COST BITES 132: INTERIM PAYMENTS FOR COSTS AND COSTS OF A CONSEQUENTIAL HEARING

In Lifestyle Equities CV & Anor v Royal County of Berkshire Polo Club Limited & Ors [2023] EWHC 2923 (Ch) Mr Justice Mellor considered issues relating to an interim payment on costs and whether a consequentials hearing should be assessed separately or  included in the costs budget.

“These considerations indicate to me that parties ought to consider when preparing their costs budgets for substantial cases where a FOO hearing is likely to be heard after hand-down of the substantive judgment, a contingent set of costs of carrying out an analysis of their costs to permit the Court to make an issue-based costs order, the contingencies being (a) the party is the winning party and (b) it is apparent in the lead up to the FOO hearing that the case is one where an issue-based costs order is likely to be made.”

THE CASE

The defendants had succeeded in defeating an action brought by the claimants. The claimant was ordered to pay the costs.  The issues considered here relate to an interim payment on account of costs and whether the costs of the separate hearing to consider the form of order should have been, or were, included in the budget.  The judge had earlier rejected the claimant’s submissions that the defendants’ costs should be reduced by a percentage and was considering the entirety of the defendants’ costs.

THE JUDGMENT ON THESE ISSUES

INTERIM PAYMENT

  1. On this issue, the Claimants reminded me of the following applicable principles, which the Defendants did not dispute and which I will apply:
  2. i)CPR r 44.2(8) provides: “Where the court orders a party to pay costs subject to detailed assessment, it will order that party to pay a reasonable sum on account of costs, unless there is good reason not to do so”.
  3. ii)C does not argue that there is good reason not to make such an order.  The question is what the “reasonable sum on account of costs” should be.

iii)               In Dana Gas PJSC v Dana Gas Sukuk [2018] 2 Costs LO 189 Leggatt LJ (completing a first instance trial) said at [6]:

“A logical approach is to start by estimating the amount of costs likely to be recovered on a detailed assessment and then to discount this figure by an appropriate margin to allow for error in the estimation.”

  1. iv)As this is a case in which costs budgeting has taken place, the impact of CPR rule 3.18 must be taken into account:

‘3.18 In any case where a costs management order has been made, when assessing costs on the standard basis, the court will –

(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 3.17(3) and recorded on the face of the order.’

  1. v)While this court is not on this hearing being asked to assess costs (and so r.3.18 does not directly arise), it is a factor to be taken into account when assessing the level of a payment on account.
  2. vi)In Thomas Pink v Victoria’s Secret [2015] Costs LR 463 Birss J concluded at [60] as follows:

‘It seems to me that the impact of costs budgeting on the determination of a sum for a payment on account of costs is very significant although I am not persuaded that it is so significant that I should simply award the budgeted sum. Bearing in mind that unless there is good reason to depart from the budget, the budget will not be departed from, but also taking into account the vagaries of litigation and things that might occur and the fact that it is, at least, possible that the assessed costs will be less, although no good reason why that is so has been advanced before me, I will make an award of 90% of the sum in the claimants budget (£644,829.10) rounded up to the nearest thousand.’

vii)             Other cases have followed the same approach of awarding 90% of the budgeted sum as a payment on account to take account of “the vagaries of litigation”. See e.g. MacInnes v Gross [2017] 2 Costs LR 243Bates v Post Office [2019] Costs LR 857Lifestyle v Amazon [2021] EWHC 721 (Ch).

viii)           Further, by rule 3.15A(1), a party “must revise its budgeted costs upwards or downwards if significant developments in the litigation warrant such revisions”, and by 3.15A(2) must “submit a revised budget promptly…to the other parties and subsequently to the court”. In Persimmon Homes v Osborne Clarke [2021] EWHC 831 (Ch) Master Kaye analysed that rule and concluded that it meant that there were two threshold conditions before a budget could be revised: first that there was a significant development, and secondly that there must have been prompt submission of a revised budget. She further held (see [134]-[136]) that if the costs for which a party sought to revise its budget had been incurred, the court had no power to then amend the budget to provide for them.  It is not open to a party therefore to seek to increase its budget to provide for costs that it has already spent.

  1. ix)Rule 3.18(b) provides that a budget may be departed from if there is good reason to do so. In Harrison v University Hospitals Coventry and Warwickshire Hospital NHS Trust [2017] 1 WLR 4456 the Court of Appeal held at [44] that this places “a significant fetter on the court’s discretion: it is deliberately designed to be so.” It decided not to proffer any guidance as to what will constitute a “good reason” for departing from an agreed or approved budget, stating that this “can safely be left to the individual appraisal and evaluation of costs judges by reference to the circumstances of each individual case.” In doing so, costs judges should be expected not to adopt a lax or over-indulgent approach to the need to find “good reason”. Costs judges should approach this topic having in mind the Denton
  2. x)While those cases give guidance about the budgeted sums, the approach in respect of incurred costs (“which are, by definition, not approved costs” per Joanna Smith QC, as she then was, sitting as a deputy judge of the TCC, in Cleveland Bridge v Sarens [2018] EWHC 827 (TCC)) must be different.  In respect of those costs, the appropriate discount is greater than that for budgeted costs, which have a degree of pre-approval.

The scope of the debate on interim payment

  1. The Defendants submit the interim payment should be £880,951.  This figure is said to be made up as follows:
  2. i)85% of the Defendants incurred costs (which were £445,706).
  3. ii)95% of the Defendants budgeted costs (which were £507,345).
  4. The Defendants reason as follows:
  5. i)In relation to incurred costs, the usual practice is to award 70% of those costs, unless there is a reason to depart from that measure.  The Defendants justify the higher percentage on the basis that:
  6. a)First, the Defendants costs are significantly lower than those of the Claimants – 70% of the Claimants Budgeted costs.
  7. b)Second, they say the Claimants accepted the Defendants’ incurred costs were reasonable in the Precedent R.
  8. ii)Overall, the Defendants suggest it is unlikely that there will be a substantial reduction in those incurred costs.

iii)               The Claimants dispute the second point, but it is clear from the Precedent R that the Claimants offered the totality of the Defendants incurred costs.  It is reasonably obvious why the Claimants agreed the whole of the Defendants budget – simply because the Claimants budget was significantly higher.

  1. iv)In relation to the recovery of budgeted costs, the Defendants point to the 90% recovery in Thomas Pink, and in other cases.  They say there is good reason to go higher than that 90% figure in the circumstances of this case:
  2. a)          First, because the Claimants agreed the Defendants budget.
  3. b)          Second, because they say that Ms Virgin’s analysis shows the budget was entirely reasonable, even if the costs actually incurred were incurred in a slightly different way to the allocations in the budget.
  4. The Claimants submit the interim payment should be £552,800.  They reach that figure by taking £260K for incurred costs and £431k for budgeted costs totalling £691k, of which 80% takes the figure to their suggested sum.
  5. For the incurred costs, £260k is 41% of the Defendants incurred costs.  The Claimants level various criticisms at the Defendants incurred costs but the volte face in the Claimants approach (agreeing 100% of the incurred costs to the percentage now offered of 41%) is remarkable.
  6. For the budgeted costs, the Claimants chip away at the total, on the basis that (a) the Defendants cannot recover costs that were not actually incurred (e.g. where they went under budget in certain phases) and cannot recover where they overspent (on disclosure and trial).  In this way, the total comes down to £478,851 from £509,845.
  7. The Claimants stick to the 90% recovery figure from Thomas Pink, which yields a total for budgeted costs of £431k.

Analysis

  1. The assessment of the sum to award by way of an interim payment is not an exact science.  In the circumstances, I am inclined to believe that the likely costs recovery for the Defendants will be relatively high.  An award of 80% of the incurred costs of £445,706 is around £356k.  90% of the budgeted costs which the Defendants are entitled to (i.e. the £478,851 figure above) amounts to just under £431k.  Those two figures total £787k.
  2. In all the circumstances, the interim payment which the Claimants must pay to the Defendants is £750,000.

The costs of this FOO hearing

  1. The Defendants served an N260 Statement of their costs for this FOO hearing, yielding a total of £58,551.35, with a request that I summarily assess these costs.  These costs were in addition to their budgeted costs.
  2. The Claimants objected to the Defendants recovering any of these costs on the basis that these costs were already included in the Defendants’ costs budget. The Claimants submit that a consequentials hearing is an entirely normal aspect of a trial and is automatically included in a budget for the Trial phase of a costs budget.  This is correct. CPR PD3D paragraph 10 and the table beneath it list out the assumptions as to what is included and excluded in each phase. The trial phase automatically includes ‘Dealing with draft judgment and related applications’.
  3. The Defendants made no application (formal or informal) to vary their costs budget to include these costs.  I note that CPR 3.18 provides that, where a costs management order has been made, when assessing costs on the standard basis, the court will (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 a good reason to do so; and (c) take into account any comments made pursuant to rule 3.17(3) and recorded on the face of the order.  Although my task is not to conduct an assessment on the standard basis, implicitly the request for summary assessment entails the application of the standard basis of assessment.
  4. In the majority of cases, the consequentials are likely to be dealt with on the giving or hand-down of the judgment.  It is only in more substantial cases (particularly in IP and Patent cases) where the practice has grown up of a separate FOO hearing which often takes place far too long after the substantive judgment has been handed down.  The assumption that the Trial phase includes ‘Dealing with draft judgment and related applications’ creates something of a trap for the winning party (assuming that the winner is readily apparent) in cases where the losing party contends that certain deductions should be made from the winning party’s costs.  The proposed deductions almost never relate to an entire phase in the costs budget.  Thus, it is frequently the case that the winning party has to carry out an analysis of its actual incurred costs, dividing them (as best it can estimate) between various issues.  This was part of the analysis conducted in Ms Virgin’s third witness statement.  By contrast, the losing party frequently incurs far less cost in addressing the costs issues.  This case is a good example, where the Claimants proposed, in Counsel’s Skeleton Argument, three % deductions amounting to an overall 20% deduction, justified on the basis of observations based on the pleadings and the opening and closing skeleton arguments, but without the provision of any evidence akin to that provided by Ms Virgin.
  5. I observe that it is very difficult to anticipate in advance how much work will be involved in the costs analysis which the winning party carries out because it depends on precisely which issues the winning party has succeeded and lost and the significance of these issues as regards costs as a whole, and, indeed, on which party actually emerges as the winner.
  6. These considerations indicate to me that parties ought to consider when preparing their costs budgets for substantial cases where a FOO hearing is likely to be heard after hand-down of the substantive judgment, a contingent set of costs of carrying out an analysis of their costs to permit the Court to make an issue-based costs order, the contingencies being (a) the party is the winning party and (b) it is apparent in the lead up to the FOO hearing that the case is one where an issue-based costs order is likely to be made.  Of course, in some substantial cases, contingency (a) may not be appropriate, in the sense that the losing party may find it necessary to prepare its own costs analysis.
  7. Reverting to this case, I also observe that it is likely to have been difficult, at the costs budgeting stage, to anticipate the application which was made at this hearing for an anti-suit injunction.  However, I should add that this is an aspect of this hearing on which the Defendants have not succeeded.
  8. Speaking generally, I have some sympathy for the Defendants because, as I related above, the costs they actually incurred were very close indeed to their budget, save for their costs of this FOO hearing.  However, on closer analysis, I note that the Trial phase of the Defendants’ costs budget assumed a 9 day trial (which included 1 day pre-reading), comprising 1 day of opening submissions, 7 days of evidence, 2 days preparation for closing submissions and 2 days of oral closing submissions).  Although these figures add up to more than 9 days in court, in fact the trial occupied 7 days in court.  Thus, it appears the Defendants underestimated their Trial costs (including consideration of the draft judgment and related applications), even though they have spent their budget.
  9. I have considered whether the length of time which I took to deliver judgment provides a good reason to depart from the costs budget, but I am not persuaded that the costs of the FOO hearing were increased to any material extent by that.  I have also borne in mind that the interim payment I have ordered is on the high side, and the fact that the Defendants did not succeed in their application for anti-suit relief.  In all the circumstances therefore, I decline to summarily assess the Defendants’ FOO costs as set out in their N260.  However, I leave open the question of whether, on any assessment which is conducted on the standard basis of the Defendants’ costs, the Costs Judge considers there is good reason to depart from the costs budget as regards these FOO costs or some part of them.