London EC4A 1NL
B e f o r e :
| JOHN MICHAEL SHARP
(and the claimants listed in the group litigation register)
|- and -
| (1) SIR MAURICE VICTOR BLANK
(2) JOHN ERIC DANIELS
(3) TIMOTHY TOOKEY
(4) HELEN WEIR
(5) GEORGE TRUETT TATE
(6) LLOYDS BANKING GROUP PLC
Tony Singla (instructed by Herbert Smith Freehills LLP) for the Defendants
Hearing dates: 6th and 12th December 2017
Crown Copyright ©
Chief Master Marsh:
i. they omitted to provide the Lloyds' shareholders with (and in some cases deliberately concealed) information relating to the true financial position of HBOS;
ii. they made a series of misstatements to the Lloyds' shareholders in relation to the acquisition of HBOS and Lloyds' participation in the Recapitalisation Scheme, and;
iii. they incorrectly, and in breach of duty, advised the Lloyds' shareholders that the acquisition of HBOS, and Lloyds' participation in the Recapitalisation Scheme, was in their best interests and that they should vote in favour of both at the EGM.
The claimants' case is that, but for the alleged omissions/concealment, misstatements and incorrect advice, the acquisition of HBOS and Lloyds' participation in the Recapitalisation Scheme would not have taken place. They claim damages and interest in the sum of approximately £600 million. The allegations are strongly denied by the defendants.
i. The statements of case are very lengthy. The claimants have served a 123 page re-amended particulars of claim and a 67 page re-re-amended reply. Their responses to Part 18 requests for information add in total a further 130 pages.
ii. The claimants have disclosed approximately 12,100 documents. The defendants have disclosed approximately 38,000 documents, having initially harvested over 10.5 million documents.
iii. The parties have served respectively 18 and 15 factual witness statements. The statements run to over 510 pages.
iv. The claimants have served four main expert reports and five responsive expert reports running in total to approximately 1800 pages. The defendants have served seven expert reports running to approximately 1100 pages. There are ten expert joint memoranda running to approximately 450 pages. In addition, both sides have recently served supplemental notes from some of their experts.
v. The claimants' written opening submissions for trial run to a total of approximately 320 pages and the defendants' opening submissions run to a total of approximately 720 pages.
vi. The trial bundle comprises approximately 400 lever arch files.
vii. The claimants' budget was set at a total of £17,601,025.49. The total of the defendants' budget is £19,141,377.54. Both budgets were agreed without any budget phases being set by the court. In aggregate, the budgeted costs, subject to the outcome of the defendants' application, amount to slightly less than £37 million.
" I also accept that the requiring of a budget is not necessarily going to be the end of the process and that, if a costs management order is in due course made, that means that the budget will have to be revised and agreed or approved at every stage at which there are developments in the litigation. Indeed, even without a costs management order being made, there is not much point in requiring budgets to be provided if they are not revised from time to time in accordance with the litigation as it develops. So I accept that there are pros and cons in making an order."
The seven significant developments
i. The assumption upon which the defendants' approved budget was prepared was that there would be a trial lasting 59 days between 2 October and 21 December 2017. The claimants' approved budget was based on the same assumption. The defendants say that due to events outside their control, the trial time estimate has been extended by 48 business days with the effect that the trial will last from a later commencement date, 19 October 2017 to 2 March 2018. They say that the trial timetable is therefore almost twice as long as it was assumed to be when the budget was approved and that this change is a significant development.
Additional costs - £1,210,215
ii. The defendants made an application for specific disclosure on 28 June 2017. It was heard by the management judge on 31 July 2017 and an order was made in favour of the defendants resulting in 984 additional documents being disclosed by the claimants. As originally put forward in their application, they relied upon the application for specific disclosure itself and the provision of additional documents as a significant development. However, they subsequently conceded that that only the latter could be a significant development.
Additional costs (as requested in the application) - £206,911
Additional costs (now sought) - £47,485
iii. On 22 June 2017, the claimants served a report from Mr Torchio who is an expert in the field of 'events study analysis'. The defendants say that, as a result of the service of Mr Torchio's report, it was necessary for them to serve a supplementary report from one of their experts, Dr Unni, in response.
Additional costs £221,956
iv. The defendants applied for permission to serve Dr Unni's supplemental report on 20 July 2017. The claimants subsequently withdrew their objection on 24 July 2017 and permission was granted.
Additional costs - £4,648
v. The claimants issued a third-party disclosure application against the Department for Business, Energy and Industrial Strategy on 22 August 2017. The application was heard by the management judge on 11 September 2017 and resulted in 71 additional documents being produced to the parties.
Additional costs - £72,781
vi. The claimants sent a number of questions to the defendants' experts on 20 June 2017. The defendants say that the scope of the questions sent by the claimants went beyond what could reasonably have been foreseen under CPR 35.6. The defendants seek to increase their budget to accommodate the costs arising out of the questions put to 3 of their experts Professor Persaud, Mr Deetz and Dr Unni.
Additional costs - £44,000
vii. On 15 September 2017, Mr Ellerton, who is one of the claimants' experts, sent a very long response to certain questions which the defendants had put to him under CPR 35.6. The defendants say that that the response contained new expert evidence which could not reasonably have been foreseen and ultimately led to the defendants having to respond through the provision of additional factual and expert evidence.
Additional costs - £124,629
i. Lateness: they say the application has been made too late and the court should not entertain it.
ii. Oppression: they say the application is, and is intended to be, oppressive to the claimants due to their precarious funding position.
iii. Jurisdiction: they make three points. First, they say that none of the matters relied upon can properly be classified as significant developments. Secondly, the court has no jurisdiction to deal under the costs management regime with any costs that were incurred by the defendants prior to the date of the hearing of their application. That would exclude any costs incurred before the application was issued and costs incurred between the date of issue and the hearing and mean they must be dealt with on a detailed assessment. Thirdly, they say the court has no power, in any event, to treat interim applications as being significant developments. They say interim applications are altogether outside the costs management regime.
"3.12(2) 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 so as to further the overriding objective.
3.13 (1) Unless the court otherwise orders, all parties except litigants in person must file and exchange budgets
(b) . not later than 21 days before the first case management conference.
3.15 (1) In addition to exercising its other powers, the court may manage the costs to be incurred (the budgeted costs) by any party in any proceedings.
(2) The court may at any time make a "costs management order". Where costs budgets have been filed and exchanged the court will make a costs management order unless it is satisfied that the litigation can be conducted justly and at proportionate cost in accordance with the overriding objective without such an order being made. By a costs management order the court will
(a) record the extent to which the budgeted costs are agreed between the parties;
(b) in respect of the budgeted costs which are not agreed, record the court approval after making appropriate revisions;
(c) record the extent (if any) to which incurred costs are agreed.
(3) If a costs management order has been made, the court will thereafter control the parties' budgets in respect of recoverable costs.
(4) Whether or not the court makes a costs management order, it may record on the face of any case management order any comments it has about the incurred costs which are to be taken into account in any subsequent assessment proceedings.
3.16 (1) Any hearing which is convened solely for the purpose of costs management (for example, to approve a revised budget) is referred to as a "costs management conference".
(2) Where practicable, costs management conferences should be conducted by telephone or in writing.
3.18 In any case where a costs management order has been made, when assessing costs on the standard basis, the court will
(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 paragraph 7.4 of Practice Direction 3E and recorded on the face of the order.
PD3E 7.3 If the budgeted costs or incurred costs are agreed between all parties, the court will record the extent of such agreement. In so far as the budgeted costs are not agreed, the court will review them and, after making any appropriate revisions, record its approval of those budgeted costs. The court's approval will relate only to the total figures for budgeted costs of each phase of the proceedings, although in the course of its review the court may have regard to the constituent elements of each total figure. When reviewing budgeted costs, the court will not undertake a detailed assessment in advance, but rather will consider whether the budgeted costs fall within the range of reasonable and proportionate costs.
PD3E 7.4 As part of the cost management process the court may not approve costs incurred before the date of any costs management hearing. The court may, however, record its comments on those costs and will take those costs into account when considering the reasonableness and proportionality of all subsequent budgeted costs.
PD3E 7.5 The court may set a timetable or give other directions for future reviews of budgets.
PD3E 7.6 Each party shall revise its budget in respect of future costs upwards or downwards, if significant developments in the litigation warrant such revisions. Such amended budgets shall be submitted to the other parties for agreement. In default of agreement, the amended budgets shall be submitted to the court, together with a note of (a) the changes made and the reasons for those changes and (b) the objections of any other party. The court may approve, vary or disapprove the revisions, having regard to any significant developments which have occurred since the date when the previous budget was approved or agreed.
PD3E 7.7 After its budgeted costs have been approved or agreed, each party shall re-file and re-serve the budget in the form approved or agreed with recast figures, and next to the order approving the budgeted costs or recording the parties' agreement.
PD3E 7.9 If interim applications are made which, reasonably, were not included in a budget, then the costs of such interim applications shall be treated as additional to the approved budgets.
[The emphasis is mine.]
i. The futurity of the words "costs to be incurred (the budgeted costs)" is not in doubt. However, it is less clear when the future commences for these purposes.
ii. Rule 3.13(1) is the default rule that applies, unless the court orders otherwise, in relation to the timing for the service of budgets. They must be served not less than three weeks before the first case management conference. At one time the rule was drafted differently and provided a default period of seven days. A more recent innovation, set out in rule 3.13(2), requires the parties to produce an agreed budget discussion report and to file it not less than seven days before the first case management conference. The parties are required to engage with each other and to consider the extent to which the figures in their budgets are agreed, or not agreed. At the hearing the court has the fruit of this discussion about the figures in the budgets.
iii. A budget, unless the court otherwise orders, must be in the form of Precedent H. It provides a format that is divided into budget phases and each phase requires the party to explain its incurred costs in one column and its estimated costs in a set of other columns. It must have a statement of truth stating:
"This budget is a fair and accurate statement of incurred and estimated costs which it would be reasonable and proportionate for my client to incur in this litigation."
iv. There is nothing in the rules or PD3E that requires the parties to provide updated budgets for the case management conference so as to provide the court with information that is current at the date of the hearing. Such a requirement would in any event create practical difficulties.
v. Rule 3.15 clearly distinguishes between costs to be incurred (budgeted costs) and incurred costs with the exception in 3.15(3) where it is stated that after a costs management order has been made the court will control the parties' budgets in respect of recoverable costs. The reference to budgets read literally means the budgets as a whole (and not just budgeted costs) and the control is in respect of recoverable costs which will not be the same as the aggregate of estimated and incurred costs. The notion of costs that are recoverable as opposed to incurred or to be incurred does not appear elsewhere in the regime. Incurred costs and costs to be incurred may, or may not, be recoverable.
vi. Rule 3.18(b) in its pre-6 April 2017 form was considered by the Court of Appeal in Harrison v University Hospitals Coventry & Warwickshire NHS Trust  EWCA Civ 792. The decision in Harrison is not directly relevant to the issue before me. However, the first instance decision in Merrix v Heart of England NHS Trust Foundation  1 WLR 3399, which was decided shortly before Harrison, was approved by the Court of Appeal and I will later refer to the judgment of Carr J in Merrix.
vii. The claimants say that paragraph 7.4 make it clear beyond any doubt that when the court is considering a revision to a budget in relation to a significant development, the court has no power to approve costs incurred. They reason that the hearing I have conducted is a cost management conference within the definition contained in rule 3.16 (1). Paragraph 7.4 specifies that the court may not approve costs incurred " before the date of any cost management hearing". [my emphasis] "Any" is not well-suited to its context and could mean several different things. Mr Friston says it means "all". It could have been intended to mean "a" or, as Mr Singla submits, any in the sense that of "if there is one". It seems likely, however, that the paragraph was intended to relate to all hearings where costs management is considered whether the hearing is a "costs management conference" (rule 3.16(1)) or a case and costs management hearing.
viii. The management judge did not set a timetable or give other directions for future reviews of budgets although he plainly contemplated from the earliest stage at which cost management was under consideration that a review of cost budgets was very likely to be required.
ix. The language used in paragraph 7.6 is of critical importance because it provides the jurisdiction, on the defendants' case to make the revisions they seek. It is notable that the language is at variance with the remainder of the rules and PD3E. It refers throughout to the revision of a "budget" (not, in accordance with the new wording, "budgeted costs"). It is explicit, however, that revision is in respect of future costs. The final sentence of this paragraph gives the court a discretion to approve, vary or disapprove the revisions " having regard to any significant developments which have occurred since the date when the previous budget was approved or agreed". On one view, such language points towards the last approved or agreed budget being the jumping off point for a revision because it is the budget that is being revised.
x. The principles set out in paragraph 7.3 will apply when a budget is re-considered. The court is only required to set figures that are within a range of reasonable and proportionate costs. A range suggests that the process is designed to produce figures for each budget phase in a way that is not a slave to arithmetical calculation. The court is approving, or the parties are agreeing, figures that are not 'right' as such, but rather figures that are within a range of acceptability.
xi. Paragraph 7.9 appears to have a restricted effect and it is only the costs of the interim application that are to be treated as additional to the approved budgets. This would suggest that costs resulting from, or are consequential upon, an interim application are outside its scope. By way of example, the costs of applying for specific disclosure would be within the provision, but the costs of dealing with the fruits of the application, if any, are outside it. Similarly, the costs of applying for permission to amend are within the paragraph whereas the costs that flow from the amendment are not.
"Until February 2017 there was some controversy as to the power of the court to vary an existing budget so as to approve any extra costs which had been incurred before that approval had been sought and obtained (contrast the ruling as to this given by Warby J in Yeo and the remarks attributed to Flaux J in the Commercial Court Update October 2015 . It is arguable that the amendments made by the Civil Procedure (Amendment) Rules 2017 with effect from 6 April 2017, have laid this controversy to rest. In r.3.15(1) as amended the term "incurred costs" is used in contradistinction to the term "budgeted costs". The former refers to the costs the parties place in the columns headed "incurred costs" in the first budget they submit in compliance with r.3.13(1). The term "budgeted costs" should now be understood to refer to the costs the parties place in the columns headed "estimated costs" in that budget. If, after the approval of that budget, the party submits a revised budget seeking an increase in respect of any part of it, the costs previously shown in the incurred costs, should remain the same; unless and until the court approves any revision, the costs previously approved in the estimated columns (the budgeted costs) should remain in the estimated columns even if substantial amounts of them have now been incurred. Practice Direction 3E, para. 7.4 . provides that the court may not approve costs incurred before the date of any case management hearing but may take those costs [ie the incurred costs] into account when considering the reasonableness and proportionality of all budgeted costs. This paragraph makes little sense unless the words "those costs" are construed as costs previously placed in the incurred costs columns.
For example, a party's budget may have been reasonably drawn on the assumption that no formal mediation would take place. Consequently, none of the budgeted cost relate to mediation. If, later in the proceedings, a real possibility of mediation arises, the parties need not seek prior approval in respect of it before incurring any expense. Of course, the party should not delay in seeking the agreement of other parties or, failing that, the approval of the court. Also, any costs incurred on mediation before agreement or approval is obtained are at risk that such agreement or approval might never be obtained."
"As to the court power on an application to revise budgeted cost, to approve an increase in those costs whether or not they were incurred before the application for revision, see the argument summarised in para 3.12.3 above. The argument in favour of allowing some retrospectivity in approving budgeted costs runs thus: costs incurred since the first budget (budgeted costs) should remain in the estimated costs column; Practice Direction 3E, para 7.4 provides that the court may not approve costs incurred before the date of any case management hearing but may take those costs [ie the incurred costs] into account when considering the reasonableness and proportionality of all budgeted costs."
"Can PD3E 7.6 be employed to obtain approval for costs that, by the time of the revised budget, are incurred costs? Paragraph 7.6 itself refers to "future costs", and PD3E 7.4 provides that the court "may not approve costs incurred before the budget"."
"If the unexpected happens, and time does not allow for a revised budget to be approved before costs are incurred, then there will often, perhaps usually, be an unexpected interim application and PD3E 7.9 will apply. The fall-back position is CPR 3.18(b)."
Submissions on the law
"[The amendments] confirm that when setting a costs budget, a court is dealing only with prospective costs. There is an ability, but no requirement, to comment on the costs already incurred. Additionally, costs of the case management conference are to be treated as costs already incurred." [my emphasis]
"Fidelity to the clear words of CPR r. 3.18, as set out above, will achieve the dual purpose both of reducing the costs of the detailed assessment process and of securing greater predictability on costs exposure/recovery for the parties. Both the receiving and paying party have the benefit of the legitimate expectation. This is a central pillar of access to justice in a world where costs will always be a primary consideration for those contemplating or participating in litigation, and consistent with the overriding objective. The expensive costs of the detailed assessment procedure are reduced and the case is dealt with justly, with both parties knowing from an early stage what their potential cost liability is, absent good reason to depart from the budget."
Review of the parties' submissions
i. The benefit for a party in knowing its exposure to costs.
ii. Greater predictability in the costs that will be recovered.
iii. A reduction in the cost of detailed assessment.
iv. The need for the court to avoid undertaking a detailed assessment in advance.
v. Significant developments should be reflected in the budgets.
i. The date of the last agreed or approved budget.
ii. The date set by the court under paragraph 7.5 for a review of the budgets, if this power is exercised.
iii. The date when the significant development is deemed to have occurred. This may be obvious in some cases but not invariably so.
iv. The date a revised budget was served on the other party.
v. The date after a reasonable time following service of the revised budget has elapsed.
vi. The date when the application is made by the court.
"The 'contingent cost' section of this form should be used for anticipated costs which do not fall within the main categories set out in this form. Examples might be the trial of preliminary issues, a mediation, applications to amend, applications for disclosure against third parties or (in libel) applications re meaning. Only include costs which are more likely than not to be incurred. Costs which are not anticipated but which become necessary later are dealt with in paragraph 7.6 of PD3E." [emphasis in the original]
Conclusion on the legal issues
i. The court has jurisdiction when revising a budget under PD3E 7.6 to revise a budget taking the last agreed or approved budget as the base reference point.
ii. Where, as in this case, the budgets were directed to be prepared to an antecedent date, the relevant date is the date set by the court.
iii. Costs which have been incurred since the date of the last agreed or approved budget (or the antecedent date) that relate to significant developments are, for the purposes of revision, placed in the estimated columns of the revised Precedent H in one or more phase. In some cases, it may not be obvious where they go (for example a late application for security for costs) but I can see no reason why Precedent H may not be adapted as necessary to accommodate work that does not easily fit in.
iv. Interim applications may be significant developments as may the consequences that flow from an interim application.
"This court will not need reminding that the claimants entered into costs management in order to try to level the playing field between the parties. Indeed, I believe that was the prime purpose of a cost management order being made. The claimant's concern is that, at this very late stage in the case, the defendants are now employing costs management as a tool to divert the claimants from the trial. Given the matters referred to in paragraph 6.2(a) - namely, the alternative course of action of relying on CPR 3.18 - this is a relevant factor. At the very least, the defendants ought to have limited their Application to future costs, and ought to have presented their case in a far less heavy-handed and document-heavy way."
The seven significant developments
(1) Extension to the trial timetable
i. Pursuant to the order made by the management judge, budgets were prepared in February 2017 on the assumption that the trial would commence on 2 October 2017 and finish on 21 December 2017. It is not right to apply knowledge acquired later by the defendants, in April 2017, to the budgets because on both sides the budgets were prepared without that knowledge. The relevant date for knowledge that might preclude a party making an application to revise a budget will usually be the date when the budget was signed and served. That is the relevant date here.
ii. The revision to the timetable developed over a period of time and the revision I am now dealing with is only distantly related to the knowledge the defendants obtained in April 2017.
i. An additional 12 business days due to the delayed start of the trial.
ii. An additional 2 sitting days due to an increase in the estimated time for cross examination of the defendants' expert witnesses.
iii. An additional 19 business days of non-sitting time of which 6 are due to Norris J being unavailable on certain dates, seven are non-sitting days and 11 are days when the court is not in session (between 22nd December 2017 and 11 January 2018).
iv. An additional 15 business days for the parties to prepare and review each other's closing submissions.
(3) and (4) Work related to service of Mr Torchio's report
(5) Claimants' third party disclosure application
(6) Questions to three of the Defendants' experts
(7) Response to Mr Ellerton