With its introduction as part of the Jackson reforms in April 2013, costs budgeting was intended to be used as a tool to streamline the costs procedure in litigation by active court management of parties’ costs from an early stage. In theory, if a receiving party litigates within an approved costs budget, only those costs which have been categorised as “incurred” will fall to be assessed at the conclusion of the matter, thus either limiting the scope of, or negating the requirement for detailed assessment.
In practice, however, the process has not been quite so simple, with numerous appeals arising from budgeting decisions. Various courts have sought to approve individual elements of costs budgets at the costs and case management conference (CCMC), despite confirmation being provided to the contrary in Practice Direction 3E.7.3:
“… the court’s approval will relate only to the total figures for budgeted costs of each phase of the proceedings, although in the course of its review the court may have regard to the constituent elements of each total figure”.
One such high profile case, Yirenki v Ministry of Defence, addressed the court’s practice of setting a budget but permitting the parties to argue hourly rates at detailed assessment. On appeal, Jacobs J held, in no uncertain terms, that it was simply wrong to do so; the court can only approve the total figure for each phase, and nothing should be left open for assessment (save for the “good reason” argument if applicable). This is so that the parties know where they stand. The constituent elements of a budget:
“… are part of the road to reaching that goal, but they are not an end in themselves, and those constituent elements are not the subject of approval.”
Whilst Yirenki appeared to put an end to approval of individual elements in a costs budget, the waters appear to have been muddied somewhat in Easteye Ltd v Malhotra Property Investments Ltd and others.
The case concerned two disputed rights of way in Newcastle. At the CCMC, the claimant sought £210,020 for the trial phase, including £139,000 for leading counsel and £30,500 for junior counsel. The defendants had offered £120,000 for the trial phase as reasonable, but provided no breakdown as to the constituent elements of this figure. Pescod DDJ allowed the £120,000 in respect of the trial and further ordered that the instruction of leading counsel was not approved.
On appeal, most of the argument focused on whether the reasons given by the judge were adequate (held that yes, a one line explanation was adequate), but this case also raises issues as to the impact of the court’s decision to not approve the instruction of leading counsel.
When dismissing the appeal, Nugee J made it clear that the decision did not preclude the claimant from instructing leading counsel:
“I do not read the Deputy District Judge’s order as precluding the claimant from recovering, should they choose to employ leading counsel and should they succeed at trial, and obtain a costs order, any costs which have, in fact, been incurred on leading counsel.”
He also added that the usual test of “good reason” would be applied if the claimant sought to depart from the approved costs budget on assessment.
Despite these comments, the decision could be more limiting in practice. Whilst the claimant correctly remains free to spend its trial phase budget as it sees fit, the practical impact of such a large reduction to the costs budget by virtue of not approving the instruction of leading counsel could effectively mean that it would in fact be impossible for the claimant to instruct leading counsel and remain within budget, thus running the risk that the claimant would have to pay for the same out of his or her own pocket. Indeed, in view of the comments made, it could also prove extremely difficult to succeed in pleading good reason at detailed assessment.
This is not to say that the judiciary’s approach is incorrect; proportionality and the reasonableness of costs as well as the individual elements in a costs budget should be taken into account when approving each phase. However, in terms of inter partes recovery, it is perhaps more limiting than previously envisaged. The most important practical point to be taken as a result of that approach is that solicitors should be considering proportionality of their prospective costs at a very early stage in the proceedings, even before their costs budgets are filed, and must provide appropriate advice to their clients as to the risks in relation to inter partes costs recovery (with particular reference to Practice Direction 46.6.1 regarding informing the client as to “unusual” costs which may not be allowed on an assessment of costs between the parties).
As to the future of costs budgeting, it appears to be working in principle. However, until appeals arising from budgeting decisions cease, there remain many areas where courts are, rightly or wrongly, exercising their discretion. It remains to be seen if any further practical implications will be realised.
Natalie Swales is a council member at the Association of Costs Lawyers and a partner at Masters Legal Costs Services LLP.