Costs budgets and the indemnity princple

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There appears to be considerable confusion as to the interrelationship between costs budgets and the indemnity principle.

The normally infallible Dominic Regan, writing in Litigation Funding magazine, said:

“Incidentally, there is no consolation for a party who, say, exceeds the budget on a given item by, for example, £10,000 – but miraculously comes in under £10,000 on another part of it. This is because of the confounded indemnity principle, which survives all assassination attempts. One cannot charge the other side more than one can charge the client, and so the underspend will not save the day.”

In similar vein, the recent Costs Law Reports newsletter said:

“It is crucial to monitor each element of the budget since swings and roundabouts do not operate here. Imagine £20,000 was approved for both evidence and disclosure respectively. The party concerned actually spends £30,000 on the former but only £10,000 on the latter. The total, £40,000, is the same as the budgeted amount but in fact only £30,000 is recoverable. Yet again the indemnity principle kicks in. Here, the client could only be charged £10,000 for disclosure so not a penny more can be sought from the paying party since he cannot be required to pay more than the sum which the client is liable to pay his solicitor for the item of work in question.”

However, the indemnity principle has nothing to do with it, as such. A costs budget does not limit the amounts a party can incur in costs but simply limits the amount they can normally expect to recover from the other side if successful (and not even that for defendants with qualified one way costs shifting in personal injury claims). A party who has a budget set at £20,000 for a given phase is perfectly free to incur costs much higher than that and can be charged the full amount by their solicitor for the work in excess of the budget (assuming they have received proper advice from their solicitors as to the likely consequences for recovery).

The reason one cannot “move” the overspend in one area to another is not because of the indemnity principle but because of the wording of the rules. CPR 3.18 states:

“In any case where a costs management order has been made, when assessing costs on the standard basis, the court will –

(a) have regard to the receiving party’s last approved or agreed budget for each phase (emphasis added) of the proceedings; and
(b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so.”

The approved budget creates not just a global cap on what can normally be recovered from the other side but also a cap on each phase of the proceedings.

Costs budgets and DBAs

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Last week Hailsham Chambers held their annual Costs Group Seminar and it was another excellent, thought provoking event. I understand an audio recording of the seminar exists and hopefully this will be made available as a podcast.

One of the questions from the floor concerned the interrelationship between DBA and costs budgets. The rules do not appear to contain any requirement to advise the other side that a matter is being funded by way of DBA, but consider the following example.

A claimant has a claim for professional negligence and the claim has a full valuation of £100,000. The DBA is set at 50% of the damages recovered. Although a court may not award the full £100,000 if the claim succeeds, it is known that this is the maximum value of the claim. The maximum the claimant can be liable for in legal costs is therefore £50,000. The indemnity principle applies to DBAs meaning the maximum costs recoverable from the other side, if the claim succeeds, is £50,000. For simplicity’s sake, let us suppose there are 10 relevant sections to Precedent H and the solicitors estimate the costs of each section at £10,000. That would give a total budget of £100,000 but the maximum the client would ever pay is £50,000. So what does the solicitor put in the budget, for each section and globally, and what figure should the court allow for each section of the budget, given it cannot allow a total of more than £50,000? (We’ll ignore the fact the solicitors would have been unlikely to take the case on based on these figures.)