Costs Budgeting – Precedent H: When Form-Filling Really Matters
The Civil Procedure (Amendment) Rules 2013 (SI 2013/262) introduced to Part 3 of the Civil Procedure Rules, Section II, dealing with Costs Management. CPR r. 3.12 stresses that ‘the purpose of costs management is that the court should manage both the steps to be taken and the costs to be incurred by the parties to any proceedings so as to further the overriding objective’.
For all multi track cases commenced on or after 1 April 2013, costs budgets must be filed and exchanged as required by the new rules or as the court otherwise directs. Filing and exchange must take place by the date specified in the notice served under CPR r. 26.3(1), or, in the event that no such date has been specified, seven days before the first case management conference (CPR r. 3.13). The notice referred to above is the notice of proposed allocation to track. The alternative seven day period was included to accommodate Part 8 claims that would not otherwise trigger the Precedent H obligation: such claims are automatically allocated to track. The ‘costs budget’ mentioned indirectly refers to the all-important Precedent H. Practice Direction 3E, which is the new practice direction supplementing Section II Part 3, stipulates at paragraph 1 that, unless the court orders otherwise, budgets must be in the form of Precedent H, a copy of which is annexed to the Practice Direction.
Precedent H itself is nine pages long and requires a break-down of costs relating to defined stages in the litigation process: pre-action costs; issue of proceedings and pleadings; Case Management Conference; disclosure; witness statements; experts’ reports; pre-trial review; trial preparation; trial; settlement discussions and ADR; and contingency costs. It is this last category, which is divided into three (A,B, and C), that provides some comfort to solicitors completing the form (which Jackson LJ predicted would take about 2 hours) and ensures some protective buffer in the event of uncertainty in an increasingly front-loaded scheme of costs control. Of perhaps further relief to lawyers is the fact that, in cases where a party’s budgeted costs do not exceed £25,000, there is no obligation on them to complete more than the first page of Precedent H (PD3E, para 1).Litigants-in-person are not compelled to file a budget but it is a requirement that they are served with the other side’s budget (PD 3E, para 2.8).
The burden of completing this costs budget is a real one, however. Consider the hypothetical case in which a claim is brought by a litigant-in-person against whom there is no prospect of practically enforcing any costs order that might be obtained following judgment. Even in these circumstances, the CPR seems unrelenting in its new budgeting demands. Furthermore, as a signal of the importance of Precedent H, which can only add to the anxiety of those meeting its demands, it must be dated and verified by a statement of truth signed by a senior legal representative of the relevant party, the wording of which is set out in Practice Direction 22.
Crucially, in those cases where a party fails to file a budget despite being required to do so they will be treated as having filed a budget comprising only the applicable court fees (CPR r. 3.14). They will simply not be able to recover any fees; a significant (some might say draconian) sanction for non-compliance. Though it is open to the court to order otherwise, this is a simple principle that is likely to be applied strictly in the light of the fact that, post-Jackson, the courts’ approach to applications for relief from sanction has widely been considered to be less accommodating.
An example of this new judicial psychology was provided by the decision of Master McCloud in Mitchell v News Group Newspapers Ltd  EWHC 2355 (QB). Who would have thought ‘Plebgate’ would lead to clarification in the law of civil costs? The QB Master determined that the claimant’s absolute failure to: (i) engage in a discussion as to budget assumptions with the defendant; (ii) apply to the court for extra time for filing; or (iii) even simply notify the parties or the court that there was a difficulty with compliance was worthy of reproach. The claimant was limited to recovering the applicable court fees. Their application for relief from sanction was dismissed but the Master was prepared to grant permission to appeal so that the appellate court could determine whether this was too strict an approach to be taken. One academic point in dispute was whether the strict sanction in CPR r. 3.14 was to apply in cases where the CPR r. 3.13 seven-day requirement was breached. Agreeing with counsel for the respondent, the Master concluded that the two rules had to be read as ‘part of a coherent whole’. However, as the Master pointed out, this comment was obiter given that there was no dispute that the general case management powers permitted him to impose the above sanction pursuant to Practice Direction 51D (Defamation Proceedings Costs Management Scheme) (now revoked).
It is important to note here that Precedent H is solely concerned with inter partes recoverability and has no bearing upon the independent contractual relationship between solicitor and client as governed by their retainer. In the light of that fact, apart from the immediate consequences of failing to file a Precedent H, the question on every lawyers’ lips is quite simple: what impact will these budgets really have upon recoverable costs?
When making any case management decision, the court is required to have regard to any available party budgets and take into account the costs involved in each procedural step (CPR r. 3.16(1)). This requirement applies regardless of whether a so-called Costs Management Order (‘CMO’) has been made. However, if a CMO is made the court will, after that point, be in a position to control the parties’ budgets in respect of recoverable costs (CPR r. 3.15). A CMO will record: (i) the extent to which the budgets are agreed between the parties; and (ii), in respect of budgets not agreed or only partly agreed, the court’s approval after making ‘appropriate revisions’. The court cannot grant its approval retrospectively in respect of costs already incurred (PD 3E, para 2.4), neither will it undertake a detailed assessment at the hearing. Instead it will consider whether the costs budgeted fall within the range of reasonable and proportionate costs. Furthermore, any approval provided will relate to the total budgeted figures in respect of each phase of the litigation. No specific approval will be given to the ‘constituent elements’ of each figure.
The consequence of a CMO being made is that, upon detailed assessment on the standard basis, the court will: (i) have regard to the receiving party’s last approved budget for each phase of the proceedings; and (ii) not depart from the approved or agreed budget ‘unless satisfied that there is good reason to do so.’ It has been suggested that any application to avoid the ‘deemed budget’ may also be dependent upon the ‘good reason’ principle. In any event, PD3E paragraph 2.6 provides that each party shall submit a revised budget to the court ‘if significant developments in the litigation warrant such revisions’. The parties are entitled to make upward or downward revisions to their budgets upon agreement, allowing them to bypass the judicial regime. Only in default of such agreement will revisions or variations to budgets have to be submitted to the court for approval, unless a budget has already been approved in which case the variation must be sanctioned by court approval.
For those who consider themselves in a comfortable position providing they avoid a CMO, Practice Direction 44n paragraph 3 makes sobering reading. It stipulates that even where no CMO is granted but there is a difference of 20% or more between the costs claimed by the receiving party on detailed assessment and the costs shown in the budget filed, a statement of reasons may have to be filed by that party. More than that, if it appears to the court that the paying party reasonably relied upon the budget as filed, the court will be entitled to restrict recoverable costs to ‘such sum as is reasonable for the paying party to pay in the light of that reliance.’(para 3.6). This principle applies even if the sum incurred by the receiving party was reasonably and proportionately incurred. Finally, if no satisfactory explanation is provided for the difference, the court might regard that difference as evidence that the costs claimed are unreasonable or disproportionate (para 3.7).
Case Law on Variation
There have been a number of recent cases dealing with the question of variation to costs budgets. The most significant was that of the Court of Appeal in Henry News Group International Ltd  EWCA Civ 19. The case primarily related to the Defamation Proceedings Costs Management Scheme pilot but has wider implications for the costs budgeting regime. In that case, the Senior Costs Judge had tried a preliminary issue as to whether there was good reason to depart from the approved budget and determined that no good reason existed. The solicitors had failed to comply with the Practice Direction governing the pilot. At paragraph 16, Moore-Bick LJ commented that:
- It was implicit in paragraph 5.6 of the pilot’s Practice Direction that the approved costs budget would not normally allow costs in an amount which exceeds what had been budgeted for in each section.
- However, paragraph 5.6 expressly recognised that there might be good reason to depart from the budget.
- Determining whether good reason existed was dependent upon an examination of all the circumstances of the case, but this was an exercise to be undertaken with particular regard to the objective of the costs budgeting regime. That objective was the proper control of the costs by managing the proceedings in a manner that would keep those costs within the bounds of proportionality.
His lordship went on at paragraphs 27 and 28 to deal with the anticipated totality of the Jackson reforms. At paragraph 28 in particular he sought to identify the features of the new overarching costs budgeting regime by comparison with the pilot scheme. He considered that the new regime: (i) imposed greater costs management responsibility on the court; (ii) imposed greater responsibility on the parties to keep their budgets under constant review; and (iii) lay greater emphasis on the importance of the approved or agreed budget providing a prima facie limit on the amount of recoverable costs.
Other recent cases of relevance include the following:
- In Murray and Stokes v Neil Dowlman Architecture Limited  EWHC 872 (TCC) the court cautioned future applicants that the courts would ‘expect parties to undertake the costs budgeting exercise properly first time around and would be ‘slow to revise approved budgets merely because, after the event, it is said that particular items’ have been ‘omitted or under-valued’. Despite the threatening language, in this case the claimant was permitted to recover CFA and ATE premiums as the defendant was not prejudiced due to the existence of a served Form N251.
- In Elvanite Full Circle Ltd v AMEC Earth and Environmental (UK) Ltd  EWHC 1643 the Defendant sought to increase the budget, approved by way of a Costs Management Order, from £268,488 to £531,946. The increase was attributed to increased expert and counsel fees. No application had been made to the court to amend the CMO. Coulson J refused to permit the retrospective budget amendment upon the application for inter partes costs in the order of £497,593, asserting that these applications ‘ought to be made immediately it becomes apparent that the original budget costs have been exceeded by a more than minimal amount’. To hold otherwise he insisted would: (i) mean that the exercise would no longer be a costs budgeting one but would instead simply entail approval of actual costs incurred; (ii) encourage parties to ‘wait and see’, only applying to the court if it was in their interests; and (iii) ‘make a nonsense’ out of the exercise in circumstances where recoverable costs could be double those projected in a party’s original costs budget.
The requirement to submit costs budgets is, however, subject to exemption. Section II of CPR Part 3 and its complementary Practice Direction 3E are not applicable in the following instances: (i) to cases in the Admiralty and Commercial Courts; (ii) such cases in the Chancery Division as the Chancellor of the High Court may direct; and (iii) such cases in the Technology and Construction Court and the Mercantile Court as the President of the Queen’s Bench Division may direct. The Admiralty and Commercial Court exemption was initially an outlier, resulting from Lady Justice Gloster’s resistance to implementation. However, it soon became apparent that concurrent jurisdiction in commercial cases between this court and those other courts mentioned in CPR 3.12(1) rendered any exemption solely confined to the Admiralty and Commercial Court somewhat incoherent. The Chancellor of the High Court and the President of the QBD have since directed that in the Chancery Division/TCC and Mercantile Court respectively these costs budgeting rules shall not apply to cases where at the date of the first CMC the sums in dispute exceed £2,000,000 (excluding interest and costs). Of course, it is open to the court to order otherwise.
Precedent H has already been amended to accommodate lessons learned from growing pains in its first four months. The 66th Update to the CPR provided a new form, which deleted the reference to court fees in the exclusions provided on the first page, adopted the terminology of ‘statements’ rather than ‘pleadings’ to reflect post-Woolf lexicon and removed text from lines 1-4 of the fee earners time costs section so as to permit solicitors to fill out fee earner descriptions for themselves. These amendments are all quite subtle and are unlikely to make the process any less demanding.
In terms of what can be expected in future amendments to the CPR, the question on the minds of those practitioners who concern themselves with these matters is whether the current exemptions from costs budgets will be lifted. Greater consistency would, of course, demand an end to the exemption for the Commercial Court and claims above £2 million. It seems to me that all bets must be on the latter exemption being removed first given that (i) it is less politicised and (ii) perhaps the most illogical of the carve outs under the new costs budgeting regime, given that the utility of costs control in any case is surely directly proportional to the value of the claim.
It would be an understatement to assert that ‘Precedent H’ has become the new thorn in the flesh for firms’ litigation departments. If it is here to stay (and there is every sign that this is the case) then practitioners will need to ensure that they meet its demands. The threshold of judicial expectation when it comes to completing costs budgets will inevitably rise as Precedent H becomes an entrenched feature of the civil justice landscape. If the new regime is to be seen by the profession and clients as credible, then the policies which inform its creation – costs transparency, control and restraint – should be applied across the board. If the highly charged debate within the judiciary relating to existing exemptions does not lead to further amendment in the near future, this form-filling exercise is likely to be considered another unjustified obstacle in an increasingly prescriptive procedural regime.
Paul Fisher, Barrister, 4 New Square, Lincoln’s Inn
Costs Lawyers, Costs Draftsmen and Legal Costs Specialists