Can lenders avoid cost budgeting?

Nowadays the courts are focused on managing the costs of litigation at the outset of proceedings by way of costs budgeting and in their continuing efforts to control litigation expenses more and more cases are subject to budgeting. This involves the court fixing at an early stage of the proceedings what a party can recover by way of costs if successful in the litigation. Whilst there is a right to come back to court to vary a budget, the concern for lenders should be the court’s interference with its contractual right before the costs have even been incurred.

The terms of the lender’s charge will frequently entitle it to recover the costs incurred in enforcing the borrower’s obligations and recovering any money owed. This contractual right allows the lender to recover costs on an indemnity basis, which will generally result in all or most of the money spent in enforcement being recovered. Different principles are applied in cost budgeting, which mean the amount of costs recovered at the end of proceedings will invariably be lower than the lender would recover under their contractual right to recover costs.

In Gomba Holdings (UK) Ltd v Minories Finance Ltd (N0.2) [1992] 3 W.L.R. 723 the courts have considered the extent of such a contractual right in the context of the court’s general power to control costs. It decided that a lender should not automatically be deprived of its contractual right to costs, without first considering the extent to which those costs should be controlled.

In these circumstances it can be argued that managing the lender’s costs is not appropriate by way of costs budgeting at the start of litigation.

First, it would be unjust to prospectively control what the lender is contractually entitled to recover at a stage of the litigation when cannot be known whether it is right to deprive it of its contractual entitlement.

Secondly, the lender will not seek to recover its costs by way of a court order for costs. Budgeting the lender’s costs will interfere with the contractual bargain that the lender and borrower have struck as recorded in the terms of the charge. Whilst a borrower is entitled to request an account, that exercise is undertaken with reference to different considerations than those which ordinarily apply when the court is determining what order to make about costs in litigation. The appropriate time for the taking of an account is once the costs have been incurred and added to the secured debt.

Accordingly, attempts by courts to cost manage a lender and budget its costs should be and can be resisted; failure to do so may materially impact on what the lender would otherwise expect to recover in terms of its litigation expenditure.