The judiciary is taking a strict approach to costs budgeting

Costs budgeting is the future. Or, at least, that is what Lord Justice Jackson and significant elements of the senior judiciary are planning for. In addition to various costs management pilots, costs management training is being rolled out to the judiciary at large. April 2013 is the likely date for costs management to be introduced across the civil courts.

If costs management is to be the future, the central question is how strictly will the courts limit a party's legal costs to a pre-approved budget? Initial signs are the answer will be: very.

The first judgment on the subject comes from the senior costs judge, Master Hurst, in the case of Henry v News Group Newspapers Ltd (Rev 1) [2012] EWHC 90218 (Costs). This was a case that ran under the defamation proceedings costs management scheme. The objective of the scheme is to manage the litigation so that the costs of each party are proportionate to the value of the claim and the reputational issues at stake, and so the parties are on an equal footing.

The rules provide that when assessing costs on the standard basis, the court will have regard to the receiving party's last approved budget and will not depart from such approved budget unless satisfied that there is good reason to do so.

In respect of witnesses, the claimant's approved budget was £12,487.50, and in respect of disclosure £11,250. After the matter had settled, the claimant's claim for costs showed, in the case of disclosure, the approved budget has been exceeded by £76,306, and, in respect of witness statements, by £216,404.

At the preliminary hearing in the detailed assessment process, counsel for the claimant summarised the issue as being that the choice for the court was to accept what the defendant said, i.e. that the practice direction is a draconian and restrictive scheme which must be adhered to, or to allow 'all factors to go into the mix'.

'No good reason'

Master Hurst stated: 'I am in no doubt whatsoever that if the bill in this case were to be the subject of detailed assessment, those representing the claimant would be able to argue very strongly that the costs incurred were both reasonable and proportionate. This hearing is, however, not a detailed assessment, but a preliminary issue'¦ and the sole question, which I have to decide, is whether there is good reason for the court to depart from the court-approved budget. It is clear that the claimant did not keep either the defendant or the court informed of the fact that its budget was being exceeded'¦ [T]he fact is that the budget has been exceeded by a very significant amount, and there has been no attempt by the claimant to pass this information on. [T]he fact is the claimant has largely ignored the provisions of the practice direction and I therefore reluctantly come to the conclusion that there is no good reason to depart from the budget.'

It would, perhaps, be a mistake to make too much of this first instance decision. Master Hurst has granted permission to appeal and the matter is very likely to be leap-frogged to the Court of Appeal. It will therefore be for the Court of Appeal, in due course, to decide the appropriate weight to place on inaccurate costs budgets. However, it is likely that they will adopt the same approach as Master Hurst. If they simply treat them as being one of the factors to go 'into the mix', the whole purpose of costs budgets will be undermined. Given the importance the senior judiciary is placing on costs budgeting it seems unlikely that is an outcome they will accept.

One legal journal summarised this decision in the following way: 'A social worker subjected to numerous defamatory newspaper articles for her involvement in the Baby P case is facing costs of about £300,000, despite winning her case.' Really? Imagine trying to draft a letter to your successful client informing them that, despite them succeeding in their claim, you were now looking to them for a shortfall in costs of £300,000 because you had failed to complete an accurate costs budget and had then failed to keep your opponent ?and the court properly advised. Now imagine trying to draft a letter to your professional indemnity insurers advising them of a claim for £300,000 plus costs and how this had arisen.

Some have been predicting that the ?next round of the costs wars will be fought over success fees with clients once recoverability ends, or disputes over damages-based agreements. This looks like equally fertile ground.