Kerry Underwood

WHEN CAN COSTS JUDGE DEPART FROM COSTS BUDGET? HARRISON CONSIDERED

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By Robert Males, Managing Partner, Underwoods Solicitors

In Harrison v University Hospitals Coventry and Warwickshire NHS Trust (2017) EWCA Civ 792 (21 June 2017)

the Court of Appeal dealt with the important issue of when a party’s costs claimed in an action can vary from the costs budget in a situation where the costs were in fact less than the cost set out in a particular phase in the budget.

The first issue concerned a situation where a costs management order approving a cost budget has been made and whether on a subsequent detailed assessment the costs judge is precluded from going below the budgeted amount unless satisfied there is a good reason to do so. Alternatively, can the costs judge go below the budgeted amount without any prior requirement for a good reason?

The second issue is whether regarding the incurred costs there is a similar requirement of a Mr Justice good reason if a costs judge on assessment wishes to depart from the amount put forward in that section of the costs budget.

The court was aware of the decision of Carr in the case of Merrix v Heart of England NHS Foundation Trust (2017) EWHC 346 (QB) where on the first of these issues the judge reached the decision that a good reason is required to go below the budgeted amount on assessment.

The case involved a clinical negligence matter following a caesarean section operation undertaken at the defendant’s hospital where proceedings were issued on 9th April 2013.

In the claim form the damages were limited to £50,000.00 and liability was disputed. A Costs Management Conference took place on 18th August 2014 and the parties were given permission to rely upon their updated costs budget as modified at that hearing. The total of the claimant’s costs, including both incurred and estimated future costs, amounted to approximately £197,000.00. The success fee and ATE insurance premium were not included in that sum. There was no comment recorded by the judge in relation to incurred costs which amounted to approximately £108,000.00 of the total figure.

In July 2015 the case was settled shortly before trial on the basis that the defendant agreed to pay £20,000.00 plus costs on the standard basis. The claimants subsequently put forward a bill of costs in excess of £467,000.00 including the success fee and ATE premium.

The court set out the relevant rules including CPR 44.3 which provided, among other things, as follows:

“(2) Where the amount of costs is to be assessed on the standard basis, the court will –

(a) only allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred; and

(b) resolve any doubt which it may have as to whether costs were reasonably and proportionately incurred or were reasonable and proportionate in amount in favour of the paying party.

The court went on to set out the factors to be taken into account when deciding the amount of costs under CPR 44.4 including all of the factors to be taken into account by the court set out at CPR 44.4(3) which include under CPR 44.(3)(h) “the receiving party’s last approved or agreed budget.”

Rules relating to costs management and costs budgeting are contained in CPR 3.12 to CPR 3.18 which include the important requirement to file costs budgets which provide that the court may make a costs management order where costs budgets have been filed and exchanged 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.

Such a costs management order will:

(a) record the extent to which the budgeted costs are agreed between the parties;

(b) in respect of budgets or parts of budgets which are not agreed, record the court’s approval after making appropriate revisions;

(3) if a costs management order has been made, the court will thereafter control the parties’ budgets in respect of recoverable costs.

The key aspect for the purposes of this case was CPR 3.18 which provided as follows:

“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 budget for each phase of the proceedings;

(b) not depart from such approved or agreed budget unless satisfied that there is a good reason to do so.

(attention is drawn to rules 44.3(20)(a) and 44.3(5), which concern proportionally of costs.)”

The court was also directed to the relevant sections of the Practice Directions relating to costs management and costs budgeting, in particular paragraph 7.3 and 7.4 of Practice Direction 3E which provided as follows:

“7.3 If the budgets or parts of the budgets are agreed between all parties, the court will record the extent of such agreement. In so far as the budgets are not agreed, the court will review them and, after making any appropriate revisions, record its approval of those budgets. The court’s approval will relate only to the total figures for 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 budgets, 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.

7.4 As part of the costs management process the court may not approve costs incurred before the date of any budget. 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 costs.”

Counsel for the appellant argued that the word budget as set out in the CPR 3.18(b) connoted a fund and if the figure for costs claimed fell within that amount then there was no departure from it. This meant that CPR 3.18(b) effectively set a cap on the amount upon which the paying party could expect to pay unless of course the court was satisfied there was a good reason to depart from that budget. Counsel submitted that there was no good reason required if the costs claimed fell below the budgeted amount because there was no departure from the budget.

Counsel went on to submit that it was appropriate for the court to consider the costs on a detailed assessment with the benefit of hindsight and conduct a thorough reappraisal of the costs which had actually been incurred rather than considering an estimate of what might in the future be incurred which occurs during the cost budgeting process. Counsel also noted that cost budgeting did not concern itself with issues such as hourly rates and furthermore, that a proper assessment of proportionally could only be made at the conclusion of the proceedings and that was better suited to a detailed assessment.

Counsel for the respondent submitted that the original costs judge’s interpretation of CPR 3.18(b) was correct.

The court considered the construction of wording CPR 3.12 and concluded that the Master had reached the correct conclusion that a good reason was required to depart from the costs budget and endorsed the reasoning of Carr J in Merrix v Heart of England NHS Foundation Trust (2017) EWHC 346 (QB).

The court was critical of the complaints raised by counsel for the appellant about the current cost budgeting process. The court referred to the latest edition of Cook on Costs which commented that to sanction a departure from the budget at detailed assessment, without good reason, would overlook that budgeted costs are already required to have regard to both reasonableness and proportionality. The aims of cost budgeting include a reduction in detailed assessment and of the issues raised in points of dispute and that the element of certainty to clients would be removed.

Furthermore, the court noted the requirement that a cost budget has to be signed and certified as being a fair and accurate estimate of the costs which it would be reasonable and proportionate for the client to receive. Any revision of those budgets has to be filed and approved where the estimates change. The judge who is being asked to approve a budget at a Costs Management Hearing must take into account considerations of both reasonableness and of proportionality.

The court did not consider there was any ambiguity in the words of CPR 3.18(b). It did not mean that a receiving party may only seek to recover more than the approved or agreed budget if good reason is shown whereas a paying party would seek to pay less than the approved or agreed budget without a good reason being required. There is no sense of fairness in that. Both the prospective paying party and the prospective receiving party need to know where they stand in relation to costs at an early stage of the litigation.

Had the intention of the rule been that a good reason is only required in the instances where the sum claimed exceeds the approved budgets then no doubt the rule could have easily and explicitly had said so. In any event, the rules provide elsewhere for costs capping cases.

The natural and ordinary meaning of CPR 3.18 is wholly consistent with the purposes behind and importance attributed to costs budgeting and costs management orders.

The court went on to identify further weaknesses in counsel for the claimant’s argument. Counsel submitted that unless the rules were interpreted as he had argued, a Case Management Order approving a budget would operate in effect to replace detailed assessment. That clearly cannot be correct. The effect of a CMO effects how the detailed assessment is conducted. Where there is a proposed departure from a cost budget, be it upwards or downwards, the court on a detailed assessment has the power to sanction a departure from the budget if it is satisfied that there is a good reason for doing so. That qualification is a significant fetter on the court’s discretion. Costs judges should not be expected to adopt a lax or overindulgent approach to the need to find a good reason. To do so would subvert one of the principle purposes of costs budgeting and the overriding objective.

The existence of the “good reason” provision provides a valuable and important safeguard in order to prevent a real risk of injustice. What will constitute a “good reason” in any given case will depend upon the circumstances and if the court decides that it was not sensible to give guidance or examples. The matter can safely be left to the individual assessment by costs judges.

CPR 3.18(b) relates to a departure from “the approved or agreed budget” however, the costs incurred before the date of the budget were never agreed nor were they ever approved by the CMO. The focus of a judge making a CMO is on estimating costs reasonably and proportionately to be incurred in the future. In carrying out this task, the court may have regard to costs already incurred and that may, in turn, impact on the assessment of what may be reasonable and proportionate for the future. However, paragraph 7.4 of Practice Direction 3E is quite specific. As part of the Cost Management process, the court may not approve costs incurred before the date of a Costs Management Conference. It can record in the CMO its comments on incurred costs (if any) and those can then be taken into account when considering reasonableness and proportionally. (See CPR 3.15(4) and CPR 3.18(c))

The court confirmed that incurred costs are not within the ambit of CPR 3.18 at all and that such incurred costs are subject to detailed assessment in the usual way without any added requirement of a “good reason” for departure from the approved budget.

Despite counsel for the claimant submitting a somewhat subtle argument saying that the incurred costs will have acquired a special status because they are considered when the court looks at each phase of the budget and takes into account incurred costs when assessing reasonableness and proportionality of future costs. This did not seek favour with the court. Incurred costs are either within the ambit of CPR 3.18(b) or they are not and the court concluded that as they are not approved budgeted costs then they are not within that sub-rule.

Furthermore, the judge conducting the Costs Management hearing is entitled, but not obliged, to record comments on incurred costs which, if made, will be taken into account when considering reasonableness and proportionality.

A costs judge on detailed assessment will be assessing incurred costs in the usual way and will also be considering budgeted costs, and not departing from those costs in the absence of a good reason, so the costs judge will be looking at matters in the round and consider whether the resulting total figure is proportionate, having regard to CPR 44.3(2)(a) and (5).

The rules and Practice Direction clearly distinguish between incurred costs and estimated budgeted costs and it is important to keep that distinction. It is only the budgeted costs which are subject to variation for good reason.

Comment

This case along with Merrix will hopefully put to bed the argument about when a Costs Budget can be varied whether up or down and help practitioners understand what is “a good reason”.

We have seen cases since this decision involving hourly rates but this decision is very important in understanding when and how a Costs Budget can be varied on assessment.

Lord Justice Jackson’s recent report on the Extension of Fixed Costs makes numerous references to the costs budgeting process and the general view that after a difficult start it is now working well and that decisions such as this will assist in the development of the costs budgeting process until such time as fixed costs enter the picture.

 

See Also:

HOURLY RATES IN BUDGET CAN BE CUT ON ASSESSMENT

HOURLY RATES IN BUDGET CAN BE CUT ON ASSESSMENT, OR CAN THEY?

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Written by kerryunderwood

August 30, 2017 at 8:40 am

Posted in Uncategorized

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