Court of Appeal decision highlights indemnity costs risk where claimant pursues speculative claims and unreasonably refuses Part 36 offer

In a recent judgment, overturning the High Court’s decision, the Court of Appeal has ordered indemnity costs in favour of a successful defendant where the claimants should have known their claims were speculative/weak and where the defendant had made an early Part 36 offer: Lejonvarn v Burgess [2020] EWCA Civ 114.

The present case acts as a warning to claimants who pursue claims which they should have appreciated were weak or speculative. When such a claim ultimately fails, the claimant may face an award of indemnity costs, regardless of whether it may be said that the claim was “hopeless”.

The decision also confirms that, while there is no automatic entitlement to indemnity costs where a claimant fails to beat a defendant’s Part 36 offer (in contrast to the position where a claimant beats its own Part 36 offer), this may be an important factor in the exercise of the court’s discretion. The court commented that, in such circumstances, the court should always consider whether the claimant’s conduct in refusing the offer took the case “out of the norm” so as to justify an award of indemnity costs.

Where costs are assessed on the indemnity basis, the receiving party is likely to recover a higher proportion of its costs than on the standard basis. That is because any doubt as to whether particular costs are reasonable is resolved in favour of the receiving party, and there is no requirement to show that the costs are proportionate. Continue reading

The dangers of filing an incomplete costs budget

The High Court has imposed severe sanctions on a claimant who “genuinely but mistakenly” thought it was acceptable to file a costs budget excluding the phases of trial preparation and trial: Page v RGC Restaurants Ltd [2018] EWHC 2688 (QB).

The decision illustrates the risks of filing a “materially incomplete” costs budget, even where a party considers it premature to budget for the later stages of the action. In these circumstances it seems the only safe course is to budget for the entire action, unless the court has made an order directing that budgets be limited to only part of the proceedings.  Continue reading

High Court clarifies approach to revising costs budgets where there are significant developments in the litigation

In a recent decision in the HBOS acquisition litigation, the High Court has clarified the proper approach in considering a party’s application to approve a revised costs budget in the light of significant developments in the litigation, under paragraph 7.6 of Practice Direction 3E (Costs management): Sharp v Blank [2017] EWHC 3390 (Ch).

The court held that, in approving a revised budget where there have been significant developments, the court can approve costs relating to those developments even though they have been incurred before the date on which the court’s approval is given. The base reference point for separating out incurred costs (which are not subject to the budgeting regime) and future costs (which are) is the date of the last approved or agreed budget, not the date of the revised budget, the application or the hearing date. This is a point on which there was some confusion so it is helpful to have clarification, albeit only at first instance.

The confusion arises principally from the wording of paragraph 7.4 of PD3E which states that, as part of the costs management process, “the court may not approve costs incurred before the date of any costs management hearing”. In the present case, the court held that this provision cannot be read literally, given that budgets will generally have been prepared at least three weeks before the hearing and so some of the estimated costs included in the budget will inevitably have been incurred by the time of the hearing.

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Court of Appeal confirms good reason required to depart (up or down) from costs budget

The Court of Appeal has recently delivered an important judgment on the relationship between the costs budgeting regime and the costs that are ultimately awarded to a successful party in litigation: Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] EWCA Civ 792.

A number of costs assessments had been put on hold pending the outcome of this appeal, which was referred directly to the Court of Appeal from the Senior Courts Costs Office on a "leapfrog" basis.

The Court of Appeal considered the meaning of CPR 3.18 which provides that, in assessing costs on the standard basis, the court will not depart from the receiving party's last approved or agreed budget for each phase of the proceedings unless satisfied that there is good reason to do so. The main issue in this appeal was whether good reason was required before a court could award a lower amount than budgeted. It concluded that good reason had to be shown for any departure, upwards or downwards, from an approved costs budget. However, the court held that this requirement did not extend to the court's assessment of costs incurred before the date of the budget, as these did not form part of the approved budget.

Two key impacts for litigants are: (i) it should be easier than it would otherwise have been for a successful party to obtain full recovery of legal costs falling within an approved or agreed budget; but (ii) the same does not apply to recovery of costs incurred pre-budget, where there is no requirement for good reason to depart from the figure put forward at the budget stage.

Francesca Ruddy, an associate in our dispute resolution team, considers the decision further below.

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Contrasting High Court decisions on whether successful party should be compensated for exchange rate loss on legal costs

The High Court (Mr Justice Coulson) has declined to order that a successful defendant should recover additional sums to reflect any currency loss caused by the decline in the exchange rate between sterling and the euro since the defendant had made payments to his solicitors: MacInnes v Gross [2017] EWHC 127 (QB).

This is in contrast to the recent decision of Mr Justice Arnold in Elkamet Kunststofftechnik GmbH v Saint-Gobain Glass France S.A., considered here. Pending any higher authority on the point, therefore, it is unclear whether a foreign party who is successful in the English courts will be compensated for exchange rate losses in converting funds to sterling to pay legal costs.

The present decision is also of interest in relation to the impact of an approved costs budget on the amount the successful party will be awarded in costs. In calculating the interim payment to be awarded to the defendant, Mr Justice Coulson started with the approved budget reduced by 10%, which he said he regarded as the maximum deduction that is appropriate in a case where there is an approved costs budget.

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Court of Appeal upholds order limiting recoverable costs to court fees where party failed to file costs budget

Lord Justice Jackson has delivered the leading judgment dismissing an appeal against imposition of the so-called "Mitchell" sanction where a party failed to file a costs budget when required to do so, so that he was treated as having filed a budget limited to court fees: Jamadar v Bradford Teaching Hospitals NHS Foundation Trust [2016] EWCA Civ 1001.

Over the past couple of years the court's approach to procedural failings has eased off from the overly draconian approach taken in the aftermath of the high-profile Mitchell decision in November 2013, in particular in light of the Court of Appeal's "clarification" of the Mitchell guidance in its Denton decision in July 2014 (see post). There are fewer cases these days in which parties even attempt to take their opponents to task for minor breaches – in part because heavy costs sanctions may be imposed on those who seek to take unreasonable advantage of an opponent’s breach.

However, it is by no means plain sailing for those who fail to comply with court rules and orders. The present decision highlights the continued scope for tough decisions, and the appeal courts' reluctance to interfere with a lower court's decision in this area; here, Jackson LJ commented that other judges might have taken a more lenient view, but the judge made no error of principle and it was a decision he was entitled to reach within the ambit of his discretion.

The decision also acts as a reminder that costs budgets must be filed in time or a party risks facing serious restrictions on its recoverable costs. If in doubt as to whether a budget is required, the safe course is to assume that it is.

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New procedures to encourage parties to agree costs budgets

A number of amendments to the procedures for costs budgeting will take effect from 6 April. The main change, which is aimed at encouraging parties to agree budgets and thereby reduce the burden that costs budgeting places on the courts, is to require parties to file "budget discussion reports" seven 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. To facilitate this process, the date for filing of budgets will be brought forward to 21 days before the first case management conference, rather than seven as currently.

There is also a new express statement in the relevant practice direction that costs management orders are concerned with the totals allowed for each phase of the budget. It explains that the underlying detail in the budget is merely to assist the court in fixing a budget, and it is not the role of the court to fix or approve the hourly rates claimed. It is not clear how much this will add, however, given that the practice direction already states: "The court’s approval will relate only to the total figures for each phase of the proceedings, although in the course of its review the court may have regard to the constituent elements of each total figure." 

Possible further changes to costs budgeting rules

At the Third Annual Harbour Lecture yesterday evening, 13 May, Lord Dyson MR and Lord Justice Jackson spoke on the topic of “Confronting Costs Management”. Lord Justice Jackson explained that the Civil Procedure Rule Committee has set up a sub-committee to review the operation of the costs management rules. He presented a paper which sets out his views on how the rules are working and makes a number of suggestions as to how the rules might be developed. It will be for the sub-committee, chaired by Mr Justice Coulson, to consider what changes, if any, should be made to the rules.

Lord Justice Jackson’s view is that, when done properly, costs management works well and brings substantial benefits to courts users. These include enabling both sides to know where they stand financially, focusing attention on costs from the outset, and encouraging early settlement.

He recognises, however, that a number of problems have emerged with the operation of costs budgeting, and makes suggestions to put these right. Continue reading

High Court highly critical of claimant’s costs budget

The court has criticised the claimant’s costs budget in a construction claim as “unreliable, disproportionate and unreasonable” and has set new budget figures indicating the maximum the claimant should recover in relation to each stage of the litigation, taking into account both past and future costs: CIP Properties (AIPT) Ltd v Galliford Try Infrastructure Ltd & Ors [2015] EWHC 481 (TCC).

The decision is particularly interesting for the court’s approach to costs budgeting where it takes the view that the costs already incurred by a party are far too high. Costs budgeting is essentially a prospective exercise. Under the relevant practice direction, the court cannot approve costs incurred before the date of a budget but can record its comments on them and take them into account when considering the reasonableness and proportionality of the subsequent costs.

Here the court gets round this issue by setting what are, in effect, composite budget figures, made up of: (a) the figures which, in the court’s view, would be recoverable on assessment in respect of incurred costs for each phase of the litigation; and (b) the approved budget figures in respect of estimated costs for each phase. To the extent the claimant actually recovers more on assessment than the figures estimated in (a), the budgeted figures in (b) will fall to be reduced pound for pound.

A striking feature of this case is that the total budget figure set by the court is £4.28 million for both past and future expenditure, which is less than the costs the claimant has already incurred. The decision is also of interest in suggesting that:

  • the complexity of a case may, in some cases, be more important than its value in determining whether costs are disproportionate; and
  • a party may be criticised for seeking to include overly widespread assumptions and contingencies, if the court considers that this is an attempt to undermine the budgeting exercise and give the party room to manoeuvre at a later stage.

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Court has broad discretion to order costs budgeting in cases falling outside mandatory regime

The High Court has considered the extent of the court’s discretion to order costs budgeting in cases where budgets are not automatically required. Under the rules in force since 22 April 2014, that means claims for more than £10 million, though in this case the relevant threshold was £2 million as it was a claim filed in the Technology and Construction Court before that date: CIP Properties (AIPT) Ltd v Galliford Try Infrastructure Ltd & Ors [2014] EWHC 3546 (TCC).

Unsurprisingly, the judge (Coulson J) rejected the claimant’s argument that the court had no discretion to apply costs budgeting in cases falling within the exceptions to the mandatory regime, saying he was in no doubt that the court has such a discretion. Although the decision relates to the construction of the rules in place before 22 April, the judge’s reasoning would lead to the same result under the new regime.

He also rejected the claimant’s fallback argument that there was a presumption that budgets would not be ordered in cases falling within the exceptions, so that the party seeking an order for budgets must demonstrate special circumstances justifying the exercise of the discretion. On the contrary, the court has an unfettered discretion and must weigh up all the circumstances of the case to decide whether the order should be made.

Whilst only first instance, the decision is of particular significance given Coulson J has been closely involved in developments relating to costs budgeting, having led the review that considered whether the original exceptions (for cases above £2 million in TCC and Chancery and all cases in the Commercial Court) should be removed and having given a number of previous decisions which take a fairly strict approach to budgets (see herehere and here).

The decision also considers the benefits (or otherwise) of ordering a stay or ‘window’ in trial preparation to allow for ADR – see this post on our ADR notes blog for more on that aspect.