Costs - Costs management and budgeting

Learning Outcomes

This article explains the regime for costs management and budgeting in civil litigation under the Civil Procedure Rules (CPR). It outlines the purpose, key procedures, and potential consequences associated with managing litigation costs. For the SQE1 assessments, you will need to understand the process of preparing and filing costs budgets, the nature and effect of Costs Management Orders (CMOs), the requirements for revising budgets, and the implications of non-compliance. Your understanding will enable you to apply the relevant rules to SQE1-style single best answer MCQs concerning costs management scenarios.

SQE1 Syllabus

For SQE1, you are required to understand the practical application of the costs management rules. It is likely that you will need to identify the correct procedure for budgeting, recognise the implications of a CMO, or determine the consequences of failing to comply with the rules.

As you work through this article, remember to pay particular attention in your revision to:

  • the purpose and scope of the costs management regime (CPR 3.12-3.18)
  • the process for preparing, filing, and agreeing costs budgets (Precedent H)
  • the nature, content, and effect of Costs Management Orders (CMOs)
  • the procedure for seeking variations to approved budgets (Precedent T)
  • the consequences of failing to comply with costs management rules and orders, particularly CPR 3.14
  • the court's approach to assessing costs by reference to approved or agreed budgets.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. In which type of case does the costs management regime under CPR Part 3 generally apply?
    1. Small claims track cases
    2. Fast track cases
    3. Multi-track cases
    4. All cases regardless of track.
  2. What is the primary form used for setting out a party's detailed costs budget?
    1. Form N244
    2. Precedent T
    3. Form N265
    4. Precedent H.
  3. What is the likely sanction if a party, required to file a costs budget, fails to do so by the specified deadline?
    1. The party's claim or defence may be struck out.
    2. The party will be limited to recovering only the applicable court fees for their costs.
    3. The party must pay the costs of the Costs Management Conference immediately.
    4. The party automatically receives an extension of time.

Introduction

Managing the costs of litigation effectively is a fundamental aspect of modern civil procedure in England and Wales. The rules aim to ensure that the costs incurred by parties are proportionate to the issues in dispute and that litigation is conducted efficiently. For SQE1, you must understand the framework established by the CPR for controlling costs through budgeting and management orders. This involves knowing the key procedural steps, the documents involved, and the potential sanctions for non-compliance. The court actively manages costs, particularly in multi-track cases, to keep expenses under control from an early stage.

THE COSTS MANAGEMENT REGIME (CPR 3.12 – 3.18)

The primary rules governing costs management are found in CPR 3.12 to 3.18 and Practice Direction 3E. The regime generally applies to most multi-track cases commenced on or after 1 April 2013, with some exceptions (e.g., cases valued at £10 million or more, unless the court orders otherwise, and cases subject to fixed or scale costs).

The overarching purpose is to enable the court to manage both the steps to be taken and the costs to be incurred by the parties, ensuring litigation is conducted proportionately and at reasonable expense.

Proportionality

A key principle supporting costs management is proportionality. Costs incurred are proportionate if they bear a reasonable relationship to the sums in issue, the value of non-monetary relief, the complexity of the litigation, additional work generated by the paying party's conduct, and any wider factors like reputation or public importance. Costs budgets help the court assess proportionality from the outset.

Key Term: Proportionality
The principle that costs incurred in litigation should bear a reasonable relationship to the factors of the case, including the sums in issue, complexity, and importance.

PREPARING AND FILING COSTS BUDGETS

Parties subject to costs management must prepare and exchange detailed costs budgets.

The Costs Budget (Precedent H)

The budget must be drafted using the prescribed court form, Precedent H. It requires parties to set out the costs they have already incurred (incurred costs) and the costs they estimate they will incur for each future stage of the litigation (estimated costs).

Key Term: Costs Budget (Precedent H)
A detailed statement, in the prescribed form (Precedent H), setting out the costs a party has incurred to date and estimates it will incur for each stage of the proceedings going forward.

Key Term: Incurred Costs
Costs relating to work done before the date of the budget. The court typically does not approve incurred costs but may comment on them.

Key Term: Estimated Costs
Costs relating to work anticipated to be done after the date of the budget for defined future stages (phases) of the litigation. These are the primary focus of court approval.

The budget must be signed with a statement of truth by a senior legal representative of the party. Parties should also provide fundamental assumptions for their figures.

Filing and Exchange Deadlines

The timing for filing and exchanging budgets depends on the value of the claim:

  • For claims valued under £50,000: File and exchange with the Directions Questionnaire.
  • For other multi-track claims: File and exchange not later than 21 days before the first Case Management Conference (CMC).

Failure to file a budget on time carries a severe sanction under CPR 3.14.

Worked Example 1.1

Your client is the Claimant in a multi-track case valued at £200,000. The first Case Management Conference (CMC) is listed for 30th June. What is the latest date your client must file and exchange their costs budget (Precedent H)?

Answer: The costs budget must be filed and exchanged not later than 21 days before the first CMC. Therefore, the latest date is 9th June.

The Budget Discussion Report (Precedent R)

Parties are required to discuss each other's budgets after exchange. They must file an agreed Budget Discussion Report (Precedent R) no later than 7 days before the first CMC, setting out which figures are agreed, which are not agreed, and brief reasons for disagreement.

COSTS MANAGEMENT ORDERS (CMOs)

At the CMC, or another hearing, the court will typically consider the parties' budgets and make a Costs Management Order (CMO).

Key Term: Costs Management Order (CMO)
An order made by the court recording the extent to which the parties' budgeted costs (usually the estimated costs for each phase) are approved.

The court will review the estimated costs for each phase of the litigation. It may approve the figures as budgeted or set different figures if it considers the budgeted amounts disproportionate. The court will not typically approve figures for incurred costs but may comment on them.

The effect of a CMO is significant. When assessing costs at the end of the case, the court will not depart from the approved or agreed estimated costs in the CMO unless satisfied that there is a good reason to do so (CPR 3.18). This provides parties with greater certainty about their potential costs recovery (and liability).

Exam Warning

Remember the strict consequence under CPR 3.14: If a party fails to file a budget when required, they are treated as having filed a budget comprising only the applicable court fees. They will generally be unable to recover any further costs for the litigation, even if successful. This is a draconian sanction underscoring the importance of compliance.

REVISING COSTS BUDGETS

Litigation can be unpredictable. If circumstances change significantly during the proceedings, a party may need to revise its approved budget.

Significant Developments

A budget can only be revised if there has been a significant development in the litigation that warrants such a revision. Minor changes or miscalculations in the original budget are generally not sufficient.

Key Term: Significant Development
A change in circumstances occurring after the last approved budget which was not reasonably foreseeable and which significantly impacts the estimated costs.

The Variation Process (Precedent T)

If a party wishes to revise its budget due to a significant development, it must:

  1. Promptly prepare a variation using Precedent T, explaining the significant development and the proposed changes.
  2. Serve Precedent T on other parties for agreement.
  3. If not agreed, apply to the court for approval of the variation.

The court has discretion whether to approve the revised figures. Failure to seek timely approval for necessary variations can prejudice a party's ability to recover costs exceeding the previously approved budget.

Key Term: Budget Variation (Precedent T)
The prescribed form (Precedent T) used by a party to propose revisions to its approved costs budget following a significant development.

Worked Example 1.2

A Claimant's costs budget was approved in a CMO. Six months later, the Defendant amends its Defence to introduce a complex new issue requiring substantial additional expert evidence not originally anticipated. The Claimant estimates this will increase costs for the expert evidence phase by £25,000. What should the Claimant do?

Answer: This likely constitutes a significant development. The Claimant should promptly prepare a Precedent T detailing the development and the revised figure for the relevant phase(s). They should serve it on the Defendant, seeking agreement. If agreement is not reached, the Claimant must apply to the court for approval of the budget variation.

Costs Assessment and Exceeding Budgets

At the conclusion of the case, when costs are assessed, the court will have regard to the last approved or agreed budget (CPR 3.18). As noted, the court will not depart from the budget unless there is a "good reason". Simply exceeding the budget without it being varied is unlikely to constitute a good reason. Therefore, careful monitoring and timely applications to vary budgets where justified are essential.

Revision Tip

Focus on the key documents (Precedent H, Precedent R, Precedent T) and their purpose within the costs management timeline. Understand the critical deadlines and the severe consequences of non-compliance under CPR 3.14.

Key Point Checklist

This article has covered the following key knowledge points:

  • Costs management applies primarily to multi-track cases, aiming for proportionality and efficiency.
  • Parties must prepare and exchange costs budgets using Precedent H, detailing incurred and estimated costs.
  • Strict deadlines apply for filing budgets; failure can lead to recovery being limited to court fees (CPR 3.14).
  • Parties must discuss budgets and file a Budget Discussion Report (Precedent R).
  • The court usually makes a Costs Management Order (CMO) approving estimated costs per phase.
  • Approved budgets provide a presumptive limit on recoverable costs unless there is a 'good reason' to depart (CPR 3.18).
  • Budgets can be formally revised using Precedent T only if there is a 'significant development'.
  • Court approval is required for budget variations if not agreed between the parties.
  • Careful monitoring and timely variation applications are necessary to recover costs exceeding the approved budget.

Key Terms and Concepts

  • Proportionality
  • Costs Budget (Precedent H)
  • Incurred Costs
  • Estimated Costs
  • Costs Management Order (CMO)
  • Significant Development
  • Budget Variation (Precedent T)
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