Sue Nash, managing director of Litigation Costs Services , explains how the costs management regime is meant to work, and the effect that last week’s Henry ruling will have on it
Lord Dyson MR has said that “it is not an exaggeration to say that, from my perspective, costs management is the key to the Jackson reforms” and also that “if costs management succeeds, the reforms will succeed”.
Given this, the Court of Appeal judgment in Henry v NGN  has been eagerly awaited. Following Master Hurst’s ruling that there was no good reason for a departure from the budgeted costs, the case was leapfrogged to the appeal court and heard on 4/5 December 2012, but the subsequent early judgment failed to materialise and it was only last Monday that it was handed down.
Before analysing the judgment, it is necessary to look at the background and why it is so important.
The Woolf reforms
The main thrust of these reforms was supposed to give the courts the power to manage cases so as to give effect to the overriding objective (CPR 1.1), which states:
“(1) These Rules are a new procedural code with the overriding objective of enabling the court to deal with cases justly.
(2) Dealing with a case justly includes, so far as is practicable –
(a) ensuring that the parties are on an equal footing;
(b) saving expense;
(c) dealing with the case in ways which are proportionate –
(i) to the amount of money involved;
(ii) to the importance of the case;
(iii) to the complexity of the issues; and
(iv) to the financial position of each party;
(d) ensuring that it is dealt with expeditiously and fairly; and
(e) allotting to it an appropriate share of the court’s resources, while taking into account the need to allot resources to other cases.”
In chapter 7 at paragraph 20 he stated: “My recommendations, together with the new rules, are intended to ensure that litigation is conducted less expensively than at present and to achieve greater certainty as to costs.”
The Jackson report
The problem is that the Woolf reforms either did not go far enough or have not been implemented properly (it depends on your perspective). Paragraph 6 of Lord Justice Jackson’s final report stated: “The present project is, essentially a matter of building upon Lord Woolf’s work and proposing reforms where (after ten years’ experience) these appear to be appropriate.”
And at 3.3 he said: “Case management by the court, with the assistance of the parties, was one of the cornerstones of the Woolf reforms.”
Part of case management is the control of costs of the case. Indeed, to Jackson LJ, the two are inextricably linked. He went on to deal with costs management in chapter 40, although there were references to it throughout his report. In chapter 40 (1.4) he said:
“The essential elements of costs management are the following:
(i) The parties prepare and exchange litigation budgets or (as the case proceeds) amended budgets.
(ii) The court states the extent to which those budgets are approved.
(iii) So far as possible, the court manages the case so that it proceeds within the approved budgets.
(iv) At the end of the litigation, the recoverable costs of the winning party are assessed in accordance with the approved budget.”
The Law Society broadly supported the proposals in principle agreeing with Jackson LJ’s proposition that:
(i) Litigation is in many instances a ‘project’, which both parties are pursuing for purely commercial ends.
(ii) Any normal project costing thousands (or indeed millions) of pounds would be run on a budget. Litigation should be no different.
(iii) The peculiarity of litigation is that at the time when costs are being run up, no-one knows who will be paying the bill. There is sometimes the feeling that the more one spends, the more likely it is that the other side will end up paying the bill. This gives rise to a sort of ‘arms race’.
(iv) Under the present regime, neither party has any effective control over the (potentially recoverable) costs which the other side is running up.
(v) In truth both parties have an interest in controlling total costs within a sensible original budget, because at least one of them will be footing the bill.
(vi) The parties’ interests may, in truth, be best served if the court (a) controls the level of recoverable costs at each stage of the action, or alternatively (b) makes less prescriptive orders (e.g. requiring notification when the budget for any stage is being overshot by, say, 20% or more).
How it will (or should) work
District Judge Chris Lethem – charged with judicial training on costs management – has described costs management thus: “[It] will involve the production of a detailed costs estimate… [which] the court will then use… as part of the case management exercise leading to an order that will limit the parties costs.”
Mr Justice Ramsay, who is responsible for the implementation of the reforms, gave the 16th lecture in the Jackson Implementation series of lectures at the Law Society last May (a ‘must read’ here ). The new rules are appended at CPR 3.11 to 3.18 and PD3E.
At 3.12(2) the purpose of the rules is set out: “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.”
Costs management will apply generally to all multi-track cases commenced on or after 1 April 2013 in a county court, the Chancery or Queen’s Bench Division (except the Admiralty and Commercial Courts) unless the court otherwise orders and to any other proceedings where the court so orders. Unless the court otherwise orders, all parties except litigants in personmust exchange cost budgets within 28 days after service of the defence. In default the budget will only comprise applicable court fees.
The budgets cannot be exceeded where a costs management order (CMO) has been made save by agreement with the other side or with the permission of the court (there is provision in the rules for either party to apply to vary their budget). Where no CMO has been made, an amended version of CPR 6.5(a) states that where the costs claimed are more than 20% over budget, the court may limit the costs to “such sum as is reasonable for the paying party to pay in light of that reliance, nothwithstanding that such sum is less than… the costs reasonably and proportionately incurred”.
The Henry judgment
In Henry v NGN  EWCA Civ 19  the receiving party’s failure to comply with the practice direction governing the defamation costs management pilot led Master Hurst at first instance to rule: “The fact is that the claimant has largely ignored the provisions of the practice direction and I therefore reluctantly come to the conclusion that there is no good reason to depart from the budget.”
The appeal was the first test of the Court of Appeal’s approach both to the importance and the application of the new costs management regime and it is perhaps of some surprise that the Master of the Rolls did not chose to sit on it himself (as he has indicated he will do concerning any challenges arising out of the Jackson reforms).
It is certainly a matter of regret that the judgment does not provide the clarity that all practioners had hoped for; instead it has opened the door to challenges (by either party) that there may be ‘good reason’ to depart from a budget.
At paragraph 18, the court sets out the matters to be considered: “Whether there is good reason to depart from the approved budget in any given case… is likely to depend on, among other things, how the proceedings have been managed, whether they have developed in a way that was not foreseen when the relevant case management orders were made, whether the costs incurred are proportionate to what is in issue and whether the parties have been on an equal footing.”
There are certainly likely to be arguments that the new rules governing costs management from 1 April 2013 do not differ in any material sense from Practice Direction 51D which governed the defamation pilot, despite what is said on this point in the final paragraph of the judgment. Therefore, whilst the judgment is good news for the claimant solicitors in this case, it is bad news for the future of the new costs management regime. It will lead to uncertainty and, probably, to the satellite litigation so abhorred by the courts.
What it means in practice
Despite the judgment, it is clear that firms will have an uphill struggle to justify any departure from their budgets so it is essential that firms put in place systems not only to record but to monitor their work by each phase of the litigation (the draft budget forms that have been being used in the pilot schemes identify 10 phases).
Firms will already be working on cases that will become subject to costs management once issued so preparing for the new regime is something that all firms should be looking at (and working on) now.
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