The battle to reduce the costs of litigation

It used to be the case that a party to litigation could decide for themselves how much they wanted to pay their lawyers and how much time they wanted them to put into the case. The only question was how much of this could be recovered from the other side if you were successful.

In the post-Jackson climate, the picture is not so simple. There are signs that the role of judges now involves preventing parties from incurring disproportionate costs, and is not limited to controlling the level of costs recovered by the winner from the loser. This will have significant consequences for the way litigation needs to be conducted, even in large commercial cases which are presently exempted from costs budgeting.

This has in theory been the case since the introduction of the overriding objective with the advent of the Civil Procedure Rules in 1999. CPR 1.1(2) has always said that dealing with a case justly includes, so far as is practicable, ensuring that the parties are on an equal footing and saving expense. The primary importance of cost has been underlined by the amendment to CPR 1.1(1) in April 2013 – the role of the CPR is now to enable the court to deal with cases justly and at proportionate cost.

Case management to limit costs
Various new rules mean that the court can limit a party’s expenditure on legal fees. Whether or not costs budgeting is required, the judge can limit the number of witnesses a party can rely on, prevent them from relying on expert evidence and limit the scope of their disclosure.

Unlike the costs budgeting rules, some case management rules that came into effect in April 2013 apply to cases begun before that date. For example, CPR 32.2(3) enables the court to limit the issues to which factual evidence may be directed, to identify the witnesses who may be called or whose evidence may be read and to limit the length or format of witness statements (see the recent example in MacLennan v Morgan Sindall (Infrastructure) Plc).

A new provision in CPR 35.4 beefs up the court’s powers to control expert evidence. It requires a party to provide an estimate of the costs of the proposed expert evidence before the court gives permission to call an expert or put in evidence an expert’s report, giving judges a means of excluding disproportionate expert evidence where no budget is required. In Lewis v Narayanasamy permission was set aside because no costs information had been provided to the court.

Disclosure
Disclosure is the acknowledged elephant when it comes to cost. In 2007, when disclosure was still the elephant in the room, Jacob LJ upheld an order that there should be no disclosure in a patent action (Nichia Corp v Argos Ltd). In his prescient dissenting judgment he said:

“the time has now come to hold that proportionality requires that normally such disclosure should not be ordered. Only in the largest kind of case, where the legal costs, although very substantial, form a small proportion of what is at stake, does what is involved by disclosure of this sort of material become proportionate. It is no good having the overriding objective, the specific requirement of dealing with a case in ways which are proportionate and a specific power to dispense with standard disclosure otherwise”.

This approach was recently endorsed by Tugendhat J in Boulter v Fox when he refused an application for disclosure. Echoing Jacob LJ’s comment that “better justice is achieved by risking a little bit of injustice”, he said:

“Of course, there is always a risk of a court reaching a result that is wrong in the sense that it is not the result that would have been reached if indefinite further resources had been devoted to the case. But it is not the law that unlimited resources are to be devoted to a case. If it were, then the burden on litigants would be such that many cases could not be brought at all, and justice (including any vindication to which a claimant might be entitled) would be denied on that account”.

A party’s duty to keep costs down
In his Birkenhead lecture last year, the Lord Chief Justice endorsed the approach taken in Truscott v Truscott; Wraith v Sheffield Forgemasters (1997). Parties, in that case trade unions and insurers, are under a duty to keep the costs of litigation down. A consequence of this is that they either instruct local solicitors, or expect to recover only local rates if they instruct London solicitors where it is not necessary to do so.

The Lord Chief Justice foresees increased competition from a truly national market reducing London prices, resulting in “a benefit to society as a whole as it will increase the affordability of justice”. Noting the huge difference in rates between London lawyers and the rest of the country, he wonders how the courts will approach the duty to avoid higher costs. Will it now be seen as one that requires instructing parties to consider how best to ensure that costs are proportionate to the claim?

Hourly rates
Hourly rates are going to be a significant battleground in 2014. Foskett J’s Civil Justice Council (CJC) committee is expected to make recommendations to the Master of the Rolls on guideline hourly rates by the end of March. The City of London Law Society’s response to the consultation illustrates the deep divide concerning what it describes as the economic and social issue about what profit solicitors' firms should make:

“The CJC should be seeking to identify market rates for solicitors' services so that guideline rates reflect what litigants actually pay; the CJC should not be setting its own rates based on its subjective view as to what profit solicitors should make and what successful litigants should recover in costs”.

It remains unclear whether judges should be looking at hourly rates when making costs management orders and, if they do, whether the rates can still be challenged at detailed assessment. In Troy Foods v Manton the defendant sought to appeal to the Court of Appeal against a costs management order where the judge had approved counsel’s allegedly excessive hourly rate in the claimant’s budget. Permission to appeal was granted on the basis that guidance was needed on the proper approach to be taken by costs judges at detailed assessment following approval of the receiving party's budget. The case settled so we are still waiting for guidance.

Commercial litigation
In November 2013 The Lawyer reported that the hourly rate for partners at magic circle firms had reached an all-time high of £850. The value of legal exports to the UK economy has been estimated to be worth some £4 billion per annum (see the Court fees: proposals for reform consultation paper published in December). In the past, the view has been taken that foreign parties should be entitled to spend as much on their legal fees as they wish. Indeed, in his Birkenhead speech the Lord Chief Justice expressly excluded international litigation from his comments about hourly rates and using lawyers based outside London.

The CLLS response about guideline hourly rates contends that leaving successful parties to bear an ever higher proportion of their actual costs will discourage international litigants. However, it looks as though one Commercial Court judge is not prepared to adopt a hands-off approach when it comes to costs. In Vitol Bahrein EC v Nasdac General Trading LLC a foreign claimant was seeking to restrain foreign defendants from joining it to proceedings in the United Arab Emirates even though all agreed justice could be done there or in England. Both sides’ costs for a single day’s hearing totalled more than £400,000.

After describing the costs as eye-watering, Males J said “these figures on both sides represent charging on an epic scale. Lawyers are of course free to agree fees with their clients according to what the market will bear. Costs are grossly disproportionate. It is important that the message should go out loud and clear that the Commercial Court will not assess costs summarily in such disproportionate amounts merely because the figures on both sides are broadly comparable.” He limited each side’s recoverable costs to £75,000.

Budgeting in commercial cases
The Commercial Court was clear from the start that it did not wish to introduce budgeting and was exempted from the budgeting proposals by Jackson LJ. In order to discourage forum shopping between the specialist courts dealing with commercial claims, a last-minute exemption from mandatory budgeting was extended to the Chancery Division, Technology and Construction Court, and Mercantile Courts where, at the date of the first case management conference, the sums in dispute exceed £2 million.

A consultation on exemptions from budgeting closed on 20 July 2013 and a response had been expected by now. The delay can reasonably be attributed to the strength of feeling about mandatory budgeting. For example, the sub-committee appointed to look into the issue by the Civil Procedure Rule Committee indicated at the outset that it was unhappy about the Admiralty and Commercial Courts’ blanket exemption from budgeting (see Litigation Futures). In contrast, the Technology and Construction Solicitors Association (TeCSA) is opposed to mandatory budgeting in the specialist commercial courts.

As a postscript, the potentially huge increase in court fees proposed for litigants in commercial money claims in the recent Court fees: proposals for reform consultation is likely to be another battleground for commercial litigants.

What does this mean in practice?

• In the present economic climate, there is likely to be continued judicial comment about examples of excessive and disproportionate fees paid to lawyers. In some cases, this may lead parties to instruct different lawyers (see, for example, Lumsdon v Legal Services Board).
• Even where budgeting is not required, and independently of the issue of recovery of costs between parties, the courts are increasingly likely to use their case management powers to prevent a party from incurring disproportionate costs.
• Parties that conduct litigation too aggressively and increase the cost of a case in the process may be penalised for breaching the overriding objective (see BMG (Mansfield) Ltd v Galliford Try Construction Ltd) or find themselves paying costs on the indemnity basis (see Excalibur Ventures LLC v Texas Keystone Inc).
• Criticism of parties using London lawyers where it is not necessary is likely to be well-received by judges and could lead to dramatic reductions of receiving parties’ bills at assessment and slashed budgets.
• The arguments about the effect of budgeting and hourly rates on international litigants will be a matter of concern but probably not enough to exempt the specialist commercial courts from rules applying in other courts. Professor Dominic Regan said on his blog in December that budgeting will probably be made universal in multi-track cases – and his predictions often come true.