If I could turn back time

One of the vagaries of the costs management regime, is that it has to function in the real world where the substantive litigation it is subsidiary too grinds through relentlessly irrespective of when a case may be costs managed and when the court system is capable of listing a costs and case management conference.

Even the rules provide for inbuilt delay with costs budgets having to be submitted no less than 21 days before the hearing where they are to be considered. Inevitably, when the case comes before a master or district judge, the costs that have been incurred will have moved on, departing silently and invisibly from the estimated future costs columns of precedent H, to join ranks with the incurred costs detailed on that form.

A further complication can arise when significant developments in the litigation mean a revised budget must be drawn for agreement or approval, but it is necessary to incur costs to deal with the developments, before costs management catches up with the situation. How is the court meant to manage costs in a way that is robust but which accords with reality?

In the case of Sharp v Blank and Others [2017] EWHC 3390 (Ch) Chief Master Marsh grappled with some of these issues and applied a purposive construction to some of the provisions which have been in force since the costs management rules were reformed in April 2017. The case is well known: the judgment of the Chief Master concerned an application to revise a budget retrospectively during the course of a lengthy commercial trial arising out of the ill fated purchase of HBOS a decade ago by Lloyds bank.

The purchase of HBOS effectively torpedo’d Lloyds, one of the few British banks left standing in the initial wave of collapse caused by the banking crisis and the action was brought by aggrieved shareholders. The costs of the action as initially reflected in the costs budgets which were agreed were substantial: over £34 million between the parties as ultimately agreed and on the basis that incurred costs were those up to and including the 27th January 2017:

8. It was not until the hearing of the second case management conference that an order was made for the exchange of costs budgets and it was not until a further hearing before the management judge on 27 January 2017 that a cost management order was made. In the course of his judgement at the hearing in January 2017, the judge remarked that the real value in a cost management order, so far as the claimants are concerned, was to bring much greater clarity to the costs exposure which they face. As at the date of that hearing the defendants’ unapproved budget amounted to approximately £24 million of which £14.9 million was still to be incurred. The judge noted it was common ground between the parties that, in accordance with the CPR, costs management is only possible for costs that have not yet been incurred and nothing can be done to manage the costs which have already been incurred although the court can make comments on incurred costs. Directions were given by the judge for the parties to file and serve costs budgets “… calculated to today’s date for incurred costs and estimated costs thereafter through to the end of trial.” The parties thereafter exchanged budgets on the basis the judge had directed.

9. In the event, the costs management conference that was listed before me on 3 May 2017 did not take place because the parties reached agreement on the figures for each phase in their budgets. A consent order was approved on 2 May 2017. It recorded that the budgets had been calculated in respect of the parties’ incurred and estimated costs as at 27 of January 2017. The order, in addition, recorded that neither party had agreed to the other parties’ incurred costs and that the court made no comments about incurred costs. The incurred costs to which reference is made are those incurred up to and including 27 January 2017.

As the Chief Master observed:

11. I pause in this introduction to observe that by the date of the order made on 2 May 2017, there was already a mismatch between the agreed incurred costs as set out in the budgets and the actual amount of incurred costs. In this case, the mismatch was a consequence of the costs management order made by the management judge. It is easy to understand that having made a costs management order relatively late in the litigation, it was important to ensure that estimated costs ran from the earliest possible date, namely the date of the order, because the court does not have power to control “incurred costs”. The issue of a mismatch between the data that is contained in a budget and the actual position in relation to costs as the claim moves inexorably forward, with costs being incurred every day, is a subject to which I will return. Three initial points, however, are clear. First, the management judge intended that the initial agreed or approved budgets would contain costs described as estimated, some or all of which would have been incurred by the date of the order approving the parties’ figures. Secondly, the judge envisaged that there were likely to be revisions to the budgets and, indeed, he expected there to be revisions on more than one occasion. Thirdly, when the parties reached agreement about the budgets, they were acknowledging that the figures for incurred costs in their budgets related back to 27 January 2017 and were not treated as incurred costs at the date of agreement. Where the statement of truth on the budgets referred to incurred costs, it was intended to relate back to that earlier date.

The defendants returned to court during the course of the trial, to seek an upwards revision to its cost budget, on the basis that there had been significant developments in the litigation which warranted a revision. In effect they proceeded to grasp the nettle of making the arguments for a departure from the budget prospectively, if not pre-emptively, rather than relying on arguments of “good reason” at a later detailed assessment.

The Chief Master noted the rules that he had to apply and gave them a certain emphasis:

3.12(2) The purpose of costs management is that the court should manage both the steps to be taken and the costs to be incurred by the parties to any proceedings so as to further the overriding objective.

3.13 (1) Unless the court otherwise orders, all parties except litigants in person must file and exchange budgets –

(b) …. not later than 21 days before the first case management conference.
3.15 (1) In addition to exercising its other powers, the court may manage the costs to be incurred (the budgeted costs) by any party in any proceedings.

(2) The court may at any time make a “costs management order”. Where costs budgets have been filed and exchanged the court will make a costs management order unless it is satisfied that the litigation can be conducted justly and at proportionate cost in accordance with the overriding objective without such an order being made. By a costs management order the court will –
(a) record the extent to which the budgeted costs are agreed between the parties;
(b) in respect of the budgeted costs which are not agreed, record the court approval after making appropriate revisions;
(c) record the extent (if any) to which incurred costs are agreed.

(3) If a costs management order has been made, the court will thereafter control the parties’ budgets in respect of recoverable costs.

(4) Whether or not the court makes a costs management order, it may record on the face of any case management order any comments it has about the incurred costs which are to be taken into account in any subsequent assessment proceedings.

3.16 (1) Any hearing which is convened solely for the purpose of costs management (for example, to approve a revised budget) is referred to as a “costs management conference”.

(2) Where practicable, costs management conferences should be conducted by telephone or in writing.
….

3.18 In any case where a costs management order has been made, when assessing costs on the standard basis, the court will –

(a) have regard to the receiving party’s last approved or agreed budgeted costs for each phase of the proceedings:

(b) not depart from such approved or agreed budgeted costs unless satisfied that there is good reason to do so; and

(c) take into account any comments made pursuant to rule 3.15(4) or paragraph 7.4 of Practice Direction 3E and recorded on the face of the order.

PD3E 7.3 If the budgeted costs or incurred costs are agreed between all parties, the court will record the extent of such agreement. In so far as the budgeted costs are not agreed, the court will review them and, after making any appropriate revisions, record its approval of those budgeted costs. 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. When reviewing budgeted costs, the court will not undertake a detailed assessment in advance, but rather will consider whether the budgeted costs fall within the range of reasonable and proportionate costs.

PD3E 7.4 As part of the cost management process the court may not approve costs incurred before the date of any costs management hearing. The court may, however, record its comments on those costs and will take those costs into account when considering the reasonableness and proportionality of all subsequent budgeted costs.

PD3E 7.5 The court may set a timetable or give other directions for future reviews of budgets.

PD3E 7.6 Each party shall revise its budget in respect of future costs upwards or downwards, if significant developments in the litigation warrant such revisions. Such amended budgets shall be submitted to the other parties for agreement. In default of agreement, the amended budgets shall be submitted to the court, together with a note of (a) the changes made and the reasons for those changes and (b) the objections of any other party. The court may approve, vary or disapprove the revisions, having regard to any significant developments which have occurred since the date when the previous budget was approved or agreed.

PD3E 7.7 After its budgeted costs have been approved or agreed, each party shall re-file and re-serve the budget in the form approved or agreed with recast figures, and next to the order approving the budgeted costs or recording the parties’ agreement.

PD3E 7.9 If interim applications are made which, reasonably, were not included in a budget, then the costs of such interim applications shall be treated as additional to the approved budgets.
[The emphasis is mine.]

He then set out his thoughts on the significance of these provisions and how they might be applied in a practical way:

24. There are a number of facets of the rules and PD3E that bear emphasis:

i. The futurity of the words “costs to be incurred (the budgeted costs)” is not in doubt. However, it is less clear when the future commences for these purposes.

ii. Rule 3.13(1) is the default rule that applies, unless the court orders otherwise, in relation to the timing for the service of budgets. They must be served not less than three weeks before the first case management conference. At one time the rule was drafted differently and provided a default period of seven days. A more recent innovation, set out in rule 3.13(2), requires the parties to produce an agreed budget discussion report and to file it not less than seven days before the first case management conference. The parties are required to engage with each other and to consider the extent to which the figures in their budgets are agreed, or not agreed. At the hearing the court has the fruit of this discussion about the figures in the budgets.

iii. A budget, unless the court otherwise orders, must be in the form of Precedent H. It provides a format that is divided into budget phases and each phase requires the party to explain its incurred costs in one column and its estimated costs in a set of other columns. It must have a statement of truth stating:
“This budget is a fair and accurate statement of incurred and estimated costs which it would be reasonable and proportionate for my client to incur in this litigation.”

iv. There is nothing in the rules or PD3E that requires the parties to provide updated budgets for the case management conference so as to provide the court with information that is current at the date of the hearing. Such a requirement would in any event create practical difficulties.

v. Rule 3.15 clearly distinguishes between costs to be incurred (budgeted costs) and incurred costs with the exception in 3.15(3) where it is stated that after a costs management order has been made the court will control the parties’ budgets in respect of recoverable costs. The reference to budgets read literally means the budgets as a whole (and not just budgeted costs) and the control is in respect of recoverable costs which will not be the same as the aggregate of estimated and incurred costs. The notion of costs that are recoverable as opposed to incurred or to be incurred does not appear elsewhere in the regime. Incurred costs and costs to be incurred may, or may not, be recoverable.

vi. Rule 3.18(b) in its pre-6 April 2017 form was considered by the Court of Appeal in Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] EWCA Civ 792. The decision in Harrison is not directly relevant to the issue before me. However, the first instance decision in Merrix v Heart of England NHS Trust Foundation [2017] 1 WLR 3399, which was decided shortly before Harrison, was approved by the Court of Appeal and I will later refer to the judgment of Carr J in Merrix.

vii. The claimants say that paragraph 7.4 make it clear beyond any doubt that when the court is considering a revision to a budget in relation to a significant development, the court has no power to approve costs incurred. They reason that the hearing I have conducted is a cost management conference within the definition contained in rule 3.16 (1). Paragraph 7.4 specifies that the court may not approve costs incurred “… before the date of any cost management hearing”. [my emphasis] “Any” is not well-suited to its context and could mean several different things. Mr Friston says it means “all”. It could have been intended to mean “a” or, as Mr Singla submits, any in the sense that of “if there is one”. It seems likely, however, that the paragraph was intended to relate to all hearings where costs management is considered whether the hearing is a “costs management conference” (rule 3.16(1)) or a case and costs management hearing.

viii. The management judge did not set a timetable or give other directions for future reviews of budgets although he plainly contemplated from the earliest stage at which cost management was under consideration that a review of cost budgets was very likely to be required.

ix. The language used in paragraph 7.6 is of critical importance because it provides the jurisdiction, on the defendants’ case to make the revisions they seek. It is notable that the language is at variance with the remainder of the rules and PD3E. It refers throughout to the revision of a “budget” (not, in accordance with the new wording, “budgeted costs”). It is explicit, however, that revision is in respect of future costs. The final sentence of this paragraph gives the court a discretion to approve, vary or disapprove the revisions “… having regard to any significant developments which have occurred since the date when the previous budget was approved or agreed”. On one view, such language points towards the last approved or agreed budget being the jumping off point for a revision because it is the budget that is being revised.

x. The principles set out in paragraph 7.3 will apply when a budget is re-considered. The court is only required to set figures that are within a range of reasonable and proportionate costs. A range suggests that the process is designed to produce figures for each budget phase in a way that is not a slave to arithmetical calculation. The court is approving, or the parties are agreeing, figures that are not ‘right’ as such, but rather figures that are within a range of acceptability.

xi. Paragraph 7.9 appears to have a restricted effect and it is only the costs of the interim application that are to be treated as additional to the approved budgets. This would suggest that costs resulting from, or are consequential upon, an interim application are outside its scope. By way of example, the costs of applying for specific disclosure would be within the provision, but the costs of dealing with the fruits of the application, if any, are outside it. Similarly, the costs of applying for permission to amend are within the paragraph whereas the costs that flow from the amendment are not.

Commenting on what would be a significant development he observed:

32. The two other legal issues overlap and concern first, what it is that amounts to a significant development and secondly, whether an interim application can fall within the costs management regime and may in some circumstances be a significant development. As to the first point, the language in paragraph 7.6 does not create difficulty. A party is required to revise its budget (“shall revise”). If the paragraph is engaged, it is not left to a party to choose whether to revise its budget and to takes its chances on a detailed assessment. A failure to apply under paragraph 7.6 for a revision may be relevant when the court is considering whether it is satisfied there is a good reason to depart from an approved or agreed budget. An application should be made promptly – see Yeo.

33. The circumstances in which paragraph 7.6 is engaged are fact specific. Significance must be understood in light of the claim – its size, complexity and the manner in which the litigation has unfolded – and also from the likely additional costs that have been, or are expected to be, incurred. The amount of the additional expense is not determinative, but it is difficult to conceive that a development leading to modest additional legal expenditure, that is modest in proportion to the amount in the relevant budget phase or phases, is likely to be significant development.

The Chief Master then considered on the policy considerations that underpin costs management:

45. It is possible to discern from a number of the sources cited in this judgment a number of policy considerations that underlie the costs management regime. Not all of them sit easily together. They include:
i. The benefit for a party in knowing its exposure to costs.
ii. Greater predictability in the costs that will be recovered.
iii. A reduction in the cost of detailed assessment.
iv. The need for the court to avoid undertaking a detailed assessment in advance.
v. Significant developments should be reflected in the budgets.

He then went onto explain why these policy considerations effectively meant that the court had to construe the rules as permitting retrospective revisions to be made to a costs budget, in order to preserve the efficacy of the first budget as approved or agreed and secondly to ensure that the rules and practice direction married with the reality of litigation in the real world, where in the period of delay before a revision application was adjudicated upon the parties would incur substantial costs:

46. To my mind the defendants’ approach finds some limited support in the rules and the practice direction, but much stronger support in the principles that lie behind costs management and in the way in which they have to work in practice. Although paragraph 7.4 read literally prevents the court from approving costs incurred before the date of a cost management hearing, the requirements of the paragraph are impossible to implement in that way. Rule 3.13(1) requires the parties to file exchange budgets not later than 21 days before the first CMC. They are required after filing and exchanging their budgets to engage and produce a budget discussion report with a view to the court having the benefit of the fruit of that discussion at the CMC. In every case the budgets will be at least three weeks out of date (and often more out of date than that) and the estimated costs for the CMC itself will have been incurred by the time the hearing of the CMC has concluded. That is not to say, however, that the estimated figure will automatically become the figure for incurred costs. Whether the estimate for the CMC proves to be accurate can only be known by looking backwards in time. Moreover, there is plainly no point in requiring the parties to engage with each other and produce a budget discussion report in relation to costs that cannot be approved by the court.

47. A similar point can be made about the agreement of budget phases, or entire budgets by the parties. Agreement of a budget phase has the effect of removing the court’s power to approve it. It is obviously salutary for the parties to agree as much as possible. They have a duty to help the court implement the overriding objective and agreement of the whole or part of a budget assists with this process. Yet it is axiomatic the parties will be agreeing costs described in the budgets as estimated that have, at least in part, been incurred. This is a necessary fiction. Some of the costs will have, in the real world, made a complete or partial transition from estimated to incurred, but within the costs management world that transition has to be ignored. It is said in paragraph 7.4 that the court may not approve costs incurred before any costs management hearing, but it is, in practice, impossible to follow that requirement literally, if there is a hearing. And it does not apply to agreement between the parties which will not involve a hearing.

48. The reference to incurred costs before the date of any costs management hearing must mean the incurred costs as specified in the budget; that is the budget the rules have required the parties to produce some weeks prior to the hearing. The rules and practice direction do not contemplate revisions to the budgets on the day of the hearing and that would not in most cases be a practical option. If the hearing is adjourned, the court always has the option, if it considers that the budgets will be out of date to direct the parties to file up-to-date budgets. Subject to the exercise of that power, it seems to me that the court will always be assessing some costs which have been incurred prior to the cost management hearing. If that were not so, such costs would fall into a ‘black hole’. They would not appear as incurred costs in the budget and could not form part of estimated costs because they have already been incurred. In every case there would have to be subject to a detailed assessment along with the costs that are shown in the budget as incurred. Such a fragmented approach to the assessment of costs seems to me to be deeply unsatisfactory and I do not consider that, properly construed, that is what the rules and practice direction can have intended.

49. I consider that a similar approach is required to make sense of paragraph 7.6. The overriding purpose of cost management is to enable the court to control costs to be incurred by the parties and their recoverable costs. Incurred costs are left to a detailed assessment without the parties having to show there is a good reason to depart from the budget, because the condition in rule 3.18(b) only applies to budgeted costs. It is notable that paragraph 7.6 speaks of revising a budget (not budgeted costs) in respect of future costs. I have already made reference to the final sentence of paragraph 7.6 which requires the court to have regard to significant developments since the date when the previous budget was approved or agreed. To my mind that language points towards taking the previous budget as a base reference point as Mr Singla has submitted. Future costs are considered by reference to the last approved or agreed budget. Mr Friston was forced to make the unattractive submission that it is unnecessary to include in a revised budget costs incurred since the last agreed or approved budget. He says those costs are outside the costs management regime.

50. I accept that a detailed assessment is needed for costs incurred up to the date of a costs management order and there may be elements of later costs that fall outside the costs management regime. However, I do not consider the rules and practice direction intended that only certain elements of the costs relating to significant developments must be dealt with as revisions with the other elements, those pre-dating the hearing or, on another view those pre-dating the application, being dealt with on a detailed assessment. This approach would run contrary to the purposes of costs management and lead to unnecessary fragmentation of the costs dealt with at a detailed assessment.

51. The approach proposed by the claimants can be tested in another way. If a significant development occurs, and a party affected by it recognises it at an early stage, and prepares a revision to its budget, paragraph 7.6 requires the revising party to submit a revised budget to the other party for agreement. A reasonable time must elapse before an application to the court can be made and the period of time that will then pass before the ‘hearing’ takes place will be subject to the vagaries of court listing. There may be a time lag between issuing the application and the cost management hearing of many weeks and it would be most strange if the courts’ power to manage costs is conditioned by the state of its lists at any given time or by whether or not a judge feels able and willing to deal with the revisions on paper rather than at a hearing. There is also the separate point that if the revisions are approved on written submissions, there has been no ‘hearing’ for the purposes of paragraph 7.4, only possibly a deemed hearing arising from rule 3.17.

52. In every case where a significant development arises, and a party prepares a budget to deal with it, there would be costs which cannot be considered by the court because of the requirements of the practice direction. Indeed, in some cases it may not be immediately obvious that a development in the litigation is significant development; a development which appeared at first sight not to be significant may change character.

53. The vagaries of the approach put forward by the claimants are demonstrated by the way in which the defendants’ application was dealt with in this case. The hearing was listed for one day on 6 December 2017. The hearing did not finish within the agreed time estimate partly because the court service decided to hold an unannounced fire drill in the middle of the day. Even disregarding that unexpected development, the hearing was unlikely to lead to an extempore judgment. If Mr Friston’s construction of paragraph 7.6 is right, it is not clear whether the operative date for establishing which the costs which have become incurred is the first hearing day, the adjourned date or the date when this judgment is handed down (or when consequential matters are dealt with). The answer is not obvious. In the meantime, during the period in which the application was before the court, the trial has continued and estimated costs have inexorably moved from an estimation about what may happen into incurred costs. It seems obvious to me that some degree of retrospectivity is inevitable if the costs management regime is to be made to work.

54. If the operative date is not the date of the hearing, as a literal interpretation of the rules and the practice direction would suggest, there are a number of possible alternatives. It could be:
i. The date of the last agreed or approved budget.
ii. The date set by the court under paragraph 7.5 for a review of the budgets, if this power is exercised.
iii. The date when the significant development is deemed to have occurred. This may be obvious in some cases but not invariably so.
iv. The date a revised budget was served on the other party.
v. The date after a reasonable time following service of the revised budget has elapsed.
vi. The date when the application is made by the court.

55. In all cases where a costs management order is made, there will need to be a detailed assessment. As a minimum, the costs shown as incurred in the agreed or approved budget will be assessed in that way. It seems to me that the manner in which paragraph 7.6 is drafted not just encourages but requires the parties to revise budgets where there are significant developments. It provides a procedure which is informal and, no doubt, in routine cases is capable of leading to revisions being agreed or approved relatively speedily. The policy is clear. If there have been significant developments, the budgets must be revised. A claim for additional costs should not be left until a detailed assessment because the parties need to know what is their exposure to costs and the costs of detailed assessment should be minimised.

56. The approach put forward by the claimants would lead to a greater proportion of the costs of a claim being left to a detailed assessment. A budget would be set at the hearing dealing only with future costs leaving the other significant development work to be dealt with at a detailed assessment. A similar position pertains if any of the dates I have posited are taken, other than the date of the last approved or agreed budget (or in a case such as this the date the court has specified as the date to which budgets should be prepared). In a case where there is more than one significant development, there is a real likelihood of the detailed assessment becoming fragmented with the Costs Judge being required to work out what work is attributable to different periods. This cannot have been intended when one of the ideas lying behind costs management was the simplification of detailed assessments.

In effect the Chief Master construing the rules, held that the court not only has the “power to turn back time” it must utilise that power on an application to revise a budget: there is no middle column of “costs that were formerly estimated but are now incurred” on a precedent H form, and there is in fact no need for one. Instead the court engages in a legal fiction as to what are incurred costs and what are budgeted costs, to make the system work. This is not in fact a novel approach: the courts have long exercised a jurisdiction to direct upon which dates their judgments take effect and are familiar both with the concepts of legal fictions and deemed states of being. The court then stated the position to be thus:

62. In summary my conclusions are:

i. The court has jurisdiction when revising a budget under PD3E 7.6 to revise a budget taking the last agreed or approved budget as the base reference point.

ii. Where, as in this case, the budgets were directed to be prepared to an antecedent date, the relevant date is the date set by the court.

iii. Costs which have been incurred since the date of the last agreed or approved budget (or the antecedent date) that relate to significant developments are, for the purposes of revision, placed in the estimated columns of the revised Precedent H in one or more phase. In some cases, it may not be obvious where they go (for example a late application for security for costs) but I can see no reason why Precedent H may not be adapted as necessary to accommodate work that does not easily fit in.

iv. Interim applications may be significant developments as may the consequences that flow from an interim application.

This judgment is a useful and thoughtful exposition of some of the conceptual problems that exist in costs management, and its solutions will be of assistance to judges when grappling with one of the surprisingly rare applications to revise a budget that will from time to time, cross their desk.

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