The finer points of costs management continue to occupy both courts and rule-makers. The impending changes to Practice Direction 3E – Costs Management, which came into effect on 6 April 2016, are set out below, together with two authorities providing further assistance on the correct approach to be taken by the courts to the budgeting process.
The changes to Practice Direction 3E are as follows:
- Budgets in low value cases (those with a value of under £50,000) are now to be filed with the directions questionnaire; in other cases they are to be filed 21 days before the first CMC;
- Budget discussion reports, setting out the figures agreed by phase, the figures not agreed by phase and a summary of the grounds of dispute, are to be filed 7 days before the first CMC;
- Only the first page of Precedent H is to be filed in cases where the value of the claim is under £50,000 (a new provision) or the costs are less than £25,000;
- In proceedings issued on or after 6 April 2016, claims made by or on behalf of a child are excluded from budgeting;
- In cases where the claimant has limited or severely impaired life expectancy, the court will ordinarily disapply costs management;
- A new paragraph PD3E 7.10 has also been added, clarifying the correct approach to be taken by the courts in setting budgets: “The making of a costs management order under rule 3.15 concerns the totals allowed for each phase of the budget. It is not the role of the court in the costs management hearing to fix or approve the hourly rates claimed in the budget. The underlying detail for each phase used by the party to calculate the totals claimed is provided for reference purposes only to assist the court in fixing a budget”.
Costs management powers restricted to future costs: The case of Venus Asset Management Limited v Mathews 33 confirms that the court’s costs management powers are restricted to future costs, and that the court has no power to revise costs that have already been incurred. In Venus, a surveyor’s negligence action in which directions had been given up to the exchange of witness evidence, budgets had been approved for the entire action, on the basis that the trial would last for 4 days. A further CMC was listed to provide directions to trial and “to consider any application to revise costs budgets”. At that CMC, both parties issued applications to revise their respective budgets both retrospectively and prospectively, arguing that the court could review costs already incurred as part of the remit of budget revision under PD3E 7.5, pursuant to which the court may give directions for the review of budgets. Chief Master Marsh disagreed however, holding that CPR r.3.12 and r.3.15 limit the court’s costs management powers to future costs, as does PD3E at paragraphs 7.4 and 7.6. The futurity of costs is taken from the date of the revised budget (rather than the date of the hearing).
This approach accords with that of Warby J in Yeo v Times Newspapers Ltd,34 who stressed that a party may need to act swiftly to apply for prospective revision of its budget if it appears likely that the costs to be incurred in a particular phase of litigation will exceed those which have previously been approved. In substantial cases, it may be worth seeking a direction for phased budgeting under PD3E 7.6, though this does run the risk of the other side incurring significant costs on phases which have not yet been budgeted that can only be challenged at detailed assessment.
Proportionality applies throughout the budget: In King v Thipthorp,35 a recent case in the TCC, Stephen Furst QC held that reasonableness and proportionality are not assessed by reference to the overall budget figure alone: it may well be appropriate to look at individual items claimed (such as experts’ fees, counsel’s fees and time costs for individual phases) and determine whether these should be subject to reduction, even if the overall budget does not appear unduly large.
The indemnity principle: In Engeham v (1) London & Quadrant Housing Ltd (2) Academy of Plumbing (In voluntary liquidation),36 an extempore decision of the Court of Appeal, it was held that the successful claimant in a personal injury action had ‘won’ her case for the purposes of a conditional fee agreement she had entered into with her solicitors by settling it with a Tomlin order requiring only the second defendant to pay her damages, although when the agreement was entered into only the first defendant was in contemplation. Consequently, and no doubt to the considerable relief of the claimant and her solicitors, the Court found that the indemnity principle had not been breached and the second defendant was obliged to pay the claimant’s costs of the action: the claimant had plainly derived a ‘benefit’ from the claim irrespective of who was to pay and was therefore liable for her solicitors’ fees. The parties could not have contemplated that only the first defendant could pay her costs: the Tomlin order was an agreement to pay damages for the purposes of the CFA, and it was not relevant that it was the second rather than the first defendant paying.
Fixed costs/indemnity costs: In an important judgment concerning the interaction between the fixed costs regime set down at CPR Pt 45 s.IIIA and the rules governing indemnity costs awarded under Part 36, the Court of Appeal considered the appropriate costs order to make where a claimant in a low value personal injury action who would otherwise only be entitled to fixed costs pursuant to CPR Pt 45 s.IIIA makes a Part 36 offer and subsequently obtains judgment which was more advantageous than the offer made.
In (1) Broadhurst (2) Taylor v (1) Tan (2) Smith 37 the first claimant and second respondent were personal injury claimants whose claims were subject to the fixed costs regime for low value personal injury claims at CPR Pt 45 s.IIIA. Both had made Part 36 offers which were rejected by the respective defendants and both had gone on to obtain more advantageous judgments. In the first appellant’s case, the judge at first instance had indicated that there was no difference between profit costs assessed on the indemnity basis and the fixed costs prescribed by Pt 45. In the second respondent’s case the judge agreed that r.36.14(3) applied but held that indemnity costs should not be equated with fixed costs.
It was held by the Court of Appeal that r.45.29B, which provides that the only costs to be awarded in s.IIIA cases are fixed costs, did not stand alone and that the need to take account of Part 36 offers in s.IIIA claims was recognised by the draftsman of the rules: r.36.14A was even headed “costs consequences following judgment where section IIIA of Part 45 applies”. The effect of r.36.14 and r.36.14A when read together was that a claimant who made a successful Part 36 offer was entitled to costs assessed on the indemnity basis: r.36.14(3) had not been modified by r.36.14A and continued to have full force and effect. Fixed costs were not to be equated with indemnity costs and any tension between r.45.29B and r.36.14A had to be resolved in favour in r.36.14A.
Fixed costs and indemnity costs were conceptually distinct: fixed costs were awarded whether or not they were incurred and whether or not they represented reasonable or proportionate compensation for the effort expended. Assessed costs, on the other hand, reflected the work actually done: the court examined whether the costs were incurred and then asked whether they were incurred reasonably or proportionately. Where a claimant had made a successful Part 36 offer in a s.IIIA case he would be awarded fixed costs to the last staging point provided by r.45.29C and Table 6B. He would then be awarded costs to be assessed on the indemnity basis from the date when the offer became effective. Whilst this would lead to a generous outcome for the claimant, it would not be an outcome so surprising or so unfair to the defendant that it required the court to equate fixed costs with indemnity costs.
Fundamental dishonesty / QOCS: Whilst only a County Court authority, the recent case of Rouse v Aviva Insurance Ltd 38 provides useful guidance concerning the approach to be adopted by the courts where a claimant discontinues and a defendant seeks a finding of fundamental dishonesty under CPR 44.16 in order to disapply QOCS.
HHJ Gosnell affirmed that the relevant procedure to be adopted was a matter for the court’s discretion: under PD 44.12.4(c) the court has the discretion to direct a paper determination, limited inquiry or full formal hearing. He made the following general observations:
- Where there was a prima facie case of dishonesty from the paperwork, it was only fair to the claimant (and the court) to allow the claimant to explain why he made a claim and discontinued. Where he failed to give evidence or did not explain the discontinuance, the defendant could invite adverse inferences;
- A hearing might be proportionate where, for example, the case was virtually ready for trial and the evidence had been exchanged. If discontinuance occurred just after service of the defence, that weighed strongly against incurring substantial further costs.
Part 36 offer / CRU: Finally, a Court of Appeal ruling determining the meaning of ‘net of CRU’ for the purposes of Part 36 offers. In Crooks v Hendricks Lovell Ltd,39 the Defendant made a Part 36 offer of £18,500 ‘net of CRU’, which was just over £16,000 at the time of offer. At trial a few months later the claimant obtained judgment for £29,550. A decision on costs was postponed pending the claimant’s appeal against the CRU certificate; a revised certificate showed deductible benefits of only £6,760. The defendant argued successfully at first instance that its offer had comprised the £18,500 plus the CRU sum outstanding at the time of its offer, which the claimant had accordingly failed to beat. The Court of Appeal disagreed, holding that the regime in r.36.14 applied to the circumstances as they were once judgment had been given, though not necessarily only at the moment of delivery: the phrase “upon judgment being entered” meant “once judgment has been given and not before then”. There would be cases in which a judge was entitled not to make his decision on costs straightaway, the facts of the instant case demonstrating why that had to be so: the judge knew that the correct amount of recoverable benefits remained to be determined. He was not constrained by r.36.14(1) to make his decision on costs in ignorance of the outcome of the CRU appeal. The real measure of whether the claimant had bettered the offer after issue of the revised CRU certificate was whether the total payment he actually received was more or less than the amount of the offer: the focus of r.36.14 (1), (1A) and (2) was on the comparative advantage to the claimant as between offer and judgment, not disadvantage to the defendant.