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Lord Justice Jackson’s “Costs Budgeting” – Mr Justice Morgan: the correct approach at last?

Costs budgeting under CPR 3.12, if nothing else, has been controversial and divisive. There are several different schools of thought. Some, like the senior judiciary, support budgeting. (See for example the Harbour lecture delivered by Dyson MR in May 2015: “At the very outset, I want to make it clear that I strongly support costs management. As Sir Rupert [Jackson] says, the new regime is in the public interest and is here to stay.”) Others, such as the judiciary who carry it out, are more ambivalent. A further school, mostly practitioners, consider it to be a waste of time because it adds a further layer of costs to the overall expense of litigation and is no guarantee that the budgeted sums will be allowed at detailed assessment. That means that costs will be scrutinised twice by the court and not just once at the end as was the case before costs budgeting, with all the additional cost that that involves. Within this group are those who also express concern at the inconsistent way in which budgeting is carried out by the court.

In May 2014, Costs Law Reports published a Bulletin entitled “Costs Budgeting – the case for the court to show more bottle on budgeting” in which the co-editors set out the arguments in favour of judges at case management conferences taking decisions about hourly expense rates and the “local” solicitor point, rather than shunting them off for the cost judge to deal with on detailed assessment. Together with proportionality, they are the areas upon which argument focuses at detailed assessments. Were that to be done, we said, the sentiments expressed by Lord Judge in Ford v GKR Construction Ltd in 1999 would have a better prospect of being fulfilled:

“Civil litigation is now developing into a system designed to enable the parties involved to know where they stand. In reality, at the earliest possible stage, and at the lowest practicable cost, so that they may make informed decisions about their prospects and the sensible conduct of their cases …”

The view we advanced in the Bulletin was that budgeting by phase whereby the judge declines to adjudicate upon the reasonableness of the hourly rate or the client’s objectively reasonable choice of solicitor but instead simply fixes an allowance “by phase”, leaves the budget ripe for unpicking if the costs subsequently fall to be scrutinised at detailed assessment. If, as frequently happens, the judge is prepared to express a view about how long the trial should take and, if appropriate, to reduce the number of days from those claimed, why should the hourly rate and reasonableness of solicitor used not be given the same treatment? Much better it is, we argued, for the court to address these issues at the CMC so that the parties involved know where they stand at the earliest possible stage in order to fulfil Lord Judge’s aspirations.

Today we publish Group Seven Ltd and Another v Nasir and Others [2016] 2 Costs LO 303 in which Mr Justice Morgan has made a costs management order (“CMO”) under CPR 3.15 in proceedings to recover losses resulting from an alleged fraud and which involve two actions to be tried together with a trial estimate of 40 days. The facts are complicated and for present purposes it is sufficient to say that the budget at a case management conference sought by the first claimant, Group Seven, was £3,576,249 and that of Equity Trading System, the second claimant, was £1,476,926, in respect of claims for 7.02m euros and 9.02m euros respectively, making a maximum combined budget for both of £5,053,176. For a Swiss bank, as a defendant in both actions which had brought Part 20 claims, the budget sought was £3,724,954, for Mr Nasir it was £1,252,955, and for the other defendants, Notable Services LLP and a Mr Louanji, the figures were £1,896,197 and £1,399,438 respectively. Accordingly, the overall budgets, as sought, produced a figure of £13,325,721! Little wonder that the sums involved appeared to Mr Morgan to be so daunting that a CMO was needed.

For the purposes of the Bulletin, it is Mr Justice Morgan’s approach which is informative since it has some unique aspects that do not feature in the recent cases on costs budgeting we have reported in Costs Law Reports. Although they are not all on point with Group Seven, for quick reference they are:

  • Stocker v Stocker [2015] 4 Costs LR 651. Warby J. The case concerned costs budgets in proceedings for libel in which, in the view of the judge, “The overall total of the parties’ incurred and estimated costs … is unquestionably far beyond anything that could reasonably be thought proportionate to the importance of the issues at stake.” For that reason, Mr Justice Warby reduced the trial estimate from ten days to seven, cut down significantly on the amount of time spent on witness statements, experts’ reports, trial preparation and the trial itself but, significantly, did not interfere with hourly expense rates because they had been agreed (see judgment para 63).
  • Yeo v Times Newspapers Ltd [2015] 4 Costs LR 687. Warby J. The case concerned an application to revise a cost budget by £21,000 for incurred costs and a further £15,440 for estimated future costs and the correct criteria to apply. No consideration was given to the quantum of the request. Warby J focused his attention on the principles applicable under CPR 3.18(b) which permit a departure from a budget where there is good reason to do so. However, he decided that there had not been “a significant development in the litigation” within the meaning of PD 3E 7.9 sufficient to justify the approval either of the additional costs incurred or those forecast, so the application failed.
  • GSK Project Management Ltd v QPR Holdings Ltd [2015] 4 Costs LR 729. Stuart-Smith J. The case concerned a costs budget in proceedings brought by a liquidator arising out of works carried out at Queen’s Park Rangers’ Loftus Road football ground amounting to £805,675. Based upon hourly expense rates of £300 for the partners, £200 for associate solicitors and £300 for counsel, the claimant had advanced a budget seeking £824,038 (including £43,067 pre-action costs) in comparison with the defendant’s budget of £450,554 at hourly rates of £575–£600, £410–£450 and £250 for partners, associates and counsel respectively. Since the claimant had taken no objection to the defendant’s budget, Stuart-Smith J made no alterations to it. the reverse was the case for the claimant’s budget. By implication, he allowed the hourly rates because these applied to the hours sought by the claimant and allowed by him. In the result, the claimant’s budget was allowed in the sum of £425,000, that being about £25,000 less than the defendant’s budget, the disparity being explained, in part, by the difference in the hourly rates.
  • Havenga v Gateshead NHS Foundation Trust [2015] 5 Costs LO 573. HH Judge Freedman sitting as a deputy judge of the High Court. The case concerned an appeal from allowances made by a district judge under a costs management order against his decisions relating to the Statement of Case, experts’ reports and time spent on preparation for trial, it being implicit that in reaching his decisions that the judge had done so by reference to an hourly expense rate for the solicitors. The appeal failed; whilst Judge Freedman would have allowed rather more than the district judge, that was not the correct test. The district judge had made decisions well within the range of his discretion, the budget was both reasonable and proportionate and the fact that Judge Freedman might have been a little more generous had not meant that the decision of the district judge had fallen outside his wide ambit of discretion, far less had it been wrong.
  • Redfern v Corby Borough Council [2015] 5 Costs LO 583. HH Judge Seymour sitting as a deputy judge of the High Court, also on appeal from a costs management order. The case concerned incurred costs and the extent to which the court could take them into account when considering the appropriate level of budget overall. Judge Seymour’s approach was to decide first whether the incurred costs had been excessive; if so, the way that they would be taken into account in determining the reasonableness of subsequent costs orders would be to limit the approved costs for the future to figures “below what they might otherwise have been approved at but for the excessive sums which have already been incurred”. As was the case in Havenga, Judge Seymour found that the judge below had reached decisions entirely within his discretion and in the absence of any serious error in principle in relation to the assessment of the overall budget, the appeal was dismissed.
  • Capital for Enterprise Fund ALP v Bibby Financial Services Ltd [2015] 6 Costs LR 1059. HHJ Pelling sitting as a deputy judge of the High Court. The case concerned the circumstances, (if any) in which it would be appropriate for the court to give an indication about whether it would have ordered any increase in a costs budget had such an application been made. In the judge’s view, it would not; there was no jurisdiction for the court to amend an approved budget after trial nor to direct the costs judge to depart from the approved costs budget and even if such a jurisdiction did exist, it could only be exercised in exceptional circumstances, so the application failed.
  • Various Claimants v Sir Robert McAlpine [2015] 6 Costs LR 1085. Supperstone J. The case concerned the appropriate CMO to make in group litigation where the claimants’ and defendants’ respective incurred and estimated costs were in the region of £22 million and £27 million with the total costs when adding all 570 individual claims likely to be in the region of £100–£150m. Without expressing any final view about hourly rates, in considering the budgets, Supperstone J indicated that the court would have regard to the number of solicitors and counsel involved, the overall size of each party’s legal team, the number of hours claimed as reasonably required, hourly rates and the costs incurred before 2 October 2015 when the court had given directions for the service of costs budgets. In addition, where the claimants had not challenged the defendants’ budgets for the purposes of CPR 3.15(2)(a), such costs were to be treated as agreed.
  • Sarpd Oil International Ltd v Addax Energy [2016] 2 Costs LO 227. Longmore LJ, Sales LJ, Baker J. The case concerned the relevance of costs budgets in deciding the appropriate level of security for costs to order under CPR 25.12. As a matter of principle, the approved costs budget was to be taken as the appropriate reference point. Two reasons were given for this ruling. First, it is at the CMC at which issues regarding the quantum of costs shown in respective costs budgets should be debated. Second, the amount of the approved costs will be a strong guide to the likely costs order to be made after trial. As Sales LJ put it: “The party who [has] put forward the costs budget would have been encouraged by the court to litigate on the understanding and with the legitimate expectation that such costs would be likely to be recovered if he were successful and good reason would need to exist to justify defeating that expectation” (see para 43).

Sales LJ’s remarks at para 43 were clearly obiter to his decision. However they are not on all fours with comments made by the judges in the other cases which suggest that a considerable degree of discretion will lie with the cost judge on detailed assessment to adjust the figures, even where the court has carefully budgeted the costs of all parties. (See for example HH Judge Pelling at paras 5–7 of his judgment in Capital for Enterprise Fund.) That said, the approach of Morgan J in Group Seven is refreshingly authoritative in that it addresses all and ducks nothing. As with the other cases we have reported in Costs Law Reports, the starting point was his finding that the costs advanced overall in the budgets were disproportionate. Given that the case “did not involve complicated matters or anything particularly sophisticated in the way of financial services or banking”, it followed that:

  • It was not necessary to instruct City of London solicitors as Notable had done, but for the Swiss bank, its decision was more understandable given its foreign status: the hourly rates for the firm instructed by the Swiss bank would be 2010 Guideline rates for Summary Assessment, namely for grades A, B, C and D, respectively £409, £296, £226 and £138 with no uplift.
  • Central London rates would be allowed for Group Seven and ETS’s solicitors but with an uplift of 15%, 7% and 5% on Guideline Rates for grades A, C and D giving allowances of £365, £210 and £132 respectively against claims for £425 to £575 for A, £250 to £285 for C and £125 to £265 for D.
  • The rates claimed by the solicitors for Notable and Mr Louanjli would be allowed as claimed for the grade A. For Mr Louanjli’s solicitor, they would be uplifted significantly to reflect the importance of the case to the client and the fact that he was using a firm in outer London. Accordingly for grades A, C and D the rates for Notable would be £255, £185 and £125 respectively and for Mr Louanjli £330, £229, £165 and £121 for grades A, B, C and D respectively.
  • Counsels’ fees. Since there was one firm of solicitors acting for the claimants, only a single team of counsel was required and a single budget could be prepared for the claimants’ future costs. The claimants would be permitted one leading counsel and one junior, and the Swiss bank one leader and one junior.
  • The hourly rate allowed for leading and junior counsel for the claimants would be a maximum of £500 and £275 per hour respectively. The brief fees and refreshers would be £200,000 and £100,000 plus refreshers of £5,500 and £2,750 for leader and junior respectively against claims of £793,100 and £468,650 for Group Seven’s counsel and £345,000 (QC without a junior) for ETS’s counsel.
  • For the Swiss bank, the figures would be £125,000 plus £5,000 a day (QC) and £65,000 plus £2,500 per day (junior) against claims for £487,000 and £319,000 respectively.
  • Remaining counsels’ fees would be approved as claimed in the costs budgets.
  • The estimated trial length would be reduced from 40 days to 36.
  • Incurred costs. On the material before it, the court could not confidently and accurately identify a reasonable and proportionate figure for the incurred costs and the approach in CIP Properties (AIPT) v Galliford Try Infrastructure [2015] 2 Costs LR 363 and GSK Project Management Ltd v QPR Holdings Ltd [2015] 4 Costs LR 729 would not be followed.
  • Contingent costs would need to be reviewed in the light of the judge’s comments.

In the result, Morgan J was unable to approve the budgets at the figures put before the court and the parties were required to review their budgets within 14 days with a final review of them to be carried out on the papers. As Morgan J put it in para 60:

“I consider that if the parties revise their budgets as to future expenditure in accordance with this judgment, I will then be able to make a final assessment as to whether the revised budgets fall within the range of reasonable and proportionate costs.”

What are the ramifications of this decision? One of them is that Sales LJ’s view that “the party who [has] put forward the costs budget would have been encouraged by the court to litigate on the understanding and with the legitimate expectation that such costs would be likely to be recovered if you were successful…” may come to pass. That would assist in fulfilling Lord Justice Jackson’s hope that costs budgeting would do away with the need for a detailed assessment at the end of the case. The reasons? The parties would know in advance whether their choice of solicitor was reasonable, what they would recover by way of hourly rates and for counsels’ fees and the level of personnel overall in the legal team which would be allowed. Thus for the future, parties would know where they stand at the stage of the CMO.

Contrast that with the case in which the decisions on rates, local solicitor, counsel, et cetera have been bottled at the case management hearing. Until adjudicated upon by a cost judge, all remain up for grabs on detailed assessment, whoever has lost and is paying or whoever has won and is receiving. Currently, it remains open for the former to argue that the rates were too high and that the work did not merit a City firm and that leading counsel was not justified, and for the latter to submit that the case was complex, the opposition made a meal of it and the instruction of City lawyers and a QC with commensurately high hourly rates was objectively reasonable. It will be interesting to see whether Morgan J’s approach will set the tone for costs budgeting for the future. Since it is a decision of a High Court judge, it is open to argument that it binds those judges who currently undertake the majority of costs budgeting, namely the Masters and district judges. Time will tell the extent to which those judges will follow it and if appeals follow if they fail to do so.

Finally, an apology for an incorrect headnote in Online Case 33 of 2015 Jackson v Thompsons Solicitors [2015] 5 Costs LO 559. Nothing gets past learned leading counsel and we are grateful for it having been pointed out that Simon J (as he then was) did not find that the breach was serious, contrary to what we put in the headnote (see paras 15 and 16). Well spotted!

The headnotes and full texts of the cases below are available to online subscribers at www.costslawreports.co.uk.

NEW! Costs Law Reports Online 2016/2

Broadhurst and Another v Tan and Smith [2016] 2 Costs LO 155: CPR 45 Section IIIA, fixed costs in low value PI Claims; CPR 36, costs consequences following judgment where Section IIIA of Part 45 applies; whether claimants who beat their own Part 36 offer are entitled to more than fixed costs.

Legg and Others v Sterte Garage Ltd and Another [2016] 2 Costs LO 167: Appeal against non-party costs order pursuant to discretion under s 51(3) Senior Courts Act 1981; insurers’ liability to indemnify the claimants’ costs under the Third Party (Rights against Insurers) Act 1930.

Stevensdrake Ltd v Hunt [2016] 2 Costs LO 187: Conditional fee agreement in insolvency proceedings: action “won” but judgment unpaid: whether insolvency practitioner’s liability to pay costs to his solicitor was contingent upon recovery.

Sarpd Oil International Ltd v Addax Energy SA and Another [2016] 2 Costs LO 227: CPR Part 25, security for costs; whether costs incurred in Part 20 proceedings are defendant’s costs for the purpose of a security for costs order; relevance of costs budgets in assessing amount of security for costs.

Flanagan v Liontrust Investment Partners LLP and Others [2016] 2 Costs LO 247: Issue based costs orders under CPR 44.2(6)(f); departing from the general rule in CPR 44.2(2)(a) that the winner should receive the costs of the action; parties’ conduct when deciding costs order.

Littlestone and Others v Macleish [2016] 2 Costs LO 275: Part 36 offers; whether payment made following admissions should be aggregated with a Part 36 offer; cross-appeal against costs order awarding costs on the standard and not indemnity basis.

Oak Cash & Carry Ltd v British Gas Trading Ltd [2016] 2 Costs LO 289: Relief from sanctions under CPR 3.9: failure to comply with an unless order and thereafter to apply for relief timeously after the default had been made good.

Group Seven Ltd and Another v Nasir and Others; Equity Trading Systems Ltd v Notable Services LLP and Others [2016] 2 Costs LO 303: Costs management order under CPR 3.15: costs budgeting, hourly rates, determination of local solicitor point, counsels’ fees and approach to costs incurred pre-budget.

Costs and Fees Encyclopaedia updating

The Encyclopaedia itself has been updated this month. Future updates will relate to this new edition.

Costs Law Reports 2016/1

Milton Keynes NHS Foundation Trust v Hyde [2016] 1 Costs LR 1: Conditional fee agreements; transfer from legal aid to CFAs before discharge of certificate where increase in limitation insufficient to bring case to a conclusion; whether “topping up” rendered the CFA is unenforceable under ss 10(1) and 22(2) Access to Justice Act 1999.

Clutterbuck and Paton v HSBC plc and Others [2016] 1 Costs LR 13: Costs of discontinuance under CPR 38 on the indemnity basis: principles applying where the discontinued action contains allegations of fraud.

Sinclair and Another v Dorsey & Whitney (Europe) LLP and Others [2016] 1 Costs LR 19: Striking out a claim for failure to comply with an order for security for costs: relief from sanctions under CPR 3.9.

Solicitors Regulation Authority v Spector; Solicitors Regulation Authority v The Solicitors Disciplinary Tribunal and Spector [2016] 1 Costs LR 35: Solicitors Act 1974 s 47(2); tribunal’s discretion to make costs order.

Garnat Trading & Shipping (Singapore) Pte Ltd v Thomas Cooper (a Firm) [2016] 1 Costs LR 45: Variation of a conditional fee agreement: whether provisions which offended against s 58 Courts and Legal Services Act 1990 could be severed so that the CFA was not rendered unenforceable for want of compliance with that section.

C&S Associates UK Ltd v Enterprise Insurance Company plc [2016] 1 Costs LR 61: Preliminary issues: costs of an expert’s report served by the claimant for which no permission had been given for the inclusion of a lengthy section: order that whatever the future course of the case, the claimant would bear 100% of the costs of the report and 80% of the costs of preparing bundles of bundles containing the report.

Mohidin and Others v Commissioner of the Police of the Metropolis and Others [2016] 1 Costs LR 71: Proceedings for false imprisonment, assault and exemplary damages: contribution to the defendant’s costs to be made by third parties under Civil Liability (Contribution) Act 1978: proportionality where costs significantly exceed damages.

Sugar Hut Group Ltd and Others v AJ Insurance Service (a Partnership) [2016] 1 Costs LR 109: CPR 44.2, court’s discretion as to costs; CPR Part 36; mischaracterisation of the claimant’s conduct as a reason for disallowing costs.

Jockey Club Racecourse Ltd v Willmott Dixon Construction Ltd [2016] 1 Costs LR 123: CPR 36.17, indemnity costs; validity of CPR Part 36 offer where it did not reflect a possible outcome but was made purely for commercial reasons.

Global Flood Defence Systems Ltd and Another v Johan Van Den Noort Beheer BV and Others [2016] 1 Costs LR 137: CPR 45.31(1)(a), scale costs for claims in the Intellectual Property Enterprise Court.

PM Law Ltd v Motorplus Ltd and Another [2016] 1 Costs LR 143: CPR 3.4(2), application for an order striking out certain paragraphs in the Particulars of Claim; CPR 24.2, application for summary judgment.

Grant and Tickell v Ralls and Others [2016] 1 Costs LR 185: Proceedings for a declaration for wrongful trading pursuant to s 214 Insolvency Act 1986: application for an order that the former directors contribute to the costs and expenses of the administration and subsequent liquidation of the company.

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