CLAIMANTS’ APPLICATION TO VARY COSTS BUDGET DISMISSED: A SELF – IMPOSED DIFFICULTY DID NOT (ON THESE FACTS) AMOUNT TO A SIGNIFICANT DEVELOPMENT

In  Simpsons (Preston) Ltd & Anor v MS Amlin Underwriting Ltd [2023] EWHC 1370 (Comm) HHJ Pearce refused the claimants’ application to vary the costs budget in relation to disclosure.  The reason the application was made because the claimants had themselves found further documents they needed to disclose. This did not warrant a variation of the budget.

“I am unpersuaded on the material that what has happened here amounts to a significant development, even on the definition given above. Whilst I acknowledge the need to avoid setting the bar too high by excluding matters that could not reasonably have been known, even if they can be said to be internal to the party seeking the variation, I am also conscious that the bar must be sufficiently high to encourage a rigorous approach to costs budgeting at the outset, otherwise a potential paying party cannot have the reasonable assurance that a costs budget is supposed to bring as to its potential liability in the event of an adverse costs order.”

THE CASE

The claimants are bringing an action against the defendants in relation to the payment of insurance following interruptions in their business caused by COVID restrictions.

BUDGETING OF THE CASE

The case had been budgeted in September 2022, the budget had been agreed.

THE DISCLOSURE PHASE AND THE CLAIMANTS’ APPLICATION

The disclosure phase had been agreed at £59,665. The claimants sought an increase of an additional £58,142.56 taking the phase to £117,807.56.

THE REASON FOR THE APPLICATION

During the process of uploading the date to the claimants’ disclosure platforms it became apparent that there were two mapped network drives that had previously been disregarded. This took the number of documents to 362,704 (as against the few thousand originally envisaged), there were almost 10,000 spreadsheets.

THE LAW

The judge considered the law relating to the revision of budgets.

1. 1. The procedure for the revision of costs budgets is set out in CPR3.15A, which provides:

“Revision and variation of costs budgets on account of significant developments (“variation costs”)

(1) A party (“the revising party”) must revise its budgeted costs upwards or downwards if significant developments in the litigation warrant such revisions.

(2) Any budgets revised in accordance with paragraph (1) must be submitted promptly by the revising party to the other parties for agreement, and subsequently to the court, in accordance with paragraphs (3) to (5).

(3) The revising party must—

(a) serve particulars of the variation proposed on every other party, using the form prescribed by Practice Direction 3D;

(b) confine the particulars to the additional costs occasioned by the significant development; and

(c) certify, in the form prescribed by Practice Direction 3D, that the additional costs are not included in any previous budgeted costs or variation.

(4) The revising party must submit the particulars of variation promptly to the court, together with the last approved or agreed budget, and with an explanation of the points of difference if they have not been agreed.

(5) The court may approve, vary or disallow the proposed variations, having regard to any significant developments which have occurred since the date when the previous budget was approved or agreed, or may list a further costs management hearing.

(6) Where the court makes an order for variation, it may vary the budget for costs related to that variation which have been incurred prior to the order for variation but after the costs management order.”

1. 1. The threshold criteria for the exercise of the power are therefore:

13.1. There has been a significant development in the litigation since the last approved or agreed budget, which warrants a revision;

13.2. The particulars of variation have been submitted promptly to the court.

1. 1. If these criteria are met, the court goes on to consider the exercise of the evaluative judgment as to whether the budget should in fact be varied. In Persimmon Homes Ltd v Osborne Clark LLP [2021] EWHC 831, Master Kaye said this of the exercise of that judgment:

“the court must have regard to the overriding objective and all the circumstances of the case including the need to deal with cases justly and at proportionate cost. This includes considering the prejudice to both the applicant if the revision (including any relevant incurred costs) is not approved or allowed and the prejudice to the respondent if the variation is approved or allowed. The question of promptness and the nature of the development giving rise to the application may re-emerge as part of this exercise of discretion.”

1. Neither party sought to disagree with this summary of the law, although as will be seen when looking at the parties’ individual cases, there is some difference as to how this is to be applied to the facts of the present case.

APPLYING THOSE PRINCIPLES TO THE CURRENT CASE

Although it was possible that a self-imposed problem could amount to a “significant development”, on the facts of this case the judge refused the claimants’ application.

1. 1. In order to determine what amounts to a “significant development” it is necessary for the court first to consider the basis on which the original budget is set. CPR3.12(2) states that the purpose of costs management is “that the court should manage both the steps to be taken and the costs to be incurred by the parties to any proceedings (or variation costs as provided in rule 3.15A) so as to further the overriding objective.” When assessing costs on the standard basis where a costs management order has been made, the court will, pursuant to CPR 3.18:

“(a) have regard to the receiving party’s last approved or agreed budgeted costs for each phase of the proceedings;

(b) not depart from such approved or agreed budgeted costs unless satisfied that there is good reason to do so; and

(c) take into account any comments made pursuant to rule 3.15(4) or 3.17(3) recorded on the face of the order.”

1. 1. It follows that, in exercising costs management powers, the court is aiming to estimate the reasonable and proportionate costs (in other words, the costs to be anticipated on an assessment on the standard basis). Such an assessment would of course be conducted pursuant to the principles of CPR Part 44.3(2)

“Where the amount of costs is to be assessed on the standard basis, the court will—

(a) only allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred; and

(b) resolve any doubt which it may have as to whether costs were reasonably and proportionately incurred or were reasonable and proportionate in amount in favour of the paying party.”

1. 1. In Kazakhstan Kagazy plc v Zhunus [2015] EWHC 404 (Comm), Leggatt J (as he then was) said in retrospect of reasonable and proportionate costs:

“13…The touchstone is not the amount of costs which it was in a party’s best interests to incur but the lowest amount which it could reasonably have been expected to spend in order to have its case conducted and presented proficiently, having regard to all the relevant circumstances. Expenditure over and above this level should be for a party’s own account and not recoverable from the other party.”

1. 1. On the other hand, in Discovery Land Company v Axis Speciality Europe [2021] EWHC 2146 (Comm), Peter MacDonald Eggars KC sitting as judge of the High Court doubted that this approach was correct where the court was dealing with costs management:

“18…..in the context of costs management, the Court should allow some flexibility to the parties to ensure that their conduct of the action is not unnecessarily and potentially unfairly hampered by an unrealistically low assessment or by only the lowest assessment of what would constitute reasonable and proportionate expenditure.”

1. 1. There is of course a substantial difference between the retrospective approach of the assessment of costs, which was the context in which the issue was being considered in Kazakhstan Kagazy plc v Zhunus and the prospective management of costs as in Discovery Land Company v Axis Speciality Europe, since in the former, the court knows what work it is considering when assessing costs, whereas in the latter the court has to work on assumptions as to what work will be involved. The inevitable uncertainties of the latter exercise make it right that the court should not simply look to manage costs at the lowest conceivable figure but rather should take a realistic view as to what work is likely to be involved in a particular phase, bearing in mind that, if the court underestimates the work involved, a party will only be able to seek revision of the budget in the narrow circumstances identified above.

1. 1. In considering what lies within the range of that which a party might reasonably be reasonably to know or anticipate at the time of the costs budgeting process, I bear in mind two factors:

36.1. The clear structure of costs budgeting is that, so far as possible, this should be done at an early stage in the litigation process, before significant costs are incurred. Of course, some cases, for example clinical negligence claims, may require considerable costs to be incurred before a party knows that a claim can properly be issued and pursued. But in the context of commercial litigation such as this, meaningful costs management requires the court to engage in the exercise as early as practicable in the litigation.

36.2. One cannot expect the process of initial disclosure to identify much about the likely scope of extended disclosure, since the ambit of initial disclosure is intended to be, and usually will be, limited. As Cockerill J put it in paragraph 18 of her judgment in State of Qatar v Banque Havilland SA [2020] EWHC 1248, “The purpose of the disclosure pilot is to streamline and not to complicate disclosure and so it would be unlikely that what was had in mind by the drafters of the disclosure pilot was a scheme whereby initial disclosure required something more than really very necessary documents; in other words that it required the disclosure of an evidence base required to test the evidence rather than to support the very key allegations.”

1. 1. It follows that the court, at the stage of costs budgeting, doing its best on the inevitably limited information to forecast a reasonable figure for the disclosure phase, may well be restricted in its ability to make an informed judgment as to what is likely to be involved in that phase. For this reason, I agree with the comment of Master Davison in Al-Najar that the bar for what is a significant development should not be set too high. Otherwise, a party risks being unable to recover costs that it incurs of which it could only have been aware had it engaged in an investigation of its own case considerably beyond that which is anticipated by the scheme of the disclosure rules in the Business and Property Courts contained in PD57AD.

1. 1. The concept of the “internal” development referred to by the Defendant, whilst potentially of some assistance cannot adequately explain where the bar is to be set for the concept of the “significant development” for two reasons:

38.1. This concept is not one established in CPR3.15A. As Mr Grantham KC pointed out, those who drafted the rules could have worded the test for variation in this way had they so wished but did not do so.

38.2. It is easy to see that such a concept might fail to catch changes of circumstances that might well justify a variation in the budget – Mr Grantham KC’s example of increased costs of disclosure caused by the need to recover documents from a device that has crashed catastrophically, where the device is under the control of the party who seeks the variation, is a good example of a cost that would fall within the category of “internal” yet which might well justify the label of being a “significant development”; looking at another phase of the budgeting process, another might be the death of an expert witness prior to trial that causes the party who instructed them to have to restart the process of obtaining expert evidence.

1. 1. A more satisfactory approach to this issue is to look at the distinction that the Chief Master drew in paragraph 37 of the judgment in Sharp v Blank between, on the one hand, circumstances (for the moment I deliberately avoid the word “developments”, so as not to create a self-fulfilling categorisation) that come to light making the litigation more (or in an appropriate case, less) costly and complex but that could not reasonably have been anticipated and mistakes, where a party could reasonably have identified and anticipated the circumstances by proper and proportionate investigation of the case prior to the costs management order. That which it is reasonable to anticipate would exclude that which could not be anticipated and/or assessed without the party incurring costs that go beyond that which are reasonably to be incurred before the costs management process takes place.

1. 1. This distinction does not focus on whether the circumstances relied on are new and unexpected events and/or relate to matters internal or external to the party applying to vary. But where the matters relied on could already have been known to the party applying to vary (such as the quantity of material which they are obliged to disclose), it is likely to be more difficult to meet the test than where the matters are truly external (such as the amount of disclosure that the opposing party gives them). It may not always be easy to draw the distinction between what could and could not reasonably have been expected to be known at the time of the budgeting process, but this distinction presents a principled dividing line between that which can properly be the subject of an application to vary and that which cannot. In particular it incentivises the proper preparation of cases and costs budgets, without penalising the party that avoids front loading costs before the court can take charge of the costs management process.

1. 1. Applying this test, I am satisfied that the discovery by a party that its own disclosure is far more substantial than it initially realised is capable of falling within the definition of “significant development” in CPR3.15A.

1. 1. I turn to whether the Claimants are able to show that they fall within this definition on the facts before the court. The discovery of the two previously unknown drives is clearly a discovery that is likely to affect the scope and therefore the cost of the disclosure process. To this extent, I am satisfied that it can properly be called a “development.”

1. 1. Whether it is “significant” is more difficult. There is relatively little information before the court to enable an assessment of this. Paragraph 30 of Mr Lewis’ statement is the closest that the material comes to explaining why the discovery of the drives was significant. But, as the Defendant points out, the development did not lead to any change in the nature of the stated assumptions for the disclosure process. Whilst the Claimants explain the increase in number of documents, it is not clear why the increased number necessarily leads to a significantly greater burden in the disclosure process. It is not clear from the evidence before the court that the increased number of excel spreadsheets which have required review is a consequence of the discovery of the previously unanticipated drives or is simply an aspect of other parts of the disclosable documents. It is not clear why the de-duplication problem referred to at paragraph 30.3 of the statement has been so time intensive, nor (for example) why the spam or “bulk” emails referred to have greatly increased the burden of the process. Further, it is not clear why the need to scan hard copies was not previously known. As to the obtaining of further licences, in my judgement that additional cost, whatever its cause, could not on its own be said to be significant.

1. 1. In all, I am unpersuaded on the material that what has happened here amounts to a significant development, even on the definition given above. Whilst I acknowledge the need to avoid setting the bar too high by excluding matters that could not reasonably have been known, even if they can be said to be internal to the party seeking the variation, I am also conscious that the bar must be sufficiently high to encourage a rigorous approach to costs budgeting at the outset, otherwise a potential paying party cannot have the reasonable assurance that a costs budget is supposed to bring as to its potential liability in the event of an adverse costs order.

1. 1. On balance, the Claimants fail to discharge the burden of proving a significant development such as to justify a revision to the budget pursuant to CPR3.15A.

1. 1. Had I been persuaded that this was a significant development, I would have concluded that the application had been made with sufficient promptness to permit an order to be made. Whilst the Claimants could have moved with greater speed, as always there is a balance to be struck between the need on the one hand to raise the issue with the other side so that it can be considered, if necessary by the making of a consent order, and on the other, to bring the case before the court if it cannot be agreed. I am not satisfied that the Claimants here have fallen outside the reasonable range of promptness.

CONCLUSION

1. For these reasons, I dismiss the application. The parties should seek to agree an order dealing with any consequential matters, failing which a further hearing will be convened.