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Costs Management: A step in the right direction

About The Author

Chris Bridges (Executive Editor)

Chris is an IT and Data Protection solicitor at a top 20 full service firm and the founder of Keep Calm Talk Law. He also contributes to Computers and Law and other sector specific publications.

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You will undoubtedly have heard of the Jackson Reforms, which, as you can deduce from the name, follow Sir Rupert Jackson’s review of civil litigation costs. The foreword of Jackson’s final report reads, “In some areas of civil litigation costs are disproportionate and impede access to justice. I therefore propose a coherent package of interlocking reforms, designed to control costs and promote access to justice.”

It is hard to dispute that this is a noble aim, but like with most things, many lawyers have different views over the impacts of the various reforms that Jackson proposed.

However, the reforms under scrutiny in this article are those to costs management in civil disputes. Jackson suggested that costs management is an intrinsic part of case management. Mr Justice Ramsay, in the sixteenth lecture in the implementation program, examines this particular reform in some detail opening with a statement that “It is no longer acceptable for questions of costs to be left to the end of litigation when the costs have been spent.”

While discussion of costs may not be as glamorous as you would like, and may not seem relevant to an aspiring lawyer, changes to rules regarding the cost of litigation are important to any legal business, as ultimately it effects a client’s ability to pay, and consequently, a legal businesses’ ability to bill. By restricting what costs can be payable by the other side, these changes could potentially place potential litigants in a less (or more) financially secure position, as I also suggested in my article Commercial Litigation: Frightening fee rises proposes a number of months ago.

Given this, if you have an upcoming interview and want to demonstrate that you have an awareness of legal business issues, then I strongly encourage you to read on…

So what is ‘costs management’?

As the name suggests, ‘costs management’ is essentially the budgeting of litigation, and there are a number of justifications for careful cost management, as summaried by Ramsay:

(i) Litigation is in many instances a “project”, which both parties are pursuing for purely commercial ends.

(ii) Any normal project costing thousands (or indeed millions) of pounds would be run on a budget. Litigation should be no different.

(iii) The peculiarity of litigation is that at the time when costs are being run up, no-one knows who will be paying the bill. There is sometimes the feeling that the more one spends, the more likely it is that the other side will end up paying the bill. This gives rise to a sort of “arms race”.

(iv) Under the present regime, neither party has any effective control over the (potentially recoverable) costs which the other side is running up.

(v) In truth both parties have an interest in controlling total costs within a sensible original budget, because at least one of them will be footing the bill.

(vi) The parties’ interests may, in truth, be best served if the court (a) controls the level of recoverable costs at each stage of the action, or alternatively (b) makes less prescriptive orders (e.g. requiring notification when the budget for any stage is being overshot by, say, 20% or more).

On issue of a costs management order, which, Jackson says, should be presumed in most cases, the court will require the parties to stick to certain guidelines concerning costs, and the regime operates, in essence, as Jackson describes:

 (i) The parties prepare and exchange litigation budgets or (as the case proceeds) amended budgets.

(ii) The court states the extent to which those budgets are approved.

(iii) So far as possible, the court manages the case so that it proceeds within the approved budgets.

(iv) At the end of the litigation, the recoverable costs of the winning party are assessed in accordance with the approved budget.

For the purposes of providing background knowledge, the above should suffice. However, should you wish understand the workings of costs management in greater detail, the technicalities are discussed in Ramsay’s lecture (little over six pages).

Applicability of Costs Management

The original intention of the proposals and implementation was for costs management to be universally applicable in civil cases, with little exception. Originally, only the Admiralty and Commercial Courts were automatically exempt from the requirements, as suggested by Jackson, due to the high value complex nature of the cases they dealt with. However, judges were encouraged to apply costs management orders on lower value cases as appropriate. For all other courts, there was to be a presumption of a costs management order, but again, this presumption could be overridden by a judge should he see fit.

However, shortly after publishing the amendments to The Civil Procedure Rules (which were to come into force April 2013), a change in policy occurred only two months before the new rules were to come into force.

It was announced that amendments were being made providing a similar exemption would be made for other courts, amending rule 3.12(1) as follows:

(1) This Section and Practice Direction 3E apply to all multi-track cases commenced on or after 1st April 2013, except -

(a) cases in the Admiralty and Commercial Courts;

(b) such cases in the Chancery Division as the Chancellor of the High Court may direct; and

(c) such cases in the Technology and Construction Court and the Mercantile Courts as the President of the Queen's Bench Division may direct,

unless the proceedings are the subject of fixed costs or scale costs or the court otherwise orders. This Section and the Practice Direction 3E will apply to any other proceedings (including applications) where the court so orders.

Furthermore, pursuant to the above sections, a direction was made that the costs management rules will not apply “to cases where at the date of the first case management conference the sums in dispute in the proceedings exceed £2,000,000, excluding interest and costs, except where the court so orders.” It was stated that this was only an interim measure.

The change to the practice direction came due to the realisation that in many cases, there is concurrent jurisdiction between several of these courts. These came as some surprise, when the pilot scheme run as part of the Jackson review were run in the Technology, Construction and Mercantile Courts. The logic for the exemption for cases exceeding £2 million was that a blanket requirement of costs management could deter potential litigants from the UK legal sector, encouraging legal ‘forum shopping’.

However, following a Rules Committee (most notably including Lord Dyson, Master of the Rolls, and Lord Justice Richards, the deputy head of civil justice) meeting in late 2013, it has been announced that whilst the exemption will now be applied to all civil cases, the threshold for the exemption will be increased to £10 million. These changes are yet to come into force, but what effect might they have on the UK legal sector?


Whilst the first change in policy (widening of applicability, and the introduction of an exemption for cases exceeding £2 million in value) was a divergence from the Jackson principles to some extent, the second policy change has brought the scheme back closer to the original intention.

Lord Dyson called the £2 million threshold a “temporary fix” and is quoted as saying, “Although it has helped to reduce the problem of forum shopping, it does not provide a uniform regime and in our view it sets too low a threshold for any general exclusion to costs management”. If it were not for an expression of concern from consultees due to the potential creation of forum shopping, the judges said they would favour Jackson’s original intention of no automatic exemptions. Furthermore, there was some hint that the £10 million threshold may later be increased to £15 million.

So why does this matter? As noted in my opening statements, whilst the cost of litigation is not a glamorous subject, the rules that govern it, at the end of the day, have a strong influence on how much practicing litigation lawyers will get paid. In fact, the committee even noted the selfish interest of many lawyers when it came to costs, stating costs management helped “protect the parties from their own lawyers”. To this end, the judges also stated an ‘opt-out’ by the parties would be out of the question.

Costs management will likely result in more conservative estimates of costs by the court, which if exceeded may not be recoverable from the other side on success. With the threat of not recovering costs, litigants are unlikely to want to exceed this estimation; effectively capping a lawyer’s billing potential on any given case.

However, it must be noted that this was the intention of the reforms. The reforms, as suggested by Mr Justice Ramsay, were intended to combat the belief that the more you spend, the more likely you will win, and the more likely your costs will be covered anyway. This is a dangerous ethos to work by, and only increases the cost of litigating in the UK market, which is potentially equalling off-putting as costs management itself; dependent on your view (personally, I do not see costs management as off-putting).

Whilst many lawyers may be against the change in exemption as it increases the number of cases they are likely to be working with a cost management order, The Association of Costs Lawyers supports the removal a blanket exemption on mandatory costs management. They believe the advantages of doing so far outweigh the disadvantages, such a decision would:

provide “comparative certainty as to final recoverable costs, which is surely to the benefit of clients” and “allows clients [and solicitors] to make an informed decision” as to whether to litigation, and for appropriate business planning.

This position does make sense, and if the cost of running costs management is low for a majority of cases, it is hard not to see this as a move in the right direction. I hope that in the cases where it would not be financially prudent to impose a costs management order, the presiding judge will use his discretion to make a case-by-case exemption wisely.

Whilst a regime closer aligned to Jackson’s original intention of extremely limited exemption may not be popular for many lawyers, the reforms are a clear step in the right direction for UK legal system: reducing unnecessary costs that make our system look archaic and out-of-sync with the modern world.

Those lawyers who increase their work load purely for the sake of increasing their billing may be limited in number; however, costs management is an important layer of protection against such practice. Furthermore, there are two sides to the coin. Should you lose the case, you cannot, in most cases under a costs management order, be slapped with an excessively high legal bill by the other side. This is all the more pertinent in David and Goliath scenarios, where previously the little guy could easily be crushed by a large corporation's out of proportion legal spend. These things, combined with the ability to financially plan more effectively should be attractive to clients. Therefore, I see little merit in the belief that costs management will increase forum shopping.

Given these considerations, I believe the automatic exemptions may in future be lifted entirely as the industry starts to get used to costs management, and starts to realise the potential advantages. The legal profession needs to become more progressive, and this is an important step in doing so.

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Tagged: Commercial Law, Courts, Legal Business

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