Practical Law

A few weeks ago I spent an interesting evening at the Rolls Building taking part in the current consultation on mandatory costs budgeting. The consultation is being chaired by Sir Peter Coulson and, amongst other things, it is considering the desirability of retaining the Admiralty and Commercial Courts’ blanket exception to the mandatory costs budgeting and the current value-based exception for the TCC, the Chancery Division and the Mercantile Courts (claims in excess of £2m are excluded).

Costs budgeting consultation

Those taking part were a lively bunch from a range of backgrounds. As well as construction lawyers, there were admiralty lawyers (no tattoos of anchors in sight though), IP lawyers, costs lawyers and so on. I don’t think I would be telling tales out of school if I said that the vast majority were opposed to any changes. Indeed, some wanted the value-based exception in the TCC (and other courts) to be lowered, or costs budgeting abolished altogether so these courts are on a par with the Admiralty and Commercial Courts.

Reasons given  included that:

• The courts in question are specialist courts which deal with complex, high value claims. It is impossible to accurately estimate costs applicable to such claims. Therefore, the courts will be overwhelmed by applications from parties seeking permission to change approved costs budgets.
• Jackson LJ concluded that costs in these courts are not disproportionate, so why is change needed.
• Mandatory costs budgeting increases costs as a result of the need to prepare detailed budgets at the outset of proceedings.
• Mandatory costs budgeting is likely to put off international users, as the costs regime in other jurisdictions may be more favourable.
• The TCC has already set a limit on claims to be dealt with in the London TCC (see West Country Renovations Ltd v McDowell and another).

One comment that really caught my attention was a solicitor who said that he is reverting back to recommending the inclusion of arbitration agreements in contracts, in order to avoid mandatory costs budgeting. So what will parties face in respect of costs budgeting if they opt for arbitration?

Costs budgeting in arbitration

It’s correct to say that there is no similar mandatory costs budgeting regime in arbitration. This has the advantage of parties not needing to spend what could amount to a great deal of time at the outset of proceedings preparing costs budgets. However, the arbitrator may nevertheless have the power to cap costs. Section 65(1) of the Arbitration Act 1996 states:

“Unless otherwise agreed by the parties, the tribunal may direct that the recoverable costs of the arbitration, or any part of the arbitral proceedings, shall be limited to a specified amount.”

Anyone familiar with the 1996 Act will be aware that this is a non-mandatory provision. Therefore, parties can agree to exclude the arbitrator’s ability to cap costs. However, parties should also be aware that many institutional rules are silent on this section of the 1996 Act, meaning that it will apply unless otherwise agreed by the parties. Rule 13.4 of the Construction Industry Model Arbitration Rules (CIMAR) goes beyond section 65 and expressly gives the arbitrator the power to cap costs.

So, if parties want to avoid cost capping in arbitration, their safest bet is to exclude it in the arbitration agreement. That said, even if section 65 is not excluded, there is limited evidence as to its use. In the fourth edition of The Arbitration Act 1996: a commentary, the authors (Harris, Plantrose and Tecks) make the point:

“Our impression is that this section is not being used very much at all.”

Certainly on the limited occasions I have acted as arbitrator, the parties have not wanted to cap costs.

Wait and see

We’ll have to wait and see the results of the consultation as to whether the value-based exception to mandatory costs budgets in the TCC is changed. Even if it isn’t changed, we may still see a rise in arbitrations, and not just in the long term. Parties are free to enter into an ad-hoc arbitration agreement on a dispute regardless of the dispute resolution procedures in their contracts.