Costs budgeting and provisional assessments

On 9th February 2012, Lord Neuberger the Master of the Rolls, gave a lecture, the ninth in the Jackson Implementation Programme, which concluded with this quotation from an article written by Geoffrey Bindman in 1992:

The secret, perhaps half-perceived at the time, was the open-endedness of litigation. The more work one did, the more one got paid; and there was no limit to the amount of work one could do, and even justify it. Barristers were encouraged (if they needed encouragement) to join in the fun. More recently the tail started to wag the dog. The litigation machines in the large firms had to be fuelled. Every case had to be expanded to fill the resources available to work on it. The pattern set by the larger firms had to be followed by everyone else. However many letters came from one side, the other had to reply. However many affidavits the plaintiff filed, the defendant had to match them – just as one barrister cannot afford to leave unanswered a point taken by his opponent. However much money one side chose to invest in the case, the other had to match it or go to the wall.”

Lord Neuberger went on to state as part of his conclusions:

“Case management and the Woolf reforms generally were a significant step forward in bringing those days to an end. The Jackson reforms are an even more significant step forward in that regard”.

This last statement could be subject to challenge.

The Woolf Reforms implemented in April 1999 miserably failed to control costs.

The introduction in April 2000, the following year of the ill-fated reforms of the Access to Justice Act 1999, with its scheme of additional liabilities, recoverable on an inter partes basis, simply added fuel to an already blazing pyre.

In a real sense, the package of reforms advocated by Lord Justice Jackson, which seem certain now to take effect, with the passage into law on the 1st May 2012, of the Legal Aid Sentencing and Punishment of Offenders Act are both the completion of the unfinished agenda of Woolf and the revocation of the Labour administration’s Access to Justice Act.

This post looks at two of the key strains of reform: the desire to make the level of costs that litigation will generate more predictable and hence more certain, and the desire to strip out of the process as much as possible the “costs of the costs”, generated by arguments over recoverable costs, culminating in the detailed assessment process.  It principally looks at two relatively novel ways by which these ends will be sought: costs budgeting and provisional assessments.

Before we look at those two new procedures, it is worth noting that they will have application only to the comparatively modest tranche of cases, which by their size and complexity will fall to be dealt with on the Multi-track.

The most far reaching of the reforms, in terms of both the overall level of costs, and the process of quantification of those costs, relates to Fast Track personal injury claims. This is because from April 2013, the costs recoverable in respect of those claims will be fixed.

Lord Justice Jackson, set out his thoughts on fixed costs in his final report: that report contained detailed figures and options for both staging and quantifying costs, for such personal injury claims.  The Ministry of Justice is reviewing the figures now: the reason is not hard to discern, and is traceable to representations from the insurance industry that the putative fees are too high.

With the forthcoming  ban on referral fees, it is contended that the fixed costs should be adjusted downwards to reflect the fact that solicitors will no longer be (lawfully, at least) paying referral fees.

From April 2013, for personal injury cases worth up to £25,000 in terms of damages, the following consequences appear clear. First, a Defendant will be able to predict with certainty, that if a case is lost at trial, or settled at any given stage, what its liability for adverse costs will be.

Secondly, that tranche of the profession of costs draftsmen or costs lawyers, which makes a living from drawing bills, in Fast Track work will lose its raison d’etre.

Thirdly, as there will be no scope for recovery of counsel’s fees (save at trial) as a disbursement, pleading and advisory work for the Bar for these lower value cases, will start to disappear.

On 29th May 2012, Mr Justice Ramsey, addressed the Law Society Conference and delivered the Sixteenth Lecture in the Implementation Programme, entitled “Costs Management: A Necessary Part of the Management of Litigation”. In so doing, he unveiled amendments to part 3 of the Civil Procedure Rules 1998, and a new Practice Direction, which builds on the defamation and TCC costs budgeting pilots, and which will come into force in April 2013. The effect of the new rules is likely to be significant. In terms of the scope of the rules they will apply to virtually all multi-track work.

3.12 (1) This Section and Practice Direction 3E apply to all multi-track cases commenced on or after 1st April 2013 in:

(a) a county court or

(b) the Chancery Division or Queen’s Bench Division of the High Court (except the Admiralty and Commercial Courts) unless the proceedings are the subject of fixed costs or scale costs or the court otherwise orders. This Section and Practice Direction 3E shall apply to any other proceedings (including applications) where the court so orders.

(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.

The rules also provide an initially robust requirement to file and serve costs budgets: and any party which fails to do so, is hit with a stiff sanction, in terms of the failure.

3.13 Unless the court otherwise orders, all parties except litigants in person must file and exchange budgets as required by the rules or as the court shall otherwise direct. Each party must do so within 28 days after service of any defence.

3.14 Unless the court otherwise orders, any party which fails to file a budget despite being required to do so shall be treated as having filed a budget comprising only the applicable court fees.

The budgets are just the first step in the process: the rules then provide for the court to go on, to consider what is termed a “costs management order”. The consequences of a costs management order, will be reflected at each stage of the proceedings:

3.15(1) In addition to exercising its other powers, the court may manage the costs to be incurred by any party in any proceedings.

(2) The court may at any time make a “costs management order”. By such order the court will:

(a) record the extent to which the budgets are agreed between the parties;

(b) in respect of budgets or parts of budgets which are not agreed, record the court’s approval after making appropriate revisions.

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

The costs management order, is the tool by which the court will pro-actively control the level of costs, on a prospective basis: this is a real departure from current practice, and reflects the perception amongst the judiciary, that even a rigorous and proportionate detailed assessment, of costs will produce figures which are too high.

How often will a costs management order be made ? In respect of what sort of case, and what circumstances ?  The rules and Practice Directions are silent on these points. But the clear steer from the Sixteenth Lecture, is they will be made in every multi-track case, save where this is good reason to the contrary, e.g. where the parties have agreed on mediation and that mediation is imminent. The rules also provide for a new species of interlocutory hearing the costs management conference, which will deal with costs on an on-going basis.

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.

The rules also contain a specific injunction, that when making case management directions in a sense, these are to go hand in hand with costs management:

3.17 (1) When making any case management decision, the court will have regard to any available budgets of the parties and will take into account the costs involved in each procedural step.

(2) Paragraph (1) applies whether or not the court has made a costs management order.

The real sting however, will come at the end of the case. The new rules make it quite plain, that the default position is that the budget in their latest incarnation, will effectively stand as the paying parties liability for costs, unless there is good reason why they should be departed from.

 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 budget for each phase of the proceedings; and

(b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so.”

What does “good reason” mean in this context, and how thorough are the courts going to be, in their scrutiny of the lawyers protestations that broken budgets have been exceeded for good reason ?

A recent decision by Master Hurst, provides a useful indication of the approach that will be taken. In Sylvia Henry.v.News Group Newspapers (SCCO 16th May 2012), Master Hurst was dealing with costs budgets, lodged under the pilot scheme for costs management, made in respect of defamation actions. She was libelled by The Sun, being the subject of various false accusations concerning the death of Baby P.

The case was one of the first to be dealt with under the Defamation Proceedings Costs Management Scheme, set out at Practice Direction 51D, which applies to libel claims commenced on or after 1 October 2009.  The Costs Management Scheme requires each party to prepare a costs budget in advance of any case management conference. The budgets detail reasonable allowances for the various elements of the litigation, including any specified contingencies. These budgets are then approved or disapproved by the court. In the event of disapproval, the budget “will record the court’s view”.

Under the Costs Management Scheme, solicitors must liaise on a monthly basis to check that their budget is not being exceeded. If the budget is being exceeded, either party can apply to the court for a costs management conference.

At the conclusion of the litigation, when the court assesses costs on the standard basis, the court will not depart from the approved budgets unless it is satisfied that there is good reason to do so.  In this case, both the Claimant and the Defendant exceeded their budgeted costs. Most significantly however, the Claimant exceeded her budgeted costs for disclosure by £76,306 (the original allowance was £11,250) and for witness statements by £216,404 (the original allowance was £12,487).

The question for the court therefore was whether there was “good reason” for the court to depart from the approved costs budgets in this case.  The court stressed that the provisions of the Practice Direction were in mandatory terms: each party must prepare a costs budget or revised costs budget; each party must update its budget; solicitors must liaise on a monthly basis to check that the budget is not being, or is likely to be, exceeded.

These requirements reflect the objective of the Practice Direction to manage the litigation so that the costs of each party are proportionate to the value of the claim and reputation issues at stake, and so that the parties are on an equal footing. Here, the court found that the Claimant’s solicitors had not adhered to the provisions of the Practice Direction to keep the parties updated as to the ongoing costs of the case. Accordingly, since the Defendant was unaware that the Claimant’s budget had been significantly exceeded, the parties were no longer on an equal footing and the purpose of the Costs Management Scheme was lost.

The court reached this decision, even though the Defendant’s conduct of the litigation (mounting a vigorous and lengthy defence which was amended four times and serving ten lists of documents) had had a major effect on the way in which the Claimant had pursued her case, and that consequently the Claimant would otherwise have been able to make “a very good case” on a detailed assessment for the costs claimed.
The court did give permission to appeal in light of the significant amount of money at stake and the importance of the issues involved which required a definitive binding decision to be given to provide a precedent in future cases.

Further detail on the practical aspects of costs budgeting, is to be found, in the Practice Direction which accompanies the rules. Practice Direction 3E, starts by explaining what is required from practitioners, under the new arrangements.

  1. Unless the court otherwise orders, a budget must be in the form of Precedent H annexed to this Practice Direction. It must be in landscape format with at least 12 point typeface. In substantial cases, the court may direct that budgets be limited initially to part only of the proceedings and subsequently extended to cover the whole proceedings. A budget must be dated and verified by a statement of truth signed by a senior legal representative of the party. In cases where a party’s budgeted costs do not exceed £25,000, there is no obligation on that party to complete more than the first page of Precedent H.

In effect, there is a new standard form to fill out, but this has to be treated with respect: far too often costs estimates, accompanying allocation questionnaires or pre-trial checklists, are simple “back of the envelope” calculations. But under the new rules, under estimation of costs for reasons of simple sloppiness, may well prove fatal, to the production of “good reasons” on any later detailed assessment.

  1. If the court makes a costs management order under rule 3.15, the following paragraphs shall apply.
  2. Save in exceptional circumstances:

(a) The recoverable costs of initially completing Precedent H shall not exceed the higher of £1,000 or 1% of the approved budget.

(b) All other recoverable costs of the budgeting and costs management process shall not exceed 2% of the approved budget.

This is an interesting provision, because it illustrates the determination to stop the calculation of costs, generating costs, by imposing a limit on how many hours (or more accurately capping the cost of the hours) can be spent undertaking this work. The Practice Direction then goes on to explain how budgets will be amended and change, during the course of the litigation, as well as commenting on the use to which they might be put.

  1. If the budgets or parts of the budgets are agreed between all parties, the court will record the extent of such agreement. In so far as the budgets are not agreed, the court will review them and, after making any appropriate revisions, record its approval of those budgets. The court’s approval will relate only to the total figures for 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 budgets, 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.
  2. As part of the costs management process the court may not approve costs incurred before the date of any budget. The court may, however, record its comments on those costs and should take those costs into account when considering the reasonableness and proportionality of all subsequent costs.
  3. The court may set a timetable or give other directions for future reviews of budgets.
  4. 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.

The plain intention from the final paragraphs, is that the costs budgets, will become far more integral, to the management and strategy of the case, than estimates ever were

  1. After its budget has been approved, each party shall re-file the budget in the form approved with re-cast figures, annexed to the order approving it.
  2. A litigant in person, even though not required to prepare a budget, shall nevertheless be provided with a copy of the budget of any other party.
  3. 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 Costs Practice Direction, also provides further detail about what the use of budgets will be, in circumstances, where, for whatever reason the court has not made a costs management order.

6.1 In any case where the parties have filed budgets in accordance with Practice Direction 3E but the court has not made a costs management order under rule 3.15, the provisions of this Section shall apply.

6.2 If there is a difference of 20% or more between the costs claimed by a receiving party on detailed assessment and the costs shown in a budget filed by that party, the receiving party must provide a statement of the reasons for the difference with his bill of costs.

6.3 If a paying party –

(a) claims that he reasonably relied on a budget filed by a receiving party; or

(b) wishes to rely upon the costs shown in the budget in order to dispute the reasonableness or proportionality of the costs claimed;


the paying party must serve a statement setting out his case in this regard in his points of dispute.

6.4 On an assessment of the costs of a party, the court may have regard to any budget previously filed by that party, or by any other party in the same proceedings. Such a budget may be taken into account when assessing the reasonableness and proportionality of any costs claimed.

6.5 (a) Without prejudice to paragraph 6.4, this paragraph applies where there is a difference of 20% or more between the costs claimed by a receiving party and the costs shown in a budget filed by that party.

(b) Where it appears to the court that the paying party reasonably relied on the budget, the court may restrict the recoverable costs to such sum as is reasonable for the paying party to pay in the light of that reliance, notwithstanding that such sum is less than the amount of costs reasonably and proportionately incurred by the receiving party.

(c) Where it appears to the court that the receiving party has not provided a satisfactory explanation for that difference, the court may regard the difference between the costs claimed and the costs shown in the budget as evidence that the costs claimed are unreasonable or disproportionate.

So what are the consequences of costs budgets and costs management orders going to be, in practical terms ? The first and foremost to my mind, is that solicitors are actually going to have to take a far greater interest, at a far earlier stage in the grubby business of costs.

The simple truth of the matter is that many lawyers find the quantification and practice of costs, rather, well dull, and are far more interested in getting on with the litigation, than dealing with costs matters. That is observed in estimates which are regularly exceeded, usually without sanction on a detailed assessment and the tangles in retainers,that arise from time to time.

Now it is going to be necessary, to draft a detailed and accurate plan, for each and every multi-track case where proceedings are issued, with solicitors right at the start asking themselves, what sort of disclosure do they want and how much will it cost, how many witnesses and how long will it take to proof them, which expert to use, and how much will expert fees be, will counsel be instructed, and what will counsel’s fees be for drafting, advisory work and advocacy at trial ? And putting the detail of these considerations, down in a schedule.

Secondly this sort of input will generate costs of its own: but those costs are to be ruthlessly capped. There will be no scope for “prospective bills” to be drawn up with the level of detail that a bill of costs contains now. Quite the contrary, as bills of costs at the end of the case, will in effect be the budgets, plus anything that can be squeezed through the loophole, of the “good reason” exception. Thus the practice of drawing up bills and dealing expensively, with the “costs of the costs” is likely to be sharply truncated.

Thirdly, there can be little doubt that this concentration on the bottom line will force a change in litigation behaviour. Just how profound a change, both in terms of the orders the court makes for case management and the attitude of clients who will have it brought home to them in very clear terms what the final bill is likely to be, will be interesting to watch.

Many of you will be aware that for quite a while now (since 2010) the county courts in Leeds, York and Scarborough have introduced a pilot scheme for provisional assessment of costs. The detail is set out in Practice Direction 51E, which provides for a paper based assessment of bills up to £25,000 with a right to an oral hearing: but unless the provisional assessment is varied by 20%, the party requesting the oral hearing pays the costs of it.

In the Eighth Implementation lecture Lord Justice Jackson noted this:

4.6 Benefits of provisional assessment. The principal benefits of provisional assessment appear to be the following:

(i) The process is quick and simple. It thus enables many parties, who would normally be put off by the expensive and convoluted process of detailed assessment, to obtain a judicial assessment of bills. Thus the process addresses one major complaint about costs which was repeatedly pressed upon me during the costs review.

(ii) The figures which are assessed or agreed following provisional assessment are likely to be fairer than settlements negotiated in circumstances where neither party can face going through the process of normal detailed assessment. 

(iii) The process is far cheaper for the parties than traditional detailed assessment, because (save in rare cases) they avoid the costs of preparing for and attending a hearing. Indeed, unlike traditional detailed assessment, it is cost effective. DJs Hill and Bedford estimate that the savings for the parties are at least £4,000 per case. This is because the case usually ends after the PA and thus the parties avoid a half day or one day hearing.

4.7 Benefits of the pilot. There have been two main benefits of the pilot. First, it has enabled an objective assessment of the process to be made. Secondly, it has been possible to try out some detailed rules and to identify shortcomings or areas where the rules can be improved. These matters will be addressed in the drafts which I shall present to the Rule Committee.

4.8 Next steps. The Senior Costs Judge, DJ Bedford, DJ Hill and I have now prepared draft rule and practice direction amendments with a view to introducing provisional assessment on a national basis as from the general implementation date. I shall present these to the Rule Committee for consideration at its meeting on 3rd February. I hope that the Rule Committee will accept this proposal either then or at some time in the future.

On detailed assessment more generally, he had this to say:

5.11 Points of dispute and points of reply. Both points of dispute and points of reply need to be shorter and more focused. The practice of quoting passages from well known judgments should be abandoned. The practice of repeatedly using familiar formulae, in Homeric style, should also be abandoned. The pleaders on both sides should set out their contentions relevant to the instant cases clearly and concisely. There should be no need to plead to every individual item in a bill of costs, nor to reply to every paragraph in the points of dispute.

5.12 In order to achieve the required approach to points of dispute and points of reply I propose that sections 35 and 39 of the Costs PD be amended as set out in appendix 10 to this report.

5.13 Compulsory offers. PP should be required to make an offer when it serves its points of dispute. The offer may be contained in the points of dispute or in a separate document. The sum offered may be more or less than the amount of the interim payment ordered by the court.

5.14 Offers. The Part 36 procedure should apply to detailed assessment proceedings. The “14 day” provision in Costs PD paragraph 46.1 should be repealed.

5.15 Costs of detailed assessment proceedings. The default position should remain as set out in CPR rule 47.18. However, if PP makes an offer which RP fails beat, then the normal consequence should be that RP pays PP’s costs after the date when the offer expired. Likewise RP should be rewarded for making a sufficient offer, which PP rejects. The reward should be enhanced interest and indemnity costs in respect of the assessment proceedings.

5.16 Time for appeal. Time for appeal should start to run from the conclusion of the final hearing, unless the court orders otherwise. There will be some occasions when it would be appropriate for the court to order otherwise. For example, it may be sensible for an appeal against a decision on preliminary issues to proceed before the full detailed assessment takes place.”

3.2 Implementation. The Rule Committee has accepted these recommendations. It has approved appropriate amendments to the Civil Procedure Rules (“CPR”) and the Costs Practice Direction. These are set out in Appendix 2. These amendments will come into force on the general implementation date.

3.3 Longer term proposals. FR chapter 45 also makes recommendations for (a) the creation of a new form bill of costs and (b) the development of software which will automatically generate schedules of costs or bills of costs at different levels of generality, according to the client’s or the court’s requirements.3 The Association of Costs Lawyers (“ACL”) has set up a Jackson Working Group to take these proposals forward. The working group produced an excellent interim report in October 2011. The working group is currently developing an interim format for bills of costs, which will need to be piloted. This aspect of the reforms, therefore, is very much work in progress.

The key points to be drawn from this evaluation, is that the practice of provisional costs assessments, has been seen as a success, and will become widespread. So, with Fast Track cases being quantified by reference to fixed costs, and additional liabilities being stripped out of bills significantly lowering the bottom line claim for costs, provisional assessments of bills in multi-track cases will become more common.

The judges like provisional assessments, because instead of listening to the detail of the bill, and spending court time doing it, they can work quickly through the bill, in 40 minutes, and come up with a result which is practicably unchallengable.

What can confidently be predicted, is that the ceiling for bills, which get provisionally assessed, rather than listed for an oral hearing will be progressively raised, and there seems little reason why a bill of up to £50,000 should not be assessed in this way, particularly given the effect of costs budgets, noted above.

The headlines of the Jackson review, have focused on the abolition of success fees or ATE premiums, inter partes, or the dubiously named QUOCS. But the detail of the rules on costs, will have equally profound and possibly longer lasting consequences for the profitability of legal practice and the law and practice of costs.

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