Budgets: hourly rates and incurred costs

The court, by the process of costs and case management, manages the future conduct of a dispute, which entails managing the steps to be taken in the litigation and managing future cost by:

  • requiring that costs budgets be filed and, if required, revised (CPR Part 3.13 and the ‘new’ CPR Part 3.15A);
  • making a Costs Management Order (‘CMO’) (CPR Part 3.15) to record the extent to which the budgeted costs are agreed or approved;
  • managing the case so that it proceeds within approved budgets (CPR Part 3.17): and
  • at the end of the case, restricting recoverable costs in accordance with the approved budget.

In approving costs budgets, two of the more esoteric features of cost budgeting arise: (a) the court cannot fix or approve hourly rates, and yet, as hourly rates are a constituent part of how the costs are arrived at, how can hourly rates truly be “off the table”?; and (b) given that the court cannot manage incurred costs, how then can the court determine proportionality?

Hourly rates

The CMO concerns the totals allowed for each phase of the budget (CPR PD 3E para. 7.10), although the court will have regard to the constituent elements of each total figure. When reviewing budgets, the court will not undertake a detailed assessment in advance but will consider whether the budgeted costs seem reasonable and proportionate (CPR PD 3E para. 7.3).

Per CPR PD 3E para. 7.10:

It is not the role of the court in the cost management hearing to fix or approve the hourly rates claimed in the budget. The underlying detail in the budget for each phase used by the party to calculate the totals claimed is provided for reference purposes only to assist the court in fixing a budget”.

In determining the totals allowed for each phase, where the sums in the costs budget are calculated by reference to hourly rates, it is arguable that, in effect, the court is fixing the rate. Often the parties’ respective rates are significantly different – in that case a similar total per phase would mean significantly fewer hours for one party. In that scenario the obvious solution is for the parties’ budgets to be approved with different phase totals but, again, how is that not, in some way, setting down a marker as to, if not fixing, the rate?

Note: while a party’s best estimate of future costs must be ‘scientifically’ calculated (i.e. hours x rates plus estimated disbursements), the court, in fixing a total figure for a phase, is not prescribing how that figure is spent – that is up to the party (see, for example, Easteve Ltd v Malhotra Property Investments Ltd & Ors [2019]).

Incurred costs and proportionality

The court is to determine whether the budgeted costs are reasonable and proportionate. Per CPR PD 3E para. 7.4:

As part of the costs management process the court may not approve costs incurred before the date of any costs management hearing. The court may, however, record its comments on those costs and will take those costs into account when considering the reasonableness and proportionality of all budgeted costs”.

See also CPR Part 3.15(4):

… the court … may record on the face of any case management order any comments it has about the incurred costs which are to be taken into account in any subsequent assessment proceedings”.

In Redfern v Corby Borough Council [2014] the Court, having found that a budget was disproportionate (noting the significant costs already incurred), approved a vastly reduced budget (compared with that claimed). In doing so the court was not approving or disproving the incurred costs, it was doing what CPR PD 3E para. 7.3 required, which was to record its comments on those costs when considering the reasonableness and proportionality of the future costs in order to fix a figure that was reasonable and proportionate for the entire action.

This is illustrated in the recent decision in Kings Security Systems Ltd v King and Anor [2019] in which a novel argument was run: the Defendant argued that the Claimant had not provided full details of their incurred costs meaning the court did not have the information it needed to carry out the costs budgeting exercise (i.e. it could not consider incurred and estimated costs to fix a proportionate figure for the whole).

The argument did not succeed. The Claimant’s costs budget was about £1.2m, including incurred costs of c. £600,000. The Defendant’s budget was c. £750,000. The claim was worth £120,000. Therefore, on any analysis, the costs were disproportionate.

The court considered that a variety of sources gave it “sufficient information” about the nature and extent of the incurred costs and said:

Although the court has to have regard to the overall costs, both incurred and to be incurred, when considering proportionality and thus having the information in relation to incurred costs is helpful in making that assessment, in this case, having more detailed information about other incurred costs is not going to tip the balance between the costs being proportionate and disproportionate; the costs of both parties are already disproportionate”.

On the question of proportionality, the court noted that the matters alleged were serious (including allegations of bribery and tortious abuse of process) such that “the importance of being seen to address the alleged wrongdoing justifies the expenditure of time and cost, notwithstanding the modest financial sums involved”. However, the court noted that the parties’ approach to the dispute “has caused it to become complex and attritional”, and the Defendant sought a judicial comment on incurred costs per CPR Part 3.15(4). The Court said this:

My starting point is that, if I were to comment at all, it would be to the effect that both parties’ incurred costs appear to be disproportionate …

if I were to comment on the incurred costs … such comment must be taken into account by a costs judge on detailed assessment but it does not bind the costs judge. I cannot see any value in a comment that simply repeats for the costs judge a general view that costs incurred to date are excessive or disproportionate but without being able to provide some express guidance as to what it is about the costs that is considered to be disproportionate or excessive.

There is little or no value in the court recording … [anything other than] a specific and well-founded comment about [a] specific element of the costs which might be of assistance to the costs judge.”

Noting that the costs judge on detailed assessment will have a detailed bill of costs and far more information about how and why the costs were incurred, the court declined to impose any “fetter on the discretion of the costs judge” saying “I will leave it to the costs judge to form his own view in due course …”.

This approach, to leave it to the costs judge at assessment, has precedent: in Richard v BBC and another [2017] the courtdecided not to make any comment about the incurred costs in the budget, observing that the amount of information in a budget is limited and that there is little or no value in a general comment along the lines that incurred costs were “substantial” or “too high“.

Our experienced team are happy to discuss with you any aspect of costs budgeting and costs management.