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Judgement has been handed down by the Court of Appeal in the landmark costs management case of Henry v News Group Newspapers
Costs Management was identified by Lord Justice Jackson in his preliminary report as being a means by which the costs of litigation could be kept within reasonable and proportionate bounds. He wrote:
The essence of costs budgeting is that the costs of litigation are planned in advance; the litigation is then managed and conducted in such a way as to keep the costs within the budget
Following the publication of Jackson’s reports, three costs management pilot schemes were launched, one of which applied in defamation cases issued in the London and Manchester High Courts. This pilot scheme followed Practice Direction 51D.
PD 51D 5.6 provides:
When assessing costs on the standard basis, the court–
(1) will have regard to the receiving party’s last approved budget; and
(2) will not depart from such approved budget unless satisfied that there is good reason to do so.
Sylvia Henry, the Appellant, was a social worker who was involved in the Baby P case. The Sun newspaper, which is published by the Respondent, printed a series of stories about the Appellant's role in the case. The Sun launched a petition calling for the Appellant to lose her job which attracted around 1.5m signatures.
None of the stories that were published about the Appellant were true. Accordingly, she brought libel proceedings which fell under the Defamation Proceedings Costs Management Scheme.
PD 51D compelled the parties to submit costs budgets at various stages in proceedings, and both parties had done so in September 2010. These budgets had been approved at a case management conference.
Over the next eight months the Respondent had amended its Defence four times, had made a number of third party disclosure applications and had served ten supplemental lists of documents. Work done by the Appellant's solicitors on witness statements and disclosure was respectively 18 times and eight times higher than the figures given in the budget. As a result, the Appellant's solicitors exceeded their budget – by some £270,000 – but failed to advise the Respondent that they had done so.
The Respondent had also exceeded its budget but had, shortly before the matter concluded, requested a Costs Management Conference in order to address this issue.
The substantive proceedings settled shortly before trial on terms including that the Respondent pay the Appellant's costs.
On assessment, the Respondent argued that the fact the Appellant had exceeded her budget meant that she should be prevented from recovering any costs over those in the last approved budget. The matter was listed for a preliminary issue hearing before the Senior Costs Judge, Master Hurst in order to determine whether there was a “good reason” to depart from the budget figures.
Judgement in the SCCO was handed down on 16 May 2012. Master Hurst held that it was a mandatory requirement of the Practice Direction to notify one’s opponent if a budget was to be exceeded. Whilst he agreed that a significant amount of work resulted from events that arose after the budget had been set, he felt that the key question was whether the Appellant had complied with the requirements of the Practice Direction. It was concluded that, by not advising the Respondent of the likely overspend nor submitting an application to amend the costs budget, the Appellant had simply failed to engage with the process of costs management. Conversely, the Respondent had informed the Appellant that its budget was likely to be exceeded. The Master felt that “if one party is unaware that the other party's budget has been significantly exceeded, they are no longer on an equal footing, and the purpose of the cost management scheme is lost” . It was concluded that there was therefore no good reason to depart from the Appellant's budget.
Permission to appeal was granted, the matter was ‘leapfrogged’ to the Court of Appeal and Judgement was handed down on 28 January 2013.
Giving the leading judgement, Moore-Bick LJ held that Master Hurst had “misunderstood the reference … to the parties being on an equal footing and took too narrow a view as to what may amount to a good reason.”  He continued:
The object of the practice direction … is twofold: (i) to ensure that the costs incurred in connection with the proceedings are proportionate to what is at stake and (ii) to ensure that one party is unable to exploit superior financial resources by conducting the litigation in a way that puts the other at a significant disadvantage … When paragraph 1.3 speaks of the parties’ being on an equal footing it is concerned with the unfair exploitation of superior resources rather than with the provision of information about how expenditure is progressing. Paragraph 5.5 assumes that the parties will exchange information about expenditure at regular intervals, but a failure to do so does not of itself put the parties on an unequal footing … In this case neither party was financially embarrassed and in my view, whatever else may be said about the way in which the proceedings were conducted, there was no inequality of arms. 
Insofar as the Appellant's failure to comply with the obligation to exchange information regularly and her requirement to serve a revised budget in advance of a Costs Management Conference, Moore-Bick LJ was:
unable to accept that compliance with all the requirements of the practice direction is essential before a party can ask the court to depart from the approved budget. It is no more than one factor which the court may take into account in deciding whether there is in fact good reason to do so 
The manner in which the case was managed by the Court also came in for some criticism. It was held that the Court should have taken “the initiative by enquiring whether the parties’ costs were within the approved budgets”  at the various interim applications within the substantive litigation.
The fact that the Appellant had made the Respondent aware of its likely costs liability – which was far greater than was detailed within the last approved budget – during costs negotiations also militated against deciding that there was no good reason to depart from the budget: essentially, the Respondent had agreed to pay the Appellant's costs in full knowledge of the level of those costs, notwithstanding what had been outlined within her earlier budget. 
The Court further held that although “budgets are intended to provide some constraint … the budget is not intended to act as a cap, since the court may depart from it when there is good reason to do so. 
The reasons for deciding that there was a good reason to depart from the budget were summarised thus:
First, because unless the court departs from the budget the appellant will not be able to recover the costs of the action. That alone would not be enough; if it were the scheme would be otiose, but it is an important factor to the extent that on examination the court is persuaded that the costs actually incurred were reasonable and, most importantly, proportionate to what was at stake in the litigation. Allied to that is the fact that the failure of the appellant’s solicitors to observe the requirements of the practice direction did not put the respondent at a significant disadvantage in terms of its ability to defend the claim, nor does it seem likely that it led to the incurring of costs that were unreasonable or disproportionate in amount. In other words, the objects which the practice direction sought to achieve were not undermined. In those circumstances a refusal to depart from the budget simply because the appellant had not complied with the practice direction would achieve nothing beyond penalising her. That might encourage others to be more assiduous in complying with the practice direction in the future, but to penalise the appellant for that reason alone would be unreasonable and disproportionate. That is all the more so in the context of proceedings which were constantly changing in ways that, in the words of the judge below, could not be passed off as no more than a minor inconvenience. Then there is the fact that the appellant’s solicitors were not alone in failing to comply with the requirements of the practice direction. The respondent’s solicitors also exceeded their budget (admittedly not to so large an extent) and the court itself was less active than it should have been in monitoring the parties’ expenditure when the matter came before it on the procedural applications in April 2011. The failure of the respondent’s solicitors to register any protest when they were finally informed of the amount of costs incurred by the appellant suggests to me some recognition of the extent to which the development of the litigation had affected the appellant’s preparation. 
Despite it being held that there was, in this matter, a good reason to depart from the budget, a warning was given that “it will rarely, if ever, be appropriate to depart from the budget if to do so would undermine the essential object of the scheme.” 
The Court of Appeal identified the fact that the new proposed Rules 3.12-3.18 are drafted in rather stricter terms to the Practice Direction of which Henry was the subject. The new Rules “impose greater responsibility on the court for the management of the costs of proceedings and greater responsibility on the parties for keeping budgets under review as the proceedings progress” ; and Moore-Bick LJ stated that he “should expect [Courts in the future] to place particular emphasis on the function of the budget as imposing a limit on recoverable costs” 
This judgement will come as a surprise to many who had expected the Court of Appeal to take a very robust stance on costs management issues. The seemingly relaxed approach would appear to fly in the face of the efforts that are being made to reduce litigation costs and the toughening-up of the provisions for applying for relief from sanctions. Within hours of the judgement being handed down, the Law Society Gazette reported concerns that the same had 'undermined' the Jackson reforms.
The circumstances in Henry were, as the Court of Appeal somewhat understated, “rather unusual”. The huge reputational damage that was done to the Claimant along with the awkward manner in which the Respondent conducted the case have evidently weighed heavily on the mind of the Lords and Lady Justices who heard the matter in the Court of Appeal, as they did with Master Hurst in the SCCO.
The Court of Appeal have made it clear that it will only be in rare circumstances that the Court will depart from budgets when assessing costs. The fact that a party will not recover its costs will not be sufficient to cause a departure. The preparation of an accurate budget and the ensuring that budgets are adhered to when conducting a case are no less important following the Court of Appeal’s ruling than they were following the SCCO’s judgement.
On a final note, the Respondent attempted to adduce an argument in terms that a receiving party could not ask the Court to depart from a budget if that budget was plainly inadequate. Due to the very late notice given that this argument was to be raised, the Court of Appeal refused to hear the same. As such, this question remains unresolved.