Costs budgeting: the sting in the Jackson tail
The costs management reforms that have come out of the Jackson report are meant to control costs before they are incurred so as to give litigants a measure of certainty before they embark on litigation.
But many of the Jackson reforms were unashamedly designed to make the costs rules ‘fairer’ to defendants, so will they achieve this end in personal injury litigation and will that be to the detriment of the Claimant or his lawyer?
In terms of costs budgeting, the underlying proposition in Jackson’s report was that litigation is a project where both parties are involved for commercial ends. Try telling that to an accident victim, but staying with it, the argument went that all commercial projects, often worth tens-of-thousands-up-to-millions, would have a costs budget.
The problem with lawyers and litigants is that they are in a unique position in a two way costs shifting system whereby it is unclear who will win and therefore who will be paid their legal costs. This tends to create an arms race to maximise the chances of winning.
The parties have no control over opponent’s costs but ought to because they may be paying them; the court should therefore step in to control recoverable costs by imposing costs budgeting on them.
The new system, to come into force in April 2013, will be based on:
- Exchange of costs budgets between the parties, with agreement where possible;
- Court approval of those budgets;
- Managing the case within those budgets, where possible;
- Assessing recoverable costs in line with those budgets.
The new rules, which at the time of writing are still in draft and under embargo, will provide that for all Multi Track cases, in the County Court and the Queen’s Bench/Chancery Divisions of the High Court, issued on/after April 2013, the parties must exchange costs budgets within 28 days of the Defence, in a (new) Form H. That form is effectively a spread sheet bill with a Statement of Truth.
In default a Claimant will only recover court fees.
The intention is that we try to agree costs budgets with opponents. But how realistic is that? It will not be a requirement of the rules, and we may not bother.
The court will then assess whether a party’s budget is reasonable and proportionate and will ‘revise’ as necessary.
The court may then manage the costs going forward and ‘may’ make a costs management order (‘may’ will usually mean ‘will’).
If a party is likely to exceed budget he must justify it (ie unforeseen extra work) and apply to revise the budget.
When assessing costs the court will hold a party to its budget “unless satisfied that there is a good reason not to.”
Parties, and particularly Claimant Personal Injury lawyers, have little experience of costs budgeting. The 20% rule in Section 6 Costs Practice Direction means only that the court may disallow costs that exceed an estimate by more than 20%. It does not mandate the lawyer to give a realistic estimate in the first place.
What makes the new costs budgeting rules frightening is their interaction with another Jackson reform, the changes to the rule of proportionality. This is because in considering parties’ costs budgets judges will only allow a budget that is ‘proportionate’. Padding a budget to allow for unspecified contingencies will not be allowed.
So what is the test for proportionality? Of course the current test derives from the Court of Appeal case of Lowndes v The Home Office in 2002. It was a two stage approach: global and then item by item.
If on a global assessment the costs claimed are proportionate, the court will allow each item if reasonably incurred and reasonable in amount.
If on global assessment those costs are not proportionate, the court needs to assess each item and will only allow those that are necessary as well as reasonable.
So necessity prevails over proportionality.
The new test of proportionality, as set out by Jackson, represents a reversal of the Lowndes test: item by item then global.
So, if on item by item assessment the costs are proportionate, the court will still have to go on to consider whether the total is proportionate, and if not to reduce the bill accordingly. Only if the costs are reasonable and proportionate will they be allowed.
So proportionality trumps necessity.
There is unlikely to be a Practice Direction to offer guidance to judges on how to apply this new test of proportionality, but the new test was test set out in speech by Lord Neuberger in May 2012:
Costs will be proportionate if they bear a “reasonable relationship” to the value of the claim (including any non-monetary value in a non-monetary claim), its complexity, any work created by paying party’s conduct or wider factors (reputation/public importance). So in reality, value will be the main criterion in the vast majority of cases.
So if at allocation stage the judge or master dealing with costs budgets sees that damages are £50k, will he or she consider that a costs budget of £30k is proportionate? If so, what about £40k? Different judges will have different views.
This is likely to lead to uncertainty and inconsistency in decisions. The Master of the Rolls has indicated that there will be designated Court of Appeal Judges to deal with the sort of satellite litigation that will surely arise, and they can expect to be busy.
If costs are overstated for budget purposes they are likely to be reduced at costs management stage. If they overshoot the budget they will be disallowed.
For practitioners, we need to get up to speed with costs budgeting, first by getting some management information on what our Multi Track costs look like, so that we can better estimate future costs.
Second, by getting our procedures in place (including using costs draftsmen if necessary) so as to be able to complete a persuasive and proportionate costs budget within 28 days of the Defence.
Finally, we need to consider the likely relative quantum of damages and cost carefully before embarking on litigation; if the costs are likely to be high relative to damages then the client may have to be the one to fund the litigation, by success fee or otherwise.
Stuart Kightley is a specialist personal injury lawyer and is joint head of the department at Osbornes. Stuart is ranked as a leading indvidual in the independent legal directory Chambers and Partners. He is also a recommended individual in the Legal 500 directory. Stuart is also a member of the Association of Personal Injury Lawyers executive committee.