Practical Law

The extension of the costs management pilot came into effect over the weekend (on 1 October). From now until the pilot ends on 30 September 2012, any case in the TCC and Mercantile Courts that has its first case management conference (CMC) during the pilot period, will be subject to the pilot. As such, the parties will be required to comply with Practice Direction 51G (PD 51G) and complete and file Precedent HB with the court. They will then be subject to the court’s costs management powers, including its approval (via the making of a costs management order (CMO)) of a party’s costs estimate.

PD 51G explains that the purpose of costs management is to “manage” and “control” litigation costs and, if a CMO is made, “to monitor expenditure” (paragraph 4, PD 51G).

Understandably, there is considerable concern about this, not least the lack of guidance on completing Precedent HB, the circumstances when the court will make a CMO and what happens when the costs estimate needs to change. Some of these concerns were raised last week at PLC Dispute Resolution’s costs management event, held at Eversheds LLP’s London offices.

What do the Birmingham pilot guidelines say?

Interestingly, the guidelines for the Birmingham pilot suggested that “no costs should be involved on either side in the preparation of [the costs] estimate” because it should be in a form that would satisfy the Solicitor’s Code of Conduct 2007 (paragraph 5, guidelines). In other words, it envisaged a solicitor would simply provide the same estimate to the court and his client. It is doubtful that this happened in practice and it is doubtful that this may happen during the current pilot, given the more extensive nature of Precedent HB and the size of the cases that will be dealt with during the extended pilot.

What about a judge’s view of all this?

HHJ Simon Brown QC has said that it is the court’s role to macro-manage litigation, with the parties’ lawyers micro-managing it. It should be equated to project management. This management role should ensure that the courts are accessible to all users, cases can be dealt with efficiently and justly, and everyone is on an equal footing. By having a realistic budget from the outset, the parties can assess the risks of litigation and the “gamble” before it is too late. He believes the Birmingham pilot was welcomed and, for those that took part, received enthusiastically. However, it was voluntary: the extended pilot is compulsory, and this may change views.

In his preliminary report, Jackson LJ noted that, in the majority of cases concluded in the TCC, “the costs incurred appear to be proportionate to the sums at stake”. He also noted that litigants in the TCC are almost exclusively businesses and are often “repeat players”. In his final report, Jackson LJ did not recommend that costs management should be made compulsory in the TCC (paragraph 5, chapter 29). Instead, it should be a decision for the judge in each case whether it would benefit the parties and the case. Even in his notes to the Civil Procedure Rules Committee (CPRC), Jackson LJ remained of the view that costs management should be undertaken at the discretion of the judge.

With this backdrop, one wonders, therefore, why the TCC has been chosen for a compulsory extended pilot (even if the making of a CMO remains discretionary).

Is it just like summary assessment?

During the Birmingham pilot, at the CMC, the court considered the items included on a party’s costs estimate in terms of whether the work was necessary, reasonable and proportionate, much like the approach adopted by judges during summary assessment.

It is anticipated that this will be the court’s approach during the extended pilot. However, how judges will be able to spot excessive hours claimed or errors or deficiencies in a costs estimate, only time will tell. In part, this will depend on the quality of the training they receive in order to be able to perform this new function. Some would say that looking at a costs estimate to the end of trial is a world away from assessing the costs on a summary basis for a hearing that lasted less than a day. This is something that solicitors are familiar with, but less so the bar and the judiciary.

How much do you know about your client’s case?

Ultimately, the accuracy of a costs estimate will depend on the level of understanding of the case: what is it really about? What are the issues between the parties that the court is being asked to resolve?

If the parties (and the court) understand the answers to such questions, then they will be better prepared and better able to put forward a costs estimate that bears some relationship to the case. Much of this will depend on the pre-action phase and the degree of co-operation and exchange of information during it. If the parties comply with the relevant pre-action protocol, they should have narrowed the issues between them and have a clearer understanding of what it is they are fighting about. As the TCC Guide says, the purpose of the Construction and Engineering Protocol is to:

“encourage the frank and early exchange of information… to enable parties to avoid litigation… and to support the efficient management of proceedings where litigation cannot be avoided.”

The Protocol is currently under review, since it is considered by some to be too prescriptive and too expensive to comply with. Therefore, it is difficult to reconcile this statement with the court’s desire to be involved and to control costs. To properly complete Precedent HB and to be able to answer questions at the CMC will involve the parties in considerable pre-action co-operation, particularly as CMCs in the TCC take place early and sometimes before a defence has been served.

What is a CMO?

A CMO is new to the extended pilot. During the Birmingham pilot, the judge could approve or disapprove a budget, but there was no provision for a formal order to be made. This will all change with the CMO. There is concern about whether a CMO will be ordered in every case and what the criteria for making one will be.

PD 51G suggests the making of a CMO is discretionary, using phrases such as: “the court… will decide whether or not it is appropriate…” and “if the court decides…” (paragraphs 4.3 and 4.4). Until the TCC issues guidance (and some have suggested Akenhead J may take the opportunity to do this in his first CMC during the pilot), uncertainty will prevail.

Of course the courts could exercise their discretion and not make a CMO, but where would that leave the pilot? And if a CMO is not made, some may wonder why they bothered completing Precedent HB in the first place.

What about dealing with change?

All litigators are familiar with the feeling they get when they prepare a costs estimate and then look at the bottom line, only to realise that the estimated costs are far in excess of the sum claimed (and that is based on a conservative estimate).

Even when one allows for a number of contingencies within an estimate, it is still difficult to predict with any degree of accuracy what the final figure will be. For example, you may know you will have four, maybe five witnesses of fact, but what happens when you realise one of those witnesses is overseas, or is proving uncooperative? These factors may not, rightly, be included in any contingency as they are unknown at the time of the CMC.

Therefore, the idea that a party may be held to its costs estimate with limited recourse to increasing the amounts set out in it, is worrying, to say the least.

One size doesn’t fit all

Also, what happens in the really large cases, where the sums claimed and the corresponding costs are counted in the millions? What happens when the costs estimate comes in at, say, £20 million? How will a judge be able to look at that estimate at the CMC and decide whether that party has put down excessive hours or made mistakes in the estimate? The court may be looking for spikes in the estimate, expected to be around the disclosure and witness statements stages, but on an estimate so large, every stage may look excessive to some judges.

A number of limitations with Precedent HB have been identified and surely it is only time before more surface. For example, unless firms take the time to create an Excel spreadsheet of their own to use, there is:

• Only room for one expert, yet it is rare in TCC litigation for a party to instruct just one.
• No room for counsel brief fees (only hourly rates). Conversely, no room for hourly rates from the expert, just lump sums.

It may be that the court is only interested in the bottom-line figure, despite scrutinising the breakdown at the CMC but, if that is the case, do the parties need such a prescriptive form? Also, if there is room for the parties to allocate resources as they think appropriate within their bottom-line figure, some may question why the court needs to scrutinise the figures so closely at the CMC.

How long will all this take?

Even if the judge can assess a multi-million pound costs estimate, how long will he take to do so?

We will surely witness longer CMC hearings simply because the judges will need to go through the items on the draft order for directions, look at the corresponding costs, test the assumptions, ponder the contingencies and so on. Even if the court adopts a summary assessment approach, a CMC will take far longer than it does now. Again, is this something else that parties will need to start catering for in the costs estimate? Is this another assumption or contingency? The nature and length of CMCs may change forever.

Costs advice and detailed assessment

Although the approved costs budget (or CMO) will carry weight with a costs judge (paragraph 8), it is unclear how far the costs judge will be bound by it at detailed assessment. For example, what will constitute “good reason”? There are also concerns regarding fixed fees (do you break it down into notional amounts for each stage?) and staged retainers. Also, will advice given to clients about how much they may recover at detailed assessment have to change?

And finally… complete the survey

HHJ Simon Brown QC has said that judges have been actively managing cases for years and costs management does not involve much more work than what they are already doing with the skills they have acquired in undertaking summary assessment of costs. Instead, the real burden falls on the parties’ lawyers to do all the hard work to prepare costs estimates in the prescribed form. One wonders if this will be TCC users’ experience in a year’s time.

If you take part in the pilot, you can share your views on it by completing the court-provided questionnaire and return it to the monitoring team at nicholas.gould@kcl.ac.uk.