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Damage control: the value of budgeting

Andy Ellis of costs consultancy Practico considers the virtues of budgeting civil cases.

Sarah Allison

I am writing this article on the first day of acclimatisation to the result of the EU referendum and I wonder whether this, or any piece commissioned prior to the Brexit vote, is still relevant other than through the prism of an outcome that appears to have shocked all sides and will have far reaching consequences for London as a litigation hub as well as the British economy generally.

For those of us who struggle to keep up with the rate of regulatory reform affecting costs, one of the unintended consequences of Brexit may be that reforms which are still at the early proposal stage, including fixed recoverable costs in cases valued up to £250,000, might become submerged by the far weightier affairs of state now facing the UK government.  For all anyone knows, the introduction of online courts under Lord Justice Briggs might also become a casualty of the inevitable hiatus and leadership vacuum at Westminster.

Better then to concentrate on how the reforms that have already been enacted are playing out before the courts and what trend that is showing to international forum shoppers.

A recent LSLA survey sends a loud message that costs budgeting by the courts has increased costs overall (80 per cent of its respondents believe this) and it bears out my own experience that where there is a discretion whether to make a costs management order, parties (and judges) are prone to avoid budgeting if they can.

However, at a time when ‘be careful what you wish for’ is a heavily laden phrase, budgeting of civil cases by the courts has begun to look like less like a bad thing. The reason can be found in the realisation of what can happen when unbudgeted cases reach costs assessment and hit the ‘new’ Jackson proportionality test. Since April 2013 proportionality trumps even those costs that are assessed as having been necessary to conduct the case.

Two rather chilling costs cases have been reported. A judgment in BNM v MGN was handed down by Andrew Gordon-Saker, the Senior Costs Judge, on 3 June 2016 in which costs had been claimed at £241,817. The matter involved the misuse of private information by a newspaper that had been gathered from a misappropriated mobile phone. Damages were £20,000 and the case did not travel far procedurally.  The shock waves come less from the fact that a ‘normal’ assessment of costs resulted in a reduction of 44 per cent to £167,389, than from what happened next.  At a follow-up hearing to apply the new ‘standing back’ test, the master took another swipe for proportionality and made a further reduction down to £83,965, leaving the claimant with a recovery of under 35 per cent of the incurred costs.

A fortnight later on 16 June 2016, fellow costs judge Jason Rowley assessed the costs in May v Wavell Group. This was a private nuisance claim brought by Brian May and his wife Anita that settled on acceptance of a Part 36 offer of £25,000. Costs were claimed at £208,236. The first cut under the application of reasonableness and necessity took this down to £99,656. But the ‘standing back’ test then went considerably further, leaving recovery of ‘only’ £35,000 plus VAT, which equates to just 20 per cent of the incurred costs.

Commercial lawyers have been used to advising clients over the years that they should expect to recover about two-thirds of their costs outlay when successful. It now seems that rule of thumb might be wildly optimistic in lower value cases and indeed in any case where costs exceed the value of the case.

So given that bad news is best delivered early, budgeting comes back into the spotlight as something worth engaging in. Once a budget has been approved by the court as proportionate, that test cannot in my view be applied a second time on assessment. It is true that the approval only applies strictly to the future costs element under consideration but at least budgeting produces a yardstick for recovery at the expensive phases of disclosure, witness statements and the trial itself.

Likewise, the relatively small numbers of costs-managed cases that have reached the costs office bear out the experience I have gained from negotiating costs – that the existence of budgets goes a long way to avoiding detailed assessment.

Litigators are asking themselves whether they can afford to take on work if they are going to be expected to share the pain of significantly lower costs recovery while still being required to prepare the case to the exacting standard required to win it. Potential claimants are also said to be put off (and few wouldn’t be) by the ramp up in court fees. If costs recovery is now to be prudently regarded as a bonus rather than a right, the LSLA members’ optimism for continued growth of specialist litigation boutiques may be misplaced. But what do I know? I thought Remain was nailed on!

Andy Ellis is the managing director at costs consultancy Practico  

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08 July 2016

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