Execessive costs budget targeted by court

• The courts are continuing to adopt a sensible, proactive and robust approach to costs management, centred on proportionality
• In GSK v QPR, a claimant’s proposed costs budget of £825,000 for a claim worth £805,000 was described as “grossly excessive”
• The court warned that it will only be appropriate or necessary to go through a costs budget with a fine tooth-comb in exceptional cases
• The strong criticism of the claimant’s proposed costs budget and the process that the court adopted in approving a significantly reduced costs budget provides both a warning and helpful practical guidance to those preparing and advising clients in relation to costs budgets
• The court approved revised costs for the claimant for each phase of the litigation, including those phases already completed.  The result was a total costs budget of £425,000

Stuart-Smith J has recently made a costs management decision in GSK Project Management Limited (in liquidation) v QPR Holdings Limited [2015] EWHC 2274 (TCC) which demonstrates the extent to which the courts are now willing to manage the costs of litigation so that they are proportionate.  The judge described this as “the court’s determination to exercise a moderating influence on costs”.

In this case:

• the value of the claimant’s claim was £805,000;
• the claimant’s proposed cost budget was for a total of £825,000 (including £312,000 of incurred costs);
• the court said the claimant’s proposed costs budget was “so disproportionate to the sums at stake or the length and complexity of the case that something has clearly gone wrong”;
• the court approved a costs budget for the claimant of just £425,000, reducing the claimant’s proposed costs budget by almost half;
• in doing so, the court approved figures for the claimant’s costs budget for each stage of the litigation, including incurred costs;
• the court said that the defendant’s detailed attack of the claimant’s proposed costs budget was justified and ordered the claimant to pay the defendant’s costs of doing so; and
• unusually, the court expressly ordered the claimant’s solicitors to bring the terms of the judgment to the attention of their client and to notify the court when this had been done.

The court’s costs management powers

One of the central pillars of the Jackson Costs Reforms is the use of active costs management in litigation.  Courts are now expected to manage the costs incurred by parties so that, in the context of CPR 1.1 and the overriding objective, cases are dealt with justly and at proportionate cost.

In claims of less than £10m (and in other cases at the judge’s discretion), courts are assisted by costs budgets, which are produced by each party in a  prescribed form (Precedent H) and which set out the incurred costs and the costs the parties anticipate they will incur in the future.  In his final report on civil litigation costs, Jackson LJ had said that: (i) the court should state the extent to which a costs budget is approved; (ii) the court should manage the case so that it proceeds within the approved costs budgets; and (iii) at the end of the case, the recoverable costs of the successful party should be assessed by reference to its approved costs budget.

The costs management rules are now found in CPR 3.12 to 3.18 – and include an express requirement that parties attempt to agree their costs budgets before the court considers them at the first Case Management Conference. In accordance with those rules, a judge will review the parties’ costs budgets at an early stage in the court proceedings and, if appropriate, approve them.

Why do we need further guidance?

The operation of the costs management rules in practice is still in its infancy. As with any new procedural rules, inevitably there will be teething problems as they are implemented and as parties and the courts encounter circumstances which the rule-writers had not anticipated.  As a result, court users and commentators have highlighted a number of apparent inconsistencies, tensions and omissions from the rules, on which the courts are only now starting to provide clarification and guidance. One of the key issues that the courts have had to grapple with is the apparently different treatment of incurred costs and anticipated future costs.    A number of cases, most recently in GSK v QPR, have demonstrated how the courts are now addressing this issue.

Recent guidance from the courts

The Technology and Construction Court, having previously hosted the pilot schemes for costs budgeting, is leading the way in providing guidance, through its costs management decisions, on how parties should approach the question of the cost of their dispute.   In CIP Properties (AIPT) Limited v Galliford Try Infrastructure Limited (Costs No. 2) [2015] EWHC 481 (TCC), Coulson J reviewed the claimant’s proposed cost budget of £9.5m (for a claim worth £18m) and offered a stern rebuke in relation to the reliability, reasonableness and proportionality of that budget.  The court considered there were a number of options available to it to deal with the errant budget and to achieve the aims of the costs management regime, including: (i) ordering the claimant to prepare a new costs budget; (ii) declining to approve the claimant’s proposed costs budget; (iii) setting budget figures for the claimant for each stage of the litigation; or (iv) refusing to approve any future costs to be incurred by the claimant.

The problem faced by the court was that the costs management rules suggest that the court cannot approve incurred costs (as opposed to anticipated future costs).  If the rules are read in this way, it effectively prohibits the court from considering the reasonableness and proportionality of costs already incurred and threatens to defeat the purpose of costs budgeting.  In CIP v Galliford Try, the claimant had already incurred costs that the court thought would be reasonable and proportionate for the whole case.

The issue of incurred costs has been considered by the courts on a number of occasions, including by Judge Seymour QC in Redfern v Corby Borough Council[2014] EWHC 4526 (QB) and again by Warby J in Yeo v Times Newspaper Limited[2015] EWHC 209 (QB). Neither case, however, provided clear or consistent guidance on how the courts should address the question of unreasonable or disproportionate incurred costs.

In CIP v Galliford Try, the court set revised figures for all phases of the litigation, even those which had already been completed and where the costs incurred significantly exceeded the judge’s budget figure.  The result was that the overall approved costs budget was only slightly more than the costs that the claimant had already incurred.

In GSK v QPR, the judge summarised this approach in these terms:  ‘there is no prohibition against saying what the court would have approved if presented with an estimate for future costs, rather than the fait-accompli of incurred costs’.

In GSK v QPR, Stuart-Smith J faced a claimant’s proposed costs budget totalling £825,000 (including £312,000 already incurred), where the total value of the claimant’s claim was only £805,000. It is worthwhile briefly considering the breakdown of the costs budget put forward by the claimant, which readily demonstrates why the court concluded that the costs budget was ’grossly excessive’.  The judge held that the claimant’s proposed costs budget was:

 ‘… so disproportionate to the sums at stake or the length and complexity of the case that something has clearly gone wrong’.

The enlightening aspect of this case is what the court did next.  The judge cautioned: 

‘… only exceptionally will it be appropriate or necessary to go through a Precedent H [costs budget] with a fine tooth-comb, analysing the makeup of figures in detail.’ 

This case was, however, such an exception. The starting point was to consider the overall proportionality of a costs budget, taking into account the value and complexity of the claim.  In this case, it was obvious that a costs budget exceeding the total value of the claim was not proportionate. The next step was for the court to examine, phase by phase: (i) the number of hours already spent on the case (and the costs that this equated to); and (ii) the number of hours anticipated to be spent in the future (and the anticipated costs that this equated to).

If those hours (and those costs) were too high, the court was entitled to set a revised budget figure for each phase of the litigation, which would then comprise the claimant’s approved costs budget.  That was the same approach – and the same interpretation of the court’s costs management powers – adopted by the court in CIP v Galliford Try. As a result, the court proceeded to set budget figures for each phase of the litigation (including those phases already undertaken) that it would be reasonable for the claimant to incur, resulting in a total costs budget of £425,000.

In doing so, the court carefully examined the number of hours spent and proposed to be spent by the claimant’s solicitors, barrister and experts and adjusted these figures significantly downwards to ensure that the claimant’s costs of the litigation were proportionate.  The judge criticised some of the incurred and estimated hours in the strongest terms: as “astonishing”; “quite simply absurd”; “exorbitant”; and “grossly excessive”.

When assessing the reasonableness of the claimant’s proposed costs budget inGSK v QPR, the court made some helpful comments about the value of comparing the costs budgets of the two parties.

The court rejected the idea that the starting point for any analysis was the other party’s costs budget. The court did, however, accept that it should have regard to the other party’s costs budget, because “it may provide useful indicators about necessary resourcing of the litigation.” In relation to the trial preparation phase, for example, the court held that there should be little or no disparity between the hours spent by each party.

Taking a broader view, there was nothing in this case to justify the claimant’s solicitors spending three times as many hours on the case as the defendant’s solicitors, as the claimant’s proposed costs budget suggested.

The future of costs budgeting

This decision 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. 

Whilst not surprising, this decision underlines the fact that the courts continue to be active in their disapproval of parties incurring unreasonable and disproportionate costs in pursuing or defending a claim.

This article was first published in the October 2015 edition of Construction Law.