The Costs Budgeting Process - the only roll of the dice
Judgments in two recent cases demonstrate that if the costs budgeting process is not given the highest priority and proper regard, litigants could suffer significant adverse consequences due to the increased influence the costs budgeting process now has on the level of costs allowed at the conclusion of the case.
The Court of Appeal in Harrison v Coventry & Warwickshire University Hospital NHS Trust (2017), have held that once the court have set the level of estimated costs at the costs budgeting stage, the court at detailed assessment will only be able to depart from the set figure with good reason, so that the costs budgeting process will have primacy over detailed assessment in respect of estimated costs.
In Findcharm Limited v Churchill Group Limited (2017) a party was criticised by the court at the costs management hearing for "game playing" and for setting out figures in their budget discussion report and their own costs budget that were unrealistically low.
In this article, we review the implications of both of these important cases and how to avoid the potential pitfalls.
Harrison v University Hospitals Coventry & Warwickshire Hospital NHS Trust
This Court of Appeal case followed on from a previous case considering the issue of primacy between the costs budgeting process and detailed assessment; Merrix v Heart of England NHS Foundation Trust (2017), which was a case considered in the High Court.
When considering the parties' budgets at the costs budgeting stage, the Court of Appeal held that the court will consider the "future estimated" costs but they may not approve the incurred costs, save that they may pass/record comment on the same or record whether incurred costs are agreed between the parties. However, the overall budget set takes into account both incurred and future estimated costs.
The key points from this decision are as follows.
Where a costs management order has been made, in relation to future estimated costs, at any subsequent detailed assessment the Court will not depart upwards or downwards from that approved budget without "good reason".
The Court of Appeal did not provide guidance as to what constituted a "good reason".
"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 principle purposes of costs budgeting and hence the overriding objective."
Incurred costs are still to be subject of detailed assessment in the usual way. At detailed assessment, the Court may take into account any comments made in relation to incurred costs when the costs management order was made.
At detailed assessment, the Court will still apply the test of proportionality to the overall costs (both incurred and estimated).
Consequently, given the court's judgment in this case, it is now more important than ever before to have proper regard for the costs budgeting process, which in light of this judgment should never be approached with the mind-set that all costs will be dealt with at the end of the case.
As a rule of thumb, it is likely following this decision, that the only chance that a party will have to influence the level of estimated costs that will be recoverable in the case, will be at the costs budgeting stage. A failure to properly engage in that process and properly prepare for a costs management hearing, is likely to lead to a party paying out more by way of estimated costs than might have been the case had the costs budgeting process been approached in the correct way.
This judgment means that the costs budgeting process must be approached as the stage at which to properly "set out your stall" in relation to your budget and to challenge the opponent's budget. It is imperative for lawyers to give proper consideration to a client's budget, ensuring that it accurately reflects what is likely to happen during the course of the litigation.
The days of some parties utilising the costs budgeting process as a means to understate the costs in budget so as to tactically place the opponents in poor light are now no more as are the days of approaching the process on the basis that the case will follow "the usual course of events".
Indeed this tactic was criticised by Justice Coulson in the High Court case of Findcharm Limited v Churchill Group Limited (2017), where the Court in its judgment stated as follows:
"Some parties seem to treat costs budgeting as a form of game in which they can seek to exploit the costs budgeting rules in the hope of obtaining a tactical advantage over the other side.
In extreme cases, this can lead to one side to offer very low figures in their Precedent R, in the hope that the Court may be tempted to calculate its own amount somewhere between the widely different sets of figures put forward by the parties. Unhappily, this is, in my view an example of that approach."
The court further stated that the Defendant's budget was "unreasonably low" and that the Defendant's Precedent R, Budget Discussion Report was "of no utility".
Therefore in this case, the Court not only criticised the unreasonably low budget submitted by the Defendant but also criticised the Precedent R, budget discussion report delivered by the Defendant as being of no use. As a result of the Defendant taking this approach, the Claimant did particularly well out of the budgeting process.
So, what are the practical implications of these two cases? These can be summed up as follows:
Parties who do not engage in the costs budgeting process will not receive a favourable hearing before the court.
The court is unlikely, at detailed assessment, to depart from an approved budget. It is therefore imperative that the cost budgeting process is treated as a party's one opportunity to challenge the other party's costs.
All courts will now need to be directed to properly engage in the costs budgeting process fully given the implications set out above and time estimates set for costs and case management conferences (CCMC) should reflect that.
Advocates appearing at the costs and case management conference must be fully conversant with the budget served on behalf of the party for which they act and the Precedent R, budget discussion report and be able to engage fully in the costs budgeting process.
Where a party is looking to update a budget, be conscious that they may now look to increase the level of incurred costs, given this is the only element that the court can increase on assessment.
Steering a course through the costs budgeting process, including the preparation of budgets, the completion of the Precedent R and the subsequent negotiations requires a steady hand at the tiller.
Having regard to these two significant cases, more than ever before the costs lawyers preparing the budget and Precedent R and the advocate attending the CCMC need to work closely together. The costs team and the advocacy team that both form part of DWF Connected Services, are extremely experienced in dealing with all aspects of the costs budgeting process and are able to provide unrivalled expertise over the course of the costs budgeting process.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.