As we move into the tenth year since Sir Rupert Jackson signed off his Review of Civil Litigation Costs: Final Report, his flagship recommendation about controlling costs through costs budgeting bears repeating (Final Report: Executive Summary 6.10):
“Costs management is an adjunct to case management, whereby the court, with input from the parties, actively attempts to control the costs of cases before it. The primary means by which costs management is effected is for the parties to provide budgets of their own costs, with those budgets being updated from time to time and submitted for approval to the court. The court then formulates the directions and orders which it makes with a view to ensuring that costs do not become disproportionate.”
Five and a half years later, on 13 May 2015, Sir Rupert delivered his Harbour lecture entitled Confronting Costs Management, in which he made the following prediction:
“I predict that within ten years cost management will be accepted as an entirely normal discipline and people will wonder what all the fuss was about.”
A further three and a half years have elapsed since he made that prediction and in view of the number of issues which remain to be resolved about budgeting (for example, can a trial judge vary a budget after trial?), it would be a brave person who would be willing to place a wager upon whether Sir Rupert’s prediction will come true.
One matter, however, which has perplexed practitioners ever since budgeting was invented, has now been resolved: when the court allocates a sum for a phase of work (such as witness statements), can the parties to the litigation spend it as they wish, or are they constrained to use it by reference to the fee earners and hourly rates contained in their Precedent H, that is to say, the form on which should set out, budgets of anticipated costs in accordance with CPR 3 and Practice Direction 3E?
Yirenki v Ministry of Defence, a short, pithy judgment of Jacobs J, now provides the answer, but in order to understand why there was a question which required such an answer, it is necessary first to delve into the confusingly drafted Practice Directions to CPR 3 Part II (Costs Management).
Precedent H is mandatory where costs budgeting applies. It requires the parties to provide, in the prescribed court form, a rate (per hour) for fee earners working on the case, and the number of hours to be expended by those fee earners, with a total then to be given for each phase of that work. However, when undertaking costs budgeting, PD 3E.7 provides that:
“When reviewing budgeted costs, the court will not undertake a detailed assessment in advance…” (paragraph 7.3)
“It is not the role of the court in the cost management hearing to fix or approve the hourly rates claimed in the budget” (paragraph 7.10).
Given that hourly rates and time spent on the case are usually the most prominent “big ticket” items over which parties argue, the wording of PD 3E.7.10 has inevitably led to disagreements about when, if ever, that argument should take place. In Yirenki, it was clearly envisaged that the time and the place was at the detailed assessment. This was plain from the terms of Master Davison’s order below:
“Save that the parties reserve their positions as to incurred costs, and as to hourly rates, the Master approved the budgets, subject to the proviso that it remains open to them to dispute those matters (and that extent the figure for each phase at a detailed assessment)…”
On appeal, two criticisms were levelled at the order: firstly, the master should not have approved a budget subject to the possibility of debate at a later stage as to hourly rates; and secondly, there had been an approval at a detailed level of the number of specific hours to be expended by the various fee earners of different grades. What the master should have done was to approve a composite figure for each phase, rather than to approve the hours to be spent.
Those submissions succeeded. Jacobs J held that the master’s approach had succumbed to several “vices” (as he described them). The first was that the figure going forward must be a final and not provisional figure (paragraph 11), so that the parties knew at an early stage where they stood. Thus, the aim was to reach a figure for each phase of the proceedings, with the constituent elements (rates and hours) being part of the road to reaching that goal. However, they were not to be the subject of approval (paragraph 12). Indeed, as Jacobs J expressed it at (paragraph 18):
“I agree with the Appellant that it is wrong to approve the budget by reference to constituent parts”,
and that, as a figure would be set for each phase:
“… since the parties [will] know where they stand at the start, it increases the probability that a detailed assessment with all its complexity and possible cost is avoided” (paragraph 17).
Jacobs J was careful to remind the parties that the figures for each phase, were not, nor could they be set in stone. The budget can be varied upwards if the court is satisfied that there have been any “significant developments” in the litigation under PD 3E 7.6: alternatively, on detailed assessment if a “good reason” can be demonstrated under CPR 3.18(b) for departing from the last agreed or approved budget, the figure for each phase can be adjusted upwards (or downwards). However, absent any such variations, the budget figures are final and the resulting allowances are for the parties to spend as they wish. It follows that if £10,000 is authorised for witness statements, it does not matter whether the work takes a very clever Grade A one-hour at £10,000 per hour, or 100 Grade Ds ten hours each at £100 per hour; it is not for the court to direct how the budget should be spent. Once the figure is given, it is for the parties to spend it on the particular phase as they think fit, without judicial interference.
What are the practical consequences of the decision in Yirenki? First, it is that to all intents and purposes, the costs managing judge will (emphasis added) be carrying out a detailed assessment in all but name, since, as Jacob J held, the resulting figure will be final for future costs unless significant developments/good reason are subsequently shown for departing from it. Second, since it is not for the court to decide hourly rates or time spent, it follows that the potentially “biggest ticket” items on detailed assessment will never be decided judicially so far as budgeted costs are concerned: that judicial process will be reserved for the incurred costs alone. Indeed, the closest that the rates will come under judicial scrutiny will be as a “constituent part” of the budget, but insofar as those rates and times are to be approved, they never will be: the approach of Master Davison in these respects, Jacobs J held, was wrong, and since Yirenki is a decision of a High Court judge, it will bind all judges at master, circuit and district judge levels who carry out costs budgeting.
All of this brings into sharp focus the importance of getting budgeting right first time round. There will be no chance later to argue hours or rates for budgeted work. It behoves all parties to make sure their budgets are approved, taking into account all possible vicissitudes in the litigation and getting their assumptions right. If they fail to do that, the costs which parties can recover from their opponents if they win will result in a significant shortfall and that, in turn, may mean that clients fall out with their solicitors for failing to update their budget. This will result in more satellite litigation if the solicitors look to the client to plug the gap. Will that mean that Sir Rupert’s prediction will come true? Surely not.