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The price and risks of costs budgeting

The Jackson litigation reforms have polarised views on costs budgeting. But, says Mike Willis, something has to give.

Costs are a contentious issue in litigation akasu

Few topics have been more controversial in the past few years in English legal practice than the Jackson reforms of litigation introduced in 2013 pursuant to the Legal Aid, Sentencing and Punishment of Offenders Act 2012; and few issues have attracted a more polarised range of views and comments than costs budgeting. Litigation in England continues to be respected for the rigours of its systems and procedures for testing evidence and facts. London has long been a popular forum for international legal disputes and the volume of cases it receives does not appear to be slowing.

Expensive

But it is notorious for being expensive by comparison with most European countries, and although costs are much higher in the US, often exceeding what is at stake, there is no ‘loser pays’ rule or one-way costs shifting to aggravate the scale and risks of making or defending a claim. It is unsurprising therefore that in his own Harbour Litigation Funding Lecture in May 2015, Sir Rupert Jackson acknowledged some of the current problems with costs budgeting as ripe for review and adjustment – specifically judicial inconsistency, delays, and lack of effective mechanism for dealing with costs already incurred. – But he gave robust reasons for his general satisfaction with how it has worked out so far:

  • Both sides know where they stand financially.
  • Costs forecasts encourage early settlement.
  • Costs are controlled from an early stage.
  • Attention is given to costs at the outset of litigation.
  • CMCs are now more effective.
  •  Budgets promote fairness in that they allow each party to know what is being claimed.
  •  Losing parties are protected from being destroyed by costs.

These have been broadly endorsed by comments at the same event by the current Master of the Rolls, Lord Dyson to effect that costs budgeting is here to stay. 

The need to control costs

Jackson LJ has by no means been the sole driver for the reforms. In his lecture to the Association of Costs Lawyers on 11 May 2012 Lord Neuberger, then Master of the Rolls, had plenty to say about the need to control costs: “Excess litigation cost has for too long been an endemic and unwelcome feature of our civil justice system. Hourly billing … simply does not reflect the value of work. An approach to litigation costs based on value-pricing rather than hourly-billing is one which urgently needs to be worked out and applied…The Jackson reforms represent the boldest attempt to cure our costs problem yet attempted. Should they fail to reduce costs, it seems to me that we will face a stark choice: the rejection of the English costs rule and the adoption of either a US-style costs rule or a German-style fixed costs regime.” 

Exposure to challenges

Lawyers have never found budgeting easy, and still don’t. According to a survey by Just Costs Solicitors of 912 commercial litigation partners at the UK's top 200 law firms, more than two-thirds report incurring costs above agreed budgets, exposing themselves to clients’ challenges of their unrecovered fees. They also face potential negligence claims if or where the client’s prospects of a good result, or more particularly their chance of a negotiated settlement, are caused to be damaged by unnecessary or disproportionate costs estimates.

Negligence claim

One of the biggest practical downsides is the hassle of producing ‘Precedent H’ costs estimates. Forecasting expenditure of money, time and human resources sets a challenge for clairvoyants, never mind busy practitioners, and it is harder still to estimate the value of skills and services required for a given set of circumstances. Yet faced with the risks and burdens of their duties of care as currently applied by the courts,  lawyers need to price every case against the most cautious forecasts if they are to ensure that a negligence claim is evaded. 

On the other hand, there is intense market pressure to do the opposite. Firms who pare their budgets and confine their predicted tasks to a minimum may be reckless, but make themselves more economically attractive to clients and stakeholders. 

Hence lawyers are being driven to race to the bottom – again, and their value and role as a profession will be further eroded. There is some irony that the most recent comprehensive commentary on that process has come from none other than Sir Rupert Jackson again, this time in his Peter Taylor Memorial lecture to the Professional Negligence Bar Association on 21 April 2015: “The common law no longer sees the professions as somehow sacred or as fragile assets of society, which merit special protection. … The privileged position of the professions now seems to have become an unconscious driver in the opposite direction. It leads courts to extend the liabilities of professionals beyond their natural bounds.”

In March, a senior Cost Master, David Cook, told a seminar at 7 Bedford Row chambers that Sir Rupert’s vision of a gradual implementation of costs budgeting ‘did not translate into reality’: the litigation system will ‘cease to function’ unless radical changes are made, and the entire process needs to be re-drawn and Judges and parties given detailed guidance about what is expected of them.

Comments published in various journals include: 

- Litigation is adversarial... One may as well ask the battlefield general what "the butcher's bill" will be, before battle is joined. Other professions generally do not have others seeking to beat them.

- On a broad brush approach the cost of cost budgeting isn't worthwhile when compared with the good it does on those cases where it works.

- Scrutiny of one party's costs after the event must surely entail less expense of time and money than scrutiny of two beforehand.

- Cost budgeting is a pain and mainly consists of making up figures and then increasing them to cover unforeseen circumstances. It adds costs and saves nothing and encourages people to front load work. I don’t know why a simpler method can’t be implemented.

- Personally I'd prefer a more American system of everyone pays their own costs save for cases of obvious abuse of process. Then litigation would be more about the merits than the risk of losing and having an unaffordable bill for the other side's costs in addition to your own.

- I am now more sympathetic with the system in USA where each side pays its own costs plus contingency fees.

- When the first negligence claim against a solicitor that cocked up the costs budgeting because he is not Mystic Meg goes to the CA, I wonder if Jackson will recuse himself...

A sub-committee of the Civil Procedure Rule Committee chaired by Coulson J has been established to review the extent of the problems and to make recommendations for improvement. It’s hard to see how they can all be resolved until at least three things happen:

- First, there needs to be more cultural adjustment by parties and their lawyers, incentivised by the courts’ management and Procedure Rules, towards agreeing costs budgets before they are submitted to court. Lord Jackson and others have encouraged introduction of practice directions for budgets to be exchanged amply (two weeks) ahead of CMCs, and preferably agreed. Budget agreements may themselves be prey to client criticisms and even claims if they unnecessarily disadvantage them; but scope for downstream complaints will be reduced.

- Second, the courts need to be more considerate as to when not to impose costs budgets or costs management directions. Some cases are simply unsuited to them. Clinical negligence claims are a class that has been identified as such, but there are plenty of others.

- Third, there should be standardised price dimensions for the various stages, case values and geographical areas, for which lawyers can’t be criticised if they keep their time and service supply within them.  

Lord Jackson has lamented that so far neither Government nor professional institutions have been prepared to put up the money for sufficiently thorough surveys from which to make a table even for fixed costs for lower value cases (never mind more comprehensive guidance, or prescriptions for the values of the various tasks entailed in mainstream disputes which Lord Neuberger hoped for). 

Dynamic businesses

There is at least one sector however for whom the investment in a comprehensive survey and published tableaux of values may be worthwhile. A lot of the recent commentaries and dialogues have been coming from the niche firms of costs lawyers, such as Just Costs Solicitors or Horwich Farrelly, and specialist counsels’ chambers. Along with specialised departments in the larger litigation practices, and firms of costs draftsmen, they have been developing dynamic businesses in the supply of outsource advice and court advocacy on costs management issues. There are enough of them that a coordinated collaboration to produce some standard costings and values should be expected to be within their collective resources.  

Guidelines 

A set of guidelines and software packages for Form H and tabulated values, whether produced and published privately or by public institution(s), would rapidly become adopted by the courts and users alike, in similar manner to Ogden tables for personal injury, or child-care awards in family cases. The regrettable downside consequence however, both for Justice and the reputation of the English court system internationally, will be that the credibility and integrity of the English litigation system will be further diluted: access to justice and protection of rights will be replaced by a grooved ‘set menu’. But hey, not every case needs to be ‘a la carte’ -  Or does it? The Court of Appeal in the recent Procter v Raleys (2015) decision allowed no lesser standards of care for commoditised or pro-bono supplies than apply to full-priced bespoke services. Something will have to give…

Mike Willis, The Professional's B(r)and-Aid, is Director of F Mike Willis Ltd Solicitors, specialising in professional risks. 

Posted by:

Mike
Willis

19 June 2015

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