Keeping control

One of the principal objects of the Woolf reforms was the control of costs', said Dyson LJ in Leigh v Michelin [2004] 1 WLR 846. On 26 April 2006, The Times published an article by District Judge Stephen Gerlis in which he publicly questioned whether this objective had been achieved.

In his article, the district judge described an 'inviduous inflation' of costs. Acknowledging that the problem may have come about because of the increasing overheads of solicitors and barristers, he implied that the cause of this might also lie at the door of the Woolf reforms. The solution, he suggested, might also lie within the rules themselves.

Cost-capping: the principles

A cost-capping order is an order that limits the amount that can be recovered by one party from another in costs.

It is not an order that limits the amount that a party may spend on litigation. This is, however, very likely to be its effect. The use of costs caps, therefore, gives rise to important issues of access to justice.

What is the jurisdiction to impose such an order?

There is no express power to impose costs caps in the CPR. But the courts have interpreted their powers under s 51(1) of the Supreme Court Act 1981 and the wide general case management powers under CPR 1.4 and CPR 3.1 (in combination with the overriding objective) as providing such a power (see AB v Leeds Teaching Hospitals NHS Trust [2003] 2 Costs LR 405 and The Ledward Claimants [2003] EWHC 2551.

The background and justification for such an approach is perhaps to be found in the Costs Practice Direction. PD 6.1 provides:

'This section sets out certain steps which parties and their legal representatives must take in order to keep the parties informed about their potential liability in respect of costs and in order to assist the court to decide what, if any, order to make about costs and about case management.'

CPD 6.4 (1) requires a party in a multi track claim to file a costs estimate (in respect of base costs to date and future costs) with the allocation questionnaire and the pre-trial checklist. That estimate should be substantially in the form Precedent H of the Schedule of Costs Precedents; in other words, a mini bill of costs is required. The estimates should also be provided by a legal representative to the client, as well as to other parties to the litigation (CPD 6.4(1)).

In Griffiths v Solutia [2002] PIQR P176, Mance LJ said at para 33:

'The present litigation was conducted under the old rules preceding the Woolf reforms. It is to be hoped that subsequent to the Woolf reforms judges conducting cases will make full use of their powers under the Practice Direction about costs, s 6, which appears in the Civil Procedure White Book 43/PD-006, to obtain estimates of costs and to exercise their powers in respect of costs to keep costs within the bounds of the proportionate in accordance with the overriding objective.'

The need for prospective costs budgeting at the outset of litigation was also emphasised in Jefferson v National Freight Carriers [2001] 2 Costs LR 313 and Lownds v the Home Office [2002] 4 All ER 775. In Jefferson, Lord Woolf CJ cited with approval the following comment of HH Judge Alton:

'In modern litigation, with the emphasis on proportionality, there is a requirement for parties to make an assessment of costs at the outset of the likely value of the claim and its importance and complexity, and then to plan in advance the necessary work, the appropriate level of person to carry out the work, the overall time which would be necessary and appropriate to spend on the various stages in bringing the action on to trial and the likely overall cost.'

In what particular types of cases have costs caps been imposed?

To date, costs caps have principally been applied in cases where there is a group litigation (eg AB v Leeds Teaching Hospitals NHS Trust and The Ledward Claimants).

But in Leigh v Michelin, Dyson LJ gave a strong indication that costs budgeting may be used more widely and enthusiastically in other types of litigation.

'Suffice it to say that, whatever the scope of the jurisdiction to make [cost-capping] orders, it is quite different from the jurisdiction that is exercised retrospectively at the stage of costs assessment, and when the court is required to decide the amount of reasonable and proportionate costs. Costs estimates can also alert the judge responsible for case management to the need to take appropriate action to prevent disproportionate costs from being incurred.'

The court dealt specifically with the issue as to whether prospective costs budgeting may be more effective than detailed assessment after the event:

'We recognise that the use of CPR 43 PD para 6.6 to control costs by taking into account estimates at the assessment stage is not the most effective way of controlling the costs of litigation. It seems to us that the prospective fixing of costs budgets is likely to achieve that objective far more effectively.'

At virtually the same time as the Court of Appeal was considering its decision in Leigh, Gage J was considering an application for a costs cap in a clinical negligence claim (Smart v East Cheshire [2003] EWHC 2806). He dismissed the application. In his judgment, the court ''¦should only consider making a costs cap in such cases where the applicant shows by evidence that there is a real and substantial risk that without a such an order costs will be disproportionately and unreasonably incurred; and that this risk may not be managed by conventional case management and detailed assessment of costs after a trial; and it is just to make such an order'.

There is perhaps a very significant difference in approach between that of Gage J and Dyson LJ.

It was however the reasoning in Leigh which was subsequently adopted by the Court of Appeal in Musa King v Daily Telegraph [2005] 1 WLR 282 when endorsing the use of cost-capping in defamation claims.

Defamation claims, however, give rise to issues of their own. In particular, the court was struck by the newspaper's complaint that the costs were so high that its freedom of expression was affected (ie, the threatened costs had a 'blackmailing' effect on the newspaper's ECHR rights).

More recently, however, Hallett J was also persuaded by the approach of the Court of Appeal in Leigh. She confirmed '“ on appeal '“ the application of a costs cap in a non-GLO clinical negligence action (Sheppard v East Essex Strategic Health Authority [2005] EWHC 1518). In the course of argument, she suggested that cost-capping might become the norm in all such cases. She said:

'The courts are moving, at whatever pace, toward a system of pre-emptive strikes in order to avoid the costs of litigation spiralling out of control, and becoming unreasonable or disproportionate.

'In my judgment, it is far better for the court to attempt [to] control and budget for costs where appropriate, than to allow costs to be incurred and that have them submitted to detailed assessment after the event.'

So what is the future for cost-capping?

It may be thought that the development of predictive costs regime in respect of low value claims is an important part of the underlying trend. And as with many issues in costs, change is driven by policy considerations and those charged with them (ie, the Civil Justice Council). The Times article by Gerlis DJï'žµand the judgment of Hallett J may however be strong an indication that at least some members of the judiciary may not wait for any such intervention.

The 'smoke signals' do not, however, all point one way. In February 2006, District Judge Price in Baker v Medway NHS (unreported) rejected an application for a cost cap in clinical negligence claim. While noting that the costs, estimated at £195,000, appeared high for a claim that was significantly under £50,000, he was heavily influenced by the observation that most clinical negligence claims settle. He adopted the three-stage test in Smart, noted the observation of Gage J that costs caps should not be the norm in clinical negligence cases and appeared to be satisfied that detailed assessment after the event was an adequate safeguard. Mann J in Knight v Beyond Properties [2006] EWHC 1242 (a passing-off action) also rejected such an application, notwithstanding that he had considerable concerns about the costs of the claimants in that case.

Relevant considerations on an application for a costs cap

It is generally not enough for a defendant to say:

(i) Your costs looks high.

(ii) The costs in clinical negligence claims often spiral out of control (Smart).

(iii) Your costs are greater than mine, even vastly more than mine (see Smart and Baker '“ in the latter case the claimant's costs estimate exceeded the estimate of costs of the defendants by a multiple of 10).

(iv) You are on a CFA '“ so that costs could get very high indeed (see Knight).

A defendant (arguably) has to establish by evidence the three criteria laid down by Gage J.

There may also be significant hurdles in the way of such case, particularly if a claimant has reliable evidence that justifies the level of costs estimated. It may also be unfair to impose a costs cap if it means that the defendants are advantaged because they can obtain access to experts that a claimant would be unable to afford under a cap.

There may also be no need for external costs control. In publicly funded cases, there is likely to be rigorous costs control by the LSC making it unnecessary for the courts to get involved. The involvement of after the event (ATE) or before the event (BTE) insurers who exercise rigorous controls over costs, or set costs limits, may also be a reason that court control is not required.

Indeed it may be hard for a defendant to establish that a costs cap should be imposed if a defendant has by his own unreasonable conduct caused costs to be incurred (for instance, by failing to make an offer in a case in which liability and causation are not properly in dispute, or in failing to take reasonable steps to narrow the issues at an early stage, despite a claimant's willingness to do so).

Moreover it may be too late to obtain a costs cap. The cost cap will ordinarily apply prospectively from the date of the order imposing the cap (see Various Claimants v TIU LTL 23/9/05). Thus if a defendant waits until close to trial before making an application, he may find himself shut out (Henry v BBC [2006] 1 All ER 154).

Assuming a costs cap is imposed, how will it be calculated?

The jurisdiction is in its infancy. Experience so far suggests that if a cap is ordered, the court will impose a total amount of recoverable costs that may be exclusive of additional liabilities. But, in the process, the court can be expected to give clear guidance as to:

(i) hourly rates (see the Chief Master's decision in TIU; he allowed summary assessment rates in a GLO case);

(ii) times to be allowed for attendances on parties/documents;

(iii) experts' fees; and

(iv) counsel's fees.

The reductions can be very substantial indeed. In TIU, the claimants estimated their prospective costs at some £1.6m; a costs cap was eventually imposed of just over half this sum '“ £0.88m.

Can the order be set aside or varied if circumstances change?

It is unlikely that the order can be set aside. It may be possible to vary it either upwards or downwards if there is significant change in circumstances (ie, if liability is admitted). But the costs estimate should be prepared on a 'worst case scenario' and the cost cap should reflect this.

Using cost-capping advantageously

If one party is seeking a cost cap, the other can do likewise. Even if the court does not impose a cost cap, a party who positively relies upon the cost estimate of another party (ie, in rejecting a payment into court) may be able to restrict his potential liability for costs to the sums set out in the estimate (CPD 6.6 and Leigh).

The provision of costs estimates will permit a solicitor to advise a party as to the level of risk. That will be important to a privately paying individual without ATE insurance; it may be an important part of the duty to the client and/or the ATE insurers in any event. It should also encourage all-inclusive settlements.

Pitfalls in the new regime

Not providing an adequate estimate of costs can have a significant effect on the recovery of costs after judgment, as noted above. Providing too low an estimate can lead to difficulties with cost recovery. Providing too high an estimate necessarily exposes a party to a cost cap.

The provision of inadequate estimates to the client can also, at least in theory, give rise to difficulties under the indemnity principle (Wong v Vizards [1997] 2 Cost LR 46) and, thus, complications in recovering costs inter partes.