Costs Budgeting: An opportunity or a threat?

07 Mar 2013

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With all the talk about non recovery of success fees and insurance premiums, banning referral fees and whether or not the RTA portal will be extended you would be forgiven for missing what could be the most significant change to the way in which litigation is conducted since the Woolf reforms: Costs Budgeting.

The basic principle behind costs budgeting is very sensible.  Essentially it will no longer be acceptable for cost issues to be left to the end of litigation when the costs have already been spent.  That was always the main failing when it came to detailed assessment and the reason why so many bills of costs were hard fought; because there was a feeling that the money had already been spent. The leap forward is that there will be control over costs as part of the general case management of cases.

The new costs management rules will apply to multi track cases after 1 April.  The idea is that this will control costs in the multi track whilst fixed fees will rule in the fast track.

All parties will be required to exchange and file costs budgets in the form of a new precedent 28 days after serving a Defence.  If this is not done only court fees will be recoverable; incentive indeed to make sure it is done correctly.  In outline these costs budgets will need to set out in detail what costs have already been incurred as well as those which will be incurred during the future course of the litigation.  It will be important to set out any assumptions on which the estimates are based.

The courts will manage costs and they will have discretion to make a costs management order.   There may need to be a costs management hearing and if so the court is likely to require a range of information including how much the case is worth and whether there are any other issues at stake of any value even if non-financial.  This will all go into the pot when considering how much it is reasonable to spend on litigating the matter.  It will not be sufficient to simply state the costs to date but rather a party will be required to explain what was done.

In some cases under this new regime, the agreed and required directions will drive the budget.  In other cases the budget will drive the directions. In many cases a combination of these things will happen.

There is of course a risk that all of this could result in satellite litigation and increasing costs at certain stages of litigation.  Some commentators have noted that, since it will be more difficult to challenge costs at the end of the case if costs fall within an approved budget, there is a risk that parties will submit exaggerated budgets.  This practice would then lead to a requirement to provided detailed challenges to proposed costs during the course of the litigation.  This may mean that costs management hearings become not unlike detailed assessment hearings of old. 

The new rules will address many of these concerns.  There are likely to be limits placed on the costs incurred in the costs budgeting process which leads to the making of a costs management order.  The associated Practice Direction will also help in that it will make clear that the court will not undertake a detailed assessment but rather it will consider whether budgeted costs fall within a reasonable and proportionate range. Furthermore, although the court will not approve costs which have already been spent they may make a note of their comments which could be taken into account later.

In reality there is an opportunity to see the full implications of the litigation at an early stage and this could well promote early settlement.  Clients will need to be closely involved in the costs management process as they will need to approve their own lawyer's costs as well as give instructions upon the extent of any proposed challenges that are to be made to the other party's costs.

Alongside all of this will sit a new test of proportionality.  As well as deciding if a costs budget is reasonable the judges will consider proportionality.  The costs will be reasonable under the new test if they bear a reasonable relationship to the sums in issue; the value of any non monetary relief in the proceedings; the complexity of the litigation; any additional work generated by the conduct of the paying party and any wider factors involved in the proceedings, such as reputation of public importance.

According to Kelvin Farmaner, Partner with Trethowans in Southampton and Head of The Forum of Insurance Lawyers Costs Sector Focus Team, "Most clients and lawyers will do well under the new regime.  The vast majority of good practitioners have for a very many years seen the benefits of working in a collaborative way with all parties in a case.  Costs budgeting calls for an open approach to the exchange of costs information; and therefore collaborative working. MI data repeatedly shows that this results in cases being dealt with more swiftly and more cost effectively for clients. Costs budgeting must be an opportunity for good lawyers to thrive and for the personal injury and litigation industry to put behind it the allegations of inefficiency and costliness which have dogged it for some time.  The truth is, as ever, only a few bad apples deserved the reputation. Costs budgeting is an opportunity for a fresh start and to put clients first."