One of the most innovative of the "Jackson reforms" was that courts would control the parties' costs before they arose, instead of assessing, at the end of a case, whether they had been reasonably incurred. Jackson LJ suggested a new costs management regime, where parties would produce budgets setting out what they were likely to spend on the case from start to finish. As the case progressed, the budgets would be updated, with the judge keeping a watchful eye to ensure that costs did not become disproportionate to what was at stake. Throughout the proceedings, he would control the case by reference to the budgets.
Crucially, unless there was a good reason to do otherwise, the losing party would pay the winner no more than what was in the winner's last approved budget. Failure to file and serve a budget within the timeframe set out by the court would attract a draconian penalty – the winning party would only be able to recover court fees and costs already incurred, but none of the projected costs in their budget.
When the new regime was introduced in April 2013, certain cases were exempted, including all Commercial Court cases and all Chancery, Technology and Construction Court and Mercantile cases of £2 million or more. As a result, to date, costs budgeting has applied in relatively few large commercial claims.
On 22 April 2014, these exemptions were removed. Costs budgeting now applies to all multi-track cases, except: claims valued at £10 million or more; Part 8 claims and cases with fixed or scale costs (eg in the Intellectual Property Enterprise Court). Whilst the court always retains a discretion to impose costs budgeting in an otherwise exempt claim and vice versa, a substantial body of claims will from now on be subject to the costs budgeting procedure.
In practice this means that, before the first case management conference ("CMC"), the parties will produce a budget for each case (other than those which are exempt) in a prescribed form. In the budget they will record the costs that have already been incurred, as well as those likely to be incurred during the remainder of the proceedings (including counsel's fees), insofar as these can be anticipated.
Under the new Rules, before the first CMC, the parties' lawyers are required to liaise with each other to try and agree each other's budgets so that they are proportionate. Where "significant developments" in the litigation warrant it, they can increase their budgets, again, ideally by agreement with the other side. It is only when the parties cannot agree that the judge steps in to ensure that the budgets are proportionate.
The new costs budgeting procedure is controversial because it involves a substantial investment of time, money and effort early on in a case, and arguably brings real benefits only when a case proceeds all the way to trial - which is the exception rather than the rule. However, it has the advantage that, for the first time, litigants will see the other side's budget and therefore know the size of the costs bill they could face if they lose. The rules have built-in contingencies for unexpected occurrences, so that, for example, a winning party would be able to recover the costs of defending a surprise application by the other side, even if it was not in their budget. In addition, in large cases, the court may order that, rather than try and estimate all the costs at the beginning of a case, the parties should produce budgets covering the early stages of the action, which they can update as the case progresses.
The creation of a budget in the prescribed form is necessarily an inexact science. There will, therefore, inevitably be some teething problems whilst the new Rules and procedures settle in.