Legal Briefing

At what cost? The introduction of costs management in court proceedings

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Dispute resolution | 01 November 2012

In the final report of his review 
of civil litigation costs, Lord Justice 
Jackson made it clear that he considers litigation to be too expensive and that 
the high costs of bringing or defending 
a claim in court effectively limit access 
to justice. He proposed that the court’s case management powers be expressly extended to allow judges greater control over the costs during the proceedings. 
This proposition is a dramatic and fundamental departure from the current practice, where parties usually only argue about costs after trial or after their case has settled.


It is also very sensible. Too often, parties to a dispute find themselves in a position where costs are the driving factor in 
the litigation decision-making process. Rather than advising solely on the 
merits of a claim, in-house counsel and external counsel alike find themselves increasingly focusing on potential costs recovery or costs liability. Indeed, in many cases the total legal fees for all parties involved easily eclipse the underlying 
sums in dispute.

Costs management is currently being piloted in the Mercantile Courts, the Technology and Construction Court and in defamation proceedings. However, according to the current timetable, from 
1 April 2013, it will be introduced for all multi-track cases in County Courts, the Chancery Division of the High Court and the Queen’s Bench Division of the High Court (other than the Admiralty and Commercial Courts). This will coincide with the introduction of the other Jackson reforms, which some practitioners and commentators have already started to describe as the ‘Big Bang’.

WHAT IS COSTS MANAGEMENT?

In his report, Lord Justice Jackson envisaged relatively simple modifications to current case management to incorporate active costs management by the court:

  1. each party would prepare a costs budget that could be updated and amended as the case proceeds;
  2. the court would consider and approve each party’s budget, with revisions where appropriate;
  3. the court would manage the case with a view to it proceeding in accordance with the approved costs budgets; and
  4. ultimately, the costs recoverable by the successful party would be assessed by reference to its approved costs budget.

HOW WILL COSTS MANAGEMENT 
WORK IN PRACTICE?

The first time that a court will usually consider the parties’ costs is at the case management conference (CMC). The CMC usually takes place relatively early in proceedings and gives the court an opportunity to review the progress of the dispute and set out the timetable for the parties to follow up to trial.

Parties will be required to prepare a costs budget, to be exchanged and provided to the court within 28 days after service of the defence. Costs budgets will be in a standard form and will set out details of the costs that each party has incurred to date and the anticipated future costs of the litigation. Those future costs will be broken down into the steps that the parties will take up to trial (for example, disclosure, witness statements, expert reports).

While preparing their costs budgets, parties will be encouraged to discuss with each other the assumptions and proposed timetable on which those budgets are based. Where possible, the parties should also seek to agree their respective costs budgets.

At the CMC, the court will review each party’s costs budget and may make a costs management order. It is understood that there will, in most cases, be a presumption in favour of making such an order and, indeed, these orders are likely to be a key tool for the court in managing the costs of litigation. The order will record the extent to which costs budgets have been agreed between the parties. Where the budgets have not been agreed, the order will record the court’s approval of the costs budgets, following any revisions that the court considers appropriate.

Whether or not the court makes a costs management order, it is clear that the court must now consider the parties’ costs budgets when making case management decisions and take into account the costs of each procedural step that the parties are required to comply with. Active costs management, therefore, will provide the court with an opportunity to tailor the litigation process to each case, seeking to ensure that the costs of litigating a dispute remain, as far as possible, reasonable and proportionate to the sums or issues in dispute. Judges have received and continue to receive training to achieve effective costs and case management. This is, ultimately, Lord Justice Jackson’s goal in relation to the cost of litigation. It is brave and unprecedented and should be applauded but it remains to be seen how realistic the judges’ costs management will be when they have no practical experience of the level of day-to-day work and costs involved.

WHEN WILL A COSTS 
BUDGET BE APPROVED?

The court will not undertake a detailed assessment of each party’s costs in advance. The court will not approve costs that have already been incurred. The court’s approval (or otherwise) of a costs budget will only relate to the total anticipated future costs of each stage of the litigation.

While the court may well consider in more detail some or all of the constituent elements of the costs budget, the overriding aim for the court is to approve costs budgets that fall within the range 
of reasonable and proportionate costs. 
This is, of course, quite a nebulous 
concept. However, the court regularly applies similar tests of reasonableness and proportionality, both in relation to costs assessments and otherwise. To achieve Lord Justice Jackson’s aims, costs management must be a flexible tool that allows the court to take into account the particular facts of any given case.

WHAT IS THE NEW TEST 
OF PROPORTIONALITY?

The court must now apply the new test of proportionality when considering costs budgets and overall case management. Lord Neuberger, the new president of the Supreme Court, sounded a note of warning in this respect when he declared that just because work in litigation is deemed to have been necessary, it does not mean that the cost of that work is proportionate.

The test is, however, underpinned by common sense. Costs will be deemed to be proportionate if they bear a reasonable relationship to:

  1. the underlying sums in dispute;
  2. the value of any non-monetary relief sought;
  3. the complexity of the case;
  4. the impact on costs of the conduct 
of the parties; and
  5. any wider factors, such as reputation and public importance.

The key principle is, of course, that 
parties should not expend more than 
a proportionate amount of money in pursuing or defending a claim. If parties 
do wish to spend more, in most cases 
they will be at liberty to do so. However, 
the new costs management procedure makes it clear that they should not 
expect to recover such sums from the 
other party.

WHAT IS THE IMPACT OF A 
COSTS MANAGEMENT ORDER?

When assessing costs, the court will have regard to the successful party’s last approved costs budget for each stage of the proceedings. Indeed, the court will not depart from that approved budget without good reason. This can have potentially dramatic consequences, as one successful party found to its detriment during one of the pilot schemes. In that case, a defamation claim arising out of the ‘Baby P’ 
controversy, the senior costs judge, Master Hurst, decided that the successful party was not entitled to recover any costs other than those set out in her last approved costs budget. The problem was that the successful party’s approved costs budget had not been updated to take into account unanticipated additional costs that were incurred during disclosure and the preparation of witness statements. She had also failed to update the other party about the increase in costs. As a result, she was not entitled to recover almost half of the costs she had incurred, despite Master Hurst’s indication that it was strongly arguable that those costs were both reasonable and proportionate.

Master Hurst’s decision is not binding 
on other courts, but the views of the 
senior costs judge are likely to be persuasive until a higher court considers the issue. Master Hurst recognised the significance of his decision when he gave permission to appeal his decision and it is understood that the Court of Appeal will revisit the issue in early 2013. However, even if the Court of Appeal adopts a less draconian approach, the case is a useful warning of the need for parties carefully to prepare, regularly review and, if necessary, update their costs budgets.

CAN COSTS BUDGETS 
BE USED TACTICALLY?

Although costs budgets will have to be verified by a statement of truth, it is inevitable that some parties will seek to use the process of preparing, exchanging and approving costs budgets to influence the costs management in their case. For example, a party that thinks it will lose and, therefore, be ordered to pay the other party’s costs, may produce a very low costs budget and seek to argue that, by comparison, the other party’s costs budget is disproportionately high. Equally, a party that is confident of success may prepare 
an inflated budget, in order to seek to recover a higher proportion of its actual costs in due course.

However, the court will no doubt be alive to such ruses and it is hoped that they will be willing to challenge the accuracy and reasonableness of low costs estimates as well as high costs budgets.

WHAT ROLE CAN CLIENTS 
PLAY IN COSTS MANAGEMENT?

Most solicitors keep their clients informed of the anticipated future costs, both at 
the outset of any litigation and throughout the process. The preparation of costs budgets should not, therefore, materially impact on the costs information available to clients.

However, because the court will now seek to control litigation expenditure from a relatively early stage in proceedings, it is inevitable that clients will have an increased involvement in the costs management process. This should, if anything, improve client care. In particular:

  1. solicitors are likely to require clients carefully to review and then approve draft costs budgets before they are exchanged with the other party and provided to the court;
  2. costs budgets will contain costs for specified contingencies, which should assist clients to budget and forecast future expenditure;
  3. clients may consider it appropriate 
to attend any court hearings at 
which costs budgets are considered. This may be the CMC, but the court will also have the power to convene separate costs management conferences to consider and approve budgets; and
  4. clients may need to turn their minds 
to whether or not they are willing 
to incur legal costs over and above those set out in a prepared or approved costs budget, even though such costs are unlikely to be recoverable in due course.