The new costs regime - examples from the front line

We assess how the courts are applying the costs rules in practice, including costs budgeting, proportionality and levels of interim awards​.

Nearly two years since the implementation of major changes to the rules on costs in civil litigation procedure, we assess how the courts are applying the rules in practice.

Costs and case management

The twin concepts of costs and case management, aimed at achieving more efficient use of the Court’s time and the parties’ resources, were at the heart of the Jackson reforms. One of the pillars of the reforms was the introduction of costs management orders, and the requirement for the parties to prepare a costs budget at the outset of litigation. In theory, this was to give the parties greater visibility of one another’s costs from the outset, and to enable the court to make appropriate case management decisions to keep costs proportionate.

In its infancy still, there remains considerable inconsistency in the judiciary’s attitude and approach to costs management. Some judges are still only glancing at the headline figures in the budgets. Others are looking very closely and critically at each phase of the budgets and often then making swingeing reductions. Unfortunately, these are often made without any corresponding limitations on procedural orders. Parties can therefore be left with an effective cap on recoverable costs at a level far below that which they must realistically spend in order to fulfil their obligations, particularly on disclosure.

While costs budgeting is compulsory in cases valued at less than £10m at the first Case Management Conference, it is now established beyond doubt that the court has a discretion to impose budgeting in cases of a greater value. In CIP Properties v Galliford Try the judge did exactly that, in a claim for £18m.

Proportionality

The new overriding objective of the CPR, as amended in April 2013, states that dealing with a case “justly and at proportionate cost” includes “saving expense” and “dealing with the case in ways which are proportionate”. This means “proportionate… (i) to the amount of money involved; (ii) to the importance of the case; (iii) to the complexity of the issues; and (iv) to the financial position of each party” (CPR 1.2(2)). The Court is required, on a standard assessment of costs, only to “allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred” (CPR Part 44.3(2)(a)). 

Through some recent decisions, we have begun to see where the ‘proportionality’ parameters lie. In Kazakhstan Kagazy v Baglan Zhunus, Leggatt J stated that “[t]he touchstone is not the amount of costs which it was in a party’s best interests to incur but the lowest amount which it could reasonably have been expected to spend in order to have its case conducted and presented proficiently”.

In Savoye v Spicers, Akenhead J summarily assessed Savoye’s costs at just £96,000 against its costs bill of just over £200,000, despite the fact that this followed a ‘win’ for Savoye in the form of judgment for the full sum claimed (£889,300). The case concerned enforcement of an adjudicator’s award and was described by the judge as a relatively simple “one-issue” case. He gave some guidance as to what the Court will consider when assessing proportionality and the reasonableness of costs for the purposes of costs assessment, namely:

  • the relationship between the amount of costs claimed for and the amount in issue
  • the amount of time said to have been spent by solicitors and barristers in relation to the total length of the hearing(s)
  • any time spent in any preceding contractual dispute resolution process on the same issues as duplicated effort cannot be proportionate
  • the extent to which the case is a test case or in the nature of a test case
  • the importance of the case to either party.

Contingencies and assumptions

This guidance on proportionality has subsequently been referred to by other judges, including Coulson J in CIP Properties v Galliford Try, where he observed that while value is a factor, it is not as important as the complexity of the case.

This was a hearing to consider the costs budgets of the parties in a claim valued at £18m. The defendant's costs, both incurred and estimated, amounted to around £4.4m, which was held to be “at the upper end of costs which could be said to be proportionate to a claim of this type”. On that basis, the claimant's figure of around £9m was “plainly disproportionate” and bore “no relation to what is required to be spent to advance this case in a proportionate way”. 

The judge criticised the lack of explanation for £5m of costs already incurred, despite that not being part of the budgeting process, which governs only the prospective costs.  The claimant’s budget was also dismissed as a “wholly unreliable document” with particular criticism levelled at the extensive schedule of 65 assumptions and contingencies, which was described as “a wholly illegitimate exercise in avoiding the certainty and clarity that comes from costs management orders”.  

The budget was effectively thrown out, with the judge substituting his own, much lower figures.  In an innovative move to address the excessive costs already incurred, he made clear that if those costs were not reduced on detailed assessment to levels he indicated he thought would be reasonable, the amounts allowed in the budget should be reduced accordingly.  In this way he set a budget that effectively capped the costs already incurred at levels less than half of those claimed.

What is clear from this case is that the courts are alert to parties seeking to subvert the budgeting process by front-loading costs before budgets are agreed and using assumptions and contingencies to give themselves reasons to request increases later.  In Yeo v Times Newspapers Ltd Warby J addressed how contingencies should be used, making clear that they should be reserved for work that does not fall within any of the categories of Precedent H, and which is “foreseen as more likely than not to be required”.

Use of interim costs orders/payments on account

The courts are displaying an increasing willingness to make generous interim costs orders where the case was subject to costs management and the winning party is within its budget. CPR 44.2(8) provides that “where the court orders a party to pay costs subject to detailed assessment, it will order that party to pay a reasonable sum on account of costs, unless there is good reason not to do so”.

In Excelerate v Cumberbatch, Judge Simon Brown QC made an interim costs order on the basis that “90% of the actual costs are bound to be payable upon any detailed assessment”. In so ordering, he considered the decisions of Elvanite v AMEC, in which an interim costs award of £250,000 was made against a budget of £264,000, and Kellie v Wheatley, in which £90,000 was ordered on account of standard costs which had been budgeted at £91,700.  Similarly, in Thomas Pink Ltd v Victoria’s Secret UK Ltd, an interim costs award was calculated at 90% of the costs budget already incurred.

By way of comparison, in Kazakhstan Kagazy v Baglan Zhunus, a case where there was no costs management and the judge felt the costs incurred to be disproportionate, an interim costs order was made for less than a quarter of the costs claimed. 

In summary

  • costs budgeting may be applied in any case, and there are judges who will impose it in cases above the £10m value threshold
  • what is proportionate to spend is the minimum for which the case could be conducted proficiently
  • proportionality of costs will be judged by the complexity of the case, as well as the value
  • as a rule of thumb, both parties’ costs combined should not exceed half the value of the claim
  • contingencies should be included in the budget only where the work is more likely than not to be needed and does not fall within an existing category
  • assumptions should be reasonable and be used with care to avoid accusations of hedging your bets
  • where costs management applies and the winning party is within budget, it can expect to receive an interim payment upon judgement of around 90% of its costs.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.