The Court of Appeal has overturned the decision of the Senior Costs Judge that there was “no good reason” to depart from the claimant’s approved costs budget in circumstances where the budget had been exceeded by close to £270,000: Henry v News Group Newspapers Limited  EWCA Civ 19.
The first instance decision, in what is believed to be the first costs management pilot case to proceed to detailed assessment, sparked controversy for its strict approach, and in particular the suggestion that a party would be unable to recover excess costs where it had failed to update its budget even if those costs were in fact reasonable and proportionate (see post). The Court of Appeal’s decision has proved no less controversial, with some commentators expressing concern that it will undermine the costs management regime which is to be introduced for all multi-track cases (save in the Commercial Court) as part of the Jackson reforms (see post).
The effect of the decision should not be overstated, however. In its judgment the Court of Appeal was careful to emphasise that the costs management rules that will apply from 1 April differ in important respects from the pilot which was the subject of the appeal. In particular, the Court of Appeal said, they “impose greater responsibility on the court for the management of the costs of proceedings and greater responsibility on the parties for keeping budgets under review as the proceedings progress”. Although the court will still be able to depart from the approved or agreed budget if satisfied that, in all the circumstances, there is good reason to do so, it is likely that the court will ”place particular emphasis on the function of the budget as imposing a limit on recoverable costs”.
The Court of Appeal’s judgment demonstrates that the courts will retain some flexibility, and will not be constrained to restrict a party to its budget whenever there has been a failure to comply with the rules. The decision should not however be taken as a licence for complacency. A party that exceeds its costs budget will need to persuade the court that there is good reason to depart from that budget. Predicting how easy or difficult a task that will be in a given case is unlikely to be straightforward.
This case was dealt with under the pilot Defamation Proceedings Costs Management Scheme, which requires the parties to prepare detailed costs budgets and update them as necessary. To the extent the budgets are not agreed between the parties, the court will approve or disapprove each side’s budget. In assessing costs on the standard basis, it will have regard to the last approved budget and will not depart from it unless satisfied that there is good reason to do so. The costs management regime which will apply more broadly from April contains a similar provision.
In this case the claimant exceeded its approved costs budget by close to £270,000 (claiming £650,137 compared to a budget of £381,305, before adding success fee and ATE premium). The court considered, as a preliminary issue, whether there was good reason to depart from the budget.
The Senior Costs Judge concluded that, although the claimant had strong arguments that the costs incurred were both reasonable and proportionate, there was no good reason to depart from the budget. He referred to the objective of the practice direction, which is to manage the litigation so that the costs of each party are proportionate and so that the parties are on an equal footing. He said he was “forced to the conclusion that if one party is unaware that the other party’s budget has been significantly exceeded, they are no longer on an equal footing, and the purpose of the cost management scheme is lost”.
The Court of Appeal overturned that decision. Moore-Bick LJ (who gave the leading judgment, with which Aikens and Black LJJ agreed) pointed out that although it is implicit in the practice direction that the budget should provide the framework for a detailed assessment and the court should not normally allow costs which exceed it, the practice direction expressly recognises that there may be good reasons for departing from the budget. When considering whether there is good reason, the court must take into account all the circumstances of the case but with particular regard to the objective of the regime which, for the pilot scheme, was to manage the litigation so that the costs of each party are proportionate to what is at stake and to ensure that the parties are on an equal footing.
Moore-Bick LJ said it would not be wise to attempt an exhaustive definition of the circumstances which might give rise to good reason for departing from the approved budget. He did however list a number of factors that might be relevant, including ”how the proceedings have been managed, whether they have developed in a way that was not foreseen when the relevant case management orders were made, whether the costs incurred are proportionate to what is in issue and whether the parties have been on an equal footing”.
In Moore-Bick LJ’s view, the Senior Costs Judge had misunderstood the reference in the practice direction to the parties’ being on an equal footing, and had taken too narrow a view of what may amount to good reason to depart from the budget. The reference to an equal footing is concerned with the unfair exploitation of superior resources; a failure to provide information does not of itself put the parties on an unequal footing in the relevant sense. Here, the court said, there was no inequality of arms. Further, it is not essential to comply with all the requirements of the practice direction before a party can ask the court to depart from the approved budget, although compliance is a factor the court may take into account in deciding whether there is in fact good reason to do so.
In the Court of Appeal’s view, there was good reason to depart from the budget in this case for a number of reasons:
- Unless the court departed from the budget the claimant would not be able to recover the costs of the action. That alone would not be enough (if it were the scheme would be otiose) but it was an important factor to the extent that the costs actually incurred were reasonable and proportionate.
- The failure to comply did not put the defendant at a significant disadvantage in terms of its ability to defend the claim, nor did it seem likely that it led to the incurring of costs that were unreasonable or disproportionate.
- This meant that the object of the practice direction was not undermined, and so a refusal to depart from the budget would achieve nothing beyond penalising the claimant. Although that might encourage compliance with the practice direction in future, it would be unreasonable and disproportionate.
- That was all the more so in the context of proceedings which were constantly changing.
- The claimant’s solicitors were not alone in failing to comply. The defendant’s solicitors had also exceeded their budget and the court itself was less active than it should have been in monitoring the parties’ expenditure.
It was for the costs judge to decide to what extent the claimant should recover costs in excess the budget.
As noted above, the Court of Appeal took pains to draw a distinction between the costs management pilot which was the subject of its decision and the rules that will apply more broadly from 1 April. In particular, in the court’s view, the new rules place greater emphasis on the importance of the budget as providing a prima facie limit on the amount of recoverable costs. So although this decision may be seen as taking a softer, more flexible approach to compliance with the requirements of the costs management regime, the courts may still be prepared to impose a tough line when the new rules come into force on 1 April. Parties will no doubt be keen to avoid testing that proposition.