The defendant costs specialists

Cost of drafting Precedent H

By on Aug 20, 2015 | 8 comments

PD 3E para.7.2 is a deceptively simple provision:

“Save in exceptional circumstances-

(a) the recoverable costs of initially completing Precedent H shall not exceed the higher of £1,000 or 1% of the approved or agreed budget”

Without any further qualification, the £1,000 figure must be taken to be inclusive of any success fee or VAT claimed. (Readers will recall a similar issue arose with the first version of the rules concerning the £1,500 provisional assessment cap. It required an amendment to allow for VAT in addition but remains inclusive of any success fee.) This means that for a costs budget of up to £100,000, the base costs recoverable (assuming a 100% success fee and VAT are claimed) would be limited to £416.67 for preparing Precedent H.

The 1% figure is more problematic.

Again, without qualification, this must be taken to include VAT and any success fee. However, Precedent H expressly excludes VAT and success fee. This would appear to mean, for example, that for an approved or agreed budget totalling £150,000 the recoverable costs are limited to £1,500 fully inclusive, even if with success fee and VAT the recoverable costs at the end of the case (once VAT and success fee is allowed) might be well in excess of £300,000.

The problems do not stop there. What is the total of the approved or agreed budget?

As explained in Cook on Costs 2015:

“There appears to be some confusion as to what constitutes the ‘approved budget’ for the purposes of the percentage calculation. As the court may only budget costs to be incurred, it seems clear that the percentage is only of the sum approved by the court/agreed by the parties as the ‘to be incurred’ costs within those phases budgeted. This view is supported by the fact that CPR PD 3E, para 7 refers back to CPR 3.15. CPR 3.15(1) makes it clear that a costs management order may only be made in respect of costs to be incurred and CPR 3.15(2) makes it clear that budget for these purposes relates to the agreed or court approved figure after revision by the court. As the court cannot revise ‘incurred’ costs’, then the agreed or approved budget seems to be “only the figures included in any costs management order.”

So, for example, a budget is prepared totalling £200,000 (excluding VAT and success fee). Of this, £50,000 represents costs already incurred and £150,000 costs to be incurred. If the budget is approved/agreed in full, the 1% is calculated on the £150,000. This equates to base costs recoverable (assuming a 100% success fee and VAT are claimed) limited to £625. All the work undertaken calculating the incurred costs is irrecoverable.

Since writing the above post, but before posting, the Senior Costs Judge Master Gordon-Saker handed down judgment in BP v Cardiff & Vale University Local Health Board [2015] EWHC B13. In relation to the above issue, he stated:

“In my view the caps imposed by paragraph 7.2 of Practice Direction 3E include additional liabilities but do not include value added tax. In practice the only additional liability that will be relevant is a success fee.

It seems to me that value added tax also falls within the expression ‘recoverable costs’. As between the receiving party and its solicitor value added tax is tax for which the solicitor must account. As between the paying party and the receiving party it is not tax but a sum recoverable by the receiving party under the indemnity provided by the costs order (i.e. costs).

On that basis the capped ‘recoverable costs’ would include both success fees and value added tax. However it would seem highly unlikely that the intention of the Civil Procedure Rule Committee was not to follow the only other example where a cap is imposed: CPR 47.15(5). The cap on the costs of provisional assessment is £1,500, including additional liabilities, but excluding value added tax and any court fee.”

Although Master Gordon-Saker may well be correct as to what the intention of the Rules Committee would have been if they had given any thought to the issue, the fact remains that the wording of the rules is silent as to VAT being payable in addition and has not, yet, being amended to mirror the wording of the rules concerning the provisional assessment costs cap.

Master Gordon-Saker does share my views that VAT is an item of costs (thus making the £75,000 provisional assessment cap inclusive of any VAT).

    8 Comments

  1. “All the work undertaken calculating the incurred costs is irrecoverable”

    Utter tosh and nonsense Simon! I agree, where a budget is agreed or approved, then the recoverable fee for the excercise for the future costs, is capped at 1%. We will agree to disagree presently on your interpretation of that including vat and success fee (as you say, the budget excludes them specifically)

    The fee for calculating the costs prior to the budget however, are completely outside the process – it is the same as when drawing a statement of incurred costs in any other circumstance, and they are recoverable as a completely separate charge, on a time spent basis.

    Whereas this may come as a blow to certain Defendant negotiators, and a bigger blow to certain foolish Claimant firms who agreed to limit their budget drafting charges to 1% in total (they were warned!), your own argument proves the point – save for your nonsense conclusion there is no recovery at all, with respect

    Anonymous

    20th August 2015

  2. Anonymous @ 11.01am, re-read PD 3E para.7.2(a): “the recoverable costs of initially completing Precedent H shall not exceed…”

    Unless you are detailing your incurred costs on a document other that Precedent H, and the court is accepting your unusual approach, I am afraid work done including incurred costs is covered by the cap. The wording of this aspect, for once, is absolutely clear.

    Simon Gibbs

    20th August 2015

  3. to quote you:-

    “As the court may only budget costs to be incurred, it seems clear that the percentage is only of the sum approved by the court/agreed by the parties as the ‘to be incurred’ costs within those phases budgeted. This view is supported by the fact that CPR PD 3E, para 7 refers back to CPR 3.15. CPR 3.15(1) makes it clear that a costs management order may only be made in respect of costs to be incurred and CPR 3.15(2) makes it clear that budget for these purposes relates to the agreed or court approved figure after revision by the court. As the court cannot revise ‘incurred’ costs’, then the agreed or approved budget seems to be “only the figures included in any costs management order.”

    you appear with respect then to use this to limit, in your example, the cost of drawing the budget, only to the future cost (in your example on £150k of a £200k budget) and nothing for the incurred cost.

    It does however follow from the same logic as expressed in Cook, that as incurred costs are not part of the budget, then they are not part of the cap. Your suggestion it is done for free, simply does not follow

    I know of many Judges in many Courts whom accept this as a separate and fee bearing exercise on exactly the same Principal. It is not necessary to present a seperate bill as you suggest, just as you do not need to do with an N260, however certain Courts now ask for a semi detailed bill for the incurred costs separately to be provided with the budgets in any event

    Anonymous

    20th August 2015

  4. The £1000 cannot include VAT or additional liabilities courtesy of the official Precedent H guidance.

    This states that the cost of preparing the budget must be in the budget CMC Phase.

    If they are in the budget, it follows they cannot include VAT or S/F.

    If the £1000, say, did include a success fee how would it be in the budget without giving advance notice of said success fee? It can’t.

    Consequently I win the internet.

    Me and my Cat

    20th August 2015

  5. I did say that, until the true nature of VAT vis-à-vis Costs is settled once and for all, then everybody will be endlessly puling in all directions.
    I accept the present posts encompass wider issues than this however.

    Functus Officio

    20th August 2015

  6. I’m with Mr Cat-man

    Further, why argue about the cost of drawing a budget, when fixed costs will very soon stop the need to do a budget – simples

    Anonymous

    20th August 2015

  7. 1. The extract from Cook on Costs seems to ignore PD3E 2.3, which states that ‘The court’s approval will relate only to the total figures for each phase of the proceedings.’ Surely that ‘total’ is the aggregate of the incurred and estimated costs, so the budget approved by the court must include both elements and cannot be limited to the estimated costs. I accept that this seems to be contradicted by PD3E 2.4, which states that ‘the court may not approve costs incurred before the date of any budget’ but this could simply mean that the inclusion of incurred costs in the ‘total figures for each phase of the proceedings’ should not be taken to exempt those costs from detailed assessment as if they had been rubber-stamped in advance.

    2. If you do it properly, the process of calculating the incurred costs is in most respects exactly the same as that of preparing a formal bill, save that there is no need to prepare a narrative or chronology etc. The reasonable costs of preparing a bill are, in principle, recoverable from the paying party. Typically those costs will be substantial, in many cases being around 5-6% of the base profit costs claimed. In his final report, Jackson LJ recognised that bills ‘typically cost many thousands of pounds to assemble’ (ch. 45 para. 5.3). If costs of that order are necessarily incurred in calculating past costs as a prelude to preparing a budget and it was the intention of those devising the rules that they should be subject to the 1% cap would it not be reasonable to expect them to have said so?

    3. The official guidance on completing Precedent H simply suggests that the CMC stage includes ‘Preparation of costs budget for first CMC and reviewing opponent’s budget.’ Although official, we all know that this guidance is less than perfect. I would have thought that because these costs are subject to caps they ought to be shown separately from the substantive costs, otherwise the 1% would be calculated on both the substantive costs and on the costs of preparing the budget, ie it would be partly calculated upon itself.

    Peter Burdge

    20th August 2015

  8. Cat man is spot on. The opening line at the bottom of Precedent H states quite clearly “This estimate excludes VAT (if applicable), court fees, success fees and ATE insurance premiums…”

    Therefore the simple fact that it is in the budget means that this part of the budget by it’s very nature cannot include either VAT or a success fee.

    It’s baffling that we are even having this discussion regards VAT, and in respect of the success fee, Senior Costs Judge Master Gordon-Saker is wholly mistaken.

    Northern Costs Monkey

    21st August 2015

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