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A “Precedent H” for arbitration?

In recent years, following the recommendations of the Jackson Review, the English courts have made significant efforts aimed at reducing the costs of litigation. One of the tools adopted by the English courts is a standard costs budgeting tool, catchily named “Precedent H”, that the parties are required to exchange and file with the court at the very outset of the proceedings. The court will use Precedent H to assess costs at the end of the proceedings. The basic idea is to ensure that the costs of the proceedings are monitored constantly and remain proportionate to the issues in dispute. Whilst the effectiveness and efficiency of this approach remain subject to debate, can arbitration practitioners learn from (and improve on) the English courts’ approach?

What is the costs budgets procedure in the English courts?

Under the Civil Procedure Rules (CPR 3.12 – 3.18 and Practice Direction 3E), the parties must prepare their respective costs budgets for the entire case using a standard Excel spreadsheet, published by the Ministry of Justice. The budget is broken down into main stages in the proceedings, and requires the parties to set out the hourly rates for each fee earner and the expected number of hours that they will devote to each stage of the proceedings. The parties must also provide details of the expected disbursements, such as experts, counsel and court fees. The parties are also required to explain the assumptions underlying their costs budgets.

From April 2016, the costs budgets in larger cases (with the stated value of £50,000 and above), will generally be required to be exchanged between the parties and filed at court 21 days before the first case management conference. The parties are then required to seek to agree their respective budgets and file an agreed budget discussion report (they are encouraged to use a new Precedent R) seven days before the first case management conference. The court has the power to make a costs management order in respect of those budgets, or parts of the budgets, that are not agreed, recording its approval of those budgets after making appropriate revisions. Throughout the lifecycle of the case, the parties are required to monitor their budgets and make upward or downward revisions if significant changes in the proceedings occur.

At the end of the proceedings, when assessing costs, the court will have regard to the parties’ respective budgets. A court-approved budget will effectively act as a prima facie limit on the recoverable costs, and the court will only depart from the approved budget where there is good reason for doing so. Where the budgets have not been approved by the court, and there is a 20% difference between the budgeted and actual costs, the receiving party will have to explain the reasons for that difference. If the paying party has reasonably relied on the receiving party’s budget, the court might limit the recoverable costs to the budgeted sum even if the actual costs were reasonable and proportionate.

Costs budgets in arbitration

Could a similar approach help reduce the costs in international arbitration proceedings? One criticism of the English courts’ approach is that it does not target base costs directly, as it is aimed at limiting recoverable costs. In other words, a party might still incur significant costs, but only the budgeted costs will be recoverable. This, of course, does not solve the high costs problem so far as the clients are concerned, and might actually make their position worse as they will be less able to recover their costs in full if they under-budgeted. In this regard, the suggestions of the ICC Commission Report on Controlling Time and Costs in Arbitration might be more effective as they are aimed at reducing the base costs of arbitration.

Nevertheless, there is an obvious logic to targeting costs through the use of early-stage budgeting that would equally apply in arbitration proceedings, as in litigation. If a party knows from the outset that it will only be able to recover reasonable and proportionate costs, it is more likely to refrain from incurring extravagant costs in the hope of still being able to recover most of them if it wins. The requirement to monitor and revise the budgets as the arbitration progresses might also help ensure that costs do not balloon later in the proceedings.

The budgeting process could also help capture the cost effect of a party’s unreasonable conduct, which could be relevant to the tribunal’s exercise of its costs allocation discretion (for example, under Article 28.4 of the LCIA Rules). The difference between actual and budgeted costs resulting from unreasonable conduct could then be awarded to the innocent party, thus providing a more solid basis for a conduct-based approach to the allocation of costs.

There could be other benefits to a costs budgets exchange in arbitration. At present, most clients will require their counsel to prepare a budget. However, that gives only a partial view of the overall costs. Although it is often possible to assume that the other side’s costs will be roughly similar to your own, having the other side’s budget will give more certainty to the overall case risk assessment. This might also help with securing third party funding, as the costs risks of losing are better understood. For the same reason, a costs budget exchange might encourage an early settlement as the process focuses the parties’ minds on the overall costs and risks; seeing detailed calculations usually has a greater impact than an abstract understanding that arbitration will be expensive.

In the arbitration context, it might also be possible to go one step further and require the arbitrators who charge on an hourly rates basis to prepare and share with the parties their own budgets.

In short, given clients’ continued concerns over the costs of arbitration, it is worth learning from the English courts’ experience and exploring how it could be adapted to the international arbitration context.

King & Spalding Grigori Lazarev

One thought on “A “Precedent H” for arbitration?

  1. I agree, Grigori; both from the perspective of a former user and now as a third party funder, proper budgeting and early transparency as to the full ambit of the risks involved in a dispute encourage sensible strategic decision-making internally within a party, which typically leads to the parties to the dispute reaching more rational outcomes than would otherwise have been the case.

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