WHAT IS THE POINT OF COSTS BUDGETING? NOW WE HAVE THE ANSWER! – [2017] EWCA Civ 792.

WHAT IS THE POINT OF COSTS BUDGETING? NOW WE HAVE THE ANSWER! – Harrison v University Hospitals Coventry and Warwickshire NHS Trust [2017] EWCA Civ 792.

In our two preceding articles under this Heading we have considered the decisions at first instance and on Appeal in the case of Merrix v Heart of England NHS Foundation Trust, in which diverging views as to the status of a Costs Management Order upon Detailed Assessment were reached. The issues have now reached the Court of Appeal, albeit not within the context of Merrix, but it does seem that a definitive view has now been expressed in the case of Harrison v University Hospitals Coventry and Warwickshire NHS Trust [2017] EWCA Civ 792.

In the lead judgment, Davis LJ determined that in the absence of good reason for further investigation, CPR 3.18 precludes the Court from undertaking a conventional detailed assessment in relation to budgeted (or what were formerly called “estimated”) costs, but that the incurred costs in the Budget should be subject to such detailed assessment (obviously in the absence of agreement between the parties).

“Budgeted Costs”

The main issue in Harrison was expressed to be whether a Costs Judge on a detailed assessment in a case where there had been a Costs Management Order was precluded from going below the budgeted amount unless satisfied that there was good reason for doing so. Put somewhat briefly, the paying party here suggested that the Budget was a factor to be taken into account upon detailed assessment and that whilst it was necessary to show good reason why more should be allowed than budgeted, the same did not apply in relation to an argument that less should be allowed.

The judgment dismisses the arguments of the paying party, preferring the approach at first instance before the Costs Judge (Master Whalan) in Harrison and Carr J on the Appeal in Merrix, which reinforced the view that the relevance of costs budgeting would be very much diminished if it was to be nothing more than guidance upon assessment; that the wording of CPR 3.18 was clear and without “any real ambiguity”; that the budgeting regime was designed such that the need for and scope of subsequent detailed assessments would be reduced. Arguments to the contrary did not “show much appreciation for the position of the actual parties to the litigation – not just the prospective paying party but also the prospective receiving party – who need at an early stage in the litigation to know, as best they can, where they stand”.

Had the rules intended that the approved Budget could only be departed from where the sum claimed exceeded the set figure, then they would have said so. There was already provision in the rules for costs capping and the approach suggested by the paying party seem to be little more than having costs capping in a different guise.

It was found that there was nothing within CPR 44.4 (3) (h) to tell against his preferred interpretation and that the wording of CPR 3.18 positively mandates regard to the last approved or agreed budget. The comments of Coulson J in McInnes v Gross [2017] EWHC 127(QB) were approved where he had stated that the significance of CPR 3.18 cannot be understated and that where costs are to be assessed the Costs Judge “will start with the figure in the approved costs budget”.

The judgement goes on to make some very interesting comments as to the ability of the court to depart from the budget on the ground of good reason:

“Where there is a proposed departure from budget – be it upwards or downwards – the court on a detailed assessment is empowered to sanction such a departure if it is satisfied that there is good reason for doing so. That of course is a significant fetter on the court having an unrestricted discretion: it is deliberately designed to be so. Costs judges should therefore be expected not to adopt a lax or over-indulgent approach to the need to find “good reason”: if only because to do so would tend to subvert one of the principal purposes of costs budgeting and thence the overriding objective. Moreover, while the context and the wording of CPR 3.18 (b) is different from that of CPR 3.9 relating to relief from sanctions, the robustness and relative rigour of approach to be expected in that context (see Denton v TH White Limited [2014] EWCA Civ 906, [2014] 1 WLR 3926) can properly find at least some degree of reflection in the present context. Nevertheless, all that said, the existence of the “good reason” provision gives a valuable and important safeguard in order to prevent a real risk of injustice; and, as I see it, it goes a considerable way to meeting Mr Hutton’s doom-laden predictions of detailed assessments becoming mere rubber stamps of CMOs and of injustice for paying parties if the approach is to be that adopted in this present case. As to what will constitute “good reason” in any given case I think it much better not to seek to proffer any further, necessarily generalised, guidance or examples. The matter can safely be left to the individual appraisal and evaluation of costs judges by reference to the circumstances of each individual case”

On this basis, it is evident that it will be no easy task to persuade the Court to depart from the Budget and the Court will clearly be expected to treat any such submissions with robustness and rigour.

Incurred Costs

However, applying the same methodology, the judgement finds that incurred costs should still be the subject of assessment and not simply allowed at the amount set in the approved or agreed Budget (again absent any submissions on good reason). Davis LJ indicated that this was the outcome of giving the wording of the rules their natural and ordinary meaning.

The rules on Budgeting were amended in April this year to draw a clear distinction between incurred and budgeted (or “estimated”) costs, but the judgment is to the effect that the rule change does no more than clarify what was the status quo ante.

The reasoning was that CPR 3.18 (b) relates to a departure from the approved or agreed budget, but the costs incurred before the date of the budget were not agreed in this case nor were they approved by the Costs Management Order. The focus of a Judge when making such an Order is on estimating the costs reasonably and proportionately to be incurred in the future as is made clear by CPR 3.15 (1). The provisions of PD 3E at 7.4 are specific that the Court may not approve costs incurred before the date of the CMC.

In relation to the argument that the incurred costs will have been taken into account by the Court when setting the future estimated costs Davis LJ said:

“With respect, this will not do. Either incurred costs are within the ambit of CPR 3.18 (b) or they are not. Since they are not approved budgeted costs, by the terms of paragraph 7.4 of PD 3E and of the Rules, they are not within that sub-rule”

He went on to criticise some of the comments made by Sales LJ in Sarpd Oil International Limited v AddaxEnergy SA [2016] EWCA Civ 120, which suggested that there should be no distinction between the treatment of incurred costs and future estimated costs found in an approved or agreed Budget upon assessment thinking that, “with all respect, those particular obiter comments may have gone too far”. He noted that the Civil Procedure Rule Committee had considered the observations of Sales LJ “unexpected” and that the effect of those observations would be to complicate as opposed to simplify costs management. There was a fear that such an approach would undermine attempts to agree costs budgets and it was with this reasoning in mind that the April 2017 rule changes were made. He went on:

“Costs budgeting, to be performed properly, undoubtedly places a real burden on the parties and court. It would potentially greatly extend that burden if incurred costs were to be subjected to the same degree of preparation and appraisal as budgeted costs. One can understand that there are principled arguments which nevertheless could favour such an approach: but there are also competing arguments. At all events, the then and current versions of the Rules and Practice Direction clearly sharply distinguish, for these purposes, incurred costs from estimated budgeted costs”.

We are thus left in a position midway between the two extreme positions adopted by proponents on either side. It is not the case that, absent good reason, whatever is in the approved or agreed Budget will be allowed upon assessment. The incurred costs at the date of the CMC may still be challenged upon assessment and any comments made by the Judge at the CMC will be taken into account at the assessment. However, in relation to the budgeted costs (“future estimated costs”) absent good reason the budgeted amount should now be allowed upon assessment without further investigation. Of interest is the suggestion that the incurred costs should not be relevant to the future estimated costs to be allowed at the Budgeting stage,

The Appeal decision will probably not come as a surprise to many. However, it does serve to emphasise the need for careful and intelligent preparation of Budgets together with forceful advocacy.

As ever, we at SPH would strongly recommend the involvement of Costs Lawyers in this process and look forward to offering our experience and expertise in this regard.