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What happens on an assessment of costs when a costs management order has been made

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management

02-04-2020

With a few exceptions, costs budgeting applies to the majority of part 7 multi-track matters. Once the costs budget is agreed between the parties, approved by the court or a costs management order has been made, what is the position upon an assessment of costs if there is an overspend or underspend in a phase? Joanne Dorgan explains:

The Rules

The Rules in relation to costs budgeting can be found at CPR 3.12 to 3.18 and in practice direction 3E.

CPR 3.15 (4) states:

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.

CPR 3.18 states:

“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;……”

So, it is each phase of the budget that should not be exceeded. It is not the case that an overspend in one phase can be set-off against an underspend in another.

The court is bound by the agreed or approved budget. If a phase is exceeded there will need to be a “good reason” for that phase of the budget to be exceeded and for the court to depart from the agreed / approved sum for that phase.

A costs budget will be relevant to any assessment of costs, at the very least in terms of being a guide and a starting point. The court will also take into account comments made and recorded on the face of the costs management order at any assessment of costs.

Departing from the Agreed or Approved Costs Budget

In Valerie Merrix v Heart of England NHS Foundation Trust [2017] EWHC 345 (QB) the question as to what extent, if at all, does the costs budgeting regime under CPR Part 3 fetter the powers and discretion of the costs judge at a detailed assessment of costs under CPR 47? The court found that where a costs management order has been made, when assessing costs on the standard basis, the costs judge will not depart from the receiving party’s last approved or agreed budget unless satisfied that there is good reason to do so. This applies when the receiving party claims a sum equal to or less than the sums budgeted or where the receiving party seeks to recover more than the sums budgeted.

In the matter of Jacqueline Harrison v University Hospital Coventry & Warwick NHS Trust [2017] EWCA Civ 792, the Court of Appeal looked at 2 issues:

1. Where a Costs Management Order approving a costs budget has been made in the course of civil proceedings is a costs judge on a subsequent detailed assessment precluded from going below the budgeted amount unless satisfied that there is a good reason for doing so?

2. Whether, with regard to costs incurred prior to the budget (incurred costs), there is or is not a like requirement of good reason if a costs judge on a subsequent detailed assessment is to depart from the amount put forward at the relevant costs management hearing.

The Court of Appeal held that there could only be a departure from the approved costs for a “good reason”, save that the requirement did not apply for costs incurred before the budget. Four points of principal emerged: -

1. where a costs management order had been made, in relation to future estimated costs, upon detailed assessment the court will not depart upwards or downwards from that approved budget without “good reason”.

2. No such “good reason” is required in relation to incurred costs. Incurred costs are to be the subject of detailed assessment in the usual way, except to the extent to which the court may take into account comments made in relation to incurred costs by the judge when the costs management order was made.

3. The making of a costs management order does not close-off arguments on assessment as to what global figure would be proportionate for the case. The costs judge will still look at the overall costs to consider whether the resulting aggregate figure is proportionate.

4. For the purpose of proportionality and the transitional provisions, a claim is “commenced” when the relevant proceedings are issued by the court, not the date they are sent to the court.

So, on an assessment of costs, a good reason will be needed to depart upwards or downwards from the approved budget in respect of estimated costs. In respect of the incurred costs, a good reason is not required and incurred costs are to be subject to detailed assessment in the usual way, except that comments made by the court when the costs management order was made may be taken into account.

What is considered to be a good reason to depart from the costs budget?

There is little guidance as to what constitutes good reason to depart upwards or downward in respect of an agreed or approved budget. The case of Harrison did not provide any guidance as to what would be “good reason” leaving this to be decided by the costs judges and the individual circumstances of a matter.

The White Book at paragraph 3.18.3 states that costs judges should have in mind the three stage test known as the “Denton principles”. The Denton principles arose out of the case of Denton v White [2014] EWCA Civ 906 which set out a 3 stage approach for assessing applications for relief from sanctions. The court might consider the significance of the departure from the approved budgeted figure, the causes of it and all the circumstances of the case including in particular a) the need for litigation to be conducted efficiently and at proportionate cost and b) the need to enforce compliance with rules, practice directions and court orders.

Is a reduction in the hourly rates of the incurred costs good reason?

Both the following cases support the view that a costs judge may depart from the last approved or agreed budget if the total costs incurred are disproportionate. However, they reach different conclusions in respect of hourly rates which are lower than those upon which the approved budget had been prepared.

In RNB v London Borough of Newham [2017] EWHC B4 (Costs), upon detailed assessment the hourly rates claimed in respect of incurred costs were reduced. The question was whether the hourly rates in respect of the budgeted costs should be reduced? The court found that reducing the hourly rates for the incurred costs meant that there was “good reason” to reduce the budgeted costs as well.

In contrast, Nash v Ministry of Defence [2018] EWHC B4 (Costs), on assessment the Master reduced the hourly rates claimed in respect the incurred costs. The defendant argued that the fact that the hourly rates had been reduced in respect of the incurred costs was good reason to reduce the hourly rates in respect of the budget costs. The Master found that a reduction in the hourly rates of the incurred costs was not a good reason to depart from the budget in respect of future costs. The hourly rates were one factor taken into account when preparing the costs budget and should not be treated as having a special status, making hourly rates different from other factors. The paying party is still able to argue that the overall sum of assessed incurred costs plus budgeted costs are disproportionate.

In Jallow v Ministry of Defence [2018] EWHC B7 (Costs), the costs judge expressed views similar to those in Nash on the basis that the assessing court has to accept that the budgeted figures for taking the case to trial, as recorded in the costs management order are reasonable and proportionate.

Is the Indemnity principle good reason?

In Barts Health NHS Trust v Salmon (Unreported) (17 January 2019), the receiving party claimed less than the budget in certain phases and the master assessed the bill as claimed. The judge held that the master had been wrong in not explaining his reasons for assessing the bill as claimed and in not allowing the paying party to make submissions as to the appropriate sums in respect of the phases before assessing. HHJ Dight said that were a party claimed less than the budget sum, because they spent less and because of the indemnity principle, that was good reason for departing from the budget and that there was no need to establish a further good reason in order to reduce the costs to a greater extent. In this matter there were good reasons to justify a further downward departure from the budget as the phases were substantially incomplete and there was no alternative dispute resolution other than the making and acceptance of a Part 36 offer. Once good reason has been identified the court should hear submissions from both parties as to what the final figure should be. Although not binding on higher courts, when budgeted cases have settled prior to trial, the costs are to be open to challenge on assessment.

Is an award of indemnity costs good reason?

In accordance with CPR 3.18 where costs are assessed on the standard basis, the court will have regarding to the receiving party’s last approved or agreed budgeted costs for each phase of the proceedings. CPR 3.18 does not provide for the assessment of costs on the indemnity basis. Therefore should an order for indemnity costs be obtained the court does not have to have regard to the last approved or agreed budgeted costs for each phase.

However, Coulson J in Elvanite Full Circle v AMEC [2013] EWHC 1642 (TCC); [2013] 4 All ER 765, suggested that the costs budget would be the starting point for an assessment, although an award of indemnity costs, which did not require any assessment of proportionality, might be a good reason to permit a departure from the budget.

Is proportionality good reason?

Proportionality still impacts costs even where the estimated costs remain within budget, as the court must still look at the entirety of costs in order to consider if the overall figure is proportionate and determine whether or not to make an additional reduction.

What will not be considered good reason?

There is no definition and only a little guidance as to what the court would consider to be “good reason”. However, it is likely that the following would not be considered to be “good reason”:

  • where a case has not lurched off track or issues did not change
  • if the original estimate was a mistake or was under-estimated
  • absence of prejudice will not turn a bad reason into a good reason
  • costs incurred by an expert unnecessarily attending every date of the trial
  • expenses, such as those of an expert, being higher than estimated even though there were no amendments of significance in the case
  • matters took longer than originally anticipated
  • failure to prepare evidence in accordance with case management directions.

How do you avoid exceeding the budget

Unless good reason can be shown to depart upwards or downwards from the budgeted costs the court will not depart from an agreed or approved costs budget upon assessment.

A carefully prepared budget at the CMC phase is required. The costs unit have experience in prepared costs budgets.

It is also important to regularly review the approved or agreed budget, to ensure that your client remains within the budget. The costs unit is also able to provide an on-going monitoring and reporting service, in order that you can stay on top of the budget. Whilst it cannot be guaranteed that there will never be a budget overrun, at the very least you will have sufficient warning, and if needs be, can apply to the court for an increase.

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