Costs Budgets apply to all Part 7 Multi-Track cases except:
(r.3.12.1)
- a) where the claim is commenced on or after 22nd April 2014 and the amount of money claimed as stated on the claim form is £10 million or more; or
(b) where the claim is commenced on or after 22nd April 2014 and is for a monetary claim which is not quantified or not fully quantified or is for a non-monetary claim and in any such case the claim form contains a statement that the claim is valued at £10 million or more; or
(c) where in proceedings commenced on or after 6th April 2016 a claim is made by or on behalf of a person under the age of 18 (a child) (and on a child reaching majority this exception will continue to apply unless the court otherwise orders); or
(d) where the proceeding are the subject of fixed costs or scale costs; or
(e) the court otherwise orders.
The purpose of costs management is to enable the Court to manage the costs to be incurred by the parties to any proceedings so as to further the overriding objective (r.3.12.2). Of course, the overriding objective is to enable the court to deal with cases justly and at proportionate costs. By its very nature, the Court will set budgets with proportionality in mind.
Rule 3.13(1) states that parties (except litigants-in-person) must file and exchange budgets
(a) where the stated value of the claim on the claim form is less than £50,000, with their directions questionnaires; or
(b) in any other case, not later than 21 days before the first case management conference.
Rule 3.14 states:
Unless the court otherwise orders, any party which fails to file a budget despite being required to do so will be treated as having filed a budget comprising only the applicable court fees.
The Costs Budget referred to is in Precedent H (this can be found in Annex A of Practice Direction 3E). The Budget typically comprises of 7 pages; a front page which summarises the costs incurred for each phase of the case and; the costs estimated (to be incurred) from the date of the budget until the end of the case. The remaining 6 pages provide a breakdown of costs and disbursements incurred; and details of the costs and disbursements (to be incurred), for the 10 phases (and 2 contingencies). For each phase, there is also a section called ‘assumptions’.
When preparing the budget, parties should not include VAT, additional liabilities or post settlement costs. As to the contents of each phase, there are guidance notes contained at Annex B of PD3E.
Paragraph 6 PD 3E states:
6.
(a) Unless the court otherwise orders, a budget must be in the form of Precedent H annexed to this Practice Direction. It must be in landscape format with an easily legible typeface. In substantial cases, the court may direct that budgets be limited initially to part only of the proceedings and subsequently extended to cover the whole proceedings. A budget must be dated and verified by a statement of truth signed by a senior legal representative of the party.
(b) Parties must follow the Precedent H Guidance Note in all respects.
(c) In cases where a party’s budgeted costs do not exceed £25,000 or the value of the claim as stated on the claim form is less than £50,000, the parties must only use the first page of Precedent H .
When do Incurred Costs End and when Does Estimated Costs Begin?
Common sense would tell us that when preparing the budget, the incurred costs recorded in the budget will be up to the date of the budget and the estimated costs shall begin from the day after the budget. However, as we all know it could be months (or as in the case of Ali v Channel 5 a year) between the date of the budget and the CCMC.
CPR PD3E 7.4 states that as part of the costs management process, the court may not approve costs incurred before the date of any costs management hearing. The ordinary reading of this paragraph suggests that incurred costs should run up to the date of the CCMC and not in fact up to the date of the budget. This was considered further by Chief Master Marsh in Sharp v Blank and Others [2017] EWHC 3390 (Ch) wherein the Chief Master acknowledged that the literal reading of paragraph 7.4 was “impossible to implement”. He noted by way of example that by the point of the CCMC, the budgets will be at least 3 weeks out of date (based on the requirement to file and serve at least 21 days before the CCMC) and the estimated costs of the CCMC itself will have been incurred by the time of the hearing.
In the case of Various Claimants v MGN Limited [2018] EWHC 1244 the Chief Master put the above into practice. This was a case where one of the Claimants served a budget showing incurred costs as they stood in January 2018. In the run up to the CCMC in May 2018, he served a further budget, showing the incurred costs up to May 2018. The first budget showed that £82,000.00 had been incurred in respect of disclosure by January 2018 and a further £98,000.00 was sought for future work. The revised budget showed that the Claimant had by then spent £197,000.00. The entirety of future costs in the updated budget related to an application for specific disclosure which was considered inappropriate and moved to a contingency, leaving nothing for future costs, but knowledge in the mind of the Court that the Claimant had already spent £197,000.00. The Court continued its budgeting exercise on the basis of the January budget and reduced future costs sought therein to £75,000.00.
This meant that the Claimant could not, without good reason, recover the full £197,000 but could only recover a maximum £157,000 for that phase, despite already spending an additional £40,000.00.
What happens if I fail to file a budget on time?
In accordance with Rule 3.14, the defaulting party will be treated as having filed a budget comprising only of applicable Court Fees. This is what happened in the case of Mitchell v News Group Newspapers Ltd [2013] EWCA Civ 1537. However, many commentators on that case incorrectly reported that the whole budget (including incurred costs) would be limited to Court Fees which was not the case. If Mitchell won the claim, he would still be able to recover, following an assessment, the incurred costs (suggested to be a 7-figure sum).
Of course, if you are in such a predicament, an urgent application should be made for relief from sanction ensuring that reference is made to the three-limb test in Denton v TH White Ltd [2014] EWCA Civ 906 and Rule 3.9. The application must be made promptly. Naturally there is no clear definition of prompt in the rules but in Oak Cash & Carry Ltd v British Gas Trading [2016] EWCA Civ 153 it was held that the delay of one-month was too long.
Notwithstanding the above, there is a potential saving grace (in the event that no relief is obtained and a party is restricted to Court fees) found in Rule 36.23. This Rule provides that where a party makes a good Part 36 Offer, they can recover 50% of their costs which ordinarily would have been restricted to Court Fees. This was confirmed in the case of Ali v Channel 5 Broadcast Ltd [2018] EWHC 840 (Ch).
Discussing the Budget
Rule 3.13(2) states that where a party has filed a costs budget, all other parties, not being litigants in person must file an agreed budget discussion report no later than 7 days before the hearing. A budget discussion report exists for this purpose and parties are encouraged to use the Precedent R Budget Discussion Report which is annexed to Practice Direction 3E.
The report must set out the figures which are agreed for each phase; the figures which are not agreed for each phase; and a brief summary of the grounds of dispute.
Parties are encouraged to try and agree budgets before the CCMC in order to save time and therefore, negotiations should take place as early as possible upon receipt of the served budget.
After a Costs Management Order – applying to amend
At the CCMC (or at any other time) the Court may make a Costs Management Order [“CMO”]. The CMO will record the extent to which the budgeted costs are agreed or if not agreed, the Court’s approved figures and, if incurred costs are agreed, they will record that agreement too.
Once a CMO has been made, it is extremely important that fee earners track the amount of work they are doing against the approved or agreed budget and the CMO as any over spend will highly likely be unrecoverable (see Various Claimants v MGN).
However, if there comes a point where you find that you are likely to overspend (or underspend) then you should ensure that you seek, early, an agreement or the Court’s approval for a revised budget. The procedure for doing so is found in PD3E 7.6 which states:
Each party shall revise its budget in respect of future costs upwards or downwards, if significant developments in the litigation warrant such revisions. Such amended budgets shall be submitted to the other parties for agreement. In default of agreement, the amended budgets shall be submitted to the court, together with a note of (a) the changes made and the reasons for those changes and (b) the objections of any other party. The court may approve, vary or disapprove the revisions, having regard to any significant developments which have occurred since the date when the previous budget was approved or agreed.
What is (or is not) a significant development? I guess this will be objective. In the case of Churchill v Boot (22/04/2016), the claim had doubled in size since the CMO, the trial had been delayed and there had been additional disclosure. Following which, the Claimant had made an application to vary the budget. On appeal, the Judge held:
- He was not satisfied that there had been significant developments.
- The increased value of the claim did not mean that there would be higher costs (Also see May v Wavell). The parties already had permission to call the relevant experts.
- The additional disclosure was clearly foreseeable when the costs budget was set.
- An adjournment could potentially be a significant development. However on the facts of this case it was not.
- The master had exercised his discretion appropriately there were no grounds to interfere with the exercise of that discretion.
At settlement
When it comes to settling the claim, if you have an approved or agreed costs budget then you should always ensure that as part of any settlement (whether by way of Consent or at Trial), you seek provision for a payment on account of costs. The relevant rule concerning payment on account is Rule 44.2(8) which reads:
Where the court orders a party to pay costs subject to detailed assessment, it will order that party to pay a reasonable sum on account of costs, unless there is good reason not to do so.
With reference to your budget, you should always request a payment on account especially with regards to those costs that you have now spent since the budget and settlement because those costs will have already been deemed proportionate and the Court will not depart from an agreed or approved budget unless satisfied that there is good reason to do so. In the case of Thomas Pink Ltd v Victoria’s Secret UK Ltd [2014] EWHC 3258 (Ch) the Court ordered the payment on account to be 90% of the costs that were ‘to be incurred’ as a payment on account. In addition, they further ordered a sum of approximately 50% of the ‘incurred’ costs in line with the decision in Mars UK Ltd v Teknowledge Ltd [1999] EWHC 226 (Pat). Most recently in Cleveland Bridge v Sarens (UK) Ltd [2018] 2 Costs LR 333 the Court awarded 90% of the ‘budgeted’ costs and 70% of the pre-budget (incurred) costs.
Costs Assessment
Rule 3.18 says:
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 budgeted costs for each phase of the proceedings;
(b) not depart from such approved or agreed budgeted costs unless satisfied that there is good reason to do so; and
(c) take into account any comments made pursuant to rule 3.15(4) or paragraph 7.4 of Practice Direction 3E and recorded on the face of the order.
For the incurred costs (pre-budget), these costs will go through the usual assessment procedure and if there have been any comments made pursuant to Rule 3.15(4) or paragraph 7.4 of Practice Direction 3E, they will be taken into consideration.
For the budgeted costs, the Court will not depart from the approved or agreed budget unless they are satisfied that there is a good reason. What that effectively means is, if your actual costs incurred for that phase do not exceed the budget that was approved or agreed, you will likely be awarded those costs in full because those costs will already have been deemed reasonable and proportionate.
What should be noted is that this rule only applies to costs being assessed on the standard basis. So if there is an order for indemnity costs (whether that arises from a good Part 36 Offer or otherwise), the rule does not apply and the Court will not be bound by any costs budgets.
In terms of preparation of the Bill, for all costs that were incurred from the 6th April 2018, you should ensure that these costs are recorded in the new electronic bill of costs (Precedent S). For any costs before that date, they can also be included in the new electronic bill or, the old style paper (Victoria) bill. If you do have pre-6th April 2018 costs, and you do choose to use the paper bill, you must also ensure that a Precedent Q is also prepared to show the comparison between the (approved or agreed) budget and the bill. If you are using the electronic bill, the Precedent Q is integrated into the Precedent S and no separate document is required.
Good Reason
So what is good reason? Authorities on this topic are limited. However that is not surprising for as Davies LJ observed in Harrison v University Hospitals Coventry and Warwickshire NHS Trust [2017] EWCA Civ 792:
“As to what will constitute “good reason” in any given case I think it much better not to seek to proffer any further, necessarily generalised, guidance or examples. The matter can safely be left to the individual appraisal and evaluation of costs judges by reference to the circumstances of each individual case.” Para.44
In other words, each case and each decision will be fact specific. Obviously, some “good reason” departures from the budget are obvious, e.g. where a budgeted contingency does not arise or whether a claim is resolved before a specific phase has commenced (and so the indemnity principle applies as no cost has been spent on that phase). Beyond these, counsel of caution must be to seek prospective variation under PD 3E paragraph 7.6 whenever it is appropriate, rather than to run the gauntlet of arguing “good reason” at assessment. Further comments made by Davis LJ in Harrison reinforce this:
“Where there is a proposed departure from budget – be it upwards or downwards – the court on a detailed assessment is empowered to sanction such a departure if it is satisfied that there is good reason for doing so. That of course is a significant fetter on the court having an unrestricted discretion: it is deliberately designed to be so. Costs judges should therefore be expected not to adopt a lax or overindulgent approach to the need to find “good reason”: if only because to do so would tend to subvert one of the principal purposes of costs budgeting and thence the overriding objective.” Para.44
Good reason was discussed in the case of Jallow v MOD [2018] EWHC B7 (Costs) wherein Master Rowley considered the amount of settlement and hourly rates. He held that the fact an action settles for less than the amount claimed is not a good reason to cut the budget. A claim pleaded at £300,000 settled for £90,000. There were a variety of quantum scenarios and absent of evidence of wilful exaggeration, the budget remained sound. In relation to hourly rates, he had reduced the hourly rates in relation to the pre-budget costs and the Defendants argued that that was “good reason” to depart from the Claimant’s approved budget. The Master disagreed and the reduction in hourly rates for the pre-budget costs was not to be read across so as to disturb the budget.
Costs of preparing and discussing the budget
Practice Direction 3E Paragraph 7.2 states:
Save in exceptional circumstances—
(a) the recoverable costs of initially completing Precedent H shall not exceed the higher of £1,000 or 1% of the total of the incurred costs (as agreed or allowed on assessment) and the budgeted costs (agreed or approved); and
(b) all other recoverable costs of the budgeting and costs management process shall not exceed 2% of the total of the incurred costs (as agreed or allowed on assessment) and the budgeted (agreed or approved) costs.