Cost management - how far will the courts go?

How robust a proportionate approach will the courts take with regards to the costs of litigation and review of costs budgets? Mark Lawrence, senior counsel and solicitor-advocate at Macfarlanes, comments on the decision in GSK v QPR, which shows how the courts are implementing the new Civil Procedure Rules in practice.

GSK Project Management Limited, (in liquidation) v QPR Holdings Limited [2015] EWHC 2274 (TCC)

What issues did this case raise? Why is it significant?

The judgment is a costs management decision that demonstrates how far the courts are now willing to go to ensure that the costs of litigation remain proportionate to both the value of the claim and the complexity of the issues in dispute. The judge in this case described this as "the court's determination to exercise a moderating influence on costs".

The decision stands out because the judge described the claimant's proposed costs budget as "grossly excessive" and, therefore, one of the exceptional cases that would justify the court examining that costs budget line by line.

The significance of the resulting judgment is plain -- namely, that the courts are no longer willing to play the part of the passive -- if critical -- observer when it comes to the cost of litigation. For too long, the costs of High Court litigation have had a tendency to become the key issue in a dispute, where neither side can afford to lose and, therefore, be ordered to pay the other side's legal costs.

In recent months, the courts have made it increasingly clear that they are willing to use their costs management powers to try to avoid (or at least reduce the number of) such scenarios. The detailed costs management judgment in GSK v QPR shows the type of approach that judges are now adopting in order to achieve this.

What did the court decide?

The decision itself is relatively simple - in the context of a claim for £805,000, the claimant's proposed costs budget of £825,000 was "so disproportionate... that something has clearly gone wrong" The interesting thing about GSK v QPR, however, is what the judge decided to do about this.

Instead of simply not approving the claimant's costs budget, or ordering the claimant to go away and file an amended costs budget for approval (both valid approaches that courts have adopted in the past) the judge examined the proposed budget line by line, hour by hour, and set a new approved costs budget that reflected the costs that it would be reasonable and proportionate for the claimant to incur in this case.

In doing so, the court confirmed following the approach of Mr. Justice Coulson in CIP Properties (AIPT) Ltd v Galliford Try Infrastructure Ltd [2015] EWHC 481 (TCC) earlier this year that it was entitled to take this approach for costs already incurred, as well as anticipated future costs. The claimant had already incurred costs of £312,000 and claimed that the court could do nothing about this.  However, the court disagreed and set an approved budget for those incurred costs which was less than half of the costs in fact incurred.

The overall result was that the claimant's costs budget was reduced from £825,000 to a far more reasonable £425,000.

How helpful is the judgment in clarifying the law in this area? Is there a clear approach by the courts will adopt when dealing with "grossly inflated estimated costs"?

The costs budgeting regime is still relatively young, having been introduced by Lord Justice Jackson's civil litigation reforms. Every new judgment in this area helps, therefore, to clarify how the new rules are being implemented in practice.

For the first time, we are seeing judgments telling lawyers and parties precisely what the courts now expect of a costs budget - and what the courts are willing to do if a party falls short in this regard.

In this case, the court has made it abundantly clear that when faced with a grossly inflated costs budget, it has both the obligation and the necessary powers to interfere in order to set and approve a revised budget.

Parties can now expect their proposed costs budgets to be measured against the yardstick of proportionality, in relation to both the value of the claim and the complexity of the issues in dispute and, if found wanting, to be examined in detail and reduced as appropriate.

The court also made an interesting comment about the value of the exercise of comparing the claimant's costs budget with the defendant's costs budget. Whilst the parties' respective roles and responsibilities in any litigation differ, an opposing party's costs budget may still "provide useful indicators about necessary resourcing of the litigation". Here, it was clear to the court that nothing could justify the claimant's lawyers spending three times as many hours on the case as the defendant's lawyers, as the proposed costs budgets had indicated.

What does all this mean for lawyers and their clients?

Parties and their lawyers now need to think very carefully before  estimating a budget for their costs of the litigation and  signing the obligatory statement of truth, confirming that the proposed costs budget is "fair and accurate statement of incurred and estimated costs which it would be reasonable and proportionate for my client to incur in this litigation".

The guidance in this case, which can be extrapolated for cases of varying size and complexity,  is that parties to High Court litigation should not expect to spend anywhere near the value of the claim on legal fees, and that the courts will actively manage the costs budgeting regime to ensure that this is not the case.

How does this fit in with other developments in this area? Do you have any predictions for future developments?

There is a growing trend of courts intervening in order to actively manage the costs of litigation - notwithstanding the assertion of the judge in this case that "it is hard to imagine anything more sterile than arguing about a grossly excessive costs estimate".

This is the latest example of the courts adopting a sensible, proactive and robust approach to costs management, so as to ensure that proportionality is at the forefront of parties' minds from the outset of any dispute.

Unless and until parties and their lawyers accept that claims cannot be pursued or defended at any cost, it is inevitable that the trend of the courts being increasingly active in managing the costs of litigation will continue.

This article was first published by Lexis®PSL Construction on the 5 August 2015.