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In this case …
In Simpsons (Preston) Ltd & Anor v MS Amlin Underwriting Ltd [2023] EWHC 1370 (Comm), the Claimants sought to vary a costs management order, specifically for the disclosure phase, which had been agreed at £59,665, by £58,142.56, bringing the total budgeted sum to £117,807.56, on grounds that the disclosure exercise had brought up documents which were not, and could not reasonably have been, anticipated. The volume of documents (30,000) and the process to refine this list required significantly more work than originally estimated.
The Defendant contested the Claimants’ alleged development in the litigation, arguing that it did not qualify as a significant development but rather as an internal realisation of underestimated disclosure obligations.
The court ruled that the Claimants had failed to discharge the burden of proving a significant development such as to justify a revision to the budget pursuant to CPR3.15A.
“In all, I am unpersuaded on the material that what has happened here amounts to a significant development, even on the definition given above. Whilst I acknowledge the need to avoid setting the bar too high by excluding matters that could not reasonably have been known, even if they can be said to be internal to the party seeking the variation, I am also conscious that the bar must be sufficiently high to encourage a rigorous approach to costs budgeting at the outset, otherwise a potential paying party cannot have the reasonable assurance that a costs budget is supposed to bring as to its potential liability in the event of an adverse costs order.”
In the course of his decision, Judge Pearce noted the substantial difference between the retrospective approach on an assessment of costs, which was the context in which the issue was being considered in Kazakhstan Kagazy plc v Zhunus and the prospective management of costs as in Discovery Land Company v Axis Speciality Europe.
“…since in the former, the court knows what work it is considering when assessing costs, whereas in the latter the court has to work on assumptions as to what work will be involved. The inevitable uncertainties of the latter exercise make it right that the court should not simply look to manage costs at the lowest conceivable figure but rather should take a realistic view as to what work is likely to be involved in a particular phase, bearing in mind that, if the court underestimates the work involved, a party will only be able to seek revision of the budget in the narrow circumstances identified above.”
In Simpsons (Preston) Ltd & Anor v MS Amlin Underwriting Ltd [2023] EWHC 1370 (Comm), the Claimants applied to vary a costs management order dated 21 September 2022, specifically in respect of the disclosure phase which had been agreed in the sum of £59,665 by £58,142.56, bringing the total budgeted sum to £117,807.56. The application was supported by a witness statement from Mr Jeffrey Michael Lewis, the Claimants’ solicitor, dated 9 February 2023.
The First and Second Claimants each operate motor vehicle businesses.
The First Claimant operates a new and used vehicle dealership and provides servicing; the Second Claimant sells second-hand vehicles, supplied to it by the First Claimant provided as part exchange where the vehicle is considered to be unsuitable for sale by the First Claimant by reason of its age, condition and/or nature.
Each Claimant was party to an insurance policy underwritten by the Defendant providing cover for business interruption arising out of the COVID-19 pandemic. These are disease policies with cover provided upon the occurrence of a notifiable disease within a radius of 25 miles of the Claimant’s premises. They were in force between 1 July 2019 and 30 June 2020 and the applicable indemnity period was 12 months.
The Claimants contended that each of them was entitled to be indemnified by the Defendant for a period of 12 months commencing 5 March 2020 on the basis that their business was affected throughout that period by reason of occurrences of Covid during the policy period (as well as other non-excluded events).
The Defendant’s case was that if there was an interruption of or interferences with the Claimants’ business caused by the imposition of the Health Protection (Coronavirus Restrictions) (England) Regulations 2020 (which were implemented in response to the occurrence of Covid-19 within 25 miles together with many other occurrences of Covid-19) then any loss caused by any such interruption or interference (which is not admitted) would in principle be covered by the policy.
A Costs Management Order (“CMO”) was made on 21 September 2022. In February 2023, the Claimant applied to vary the CMO in respect of disclosure on grounds that:
“The Claimant has commenced the Disclosure exercise which has brought up documents which were not, and could not reasonably have been, anticipated. The volume of Documents (300,000) along with the process to refine this list will require significantly more work than originally estimated. The Defendant has now raised issues with the search terms which will result in further unanticipated work. The hardcopy Documents received are being manually reviewed to aid the Defendant in then reviewing the same. Further Disbursements are sought for the Disclosure provider and licences.”
The Claimants’ original Precedent H, containing the agreed figure of £59,665, stated the following in respect of assumptions for the disclosure phase:
“It will proceed in accordance with P51(U) (sic) – Disclosure Pilot. An external disclosure provider will be instructed and access to the online review platform will be required for 5 months.”
There was no reference to the number or size of documents which it was anticipated would fall within the Claimants’ disclosure obligation. The estimated costs of £59,665 in the original approved budget were stated to comprise fee earner time of £34,100 and disbursements (which I understand to be the external disclosure provider operating the online review platform) of £25,565.
The Claimants’ proposed increase of £56,142.56 was calculated as an increase in fee earners’ time of £49,000 and an increase in disbursements of £9,142.56. The explanation in the Claimant’s Precedent T is stated thus:
“The Claimant has commenced the Disclosure exercise which has brought up documents which were not, and could not reasonably have been, anticipated. The volume of Documents (300,000) along with the process to refine this list will require significantly more work than originally estimated. The Defendant has now raised issues with the search terms which will result in further unanticipated work. The hardcopy Documents received are being manually reviewed to aid the Defendant in then reviewing the same. Further Disbursements are sought for the Disclosure provider and licences.”
The Claimants’ case centred around the unexpected discovery of two network drives, leading to a more extensive and costly disclosure process than anticipated in the costs budget. The review of documents by Brabners (the Claimants’ representatives) exceeded 30,000, including around 10,000 detailed spreadsheets. Significant duplication and irrelevant data were encountered, requiring time-consuming deduplication efforts. Despite refining search terms, over 13,000 documents were marked as ‘not relevant,’ including spam emails. The costs of the e-disclosure provider increased due to scanning hardcopy documents and obtaining additional licenses for the expanded review team. Relying on the Al-Najar v The Cumberland Hotel case, the Claimants argued that the budgeting process occurs early with limited knowledge, and the discovered scale of disclosure qualifies as a significant development. The application to vary the budget was promptly made, with the Precedent T served on December 2, 2022, and the application issued and served on February 21, 2023.
The Defendant contested the Claimants’ alleged development in the litigation, arguing that it did not qualify as a significant development but rather as an internal realisation of underestimated disclosure obligations. They asserted that if such internal matters were considered grounds for varying the budget, it would have opened the floodgates for parties to claim a lack of understanding at the budgeting stage. The Defendant emphasised the burden on the party seeking to amend the budget and contended that the Claimants failed to provide sufficient evidence to justify the variation. They questioned the lack of information on the Claimants’ initial anticipation, undisclosed details surrounding the discovery of additional drives, and an unclear explanation for realizing the need for an increased budget. The Defendant also pointed out the absence of promptness in the presented timetable, without evidence of when the alleged significant development had occurred.
The procedure for revising costs budgets is governed by CPR3.15A which states that:
Persimmon Homes Ltd v Osborne Clark LLP [2021] EWHC 831 established that the court should consider the overriding objective and all circumstances, including the need for just and proportionate case resolution. This involves assessing the prejudice to both the applicant and respondent if the revision is approved or disallowed, and the promptness and nature of the development may also be relevant factors.
31. In order to determine what amounts to a “significant development” it is necessary for the court first to consider the basis on which the original budget is set. CPR3.12(2) states that the purpose of costs management is “that the court should manage both the steps to be taken and the costs to be incurred by the parties to any proceedings (or variation costs as provided in rule 3.15A) so as to further the overriding objective.” When assessing costs on the standard basis where a costs management order has been made, the court will, pursuant to CPR 3.18:
“(a) have regard to the receiving party’s last approved or agreed budgeted costs for each phase of the proceedings;
(b) not depart from such approved or agreed budgeted costs unless satisfied that there is good reason to do so; and
(c) take into account any comments made pursuant to rule 3.15(4) or 3.17(3) recorded on the face of the order.”
32. It follows that, in exercising costs management powers, the court is aiming to estimate the reasonable and proportionate costs (in other words, the costs to be anticipated on an assessment on the standard basis). Such an assessment would of course be conducted pursuant to the principles of CPR Part 44.3(2)
“Where the amount of costs is to be assessed on the standard basis, the court will—
(a) only allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred; and
(b) resolve any doubt which it may have as to whether costs were reasonably and proportionately incurred or were reasonable and proportionate in amount in favour of the paying party.”
33. In Kazakhstan Kagazy plc v Zhunus [2015] EWHC 404 (Comm), Leggatt J (as he then was) said in retrospect of reasonable and proportionate costs:
“13…The touchstone is not the amount of costs which it was in a party’s best interests to incur but the lowest amount which it could reasonably have been expected to spend in order to have its case conducted and presented proficiently, having regard to all the relevant circumstances. Expenditure over and above this level should be for a party’s own account and not recoverable from the other party.”
34. On the other hand, in Discovery Land Company v Axis Speciality Europe [2021] EWHC 2146 (Comm), Peter MacDonald Eggars KC sitting as judge of the High Court doubted that this approach was correct where the court was dealing with costs management:
“18…..in the context of costs management, the Court should allow some flexibility to the parties to ensure that their conduct of the action is not unnecessarily and potentially unfairly hampered by an unrealistically low assessment or by only the lowest assessment of what would constitute reasonable and proportionate expenditure.”
35. There is of course a substantial difference between the retrospective approach of the assessment of costs, which was the context in which the issue was being considered in Kazakhstan Kagazy plc v Zhunus and the prospective management of costs as in Discovery Land Company v Axis Speciality Europe, since in the former, the court knows what work it is considering when assessing costs, whereas in the latter the court has to work on assumptions as to what work will be involved. The inevitable uncertainties of the latter exercise make it right that the court should not simply look to manage costs at the lowest conceivable figure but rather should take a realistic view as to what work is likely to be involved in a particular phase, bearing in mind that, if the court underestimates the work involved, a party will only be able to seek revision of the budget in the narrow circumstances identified above.
36. In considering what lies within the range of that which a party might reasonably be reasonably to know or anticipate at the time of the costs budgeting process, I bear in mind two factors:
36.1. The clear structure of costs budgeting is that, so far as possible, this should be done at an early stage in the litigation process, before significant costs are incurred. Of course, some cases, for example clinical negligence claims, may require considerable costs to be incurred before a party knows that a claim can properly be issued and pursued. But in the context of commercial litigation such as this, meaningful costs management requires the court to engage in the exercise as early as practicable in the litigation.
36.2. One cannot expect the process of initial disclosure to identify much about the likely scope of extended disclosure, since the ambit of initial disclosure is intended to be, and usually will be, limited. As Cockerill J put it in paragraph 18 of her judgment in State of Qatar v Banque Havilland SA [2020] EWHC 1248, “The purpose of the disclosure pilot is to streamline and not to complicate disclosure and so it would be unlikely that what was had in mind by the drafters of the disclosure pilot was a scheme whereby initial disclosure required something more than really very necessary documents; in other words that it required the disclosure of an evidence base required to test the evidence rather than to support the very key allegations.”
37. It follows that the court, at the stage of costs budgeting, doing its best on the inevitably limited information to forecast a reasonable figure for the disclosure phase, may well be restricted in its ability to make an informed judgment as to what is likely to be involved in that phase. For this reason, I agree with the comment of Master Davison in Al-Najar that the bar for what is a significant development should not be set too high. Otherwise, a party risks being unable to recover costs that it incurs of which it could only have been aware had it engaged in an investigation of its own case considerably beyond that which is anticipated by the scheme of the disclosure rules in the Business and Property Courts contained in PD57AD.
38. The concept of the “internal” development referred to by the Defendant, whilst potentially of some assistance cannot adequately explain where the bar is to be set for the concept of the “significant development” for two reasons:
38.1. This concept is not one established in CPR3.15A. As Mr Grantham KC pointed out, those who drafted the rules could have worded the test for variation in this way had they so wished but did not do so.
38.2. It is easy to see that such a concept might fail to catch changes of circumstances that might well justify a variation in the budget – Mr Grantham KC’s example of increased costs of disclosure caused by the need to recover documents from a device that has crashed catastrophically, where the device is under the control of the party who seeks the variation, is a good example of a cost that would fall within the category of “internal” yet which might well justify the label of being a “significant development”; looking at another phase of the budgeting process, another might be the death of an expert witness prior to trial that causes the party who instructed them to have to restart the process of obtaining expert evidence.
39. A more satisfactory approach to this issue is to look at the distinction that the Chief Master drew in paragraph 37 of the judgment in Sharp v Blank between, on the one hand, circumstances (for the moment I deliberately avoid the word “developments”, so as not to create a self-fulfilling categorisation) that come to light making the litigation more (or in an appropriate case, less) costly and complex but that could not reasonably have been anticipated and mistakes, where a party could reasonably have identified and anticipated the circumstances by proper and proportionate investigation of the case prior to the costs management order. That which it is reasonable to anticipate would exclude that which could not be anticipated and/or assessed without the party incurring costs that go beyond that which are reasonably to be incurred before the costs management process takes place.
40. This distinction does not focus on whether the circumstances relied on are new and unexpected events and/or relate to matters internal or external to the party applying to vary. But where the matters relied on could already have been known to the party applying to vary (such as the quantity of material which they are obliged to disclose), it is likely to be more difficult to meet the test than where the matters are truly external (such as the amount of disclosure that the opposing party gives them). It may not always be easy to draw the distinction between what could and could not reasonably have been expected to be known at the time of the budgeting process, but this distinction presents a principled dividing line between that which can properly be the subject of an application to vary and that which cannot. In particular it incentivises the proper preparation of cases and costs budgets, without penalising the party that avoids front loading costs before the court can take charge of the costs management process.
41. Applying this test, I am satisfied that the discovery by a party that its own disclosure is far more substantial than it initially realised is capable of falling within the definition of “significant development” in CPR3.15A.
42. I turn to whether the Claimants are able to show that they fall within this definition on the facts before the court. The discovery of the two previously unknown drives is clearly a discovery that is likely to affect the scope and therefore the cost of the disclosure process. To this extent, I am satisfied that it can properly be called a “development.”
43. Whether it is “significant” is more difficult. There is relatively little information before the court to enable an assessment of this. Paragraph 30 of Mr Lewis’ statement is the closest that the material comes to explaining why the discovery of the drives was significant. But, as the Defendant points out, the development did not lead to any change in the nature of the stated assumptions for the disclosure process. Whilst the Claimants explain the increase in number of documents, it is not clear why the increased number necessarily leads to a significantly greater burden in the disclosure process. It is not clear from the evidence before the court that the increased number of excel spreadsheets which have required review is a consequence of the discovery of the previously unanticipated drives or is simply an aspect of other parts of the disclosable documents. It is not clear why the de-duplication problem referred to at paragraph 30.3 of the statement has been so time intensive, nor (for example) why the spam or “bulk” emails referred to have greatly increased the burden of the process. Further, it is not clear why the need to scan hard copies was not previously known. As to the obtaining of further licences, in my judgement that additional cost, whatever its cause, could not on its own be said to be significant.
44. In all, I am unpersuaded on the material that what has happened here amounts to a significant development, even on the definition given above. Whilst I acknowledge the need to avoid setting the bar too high by excluding matters that could not reasonably have been known, even if they can be said to be internal to the party seeking the variation, I am also conscious that the bar must be sufficiently high to encourage a rigorous approach to costs budgeting at the outset, otherwise a potential paying party cannot have the reasonable assurance that a costs budget is supposed to bring as to its potential liability in the event of an adverse costs order.
45. On balance, the Claimants fail to discharge the burden of proving a significant development such as to justify a revision to the budget pursuant to CPR3.15A.
46. Had I been persuaded that this was a significant development, I would have concluded that the application had been made with sufficient promptness to permit an order to be made. Whilst the Claimants could have moved with greater speed, as always there is a balance to be struck between the need on the one hand to raise the issue with the other side so that it can be considered, if necessary by the making of a consent order, and on the other, to bring the case before the court if it cannot be agreed. I am not satisfied that the Claimants here have fallen outside the reasonable range of promptness.
COSTS MANAGEMENT ORDER | SIGNIFICANT DEVELOPMENT | DISCLOSURE PHASE | BUDGET VARIATION | STANDARD BASIS | PROPORTIONATE COSTS
“The discovery by a party that its own disclosure is far more substantial than it initially realized is capable of falling within the definition of “significant development” in CPR3.15A.” [41]
“I turn to whether the Claimants are able to show that they fall within this definition on the facts before the court. The discovery of the two previously unknown drives is clearly a discovery that is likely to affect the scope and therefore the cost of the disclosure process. To this extent, I am satisfied that it can properly be called a ‘development.'” [42]
“Whether it is ‘significant’ is more difficult. There is relatively little information before the court to enable an assessment of this. Paragraph 30 of Mr Lewis’ statement is the closest that the material comes to explaining why the discovery of the drives was significant. But, as the Defendant points out, the development did not lead to any change in the nature of the stated assumptions for the disclosure process. Whilst the Claimants explain the increase in number of documents, it is not clear why the increased number necessarily leads to a significantly greater burden in the disclosure process. It is not clear from the evidence before the court that the increased number of excel spreadsheets which have required review is a consequence of the discovery of the previously unanticipated drives or is simply an aspect of other parts of the disclosable documents. It is not clear why the de-duplication problem referred to at paragraph 30.3 of the statement has been so time intensive, nor (for example) why the spam or ‘bulk’ emails referred to have greatly increased the burden of the process. Further, it is not clear why the need to scan hard copies was not previously known. As to the obtaining of further licences, in my judgment that additional cost, whatever its cause, could not on its own be said to be significant.” [43]
“In all, I am unpersuaded on the material that what has happened here amounts to a significant development, even on the definition given above. Whilst I acknowledge the need to avoid setting the bar too high by excluding matters that could not reasonably have been known, even if they can be said to be internal to the party seeking the variation, I am also conscious that the bar must be sufficiently high to encourage a rigorous approach to costs budgeting at the outset, otherwise a potential paying party cannot have the reasonable assurance that a costs budget is supposed to bring as to its potential liability in the event of an adverse costs order.” [44]
“On balance, the Claimants fail to discharge the burden of proving a significant development such as to justify a revision to the budget pursuant to CPR3.15A.” [45]
“Had I been persuaded that this was a significant development, I would have concluded that the application had been made with sufficient promptness to permit an order to be made. Whilst the Claimants could have moved with greater speed, as always there is a balance to be struck between the need on the one hand to raise the issue with the other side so that it can be considered, if necessary by the making of a consent order, and on the other, to bring the case before the court if it cannot be agreed. I am not satisfied that the Claimants here have fallen outside the reasonable range of promptness.” [46]
“For these reasons, I dismiss the application. The parties should seek to agree an order dealing with any consequential matters, failing which a further hearing will be convened.” [47]
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