horwich farrelly

Costs Budgeting and the Discount Rate

March, 22, 2017

The Discount Rate was reduced to -0.75% on 20 March 2017, meaning that a defendant’s liability for future losses greatly increased.

The rate change was announced by the Lord Chancellor on 27 February and its impact on costs was felt immediately. Whilst a further consultation is to be launched imminently, there is little doubt that the presiding rate of -0.75% will be applicable for some time and will be one that the court will base the valuation of claims upon for budgeting purposes.

In practice

At a CCMC on the morning of the announcement it was suggested by counsel for the claimant that the reduction in the Discount Rate (DR) would have a significant impact on the likely level of damages awarded. This was used in support of the claimant’s argument that the costs claimed were proportionate. The judge was persuaded that the costs were indeed proportionate on the broad -0.75% DR valuation, and whilst precise figures for the impact of the change could not be provided he was clearly influenced by the rate change. The budget was still subjected to significant reductions but those reductions were based on issues of reasonableness as opposed to proportionality. Reasonableness is, of course, assessed secondary to proportionality.

Horwich Farrelly attended a further CCMC last week when the issue of the DR was again raised. It was suggested that the pleaded value of the claim had doubled from £5million to £10million and that the proportionality of the budgeted costs should be assessed in light of this. There are also other claims being dealt with by ourselves that will be budgeted in the near future, especially for young claimants where the pleaded value of the claim using a -0.75% rate will almost treble.

It is therefore clear that the reduction in the DR is likely to have a significant impact on costs in so far as proportionality is concerned.

The future

It does seem likely, given the joint statement from the Chancellor of the Exchequer and the ABI in relation to the consultation on the framework for setting the DR, that the rate will be subject to further variation in the not too distant future. We understand the consultation may be launched as early as the week commencing 27 March.

However, we believe that at CCMCs (as opposed to the position that will be adopted at trials and assessments) the court will not be interested in looking beyond the presiding rate and will have no appetite for considering what a consultation may deliver in say 12 months’ time.

Having carefully considered the likely impact of these changes on costs we have begun to record those cases that are currently being impacted by the DR change. That data will then enable to us to consider whether budgets need to be re-visited once the rate has been changed again.

In terms of varying existing budgets upwards on account of the reduction to -0.75% we are yet to see any such applications from claimants. But there is no doubt that they are now considering whether the impact of the DR on the issue of proportionality will warrant upwards revision of their budgets.

Our view at this stage is that in most cases such an application will fail. Whilst the DR will impact on the value of a claim it does not impact on the work required. As such, unless the court is prepared to vary the directions due to the increase in value (for example by allowing additional evidence that had previously been considered disproportionate), it seems to us that there is limited scope for varying a budget upwards.

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