Framing Costs-Inclusive Offers - Are you up to date?

For years it has been accepted wisdom for litigation lawyers to advise their clients that they will not recover all their costs if they win at trial. Clients are told that the irrecoverable costs – those that are disallowed by the costs judge upon detailed assessment – are typically pitched in a range between 25% to 33% of the actual costs paid by the client. To put it the other way round, the maximum costs that the losing party will be ordered to pay to the winning party will be somewhere between three quarters and two thirds of the winning party’s actual costs.

This unwritten rule is frequently deployed in mediations: paying parties routinely apply such discounts to receiving parties’ costs when formulating costs-inclusive offers. Equally, mediators may deploy it in an attempt to demonstrate that the additional financial benefit in proceeding to trial and winning, as opposed to settling at less than 100%, will be wiped out by the irrecoverable element.

In an era of costs budgeting and costs management orders (CMOs), is this still sound advice? The answer is no.

In June of this year the Court of Appeal gave guidance on the relationship between approved budgets and standard basis detailed assessment in Harrison v University Hospitals Coventry & Warwickshire Hospital NHS Trust [2017] EWCA Civ 792, which can be summarised as follows:

• A distinction is to be drawn in an approved budget between future costs and incurred costs.
• The future costs of the receiving party (that is to say, the estimated costs yet to be incurred at the date of the CMO approving the parties’ budgets) will not be departed from on detailed assessment – upwards or downwards – unless there is “good reason to do so” (CPR 3.18(b) clarified).
• The existence of “good reason” is a matter for the individual appraisal and evaluation of costs judges by reference to the circumstances of each individual case. But they should not adopt a lax or over-indulgent approach to the need to find “good reason” because to do so would tend to subvert one of the principal purposes of costs budgeting and thence the overriding objective.
• The incurred costs of the receiving party (that is to say, the costs already spent at the time the CMO was made) are to be the subject of detailed assessment in the traditional way, without any added requirement of “good reason” for departure from the approved budget. Incurred costs do not fall within the ambit of CPR 3.18(b).

In mediation it is almost always sensible for the paying party to provide a reasoned build-up of an offer, at least in the initial stages of the negotiation. If the offer is to include a contribution to the receiving party’s costs then it will no longer do to simply apply the traditional discount. Reference should be made to the receiving party’s approved budget (these should always be included in the mediation bundle), and a more sophisticated calculation of the offer for costs should be made. For the costs incurred up to the time the budget was approved it makes sense to apply the traditional discounting. But for budgeted future costs (which in practice means the budgeted future costs from the date of the CMO to the date of the mediation) it will be difficult to justify any discount for an irrecoverable element.

Of course, that does not preclude the application of discount for other reasons, such as litigation risk.

If the paying party is serious about settlement then the objective should be to frame a credible offer. Reliance on obsolete rules of thumb undermines that objective.