Costs management

What changed?

"Costs management" procedures were introduced for multi-track cases commenced on or after 1 April 2013 in both the county court and the High Court, following a pilot in the Mercantile Courts and Technology and Construction Court (TCC) and a separate pilot in defamation cases. Initially, there were exceptions for the Commercial Court, and cases in the Chancery Division, TCC and Mercantile Courts where the sums in dispute exceed £2 million excluding interest and costs.

For cases commenced on or after 22 April 2014, however, the budgeting regime applies to all Part 7 multi-track cases below £10 million in all courts including the Commercial Court (see "Costs budgeting to be extended to cases below £10 million in all courts").

How was the change implemented?

The change was implemented by the introduction of new Civil Procedure Rules 3.12 to 3.18 and new Practice Direction 3E on Costs Management, as well as amendments to the Costs Practice Direction.

What do the rules require?

All parties (except litigants in person) have to file and exchange budgets setting out their estimated costs for each stage in the proceedings. The budgets have to be filed not later than 21 (clear) days before the first CMC. The budget must be verified by a statement of truth signed by a senior legal representative of the party.

Where a party files and exchanges a budget, all other parties (except litigants in person) must file an agreed budget discussion report no later than 7 (clear) days before the first case management conference. These must set out which figures in an opponent's budget are agreed, or not agreed, for each phase of the budget and a brief summary of the grounds of dispute.

The court may at any time make a “costs management order”, in which it will record the extent to which the budgets are agreed between the parties, or (to the extent not agreed) record the court’s approval of a budget, if necessary after making appropriate revisions. Where costs budgets have been filed and exchanged the court will make a costs management order “unless it is satisfied that the litigation can be conducted justly and at proportionate cost in accordance with the overriding objective without such an order being made”.

Whether or not the court has made a costs management order, when making any case management decision it will have regard to the budgets and take into account the costs involved in each procedural step.

Do the budgets need to be updated?

Yes. Each party has to revise its budget if this is warranted by significant developments in the litigation and submit the amended budget to the other parties for agreement.

If the revisions are not agreed, the amended budgets must be submitted to the court, together with a note of the changes and the reasons for them, as well as the other parties' objections to them. The court may then approve, vary or disapprove the revisions.

Will the court approve each element of the budgets?

The court will approve the total figures for each phase of the proceedings, not the constituent elements. However, the court may have regard to the constituent elements in approving the total figures.

The practice direction states that, when reviewing budgets, the court will not undertake a detailed assessment in advance, but rather will consider whether the budgeted costs fall within the range of reasonable and proportionate costs.

What is the effect of making a costs management order?

If a costs management order has been made:

  • The court will then control the parties’ budgets in respect of recoverable costs.
  • Crucially, when assessing costs on the standard basis, the court will have regard to a party’s last approved or agreed budget and will not depart from it unless satisfied that there is good reason to do so.

What if the court does not make a costs management order?

Where the parties have filed budgets but the court has not made a costs management order, the court may still take the budgets into account when assessing the reasonableness and proportionality of any costs claimed on a detailed assessment.

If there is a difference of 20% or more between the costs a party is claiming on detailed assessment and its budgeted costs:

  • That party must provide a statement of the reasons for the difference with its bill of costs. If those reasons are not satisfactory, the court may regard this as evidence that the costs claimed are unreasonable or disproportionate.
  • Where it appears to the court that the paying party reasonably relied on the budget, the court may restrict the recoverable costs to such sum as is reasonable for the paying party to pay in the light of that reliance.

Are the costs of the costs management procedures recoverable?

Yes, within limits:

  • No more than £1,000 or 1% of the approved budget (whichever is higher) is recoverable for preparing the initial budget.
  • No more than 2% of the approved budget is recoverable for all other aspects of the budgeting and costs management process.

Has costs management reduced costs?

The procedures for costs management effectively shift the focus of costs control from retrospective, as it was previously, to prospective, with the court focusing upfront on how much should be spent (or at least recovered) in the litigation. Lord Justice Jackson considered that controlling costs before they are spent is a more effective process than assessment of costs after the event.

The jury is still out on whether costs management saves more costs than it generates. Lord Justice Jackson recognised that the main drawback of costs management is that the process itself is expensive, but he considered that the overall effect would be to bring down the total costs of the litigation. In this context it is worth noting that the rules limit recoverable costs of the budgeting and costs management process to 3% of the approved budget overall.

What are the implications for commercial parties?

It is essential for parties to prepare accurate budgets and keep them up to date.

Any party which fails to file a budget when required to do so will be treated as having filed a budget comprising only the applicable court fees, unless the court orders otherwise. It appears that this sanction will be applied strictly and the courts will, generally, be slow to grant relief unless there is good reason for the failure to comply (see "Court of Appeal sends clear message on need for strict compliance in Mitchell decision", "Court of Appeal softens Mitchell guidance but insists no return to old culture of non-compliance" and "Court of Appeal upholds order limiting recoverable costs to court fees where party failed to file costs budget").

The courts have also generally taken a strict approach to applications to revise or depart from budgets.  In particular, it will not be sufficient to show that there was an error or inadequacy in the original budget and that the opponent has not been prejudiced. This underlines the importance of getting the budget right first time around (see "High Court decision indicates strict line on revision of costs budgets" and “Another High Court decision indicating strict approach to departures from costs budgets”).

The court may however be prepared to allow a departure from the approved budget where there have been significant changes to the course of the litigation since the budget was prepared (see "High Court comments on “obvious case” for departing from costs budget").

Costs budgeting may, however, soon be a thing of the past for the lower end of the spectrum of commercial claims, if a regime of fixed recoverable costs is brought in for non-personal injury claims (there is already a system in place for personal injury claims). In September 2016 the government announced its intention to extend fixed costs to "as many civil cases as possible", and in November Lord Justice Jackson was commissioned to lead a new review of fixed recoverable costs to report by the end of July 2017. The threshold at which any regime of fixed recoverable costs might be set is a matter to be considered in the review, but it is understood that Lord Justice Jackson is particularly interested in cases valued at up to £250,000.

Note: Content up to date as at 16 January 2017

Click here to return to the ”Handy client guide to the Jackson reforms” home page, or on the links below to access information on other Jackson topics: