Much has been written about the current massive shake-up to the litigation costs regime, including the abolition of the recovery of lawyer's CFA (no-win, no-fee) success fees from the losing party. However another facet of the new costs rules will be equally, if not more, important to litigants – the introduction of costs management rules, also known as costs budgeting.

The idea behind costs budgeting is simple; in all "multi-track" claims (generally speaking any claims worth over £25,000) the parties' solicitors will each have to provide a fairly detailed costs budget, which sets out the anticipated legal costs for every stage of the litigation process, and the assumptions on which the figures are based. The budget is to be provided to the Court and the other parties at an early stage in the proceedings – shortly after the Defendant has served its Defence, and before the initial "costs management conference" (CMC), at which the Court sets down the directions to trial. At the CMC, the Court will have the power to approve or modify the parties' costs budgets, which may or may not have been agreed between the parties.

This approval by the Court is where the new costs management regime bites: a party will not be permitted to depart from its initial Court-approved budget unless it has made a successful application to Court to amend its budget during the litigation, or unless there is "good reason" to do so after the event. This is relevant to the recoverability of costs from the losing party – if the winning party claims say £100,000 in costs but its Court-approved budget was £10,000, then absent a "good reason" (whatever that might mean, but in reality likely to mean a very good reason indeed) the winning party's cost recovery will be limited to £10,000, even if all of the costs were reasonably and necessarily incurred. It is therefore clearly vital for parties to stick to their approved budgets, or to apply to Court to amend their budgets should that become necessary.

By way of comparison, under the current system, the winning party which had spent £100,000 on costs would prima facie have been entitled to recover all of those costs, subject to assessment. The outcome of the assessment of costs is case-specific, but generally a successful party would expect to recover somewhere in the region of 70 percent of its costs on assessment, so in this example around £70,000.

It is important to note that the limit of the approved costs budget only applies to the recovery of costs from the other (generally the losing) party. It does not in any way limit a successful litigant's liability for its own legal costs, only how much of those costs are recoverable from the other side. Therefore in the example above, the winning party will have a legal bill of £100,000 but will only recover £10,000 from the other side in respect of costs, leaving a considerable shortfall.

The flip-side is that if the winning party in the example had an approved budget of £100,000, it seems on the face of it that they should be able to recover the full £100,000 from the other side, as the Court will not depart from the costs budget without good reason. As such, it would appear that the new rules might actually have the effect of increasing the amount of costs recoverable by a successful party to litigation, if that party has stuck very closely to its approved budget. Good for winners, bad for losers – and the opposite of what the new rules are intended to achieve.

A number of considerations flow from these new rules. First, introducing an additional step or steps into litigation (i.e. the production of a fairly detailed and important costs budget) will almost inevitably add to the time spent in the conduct of litigation and hence the costs. This applies both to the preparation of the initial costs budget, and to any applications to amend the costs budget later in the litigation process.

Secondly, the fact that the costs budget must be provided in advance of the first CMC (i.e. at an early stage in the case) means that the issues which are likely to be most important in the case may not yet have become clear. For example, disclosure (the process of exchanging relevant documents and information) can often throw up new issues, as can expert or witness evidence. Equally, issues which initially appeared to be central may fall away entirely as the case develops, or previously minor issues may become critical. This potential problem is addressed in the new rules by allowing the parties to apply to Court to amend their costs budgets.

Making applications to amend budgets is the solution to new or unexpected issues cropping up, but at the additional cost of having to make that application at Court. It also remains to be seen how open the Courts are to such applications; it may prove to be very difficult to get a costs budget amended, especially as the rules are specifically intended to keep costs down. That is of course an admirable aim, but where does it leave the litigant who feels they have a strong case but is unwilling or unable to spend more than the approved level of costs in pursuing it, in circumstances in which they will almost certainly not recover those costs even if they win? On the face of it, not allowing costs budgets to be amended might therefore be seen as a barrier to justice. Furthermore, if Courts do indeed prove reluctant to allow amendments to costs budgets, might that create pressure on parties to litigation to make their initial budgets as high as possible?

One way round this problem might be to make the assumptions in the costs budget as narrow as possible, with as many caveats and contingencies as possible, thereby leaving the door open for amendments on the basis that a particular matter was not within the scope of the initial budget. How such an approach will be viewed by the Courts again remains to be seen; it would certainly not seem to be in the spirit of the new regime, but will undoubtedly be tried.

Thirdly, costs budgets will be expected to be "proportionate" to the case, but what does that actually mean? The obvious answer is that it means proportionate relative to the value of the case (i.e. it would not be proportionate to spend £100,000 to recover a £10,000 debt) but there is more to it than that; the complexity of the case, the conduct of the other party, the importance of the case to the parties other than financially (such as damage to reputation) and so on, can all be taken into account. Given all these factors, it may not be easy to ascertain what is "proportionate" in any given case.

The additional cost of preparing a detailed budget also adds to the "front loading" of costs, in which a large amount of costs are spent at an early stage of proceedings. This already happens to some extent with pre-action exchange of information and early mediations – both actively encouraged by the Courts. While early exchange of information has some obvious benefits, this "front loading" of costs can sometimes hinder settlement, which is clearly contrary to the intention of the Courts.

It is also easy to see how parties and their legal advisors might try to use costs budgets tactically. For example an otherwise hopeless Defendant, who is trying everything to put off the evil day when they will eventually have to pay out, might well argue that a Claimant's costs budget is too high and should be limited by the Court. If this argument were to succeed, it would have the effect of placing an irrecoverable costs burden on the entirely innocent Claimant; in some cases it could lead to perfectly good claims not being pursued. In other cases, between two well matched parties, it may be the case that neither side has any incentive to argue for a limit to the other side's budget, as that may well lead to their own budget being limited.

Finally, it is worth considering that the act of approval of costs budgets by the Court means legitimising those costs, which therefore are arguably more likely to be actually incurred.

It remains to be seen how the new costs management rules will operate in practice. Whilst the overall objective is to reduce costs, it is possible that the end result may actually be the opposite.

The new costs budgeting regime comes into force on 1 April 2013, and will apply to all multi-track cases with a first CMC falling after that date.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.