We are five working days in to July and already I am aware of three reported decisions that consider Costs Management. Rewind a few more weeks into June and we had Court of Appeal guidance on the approach to detailed assessments where there has been a costs management order (see Harrison article) and Chief Master Marsh’s guidance on how/when/if the Court should comment on incurred costs and when a party may escape the 1% and 2% caps.
This article is intended to provide practical guidance on how you should approach costs management.
It worries me how some lawyers approach incurred costs. I have seen work obviously claimed in the wrong phases, rates being claimed incorrectly, the work claimed bearing little resemblance to WIP and significant disbursements being omitted. Let’s step back and consider the implications of getting the incurred costs wrong. We now know that incurred costs will be subject to detailed assessment in any event, so you may feel that they have very little importance in the costs management process. Let us start with PD 7.4 (my emphasis added):
7.4 As part of the costs management process the court may not approve costs incurred before the date of any costs management hearing. The court may, however, record its comments on those costs and will take those costs into account when considering the reasonableness and proportionality of all budgeted costs.
The impact of the Court’s recorded comments is an issue in its infancy. If the costs are said to be disproportionate then we know from BNM and May (see May Article and BNM Article ) that the Court can and will reduce the costs to a proportionate level, notwithstanding what is reasonable and necessary. However if a comment simply states that the costs are excessive, I cannot see how that is likely to have much bearing on the assessment. Chief Master Marsh (see Article) stressed that a degree of caution should be applied when deciding whether to make a comment on the incurred costs and that any comment should be made on a sound footing and not based on an impression as disproportionate weight might be given to it at the detailed assessment.
The second and perhaps more important factor is the fact that the Court will take the incurred costs into account when considering the budgeted costs. For the avoidance of doubt, when we refer to budgeted costs we are referring to the future costs within the budget. Two issues arise. The first obvious issue is that if the incurred costs are incorrectly too high, then the Court may allow you a lesser sum for your budgeted costs. The second issue is that if the incurred costs are incorrect, this may have influenced the Judge's decision in setting the budget and accordingly may provide good reason for departing from the approved budget when the errors with incurred costs emerge. This may cause additional/wasted costs which, it could be argued, were as a result of misleading the Judge. If the budgeting exercise becomes meaningless because the budget was wrong, then the party at fault may find they do not recover those costs and may have to meet the costs of the other side. This would not be the best start to a detailed assessment.
Make sure to put the incurred costs in the correct phase with the correct rates and include all disbursements. A budget must be in the form of Precedent H in the Practice Direction and must follow the MOJ Guidance in all respects. Prepare a summary of the work done so that when the Judge asks “what has been done” the advocate can provide a proper explanation.
Preparing the budget
When preparing the budget have in mind that a Judge may ask you what have you included and why. If you can provide a comprehensive response, a Judge is likely to be satisfied that you have a clear vision, understand the work that needs to be done and have carefully considered what time will reasonably be required. That does not protect you from a Judge concluding that the time is excessive and/or disproportionate, but it gives you a fighting chance. If you cannot adequately answer the question about your incurred costs, the Judge is most likely to conclude that you have prepared the budget without proper consideration and will most likely reduce the budget to the minimum level they consider reasonable to do what they consider is reasonably required. Help the Judge to help you.
Also help your advocate to help you. When we prepare a budget for our clients we itemise every step anticipated within each phase. Not only does this help your advocate at the CCMC but it may prove invaluable if you need to apply to amend your budget or you need to demonstrate good reason for departing from your budget. If you cannot prove what was accounted for then the Judge will have greater difficulty in finding that something was reasonably not included.
Amending the budget
It is worrying when we compare how many budgets we have prepared with how few instructions we have received to seek amendments. The Practice Direction states that:
7.6 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.
Litigation is unpredictable and significant developments are uncommon. New witnesses may come to light, further expert evidence may be required or the length of trial may change. Providing these were not reasonably anticipated, they would seem to constitute a significant development. Guidance can be found in Yeo (see Article) by Mr Justice Warby. If you could and should have anticipated the cost at the time of originally preparing your budget, the likelihood is that you will not meet the criteria of there being a significant development in the litigation.
Remember the Court cannot approve incurred costs and therefore you should apply to amend your budget before you incur the costs caused by the significant development.
Good Reason to depart from an approved budget
To my mind the test of “significant development” in the litigation and “good reason” to depart from the budget are different. There may be a good reason to depart from the budget even though there has not been a significant development. Examples can be found in Henry (see Article) and Sony (see Article). The costs, in excess of the approved budget, being reasonable and proportionate may in itself be grounds for departing from the approved budget. The conduct of the opposing party is also likely to be a significant factor in considering whether there is good reason.
Essentially a receiving party will need to demonstrate that issues arose and additional costs were incurred which were not reasonably anticipated.
A paying party, in seeking to depart downwards from the receiving party’s approved budget, will need to demonstrate that certain costs have been unreasonably incurred or are disproportionate. It goes without saying that if the incurred costs are less than the budgeted costs then the receiving party will only be entitled to the amount incurred (indemnity principle still applies), so there will be an inevitable departure downwards.
The test of proportionality is different at a CCMC to what it is at Detailed Assessment. Most importantly a Costs Judge will have regard to factors such as conduct and offers to settle. If the paying party can demonstrate at Detailed Assessment that the costs are disproportionate based on what is now known to the Costs Judge, this may be grounds for departing downwards from the approved budget. Equally if the receiving party could overturn adverse findings of proportionality made at a CCMC, then that again could allow them to depart upwards.
Want to explore this in greater detail? Contact Paragon Costs to arrange some free in-house training.