Costs - Costs management orders

Learning Outcomes

This article explains the process of costs management in civil litigation, focusing on Costs Management Orders (CMOs). After reading this article, you will understand the purpose of costs management, the requirements for preparing and filing costs budgets (Precedent H), the court's role in making CMOs, and the consequences of non-compliance. This knowledge is essential for advising clients on litigation costs and following the procedural requirements of multi-track claims under the Civil Procedure Rules (CPR). Your understanding will enable you to apply these rules to SQE1 assessment questions.

SQE1 Syllabus

For SQE1, you are required to understand the court's active role in managing the costs of litigation, particularly in multi-track cases. This involves familiarity with the rules surrounding costs budgets and Costs Management Orders. Your knowledge should allow you to advise on compliance and the potential consequences of non-compliance.

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

  • The purpose and scope of costs management under CPR Part 3.
  • The requirements for filing and exchanging costs budgets (Precedent H) and budget discussion reports (Precedent R).
  • The specific time limits for filing costs budgets (CPR 3.13).
  • The nature and effect of a Costs Management Order (CMO) made by the court (CPR 3.15, 3.18).
  • The significant sanction for failing to file a costs budget on time (CPR 3.14).
  • The importance of proportionality in the costs management process.

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 track does costs management primarily apply?
    1. Small claims track
    2. Fast track
    3. Multi-track
    4. All tracks equally
  2. What is the usual sanction if a party fails to file a costs budget by the deadline specified in CPR 3.13?
    1. The party must pay the opponent's costs immediately.
    2. The party's budget is treated as comprising only the applicable court fees.
    3. The party's statement of case is automatically struck out.
    4. The party must attend an extra case management conference.
  3. What is the primary purpose of a Costs Management Order (CMO)?
    1. To fix the exact amount of costs payable at the end of the case.
    2. To approve or revise the parties' budgeted costs for each phase of the litigation.
    3. To penalise parties for spending too much on legal fees.
    4. To dispense with the need for detailed assessment.

Introduction

Managing the costs of civil litigation is a fundamental aspect of the court's role under the Civil Procedure Rules (CPR). The overriding objective requires cases to be dealt with justly and at proportionate cost (CPR 1.1). Costs management, primarily applicable to multi-track claims, is a key mechanism through which the court actively controls litigation expenditure. This involves parties preparing and exchanging detailed costs budgets, which the court then reviews and manages, often by making a Costs Management Order (CMO). Understanding this process is important for advising clients and ensuring compliance with court requirements.

The Framework for Costs Management

The rules governing costs management are principally found in CPR 3.12 to 3.18 and Practice Direction 3E. The primary aim is to ensure that the costs incurred by parties throughout the litigation process are proportionate to the value, complexity, and importance of the claim.

Costs management generally applies to most multi-track cases commenced on or after 1 April 2013, subject to certain exceptions (e.g., claims valued at £10 million or more, or specific types of proceedings like those involving children).

Key Term: Costs Management
The process by which the court manages both the steps to be taken and the costs to be incurred by the parties to any proceedings, particularly multi-track claims, to ensure proportionality.

The process begins with the parties preparing and exchanging detailed estimates of their likely future costs.

Costs Budgets (Precedent H)

Unless the court orders otherwise, all parties (except litigants in person) in cases subject to costs management must file and exchange costs budgets.

Key Term: Costs Budget
A detailed statement estimating the costs (solicitor's fees and disbursements) that a party anticipates incurring for each stage of the litigation process. It must be prepared in a specific format.

The required format for a costs budget is Precedent H, as annexed to Practice Direction 3E. It breaks down costs into distinct phases of litigation:

  • Pre-action costs
  • Issue/Statements of Case
  • Case Management Conference (CMC)
  • Disclosure
  • Witness Statements
  • Expert Reports
  • Pre-Trial Review (PTR)
  • Trial Preparation
  • Trial
  • ADR/Settlement discussions
  • Contingencies (for anticipated but uncertain steps)

The budget distinguishes between costs already incurred up to the date of the budget and estimated future costs for each phase. Assumptions supporting the estimated costs must also be stated.

Key Term: Precedent H
The specific mandatory form prescribed by the CPR for presenting a costs budget to the court and other parties.

Filing Deadlines (CPR 3.13):

  • For claims valued at less than £50,000, the budget must be filed with the directions questionnaire.
  • For any other case, the budget must be filed not later than 21 days before the first case management conference (CMC).

Budget Discussion Reports (Precedent R):

After exchanging budgets, parties must discuss them and seek agreement. They must then file a budget discussion report, using Precedent R, no later than 7 days before the first CMC. This report details which figures are agreed, which are not agreed, and provides brief reasons for any disagreement.

Key Term: Budget Discussion Report
A report (using Precedent R) filed before the CMC, outlining the extent to which parties have agreed or disagreed on the figures presented in each other's costs budgets.

Costs Management Orders (CMOs)

At the case management conference (often referred to as a Costs and Case Management Conference or CCMC when costs are considered), the court reviews the parties' budgets. The court's role is not to conduct a detailed assessment but to consider whether the budgeted costs fall within a range of reasonable and proportionate costs for each phase.

The court may then make a Costs Management Order (CMO).

Key Term: Costs Management Order (CMO)
A court order which records the extent to which the parties' budgeted costs are agreed or approved by the court. It manages the recoverable costs for the remainder of the litigation.

A CMO will record which parts of the budget are agreed between the parties and, for those parts not agreed, record the court's approval following any revisions made by the judge (CPR 3.15). The court will focus on the estimated future costs but may comment on incurred costs, considering their reasonableness and proportionality when approving the budget for future phases (PD 3E, para 7.4).

The effect of a CMO is significant. When the court later assesses the costs recoverable by the winning party (on the standard basis), it will not depart from the receiving party's last approved or agreed budget unless satisfied that there is a good reason to do so (CPR 3.18). This provides parties with greater certainty about potential cost recovery.

Worked Example 1.1

Alpha Ltd is suing Beta Ltd in a complex contractual dispute valued at £200,000. Both parties file costs budgets 21 days before the first CCMC. Alpha Ltd's budget estimates £40,000 for the disclosure phase. Beta Ltd's budget estimates £25,000 for disclosure. In their Budget Discussion Report, Beta Ltd disputes Alpha Ltd's disclosure estimate as disproportionate.

At the CCMC, the judge reviews the budgets and the nature of the likely disclosure exercise. The judge considers Alpha Ltd's estimate high given the issues and likely volume of documents.

Answer: The judge is likely to revise Alpha Ltd's budgeted costs for disclosure downwards when making the Costs Management Order. For example, the judge might approve only £30,000 for Alpha Ltd's disclosure phase, deeming this a more reasonable and proportionate figure. Alpha Ltd will then know that, if successful, they are unlikely to recover more than £30,000 for disclosure costs unless they can later show a good reason for departure.

Consequences of Non-Compliance

The CPR imposes strict consequences for failing to comply with costs management rules.

Failure to File a Budget (CPR 3.14):

The most severe sanction relates to failing to file a costs budget on time.

Key Term: CPR 3.14 Sanction
The rule stating that unless the court orders otherwise, a party failing to file a costs budget by the deadline will be treated as having filed a budget comprising only the applicable court fees.

This means the defaulting party risks being unable to recover any of their solicitors' fees or disbursements (beyond court fees) from the opponent, even if they win the case and obtain a costs order in their favour. Relief from this sanction can be sought under CPR 3.9, but it is not guaranteed and requires satisfying the court based on the Denton criteria (seriousness of breach, reason for default, all circumstances).

Worked Example 1.2

Gamma Ltd is suing Delta Ltd. The case is allocated to the multi-track, and budgets are ordered to be filed 21 days before the CCMC scheduled for 1st July. Gamma Ltd's solicitor misses the deadline (9th June) and only files the budget on 20th June. Delta Ltd filed its budget on time.

At the CCMC, Delta Ltd points out Gamma Ltd's late filing.

Answer: Gamma Ltd is subject to the CPR 3.14 sanction. Their recoverable costs will be limited to court fees unless they successfully apply for relief from sanctions. They would need to make a prompt application under CPR 3.9, explaining the reason for the delay and satisfying the Denton criteria. The court has discretion, but relief is not automatic, especially if no good reason is provided.

Budget Revisions (CPR 3.15A):

Once a CMO is made, parties must comply with their approved budgets. If unforeseen "significant developments" occur during the litigation which warrant changes to the budget, the party must promptly revise their budget (using Precedent T) and submit it to the other parties for agreement. If not agreed, the revised budget must be submitted to the court for approval. Failure to do so means the party risks not recovering costs exceeding the originally approved budget.

Exam Warning

Remember the strict deadline under CPR 3.13 for filing costs budgets. Missing this deadline triggers the severe sanction under CPR 3.14, limiting recoverable costs to court fees only. Advise clients of the importance of providing timely instructions to allow for budget preparation. Also, be aware that the court's approval of a budget at a CCMC does not guarantee recovery of that amount at detailed assessment; it sets a cap, and costs must still be shown to have been reasonably and proportionately incurred up to that cap.

Strategic Importance

Costs management significantly influences how litigation is conducted. Parties must plan their strategy within the financial constraints of their likely budget. Decisions regarding the scope of disclosure, the number of witnesses, or the instruction of experts will be heavily influenced by the approved or anticipated budget figures. The transparency provided by exchanged budgets can also facilitate settlement discussions, as parties have a clearer picture of the potential costs liability.

Revision Tip

Focus on the interaction between CPR 3.13 (filing deadlines), CPR 3.14 (sanction for default), CPR 3.15 (CMOs), and CPR 3.18 (effect of CMO on assessment). Understand that proportionality is the guiding principle. Use flowcharts or tables in your revision to map out the process and consequences.

Key Point Checklist

This article has covered the following key knowledge points:

  • Costs management aims to control litigation costs, ensuring they are proportionate, primarily in multi-track cases.
  • Parties (except litigants in person) must file and exchange detailed costs budgets using Precedent H by strict deadlines (CPR 3.13).
  • Parties should discuss budgets and file a Budget Discussion Report (Precedent R) before the first CCMC.
  • Failure to file a budget on time results in a severe sanction under CPR 3.14, limiting recoverable costs to court fees only, unless relief is granted.
  • The court reviews budgets at a CCMC and may make a Costs Management Order (CMO) approving or revising the budgeted costs (CPR 3.15).
  • A CMO provides greater certainty, as the court will generally not depart from the approved budget at assessment unless there is good reason (CPR 3.18).
  • Approved budgets can only be varied following a significant development in the litigation, usually requiring court approval (CPR 3.15A).

Key Terms and Concepts

  • Costs Management
  • Costs Budget
  • Precedent H
  • Budget Discussion Report
  • Costs Management Order (CMO)
  • CPR 3.14 Sanction
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