The introduction of cost budget discussion reports appears to have given rise to a new area of tactical game playing by litigators. Coulson J has issued a stern warning to parties who seek to engage in such games by putting forward unrealistically low figures for the opposing party’s costs and, in a recent case, wholly disregarded a defendant’s budget discussion report because it was considered unrealistically low.
The Civil Procedure (Amendment) Rules 2016/234 introduced the requirement in CPR 3.13(2) for parties to file and serve budget discussions reports in form Precedent R following exchange of cost budgets. The aim of the reports was for the parties to record the extent of any agreement reached in respect of cost budgets.
Where agreement is not reached in respect of a phase of the proceedings, each party is required to set out the figure which it considers to be reasonable and proportionate in respect of that phase and explain why the proposed figure is different from that included in the opposing party’s costs budget.
The clear aim of such reports is to ensure that discussions regarding cost budgets take place in advance of a costs and case management conference and to enable the court to know the differences between the parties arising from such discussions quickly and easily.
Importance of cost budgets
Costs budgets are important for two main reasons:
- First, it is now firmly established that the court will not depart from a costs budget during detailed assessment unless there is good reason to do so (for a recent example, see Merrix v Heart of England NHS Foundation Trust).
- Secondly, parties sensibly use approved budgets to inform the making, assessment and acceptance of settlement offers.
Consequently, where parties consider that a favourable outcome is unlikely for them, or where it is considered likely that the case will settle, it is tempting to seek to ensure the opposing party’s costs budget is set as low as possible by filing a low cost budget and offering similarly low sums in the budget discussion report.
However, in a recent costs management hearing, Coulson J has issued a warning against giving in to such temptation.
Findcharm v Churchill
Findcharm Limited v Churchill Group Limited concerned a gas explosion at a hotel owned by the defendant (Churchill), but operated by the claimant (Findcharm). The claim was valued at £820,000.
During the course of costs budget discussions, Findcharm reduced its costs budget down, such that, at the hearing, the total incurred and estimated costs were approximately £244,000. This was based on a single joint accountancy expert report in respect of the business interruption and loss of profits claim, but no expert evidence about the cause of the explosion, because no positive defence on that issue had been pleaded by Churchill.
Churchill’s costs budget was £79,371. It had suggested a budget of £46,900 for Findcharm’s future estimated costs, giving a total cost budget of approximately £90,000 when account was taken of the incurred costs.
Coulson J was unimpressed with Churchill in all respects. Churchill’s defence was described as “an insurer’s defence straight out of the 1970’s” and one which the CPR was intended to sweep away. In relation to Churchill’s cost budget, Coulson J stated:
“Even on Churchill’s own case, it seems erroneous on its face. For example, it allows nothing at all for fire experts, even though at the CMC Churchill were arguing that causation was in issue and an expert was necessary. It also purports to estimate a sum of less than £7,000 for the preparation of a High Court trial. It is therefore, on any view, an unrealistically low budget.”
Since Churchill’s budget was significantly lower than its own, unsurprisingly, Findcharm had agreed it. Coulson J therefore approved it.
In relation to Churchill’s treatment of Findcharm’s costs, Coulson J stated that it was of no utility continuing:
“It is completely unrealistic. It is designed to put as low a figure as possible on every stage of the process, without justification, in the hope that the court’s subsequent assessment will also be low. In my view, therefore, it is an abuse of the cost budgeting process.”
Coulson J then gave examples of the offers made in the Precedent R which were unrealistic. He stated that, as a result, he was obliged to disregard the whole of Churchill’s budget discussion report. He then went on to approve Findcharm’s budget, without deduction.
Lessons to be learned
Coulson J was clear that attempts by parties to treat costs budgeting as a form of game, in which they could seek to exploit the rules in the hope of obtaining a tactical advantage over the other side, would not be permitted. Therefore, parties need to be quite careful, both in terms of estimating their own costs for the purpose of cost budgeting and in completing Precedent R.
If the figures adopted are deemed unrealistically low, there is now clear precedent for the budget discussion reports to be disregarded. In those circumstances, the game playing party faces two consequences:
- First, its unrealistically low budget will likely be approved. Whilst a party intending to settle a case may not consider this to be problematic, it overlooks what may happen if the case does not settle or there is late acceptance of an offer. If, at trial, the game playing party beats a settlement offer it has made or if an offer it has made is accepted late, the costs which the game playing party can recover for the period after which the offer should have been accepted will likely only be those contained in its approved budget.
- Secondly, if its Precedent R is disregarded, the court will not have any alternative figures, assessment or explanation by which to reference any reduction in the other party’s budget. This will not only be relevant at the conclusion of a trial, but also in relation to any costs the other party is entitled to if settlement is achieved.
Accordingly, litigants are best advised to ensure that the costs included in both Precedent H and Precedent R are realistic or, at the very least, that any game playing is subtle enough to fall below the court’s radar.