Costs management: approved budget cannot be revised after trial (High Court)

Practical Law UK Legal Update Case Report 7-532-3435 (Approx. 7 pages)

Costs management: approved budget cannot be revised after trial (High Court)

by Practical Law Dispute Resolution

Background

Indemnity costs

Costs may be assessed on either the standard basis or the indemnity basis. The purpose of indemnity costs is to provide a party with compensation to as full an extent as possible for the outlay and trouble of litigation. Indemnity costs are awarded at the discretion of the court, although they are more likely to be ordered when there is some culpability or abuse on the part of the paying party. For guidance on the exercise of the court's discretion, see Practice note, Indemnity costs.

Costs management rules

A new costs management regime was introduced with effect from 1 April 2013 (CPR 3.12-3.18 and Practice Direction (PD) 3E). Previously, a pilot scheme of costs management had been operated in the Technology and Construction Court (TCC), governed by PD 51G. Under transitional provisions, proceedings in the TCC commenced before 1 April 2013, that were within the scope of the scheme in PD 51G, continued to proceed in accordance with the scheme.

Among the relevant provisions in PD 51G were:

"In a case where a costs management order has been made, .... before trial, a party whose costs budget is no longer accurate must file and serve a budget revision showing what, if any, departures have occurred from that party’s last approved budget, and the reasons for any increased budget. The court may approve or disapprove such departures from the previous budget." (Paragraph 6, PD 51G.)
"When assessing costs on the standard basis, the court(1) will have regard to the receiving party's last approved budget; and (2) will not depart from such approved budget unless satisfied that there is good reason to do so." (Paragraph 8, PD 51G. See also CPR 3.18.)

Under the current regime, the court may approve, vary or disapprove any revisions to a costs budget, "having regard to any significant developments which have occurred since the date when the previous budget was approved or agreed" (paragraph 2.6, PD 3E).

Courts' approach to costs management

The Court of Appeal has held that, when considering whether there is good reason to depart from an approved costs budget, the court should consider all the circumstances of the case, but in particular, the objective of the costs budgeting regime (Henry v News Group Newspapers Ltd [2013] EWCA Civ 19). The court will not allow costs in excess of the budget "unless something unusual has occurred". For more detail, see Legal update, Court of Appeal allows departure from court approved costs budget.

The circumstances in which an approved costs budget can be subsequently revised were considered further in Murray and another v Neil Dowlman Architecture Ltd [2013] EWHC 872 (TCC). In Murray, Coulson J held that it would normally be extremely difficult to persuade a court to rectify inadequacies or mistakes in the preparation of a budget, which has then been approved by the court. The courts will expect parties to undertake the budgeting exercise properly first time around, and will be slow to revise approved budgets. See Legal update, When approved costs budget can be revised or rectified (High Court).

Facts

The claimant had after the event (ATE) legal expenses insurance cover up to £250,000. During the proceedings, the court made a costs management order, approving the defendant's costs budget of £268,000, under the pilot scheme governed by PD 51G.

A number of settlement offers were made, but not accepted. In particular, the defendant had offered to settle the claim for £150,000 inclusive of costs and interest (the defendant's offer).

On 7 February 2013, about a month before the trial started, the defendant filed and served a revised costs budget of £532,000. However, no application was made to revise the approved costs budget.

Ultimately, the claimant's claim was unsuccessful, and judgment was awarded on part of the defendant's counterclaim. The defendant sought costs of almost £500,000 on the indemnity basis.

Decision

Coulson J awarded the defendant costs to be assessed on the standard basis, and ordered an interim payment of £250,000 (the amount of the ATE insurance cover) on account of costs. He held that the defendant had not varied its approved costs budget, and that it would be granted costs in excess of budget only if, on assessment, there was good reason to do so.

Indemnity costs not appropriate

Indemnity costs were not appropriate in this case as Coulson J concluded that the claimant had not conducted the case in a disproportionate manner. He rejected the submission that the claimant's experts had either behaved unreasonably or been responsible for increasing costs.

There was force in the argument that, as the claimant would have been better off if it had accepted the defendant's offer, the defendant should be entitled to indemnity costs from the date the offer expired. However, Coulson J noted that, as the defendant's offer was inclusive of costs, the claimant would have been significantly out of pocket if it had accepted the offer. In these circumstances, it had not unreasonable for the claimant to refuse the offer and pursue its claim to trial.

Would the costs management order be relevant if indemnity costs were awarded?

Coulson J noted that the wording of both paragraph 8 of PD 51G and CPR 3.18 expressly referred to costs being assessed on the standard basis. He concluded that the costs management order should also be the starting point of an assessment on the indemnity basis. This was because a costs budget is not based on any particular form of costs assessment; it represents a party's estimate of all the costs that they think they will incur.

Further, if a party who has been awarded indemnity costs is permitted to ignore any costs management order, successful parties would be encouraged to argue for indemnity costs every time. The costs management regime aims to achieve certainty. When going to trial, the parties may assume that, if they lose, any adverse costs liability will be limited to the amount of the approved costs budget, unless there is a good reason for any departure. The award of indemnity costs, does not automatically justify abandoning this certainty.

Was the defendant entitled to recover more than its court-approved costs budget?

Coulson J held that the defendant's costs should be assessed by reference to the costs management order unless it could either:

Revise its approved costs budget under paragraph 6 of PD 51G.
Persuade the court that there was good reason to depart from the approved costs budget.

This conclusion was the same whether based on PD 51G, the current CPR provisions on costs management or the Court of Appeal's guidance in Henry.

Had the defendant's costs budget been revised?

Coulson J held that, if a party wanted the court to approve significant changes to a costs budget, it had to make a formal application. Merely filing a revised costs budget at court was not sufficient.

A party should apply to court immediately it becomes apparent that its original budget costs have been exceeded by more than a minimal amount.

Paragraph 6 of PD 51G expressly required any application to be made before the trial. Coulson J's view was that an application to amend an approved costs budget after judgment was a contradiction in terms, and would lose the certainty provided by the costs management rules.

The claimant would be prejudiced if the application was heard after judgment, because, throughout the trial, the claimant had thought that its personal liability above the ATE cover was relatively modest (£18,000); permitting the defendant to revise his budget might mean the claimant would face personal liability of up to £250,000. This would be unjust and contrary to the costs management rules. In any event, Coulson J did not regard the question of prejudice to be of real relevance, for the reasons set out in Murray.

Even if it was possible to consider an application to revise a costs budget after judgment, the applicant would need to demonstrate, at the very least, a good reason for making the application so late.

When considering an application to vary a previous budget, the test is whether the court is satisfied that there is good reason to do so in all the circumstances (that is, the test applied on assessment should also be applied when seeking to revise a costs budget).

Was there good reason to depart from the approved costs budget?

A party may seek to depart from the approved budget costs under paragraph 8 of the PD (or CPR 3.18(b)), if there is good reason to do so. This issue was primarily for the costs judge, rather than the trial judge. However, Coulson J set out his views on the alleged reasons for departing from the defendant's costs budget.

In this case, the issues at trial were precisely those that had been pleaded originally. This was not a case where the issues ended up being very different to those in the original statements of case. In these circumstances, there was limited scope for finding a good reason to depart from the costs management order.

Making a mistake in a costs budget was unlikely to amount to a good reason (applying Murray). In this case, no details of any mistake or how it happened had been provided.

Questions of prejudice were less relevant under the new costs management rules. In any event, he considered that the claimant had suffered prejudice (for the reasons mentioned in Had the defendant's costs budget been revised?).

Accordingly, although the defendant was entitled, on assessment, to argue that there were good reasons for departing from its approved costs budget, Coulson J regarded the scope for departure was limited, save for one exception in relation to experts' fees.

Experts' fees

The sum claimed in relation to the defendant's experts' fees was £200,000, compared to £30,500 as estimated in the costs budget. Coulson J regarded this as "astonishingly high". The possible explanations for the increase were:

The costs budget woefully underestimated the experts' fees.
The experts took longer and cost more than they had anticipated.
The defendant's evidence was filed late, so it was only at a late stage that the defendant realised the fees were higher than estimated.

In Coulson J's view, none of these explanations amounted to a good reason for departing from the costs management order. He added that it had been completely unnecessary for one of the defendant's experts to attend every day of the trial. No case had ever required that level of knowledge or involvement.

The only justification for departing from the approved costs budget was to the extent that experts' fees had been incurred to deal with one aspect of the case that had reasonably not been thought would be the subject of expert evidence. Other than to this extent, the increase in experts' fees was not justified by any good reason and was the defendant's responsibility.

Comment

This decision reinforces the strict approach to costs management being taken by the courts. Although this case was decided under the TCC pilot scheme in PD 51G, the principles are likely to apply under the CPR costs management regime in Part II of CPR 3 with effect from 1 April 2013.

Coulson J's obiter comments that a court-approved costs budget should be the starting point when assessing costs on an indemnity basis are interesting. The relevant provision in CPR 3.18 (and paragraph 8, PD 51G under the previous pilot scheme) refers only to assessment on the standard basis. When approving a budget, the court will approve only those costs that it considers to be reasonable and proportionate (paragraph 2.3, PD 3E). It is, therefore, surprising that a court-approved costs budget should be the starting point for indemnity costs, where issues of proportionality do not arise.

It is worth noting that Coulson J is chair of a sub-committee of the Civil Procedure Rule Committee that is considering the automatic exemptions from costs management under CPR 3.12 (which exclude costs budgeting from proceedings in Admiralty and Commercial Courts, and such proceedings in the TCC and Chancery Division as may be directed).

Case

Elvanite Full Circle Ltd v Amec Earth & Environmental (UK) Ltd. [2013] EWHC 1643 (TCC) (14 June 2013).

End of Document

Also Found In

Resource ID 7-532-3435

Published on 19-Jun-2013

Resource Type Legal update: case report

Jurisdictions

England
Wales