continue to incentivise potential receiving parties to apply to exceed budgets during the litigation.

Finally, if parties are incentivised to submit and to agree reasonable budgets going forwards then absent the need to show “good reason” there will be fewer issues needed to be determined at detailed assessment resulting in a saving in court resources.

Amendment to CPR 47.20

Many practitioners view the fees that can be generated from the detailed assessment process as another revenue stream to be maximised. Currently, the rule creates a presumption that the receiving party is entitled to the costs of the detailed assessment proceedings unless the court can be persuaded otherwise.

It is accepted that the presumption should apply to the costs of drafting the bill of costs. However, the presumption does not incentivise the receiving party to make any (or any realistic) offer of settlement until a few weeks or days before the detailed assessment hearing.

If the rule was amended so that the presumption only applied to the costs of drafting and checking the bill of costs then the parties would be able to negotiate on a level playing field. Thereafter, the parties need to be incentivised to make reasonable offers.

Compulsory Part 36 offers in detailed assessment proceedings

The rules could be amended to require each party to make only one compulsory Part 36 offer in the assessment proceedings and a point no later than 21 days after service of points of dispute.

The costs of assessment would only be recoverable if a party bettered or equalled their own Part 36 offer as under the current rules. However, to prevent entrenchment and to incentivise realistic Part 36 offers, there would be no order as to costs of the assessment in circumstances where costs were assessed between the two offers.

The risk of not recovering costs of assessment will incentivise the parties to make realistic Part 36 offers and, where the offers are relatively close together, to seek a quick resolution in the most cost-effective way.

This package of measures would reverse the incentives that are inherent in the current costs management process and save more costs and court time than are generated by it.