The recent decision of Senior Costs Judge Hurst in Henry v News Group Newspapers Ltd [2011] EWHC 1364 provides the first reported example of the risks that parties and their solicitors face if they ignore the new rules on costs management.

The decision arises under Practice Direction 51D, the pilot scheme currently operating in defamation cases, but the issues considered apply equally to a similar pilot operating in mercantile and TCC cases. The pilot schemes have led to new rules which have been passed by the Civil Procedure Rules Committee and are being held in escrow until April 2013. From that time, the only cases that will be exempt from the costs reforms will be those proceeding in the Admiralty and Commercial Courts, although the Court may apply the new rules to such cases in its discretion.

In his decision, Hurst SCJ noted that PD 51D is in mandatory terms. Each party must prepare a costs budget and keep its budget updated, and solicitors must liaise monthly to check that the budgets are not being or are not likely to be exceeded.

In this case, the Claimant had exceeded her budget for Disclosure by £76,306 and for Witness Statements by £216,404. The Claimant's solicitor largely ignored the provisions of PD 51D by failing to inform the Defendant that the costs budget was being exceeded and to seek the Court's approval for the additional costs. This was despite prompting by the Defendant's solicitor who sought to discuss the budgets prior to the CMC, and whilst the Defendant also exceeded its budget, the Claimant's solicitors were informed of this and provided with a revised budget, which the Defendant sought to have approved at a further CMC.

The Claimant's failure to comply with the provisions of PD 51D led the Court to conclude that there was no good reason to depart from the Claimant's approved budget when assessing the Claimant's costs on the standard basis. The additional costs are, therefore, irrecoverable from the Defendant and will need to be paid by the Claimant (or potentially borne by the Claimant's solicitors if the failure to comply with PD 51D amounts to negligence) despite the Defendant having agreed to settle the claim on terms that were favourable to the Claimant.

Hurst SCJ said that he came to this decision reluctantly since he had "no doubt whatsoever" that if there were to be a detailed assessment, the Claimant would be able to argue very strongly that the additional costs were reasonable and proportionate. The additional costs appear to have been incurred as a result of the Defendant mounting what was said to be a "vigorous and lengthy defence which was amended four times" and who also served numerous Supplementary Lists of Documents. Such comments are unlikely to be of much comfort to the Claimant, who has been given permission to appeal in light of the importance of these issues.

All parties will recognize the difficulty of providing a robust and accurate costs estimate for a case at the outset. The problems include those which arose in this case, i.e. the need to anticipate the likely course of the dispute and to make provision for contingencies to cover unknown issues that may arise. This decision makes it clear that solicitors need to grasp the nettle of such problems and that they cannot afford to ignore the new costs management regime.

Rani Mina is a partner in the Commercial Dispute Resolution group of Mayer Brown International LLP in London.