April 2013 witnessed significant change to the legal landscape regarding costs in civil litigation. The overhaul of civil litigation costs came into effect following publication of the Lord Justice Jackson's package of reforms.
The reforms were embedded within the Civil Procedure Rules. Since the inception of the amended rules in April 2013, and as is always the case with our adversarial English legal system, the application of the amendment to legislation or procedure rules is thereafter clarified by judgements in the English and Welsh Courts.
Parties involved in civil litigation must now conduct themselves with a greater emphasis on proportionality and justification. To facilitate this ideology, in complex cases and those where the issues in dispute relate to a larger sum of money, usually in excess of £25,000.00, parties must file with the court and serve upon their opponent a Precedent H Costs Budget at the outset of proceedings. The costs budget does precisely that, it breaks down the process of litigation from start to finish, detailing the extent and summary of all projected costs each Party foresees it will incur in the pursuit of their case against the opponent via litigation.
Increasingly, parties may face themselves engaged in litigation with litigants in person. Section 3.13 of the Civil Procedure Rules contains provision for the requirement for Parties to file a costs budget, excluding litigants in person. There are, however, situations with some ambiguity where a litigant in person may be ordered or be well advised to file a costs budget:
“… a litigant in person may opt to serve and file a budget, or the court may order a litigant in person to do so. Furthermore, the court may decide to make a costs management order in relation to a litigant in person’s budget. Indeed, in a case in which a litigant in person is likely to be seeking a substantial costs order, whether because there will be fees of counsel under the Direct Access scheme or otherwise, it may well be desirable to do so.” Campbell v Campbell  EWHC 2237 (Ch), at paragraph 18.
The intention of this paper is not to provide a practical guide to drafting the Precedent H. It is, with hope, intended to provide a summary of the common pitfalls suffered by those involved in costs budgeting in civil litigation and to shine a spotlight on the court's trends in relevant judgements.
Considerations for the client
Whilst it is correct that the responsibility for the drafting and presentation of a Party's costs lies with their legal representative, it is crucial that clients are made aware by their lawyers that the requirements and application of costs budgeting affects them and their representatives from day one.
From the moment the client provides initial instructions to their lawyers the obligations imposed upon them in relation to budgeting for costs apply.
The following sub-sections detail various implications of budgeting for costs which all Parties should be mindful of in preparing their case for litigation.
Precedent H (Costs Budgets)
Where applicable, each Party to the proceedings must prepare and submit a Precedent H Costs Budget to the court in the early stages of court proceedings, specifically in contemplation of the case being allocated to track. The document sets out costs which the Party expects to incur in the pursuit or defence of the action up to and including Trial. The costs budget must be proportionate to the issues in dispute.
Therefore, the Parties and their lawyers are burdened with having to predict all reasonable work to be completed in pursuit of their case against the opponent and budget accordingly. Once a Party has filed it's costs budget with the court, they are fixed with said budget and a maximum threshold of those costs detailed within it, save for any subsequent application to the court to amend the costs budget.
Only, in extremely limited circumstances, will the courts permit amendment to a previously filed costs budget.
The Court will not allow amended costs budgets to be relied upon due to 'bad' drafting'. i.e. where amendment is sought due to anything other than a 'significant development'. – see CPR PD 3E.7.6
The proverbial elephant in the room however is that there is, at present, no statutory definition and only limited case law to assist Parties in determining what constitutes a significant development. The wheels of justice grind slowly indeed.
Late filing of precedent H costs budgets
Where a party has filed a late budget or indeed no budget at all, they will be entitled to court fees only. The defaulting Party must make an immediate application for relief from sanctions and file a budget at the very earliest convenience.
Many will recall the high profile case of Mitchell MP v News Group Newspapers Limited  EWCA Civ 1537 where then Conservative Government Chief Whip, Andrew Mitchell MP unceremoniously fell foul of the government's reformed and robust approach to compliance of the court's rules whereby he, or perhaps more accurately, his lawyers failed to file their costs budget by the specified seven clear days prior to the costs case management hearing.
Due to the breach of the revised rules on filing of costs budgets, Mr Mitchell was limited to court fees only versus the late, filed costs budget of £506,425.00. On Appeal, the Court of Appeal upheld the decision of first instance citing that, having regard to the principles of rule 3.9 of the Civil Procedure Rules, the Claimant failed to satisfy the test which would give rise to the court giving the Claimant relief from sanctions for failing to file the costs budget by the appropriate date. The proverbial bar was set!
As we know, Mr Mitchell also went on to also lose his libel case against his opponent and was ordered to pay substantial costs, but I digress.
Where a Party successfully applies to the court, or where the court Orders it, a case may be listed for a hearing to determine a preliminary issue either on a point of law and or fact.
There are a number of considerations for the court in determining whether a case is listed for a hearing on the preliminary issues. Namely, whether the outcome of such hearing would decide the outcome of the case, in part or entirely; and whether it would potentially reduce the extent of time and cost to the court and the Parties. Such hearings are the exception rather than the rule, however it raises an important issue with respect to budgeting for costs.
If it is the client's intention to apply for a split trial, Parties are recommended to file two costs budgets; one budgeting for costs whereby the matter proceeds to full trial and another detailing the budget for costs incurred up to the liability only hearing.
n.b. Parties must not simply file a budget detailing only projected costs up to the liability only hearing. (i.e. If the court refuses permission for split trial, then the Party will be limited to those costs detailed in the 'curtailed' costs budget).
Whilst the Parties are required to make a pragmatic, justifiable approach to costs budgeting, the Costs Judges appreciate that by its very nature it is impossible to accurately budget for costs which have yet to be incurred. The consolation is that an allowance of no more than 10% can justifiably be added to each budget phase to allow for unforeseen extra costs to be incurred during the budgeted phase. The purpose of this mechanism, is to deter the bottleneck of applications made to the court for permission to amend a costs budget where one or more phase of a budget has been marginally exceeded.
Parties are reminded that whilst it is not the normal course of action, the courts can strike out a Party's case due to failure to file a costs budget (see CPR 3.14).
Amendment to a previously filed costs budget
Where there has been a 'significant development', a Party may seek to vary their costs budget. In most cases, this will be to increase costs to one or more phase of the budget. In such circumstances, the Party must seek consent from their opponent with specific details on the reason for the variation and details of the amended budget sought. Where there is agreement between the Parties, the court must be notified of the same.
If there is no agreement between the Parties, the Party who seeks amendment to their costs budget must apply to the court for relief from sanctions and stipulate the reason(s) which gave rise to the requirement to amend the costs budget and file the draft amended budget.
n.b. If there is agreement between the Parties for amended budgets, there still must be evidence of a significant development having occurred. The court will likely sanction any party which has failed to evidence their amended budget. (The likely sanction being refusal to permit reliance upon the amended costs budget).
As detailed earlier in this article, section 3.9 of the Civil Procedure Rules details the considerations given by the courts in relation to applications for relief from sanctions. "Relief from sanctions", a potent combination of words to send a shiver down the spine of litigators across the land, nonetheless words which said litigators will be familiar with.
Should the unfortunate Party find itself in breach of a court rule or direction, it must apply for relief from sanction from the court to remedy the 'defect' in their failure to comply with a rule or direction. Since the introduction of the Jackson reforms key case law is now established as an authority on the very issue. The famed Mitchell MP v News Group Newspapers Limited, detailed earlier, highlighted the courts' robust approach to non-compliance. In dismissing the Claimant's appeal for relief from sanctions, Lord Dyson gave judgement:
"The defaults by the claimant’s solicitors were not minor or trivial and there was no good excuse for them. They resulted in an abortive costs budgeting hearing and an adjournment which has serious consequences for other litigants.
Although it seems harsh in the individual case of Mr Mitchell’s claim, if we were to overturn the decision to refuse relief, it is inevitable that the attempt to achieve a change in culture would receive a major setback."
Further, the Court of Appeal judgment in Denton v White  EWCA Civ 906 set out a three‐stage approach for the courts' assessment of applications for relief from sanctions under section 3.9(1) of the Civil Procedure Rules:
- Identify and assess the seriousness or significance of the breach
- Consider why the default occurred
- Evaluate all the circumstances of the case so as to enable the court to deal justly with the application (including the need (a) for litigation to be conducted efficiently and at proportionate cost; and (b) to enforce compliance with rules, PDs and orders).
It goes without saying each case is judged on its facts. However, the approach now adopted by the courts provides tangible criteria against which any relief from sanction will be judged.
As we navigate back towards the nuances of costs budgeting, one must consider what may be deemed to be a 'significant development', in support of an application to amend a costs budget.
This issue was addressed by the courts in Al-Najar and Others v The Cumberland Hotel (London) Limited  EWHC 3532 (QB). In Al-Najar, the court accepted that the unexpected and extensive nature of the opponent's disclosure departed from what could have reasonably have been expected within the course of the litigation and thus satisfied the test of 'significant development' as detailed in CPR PD 3E 7.6.
n.b. It is prudent for lawyers to include a written summary of the costs budgeted for in each stage of the phased budget as a 'contingency', detailed in the costs budget. Those details may provide valuable ammunition in support of a Party's application to amend the budget should their case depart from the confines of the budget.
Advice to clients
It is essential that at the outset of each case, legal representatives ask the relevant questions of their clients to encourage timely and accurate instructions including unearthing of relevant evidence and documents. Costs budgeting affects clients as well as their legal representatives as the lawyers are budgeting for costs which the client is ultimately liable for and where applicable, those which may be recovered from the opponent.
The importance of accurate and timely instructions must not be understated. If, at the outset of a case, the Party's lawyers identify queries in relation to the client's evidence, steps must be taken to resolve evidential queries with efficiency and proportionality.
In practical terms, clients must be encouraged to engage with their lawyers willingly and without delay. Equally, legal representatives must limit their investigations to the relevant issues in dispute. Failure to do so may affect the client's ability to recover their legal fees and by implication those incurred by their legal representatives.
All the more importance is placed upon lawyers advising their clients, at the outset of each action, on the latest revision of disclosure rules. The new Disclosure Pilot Scheme set out in Practice Direction 51U to the Civil Procedure Rules sets out the new rules on documents and evidence, relevant to any issue in contemplation of litigation, which must be preserved and disclosed at the appropriate time detailed within the practice direction.
The exercise of costs budgeting is vital to the Parties' ability to recover legitimate costs.
Parties must demonstrate that the costs previously incurred and those which are projected to be incurred are proportionate and relevant to the issues in dispute. In circumstances where the court deems that the budgeted costs are excessive or disproportionate, the court will reduce the value of the costs budget and/or it may sanction the defaulting Party.
With increasing and relentless onus placed upon Parties to engage in cooperative, proportionate litigation, the lay of the land appears to be one way traffic folks. Clients, lawyers, insurers; we are all in this together. Only those who evolve and adapt will prosper.
Whilst the subject of costs budgeting may be regarded as a grey cloud on a summer's day, there is a ray of sunshine to be embraced by those savvy enough to harness the positive effect of the Jackson reforms.
All involved in civil litigation would do well to keep following in the forefront of their mind. Prepare your case and prepare your case well. Budget for costs in a thorough, yet proportionate manner. Thereafter, those costs detailed within the costs budget which have been approved by the court are recoverable upon successful conclusion of the case (provided that the work relating to each budgeted phase has been done). It is therefore essential that once costs have been budgeted, lawyers must ensure that the work budgeted for is completed. To not do so is to throw away costs which are there for the taking!
With sincere thanks for taking the time to digest this 'amuse bouche' to Costs Budgeting.