In all legal proceedings, controlling costs is essential to ensure just litigation and proportionate costs pursuant to the Overriding Objective in CPR 1. 3.15 of the Civil Procedure Rules (CPR) outlines the rules in regards to costs management orders (CMOs), which give the Courts power to manage budgeted costs for each party. CPR 3.15 aims to maintain financial discipline in litigation while upholding the overriding objective of fairness and efficiency.

CPR 3.15 and the Court’s Power to Manage Costs

CPR 3.15 (1) states:

“In addition to exercising its other powers, the court may manage the costs to be incurred (the budgeted costs) by any party in any proceedings.”

Under this provision, the Court has the authority to manage a party’s budgeted costs in any proceedings. This power is exercised in addition to the court’s general case management powers.  It should be noted that this also means that any costs incurred prior to the date of any Costs and Case Management Conference, and pre-dating the CMO, cannot be managed the Court i.e. retrospective caps cannot be placed on costs.  That said, commentary can be passed on these incurred costs and recorded in any CMO.

CPR 3.15 (2): Costs Management Orders

A Costs Management Order (CMO) is a specific tool that regulates legal costs and expenses. According to CPR 3.15(2), a CMO is issued if costs budgets have been filed and exchanged, unless the court is convinced that the case can proceed justly and at proportionate cost without one.

CPR 3.15(2) states the following:

“The court may at any time make a ‘costs management order’. Where costs budgets have been filed and exchanged the court will make a costs management order unless it is satisfied that the litigation can be conducted justly and at proportionate cost in accordance with the overriding objective without such an order being made. By a costs management order the court will—

(a) record the extent to which the budgeted costs are agreed between the parties;

(b) in respect of the budgeted costs which are not agreed, record the court’s approval after making appropriate revisions;

(c) record the extent (if any) to which incurred costs are agreed.”

A Costs Management Order can be used to achieve the following:

• Record agreed budgeted costs: The court notes which costs have been mutually agreed upon by the parties.
• Approves or revises disputed budgeted costs: The court reviews any contested budgeted costs and either approves or amends them accordingly.
• Records agreed incurred costs: The court may also acknowledge costs already incurred to the extent they have been agreed upon.

CPR 3.15 (3) Ongoing Budget Control

If a Costs Management Order is issued, the court retains control over the parties’ budgets concerning recoverable costs (CPR 3.15(3)). This provision ensures that litigation expenses remain within the agreed scope, preventing disproportionate costs from escalating unchecked.

In practical terms, this means on conclusion of the litigation, the successful party which as a costs order in their favour, cannot recover costs in excess of the approved Costs Budget, unless the Court permits otherwise under the “good reason” rule.

CPR 3.15 (4):Comments on Incurred Costs

Even in the absence of a Costs Management Order, CPR 3.15(4) permits the Court to record its observations regarding incurred costs in a case management order. These remarks are relevant during subsequent costs assessments.

Comments rarely take the form of actual approval of incurred costs, but if a Court is concerned by the level of costs incurred to date, they may record a preliminary consideration that costs pre-dating the CMO appear disproportionate or excessive.  This can have significant adverse impact upon costs recovery on the conclusion of any costs assessment.

CPR 3.15 (5): Limits on Recoverable Costs for Budgeting

To prevent excessive costs associated with cost budgeting, CPR 3.15(5) sets recoverable limits:

• The cost of initially completing Precedent H, the mandatory form for costs budgets, is capped at the higher of £1,000 or 1% of total incurred and budgeted costs.
• Other costs associated with the budgeting and costs management process are limited to 2% of total incurred and budgeted costs.

(Practice Direction 3D, which provides guidance on costs budgeting.)

Practically speaking, the actual recoverable amounts under the 1% and 2% rules are not known until costs have been assessed at the conclusion of the costs assessment process.  This is because the level of incurred costs are likely to be reduced to some extent on assessment, such that the relevant budgeting and costs management % figures may adjust downwards dependant upon actual recovery.

CPR 3.15 (6): Future Budget Reviews

The Court has the discretion to establish a timetable or issue directives for future budget reviews (CPR 3.15(6)). This ensures that costs management remains responsive to any changes in litigation circumstances.

Something that can arise in more complex litigation, is that budgets are only partially set for a certain number of phases, say up to and including Expert Reports, with work related to PTR and Trial deferred for approval at a later date once more information comes to light as to what will be needed at the final hearing.

On split Trial matters, for instance in relation to liability being heard as a preliminary issue, the Budget/Costs Management Order should only apply to the preliminary Trial in the first instance, and separate Budgets will need to apply for any subsequent Trial e.g. in relation to settling quantum issues, once the liability issue has been resolved.

CPR 3.15 (7): Re-Filing and Re-serving of Approved Budgets

Once an approved or agreed budget is achieved between the parties, or approved by the Court, CPR 3.15(7) mandates that the budget must be re-filed and re-served in the approved format. This updated budget must also be annexed to the relevant order that approves the budgeted costs.

Only the front sheet is required, and this should record the gross amount approved for each phase of the budget, rather than it being split between profit costs and disbursements, as per the original Precedent H.

CPR 3.15 (8): Scope of the Court’s Role in Budgeting

CPR 3.15(8) clarifies that a costs management order concerns only the totals for each phase of the budget. The court does not fix or approve hourly rates within the costs management hearing, or how the specific costs of any phase should be distributed/spent. Instead, the initial detailed costs calculations serve as reference points to help the court establish a reasonable budget for each phase, but the allowance for each phase is ultimately left to the discretion of each party as to how it will be spent.

“(8) A costs management order concerns the totals allowed for each phase of the budget, and while the underlying detail in the budget for each phase used by the party to calculate the totals claimed is provided for reference purposes to assist the court in fixing a budget, it is not the role of the court in the costs management hearing to fix or approve the hourly rates claimed in the budget.”

Variation of Costs Budgets

Litigation is often unpredictable, and significant developments may necessitate budget revisions. CPR 3.15A provides rules for modifying budgets in response to such changes.

Under CPR 3.15A(1), a party must revise its budget upwards or downwards if significant developments justify such amendments.

“(1) A party (“the revising party”) must revise its budgeted costs upwards or downwards if significant developments in the litigation warrant such revisions.”

If a party wishes to vary the budget, they should communicate the variation promptly to all parties involved, and subsequently submit it to the court (CPR 3.15A(2)).

“(2) Any budgets revised in accordance with paragraph (1) must be submitted promptly by the revising party to the other parties for agreement, and subsequently to the court, in accordance with paragraphs (3) to (5).”

CPR 3.15A(3) sets out the procedure for submitting revised budgets:

“(3) The revising party must—

(a) serve particulars of the variation proposed on every other party, using the form prescribed by Practice Direction 3D;

(b) confine the particulars to the additional costs occasioned by the significant development; and

(c) certify, in the form prescribed by Practice Direction 3D, that the additional costs are not included in any previous budgeted costs or variation.”

Court’s Role in Approving Variations

Upon receiving the revised budget, the court may take one of the following actions (CPR 3.15A(5)):

• Approve the variation.
• Modify the proposed adjustments.
• Reject the variation.
• Schedule a further costs management hearing to discuss the changes.

“The court may approve, vary or disallow the proposed variations, having regard to any significant developments which have occurred since the date when the previous budget was approved or agreed, or may list a further costs management hearing.”

Where a variation order is granted, the court may amend the budget to account for costs already incurred after the original costs management order but before the variation order (CPR 3.15A(6)). This provision ensures fairness in cost recovery when unforeseen developments arise during litigation.

Significance of Costs Management Orders

CPR 3.15 and 3.15A play a crucial role in maintaining proportionality in litigation costs. The benefits of Costs Management Orders include:

• Prevention of excessive litigation costs: Costs Management Orders ensure that legal expenses remain reasonable by setting cost limits.
• Transparency in cost management: Parties gain clarity on their financial obligations, reducing disputes over costs.
• Enhanced efficiency in case progression: Courts can manage budgets effectively, preventing unnecessary delays due to cost-related disagreements.
• Fair allocation of resources: Costs Management Orders help parties focus their resources on substantive legal issues rather than prolonged cost disputes. 

How can ARC Costs Assist with Costs Budgeting and Compliance with CPR 3.15?

At ARC Costs, we are an independent expert team of Costs Lawyers and experienced Costs Draftsman. As such, we are able to represent Claimants or Defendants in litigation, and our input is not limited to the costs budgeting process.

In respect of CPR 3.15, we can assist with preparing your Costs Budget and assisting if a variation is required. Once filed and served, Costs Budgets still need to be agreed and approved by the Court, and we can provide assistance with settling of Budget Discussion Reports (Precedent R) as well as Budget negotiations, or providing representation at any CCMC.

If successful during litigation, you will be entitled to recover your costs, upon which we can assist in preparation of your Bill of Costs (which will need to take the Excel electronic format and be phased for any budgeted matter) and throughout the Detailed Assessment process.

For assistance with your costs related queries, contact us at info@arccosts.co.uk, or speak to one of the team by calling 01204 397302.

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