Costs that fall within court-approved budget not necessarily proportionate, court suggests

Giving permission to appeal a costs management order made under last year's Mercantile Court costs management pilot, Lord Justice Moore-Bick said that the costs judge "did not apply the correct principles" when making the order.

"Although the court will not readily interfere with the judge's decision in a matter of this kind, which essentially involves an exercise of judgment, I think it is arguable that in this case the judge did not apply the correct principles and, as a result, approved an over-generous budget in respect of some elements of costs," he said.

Instead of considering whether the individual elements of the budget were proportionate, Judge Kaye had instead "proceeded on the basis that he would approve any figure for a particular element of the claim, provided it was not so unreasonable as to render it obviously excessive or, as he put it, 'grossly disproportionate'," Lord Justice Moore-Bick said.

He added that one of the most important reasons behind the new regime was to give the parties more certainty over costs in the event that they lost the case. "That will not be effective if judges do not apply the correct principles," he said.

A new costs management regime was introduced in April. It requires most parties in civil court actions to prepare and exchange costs budgets for agreement by the court. Parties that do not file a budget will be heavily penalised. Parties can submit amendments to the budget at any time; however, approval will be at the discretion of the court. Costs recoverable by the winning party will be linked to the court-approved budget.

In his judgment, Lord Justice Moore-Bick said that as the new regime was "still in its relative infancy", proportionality would now "assume greater importance in the assessment of costs than it has in the past".

"I think it is important, therefore, to ensure that the correct principles upon which costs budgeting is to be carried out are established at an early stage, which reinforces my view that permission to appeal should be given in this case," he said.

The case has now been settled, according to reports.

Legal costs expert Keith Levene of Pinsent Masons, the law firm behind Out-Law.com, said that had the case proceeded to full appeal, judges would have had an "important opportunity" to provide guidance on how the new cost management rules should be interpreted.

"Parties now know what the new rules are, but are not sure how they will be interpreted in the absence of this guidance," he said. "It is not yet clear how courts will interpret what is 'proportionate', or how courts will carry out a detailed assessment of costs."

Referring to a ruling he handed down earlier this year in a costs dispute between The Sun newspaper and one of the social workers involved in the 'Baby P' case, Lord Justice Moore-Bick said that an approved budget should never be considered a "licence to conduct litigation in an unnecessarily expensive way".

"It follows that I do not accept that costs judges should or will treat the court's approval of a budget as demonstrating, without further consideration, that the costs incurred by the receiving party are reasonable or proportionate simply because they fall within the scope of the approved budget," he said.