What is a good reason for departing from a mandatory costs budget? A practical view from the Bar

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1 What is a good reason for departing from a mandatory costs budget? A practical view from the Bar Resource type: Articles: know-how Status: Published on 06-Feb-2013 Jurisdictions: England, Wales In his monthly column, James Bickford Smith examines the much anticipated decision of the Court of Appeal in Henry v News Group Newspapers Ltd [2013] EWCA Civ 19. James is a barrister at Littleton Chambers specialising in commercial and employment law. James Bickford Smith, Littleton Chambers... The costs budgeting provisions of the Jackson Report are among the most significant issues facing litigators today. One key concern has been that parties and their legal advisers face having otherwise recoverable costs disallowed if they fail to comply with the requirements concerning costs budgets. Those concerns were heightened by the decision in Sylvia Henry v News Group Newspapers Ltd [2012] EWHC (Costs) ( to disallow 268,832 of costs on the grounds that the claimant had failed to comply with rules concerning costs budgeting in PD 51 (see Legal update, Costs management: first decision under Defamation Proceedings Pilot Scheme ( Those rules formed part of the Defamation Proceedings Pilot Scheme, on which the case was the first decided authority. The decision was taken to have considerably wider significance because of the similarity between the provisions of that pilot scheme and the main elements of the impending Jackson reforms. Given the significance of the point decided in Sylvia Henry v News Group Newspapers Ltd [2012] EWHC (Costs), Senior Costs Judge Hurst gave permission to appeal of his own motion. Judgment has now been handed down by the Court of Appeal, who have reversed the first instance decision. In doing so they have made both a series of findings about the PD 51 rules and several obiter statements about how the picture may change with the new Jackson rules. As this may suggest, the decision is relatively nuanced and requires careful consideration.

2 The context: the underlying case and the course of the litigation The facts of the underlying case can, for present purposes, be summarised shortly. Ms Henry was a senior social worker employed by Haringey council. The Court of Appeal described her as "the victim of a sustained and vitriolic campaign by The Sun following the death of the child known as "Baby P"" (Henry v News Group Newspapers Ltd [2013] EWCA Civ 19, paragraph 1 ( She brought defamation proceedings against the newspaper. These were ultimately settled on payment of a substantial but undisclosed sum, a statement in open court, and the publication of an apology. The underlying litigation appears to have been hard fought. The Sun re-amended its defence. By amendment, it advanced the forceful case that Ms Henry had been guilty of "criminal incompetence". Ultimately, however, the case settled shortly before trial. That left the issue of costs, which was to be determined by reference to provisions that included the costs budgeting proposals at the heart of the Jackson reforms. Budgets had been exchanged early in proceedings but these had not been updated in accordance with PD 51, which materially provides that: " At any case management conference, costs management conference or pre-trial review, the court will have before it the detailed costs budgets of both parties for the litigation, updated as necessary, and will take into account the costs involved in each proposed procedural step when giving case management directions At any case management conference, costs management conference or pre-trial review, the court will, to the extent the budgets are not agreed between the parties, record approval or disapproval of each side s budget and, in the event of disapproval, will record the court s view." These provisions are significant because PD provides that: " When assessing costs on the standard basis, the court (1) will have regard to the receiving party s last approved budget; and (2) will not depart from such approved budget unless satisfied that there is good reason to do so."

3 The issue The key issue both at first instance and on appeal was whether there was "good reason" to depart from the last court-approved budget. If there was not, then 268,832 of otherwise recoverable costs would be disallowed. NGN s simple argument was that the provisions of PD 51 were mandatory and had not been complied with by Ms Henry s representatives. Therefore, so it was argued, to allow Ms Henry to recover unbudgeted and unapproved costs after the end of proceedings would be to drive a coach and horses through the practice direction. This main point was developed by reference to a number of alleged failures to comply with the practice direction and to criticisms of Ms Henry s initial cost budget itself. Ms Henry s main argument at first instance was that NGN s conduct of the proceedings provided good reason to depart from the budget. This argument was developed by reference to a detailed critique of NGN s conduct and evidence from Ms Henry s solicitor. As regards Ms Henry s argument, Senior Costs Judge Hurst held as follows: He was not prepared to resolve the issue of whether NGN s conduct had caused Ms Henry to incur additional cost and expense. Doing so would have involved cross-examination of the solicitors on both sides, "a process which would have taken an inordinate amount of time, and would not, in the end, have greatly assisted me in deciding whether or not there was good reason to depart from the approved budget." (Sylvia Henry v News Group Newspapers Ltd [2012] EWHC (Costs), paragraph 64.) Nevertheless, "the impression I am left with is that [NGN s solicitor s] protestations that the actions of the Defendant should not have had any major effect on the way in which the Claimant was dealing with her case rings somewhat hollow. The Defendant in these proceedings mounted a vigorous and lengthy defence which was amended four times. They served ten lists of documents. I do not suggest that the Defendant was not entitled to act as it did, but it cannot now try to pass off this constantly changing scenario as being no more than a minor inconvenience to the Claimant." (Sylvia Henry v News Group Newspapers Ltd [2012] EWHC (Costs), paragraph 64.) It was "very strongly" arguable that Ms Henry s costs would be recoverable on normal principles. Despite these findings, Senior Costs Judge Hurst resolved the central issue against Ms Henry because:

4 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. and The provisions of the Practice Direction are in mandatory terms. Each party must prepare a costs budget or revised costs budget (paragraph 3.1), each party must update its budget (3.4), solicitors must liaise monthly to check that the budget is not being or is likely to be exceeded (paragraph 5.5). The objective of the Direction is to manage the litigation so that the costs of each party are proportionate to the value of the claim and reputational issues at stake, and so that the parties are on an equal footing (paragraph 1.3) I am forced to the conclusion that if one party is unaware that the other party s budget has been significantly exceeded, they are no longer on an equal footing, and the purpose of the cost management scheme is lost. (Sylvia Henry v News Group Newspapers Ltd [2012] EWHC (Costs), paragraph 68.) The Court of Appeal decision Allowing the appeal, Moore-Bick LJ held that when deciding whether there is good reason to depart from the approved budget the correct approach is to: "take into account all the circumstances of the case, but with particular regard to the objective of the costs budgeting regime. In the case of the present scheme the objective is set out in paragraph 1.3 of the practice direction, namely, to manage the litigation so that the costs of each party are proportionate to what is at stake and to ensure that the parties are on an equal footing." (Henry v News Group Newspapers Ltd [2013] EWCA Civ 19, paragraph 17.) This broad approach was further explained as follows: "I do not think that it would be wise to attempt an exhaustive definition of the circumstances in which there may be good reason for departing from the approved budget. The words themselves are very broad and experience teaches that any attempt by an appellate court to provide assistance in a matter of this kind risks creating a set of rigid rules where flexibility was intended. Circumstances are infinitely variable and it is vital that judges exercise their own judgment in each case. Having said that, the starting point must be that the approved budget is intended to provide the financial limits within which the proceedings are to be conducted and that the court will not allow costs in excess of the budget unless something

5 unusual has occurred. Whether there is good reason to depart from the approved budget in any given case, therefore, is likely to depend on, among other things, how the proceedings have been managed, whether they have developed in a way that was not foreseen when the relevant case management orders were made, whether the costs incurred are proportionate to what is in issue and whether the parties have been on an equal footing." (Henry v News Group Newspapers Ltd [2013] EWCA Civ 19, paragraph 18.) Notably absent from this list of factors is the question of whether there has been strict compliance with practice directions. Whereas for Senior Costs Judge Hurst, the issue had been, what flowed from non-compliance with costs budgeting requirements, for Moore-Bick LJ, the issue was whether that non-compliance had put the parties on an unequal footing: a failure to exchange information "does not of itself put the parties on an unequal footing". Further: "I am unable to accept that compliance with all the requirements of the practice direction is essential before a party can ask the court to depart from the approved budget. It is no more than one factor which the court may take into account in deciding whether there is in fact good reason to do so." (Henry v News Group Newspapers Ltd [2013] EWCA Civ 19, paragraph 21.) Moore-Bick LJ then undertook a broader assessment of whether there was good reason to depart from the costs budget. He held that there was, "for several inter-related reasons". The nub of his reasoning was as follows: "[U]nless the court departs from the budget the appellant will not be able to recover the costs of the action. That alone would not be enough; if it were the scheme would be otiose, but it is an important factor to the extent that on examination the court is persuaded that the costs actually incurred were reasonable and, most importantly, proportionate to what was at stake in the litigation. Allied to that is the fact that the failure of the appellant s solicitors to observe the requirements of the practice direction did not put the respondent at a significant disadvantage in terms of its ability to defend the claim, nor does it seem likely that it led to the incurring of costs that were unreasonable or disproportionate in amount. In other words, the objects which the practice direction sought to achieve were not undermined. In those circumstances a refusal to depart from the budget simply because the appellant had not complied with the practice direction would achieve nothing beyond penalising her. That might encourage others to be more assiduous in complying with the

6 practice direction in the future, but to penalise the appellant for that reason alone would be unreasonable and disproportionate." (Henry v News Group Newspapers Ltd [2013] EWCA Civ 19, paragraph 25.) Moore-Bick LJ further noted that, "the court itself was less active than it should have been in monitoring the parties expenditure when the matter came before it on the procedural applications in April 2011", and that NGN had failed to comply strictly with the practice direction. Finally, NGN had received an up-to-date account of Ms Henry s costs position, albeit in the context of settlement discussions. It could not, therefore, be said that the parties had been on an unequal footing or in the dark. Comment Despite the considerable detail of the judgments, the key question raised by Henry v News Group Newspapers Ltd [2013] EWCA Civ 19 can be put very simply: should non-compliance with a practice direction on costs management phrased in mandatory terms be enough, without more, to cause the disallowance of unbudgeted costs? Senior Costs Judge Hurst answered that question in the affirmative; Moore-Bick LJ answered it in the negative. Given the doctrine of precedence, one might be forgiven for concluding (as some litigators doubtless already have) that the ensuing position is that the mandatory provisions of PD 51 have been considerably softened by this decision. Put more colourfully, the coach and horses that Senior Costs Judge Hurst feared might seem to have duly driven through PD 51. The real difficulty of the Court of Appeal judgment, however, is that by propounding a multifactorial test and emphasising the discretion of the first instance judge, the Court has left a degree of uncertainty in the law; some judges may well be more willing than others to conclude that the facts of a given case give "good reason" to depart from a costs budget. That uncertainty in turn may render it more difficult to reach settlements that include settlements as to costs. Further, and despite the caveat discussed below, the logic of the Court of Appeal s decision would seem difficult to reconcile with the policy behind the Jackson reforms. That is doubtless why the Court of Appeal decision has been subject to practitioner criticism almost immediately. Equally, however, it would be unwise to forget the earlier practitioner criticism that greeted the first instance decision. Many litigators unfamiliar with costs budgeting were understandably concerned at the seemingly draconian interpretation of the rules adopted by Senior Costs Judge Hurst. Those practitioners will be forgiven a sigh of relief at the Court of Appeal s decision.

7 The caveat In important obiter remarks at the end of his judgment, Moore-Bick LJ was at some pains to stress that the Jackson reforms "differ in some important respects from the practice direction with which this appeal is concerned". Moore-Bick LJ suggested that for the purposes of those reforms, the budget was "a prima facie limit on the amount of recoverable costs". It follows that: "In those circumstances, although the court will still have the power to depart from the approved or agreed budget if it is satisfied that there is good reason to do so, and may for that purpose take into consideration all the circumstances of the case, I should expect it to place particular emphasis on the function of the budget as imposing a limit on recoverable costs. The primary function of the budget is to ensure that the costs incurred are not only reasonable but proportionate to what is at stake in the proceedings. If, as is the intention of the rule, budgets are approved by the court and revised at regular intervals, the receiving party is unlikely to persuade the court that costs incurred in excess of the budget are reasonable and proportionate to what is at stake. (Henry v News Group Newspapers Ltd [2013] EWCA Civ 19, paragraph 28.) This statement can be read either as an attempt to narrow the scope of the ruling in Henry v News Group Newspapers Ltd [2013] EWCA Civ 19, or as a warning shot to practitioners, or as a preemptive response to criticism of the potential impact of the decision. It remains to be seen whether its logic is followed in future cases. Practical points Irrespective of which side of the above debate one s sympathies lie on, the practical learning points from the case are the same: Few litigators will want to find themselves needing a Court of Appeal bench prepared to take a broad and relatively relaxed view of compliance with the new costs budgeting rules before they can recover their costs. Consequently, compliance with the costs budgeting rules must be the default setting. It seems very likely that there will be significant teething problems with costs budgeting. The best way to reduce the ensuing risks will be to take the practical steps of: o involving costs draftsmen significantly earlier in proceedings than has been the norm;

8 o ensuring that whoever attends case management hearings is fully informed not only of the current costs position but also of the assumptions on which the future costs budget has been based; o gathering costs information from earlier cases into an archive to assist with future costs budgeting; o identifying the full legal team (including experts) as early as possible and securing detailed quotations; while fee-capping may be the objective in many cases, in more complex matters an obvious purpose of doing this is to make any rebudgeting of the case easier: for example, if an accountancy expert will charge X if Y is not in issue and Z if it is, it is sensible to work out what Z is as early as possible. Even if the above steps are taken, it would be surprising if there were not cases in which budgets prove overly optimistic as proceedings unfold. It is plain from Henry v News Group Newspapers Ltd [2013] EWCA Civ 19 that informing the other side of departures from agreed costs budgets provides at least some protection in the event of a later dispute. This should, therefore, always be given active consideration if costs are starting to rise significantly. What is much harder to predict at this stage is what role the courts themselves will play in the above scheme. Moore-Bick LJ s comments about the failure of the court to play a more active role in costs management during Henry v News Group Newspapers Ltd [2013] EWCA Civ 19 are particularly interesting in this regard. One waits to see what more active costs management will look like, and whether it will achieve the promised aim of significantly more cost-effective litigation.