In discussing the control of costs expenditure, it is almost trite to cite paragraph 13 of Kazakhstan Kagazy plc v Zhunus [2015] EWHC 404 (Comm), ‘…What is reasonable and proportionate in that context must be judged objectively. 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…’.  

In Discovery Land Company, LLC & Ors v Axis Specialty Europe SE [2021] EWHC 2146 the Commercial High Court of Justice was tasked with considering whether this strict approach was appropriate to adopt within the costs management process.

CPR 3.17

Before addressing Discovery Land however, it is necessary to review CPR 3.17 (rules informing the costs case management decision process), rules which have a particular impact in assessing costs under CPR 3.18. CPR 3.17 is as follows:

3.17

(1) When making any case management decision, the court will have regard to any available budgets of the parties and will take into account the costs involved in each procedural step.

(2) Paragraph (1) applies whether or not the court has made a costs management order.

(3) Subject to rule 3.15A, the court—

(a) may not approve costs incurred up to and including the date of any costs management hearing; but

(b) may record its comments on those costs and take those costs into account when considering the reasonableness and proportionality of all budgeted costs.

In determining the proportionality of all budgeted costs, pursuant to CPR 3.17(1)/(2), the Court may take costs into account any available costs budget, this consideration being within the context of PD 3E (primarily the para 10 standard budget assumptions).

CPR 3.17(3)(a) further clarifies that the Court may not approve costs incurred up to and including the date of the relevant costs management hearing (the ‘incurred costs’). However, it may nevertheless make a comment as to any such costs incurred before the date of any CMC/CCMC (CPR 3.17(3)(b)).

The rule in 3.17(3) is further subject to rule 3.15A – under rule 3.15a the Court may consider any Precedent T revision document, this being the new October 2020 introduced framework for revising budgets where there have been significant litigation developments (3.15A(1)).

CPR 3.17(4) finally clarifies that interim application costs may be recoverable in addition to the budgeted costs.

These rules on cost management orders are particularly significant for those preparing electronic bills of costs post 6 April 2018. Such rules changes more generally reflecting the living and breathing nature of the CPR e.g. the more recent changes which came into force on 6 April 2021 following The Civil Procedure (Amendment) Rules 2021.

Discovery Land Company, LLC & Ors v Axis Specialty Europe SE

Turning to the facts in Discovery Land, following the Defendant’s provision of a professional indemnity policy to the Claimants, the Claimants sought to rely upon the policy and sought a declaration to this effect. The Defendant’s contested liability and sought to invoke an exclusion owing to the dishonesty of an affiliated party.

At the costs management hearing, the Court firstly reviewed the general powers available to control costs budgets by way of the CPR 3.15 Costs Management Orders. The guidance in Kazakhstan Kagazy plc was rejected by the Court ‘…Expenditure which is within a reasonable and proportionate range is still reasonable and proportionate even if it is not at the lower end…’. The ‘lower end’ aspect of the guidance was thus, diluted at the outset before dealing with the specifics of the challenges raised.

Specific concern was raised with the level of costs incurred/estimated within the disclosure phase and otherwise more generally within the costs budget. Disclosure phase costs stood at £624,781.99 for the Defendant as against £89,230 for the Claimants and this was taken by the Claimant to evidence disproportionality and a need to significantly limit future costs, given the level of costs already incurred.

Notwithstanding the Defendant’s costs exceeding the Claimants’, the explanation provided by the Defendant was accepted, setting the grounding for resistance from the Court in terms of recording any CPR 3.17(3)(b) comments on those costs.

Having reviewed the authorities as to CPR 3.17(3)(b), the Court preferred the guidance provided in Richard v The British Broadcasting Corporation [2017] EWHC 1666 (Ch). They therefore adopted a cautious tone as to recording of such comments, the same being limited to cases where inadequate explanation of the incurred costs had been provided . Nevertheless it is clear to note that the Court may not approve such incurred costs and thus refraining from making a comment cannot be treated as being akin to approval.

As to the estimated costs, various reductions were made to Disclosure, Trial Preparation, and contingent application costs; however, conversely, the costs of Pre-Trial Review and Trial were approved. The Court demonstrated restraint in reducing the Defendant’s costs budget. The argument that the costs were disproportionate owing to the fact that they exceeded the Claimants’ own Precedent H being rejected in that a reasonable explanation for the costs had been provided and otherwise, given the fact that the Claimants’ may have in fact under-budgeted.

As this decision demonstrates, cost budgeting is a broad-brush exercise. With this in mind, the Court freed itself of the strict approach set out in Kazakhstan Kagazy plc. They adopted a cautious tone with regards to CPR 3.17(3)(b) comments and otherwise entertained the view that whilst costs may initially appear disproportionate, sometimes there is a reasonable explanation for such costs.

How can ARC Costs Assist?

The ARC Costs team of Costs Draftsmen and Costs Lawyers are always happy to help with costs challenges.

Whether you have been ordered to pay costs or wish to recover your costs, we can assist.

We can be contacted via email at info@arccosts.co.uk, or by telephone on 01204 397302. For more information on legal costs, please find out more about our speciality areas of expertise and our services on our legal costs page.

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