In a recent decision in the HBOS acquisition litigation, the High Court has clarified the proper approach in considering a party’s application to approve a revised costs budget in the light of significant developments in the litigation, under paragraph 7.6 of Practice Direction 3E (Costs management): Sharp v Blank [2017] EWHC 3390 (Ch).

The court held that, in approving a revised budget where there have been significant developments, the court can approve costs relating to those developments even though they have been incurred before the date on which the court’s approval is given. The base reference point for separating out incurred costs (which are not subject to the budgeting regime) and future costs (which are) is the date of the last approved or agreed budget, not the date of the revised budget, the application or the hearing date. This is a point on which there was some confusion so it is helpful to have clarification, albeit only at first instance.

The confusion arises principally from the wording of paragraph 7.4 of PD3E which states that, as part of the costs management process, “the court may not approve costs incurred before the date of any costs management hearing”. In the present case, the court held that this provision cannot be read literally, given that budgets will generally have been prepared at least three weeks before the hearing and so some of the estimated costs included in the budget will inevitably have been incurred by the time of the hearing.

Background

The decision arises in the context of shareholder litigation brought in connection with the acquisition of Halifax Bank of Scotland (HBOS) in 2009. The case is currently in trial, which began on 18 October 2017 and is due to conclude on 2 March 2018.

On 27 January 2017, on the claimants’ application, the court made a costs management order. It directed 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 the trial”, with a view to holding a costs management conference to approve the budgets.

An order was made on 2 May 2017 recording the budgeted figures (ie those for estimated costs to be incurred after 27 January 2017) and confirming that there was no agreement in respect of incurred costs (ie those up to and including 27 January 2017).

Paragraph 7.6 of PD3E (Costs management) provides: “Each party shall revise its budget in respect of future costs upwards or downwards, if significant developments in the litigation warrant such revisions.” The amended budgets must be submitted to the other parties for agreement, or failing that submitted to court for approval. 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”.

In October 2017 the defendants issued an application seeking the court’s approval for a revised costs budget under this provision. The defendants cited seven developments which they said were significant for these purposes.

The claimants opposed the application on a number of grounds, including that none of the matters relied on could properly be classified as significant developments. They also argued that the court had no jurisdiction to deal with any costs incurred by the defendants prior to the date the application was heard; those costs, they said, fell outside the budgeting regime and had to be dealt with on detailed assessment. In addition, the claimants argued that interim applications were outside the costs management regime pursuant to paragraph 7.9 of PD3E. Accordingly, the claimants did not seek to revise their costs budget.

Decision

The court (Chief Master Marsh) granted the defendants’ application to revise the budget in respect of the first four of the seven developments relied on. The Chief Master did not consider the other three developments to be significant in the context of the litigation. The costs associated with those categories will fall to be dealt with at detailed assessment pursuant to CPR 3.18.

In relation to the question of whether the court had power to approve costs that had been incurred by the date the application was heard, the Chief Master held that it did. He rejected the claimants’ argument that any expenditure incurred up to the date of the hearing had to be ignored and left over to be considered on a detailed assessment.

The Chief Master identified a number of policy considerations underlying the costs management regime, noting that not all of them sit easily together. They include:

  1. The benefit for a party in knowing its exposure to costs.
  2. Greater predictability in the costs that will be recovered.
  3. A reduction in the cost of detailed assessment.
  4. The need for the court to avoid undertaking a detailed assessment in advance.
  5. Significant developments should be reflected in the budgets.

He noted that, although paragraph 7.4 of PD3E, read literally, prevents the court from approving costs incurred before the date of a cost management hearing, it is impossible to implement in that way. The parties are required to file and exchange budgets at least 21 days before the first case management conference (CMC). So the budgets will always be at least three weeks out of date by the time of the CMC, and some of the costs stated as estimated in the budget will necessarily have been incurred in the interim period.

The reference in paragraph 7.4 to costs incurred before the date of any costs management hearing must therefore mean the incurred costs as specified in the budget. The court will generally be approving some costs which have been incurred after the date of the budget but before the cost management hearing. Otherwise those costs would fall into a “black hole”, in that they would not appear as incurred costs in the budget but could not form part of the estimated costs because they had already been incurred. They would have to be subject to a detailed assessment along with the costs shown in the budget as incurred. That would lead to a fragmented approach to the assessment of costs, which could not have been intended.

A similar approach is required, the Chief Master said, to make sense of paragraph 7.6 of PD3E. It cannot have been intended that, where there are significant developments, the court can approve only those costs incurred after the date of the hearing to approve the revised budget, with others being dealt with on detailed assessment. This too would lead to unnecessary fragmentation of the costs dealt with at a detailed assessment.

Although the costs management regime is meant to operate prospectively, rather than retrospectively, as the Chief Master put it: “It seems obvious to me that some degree of retrospectivity is inevitable if the costs management regime is to be made to work.”

The Chief Master also emphasised that paragraph 7.6 is not optional. The policy, he said, 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. The claimants’ approach would lead to a greater proportion of the costs being left to a detailed assessment, as the budget would deal only with future costs as at the date of the hearing.

In summary, the Chief Master’s conclusions on these points were:

  • The court has jurisdiction when revising a budget under paragraph 7.6 to revise a budget taking the last agreed or approved budget as the base reference point.
  • 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.
  • 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 the revised budget, treated as estimated costs.
  • Interim applications may constitute significant developments as may the consequences that flow from an interim application.