This decision may surprise some.
In the leading case on ‘good reason’ under CPR 3.18(b) Harrison v University Hospitals Coventry and Warwickshire NHS Trust  EWCA CIV 792 Alexander Hutton QC (who also acted for the appellant in this case) argued [at 19] that:
“the purpose of CPR 3.18 (b) was, in effect, to set a cap on the amount which the paying party could expect to pay – unless, of course, the court was satisfied that there was “good reason” to the contrary. But no “good reason” he said, was required if it was being asserted that the recoverable costs should be below the budgeted amount: because then there was no “departure” from the budget.”
In effect, it was the paying party’s case in Harrison that a costs budget acted as an “available fund” and that whilst “good reason” was required to recover costs in excess of a phase, no such “good reason” was required to reduce the costs claimed and that these remained subject to assessment in the usual manner.
This proposition was rejected by Davis LJ who cited with approval the observations of Master Gordon-Saker in Collins v Devonport Royal Dockyard Limited at :
“… what would be the point of costs budgeting (and the considerable resources it has required) if the resulting figures amount to nothing more than a factor, guidance or cap at detailed assessment?”
He went on to say [at 34]:
“if approval of a costs budget by a CMO has the more limited status which the appellant would ascribe to it then that would have a potentially adverse impact on parties thereafter attempting to agree matters without requiring a detailed assessment. Although Mr Hutton queried if that was one of the perceived prospective benefits of the costs budgeting scheme, it seems to me … wholly obvious that it was indeed designed to be one of the prospective benefits of cost budgeting that the need for, and scope of, detailed assessments would potentially be reduced.”
“The appellant’s argument has this initial, and unattractive, oddity. If it is right, it involves a most unappealing lack of reciprocity. It means that a receiving party may only seek to recover more than the approved or agreed budgeted amount if good reason is shown; whereas the paying party may seek to pay less than the approved or agreed budgeted amount without good reason being required to be shown. It is difficult to see the sense or fairness in that.”
“the appellant’s argument bases itself almost entirely on the perceived advantages to the paying party with scant, if any, regard to the position of the receiving party: who no doubt will have placed a degree of reliance on the CMO. From the perspective of the receiving party it is all too easy to see that the paying party is indeed seeking to “depart from” the approved budget in endeavouring to pay less than the budgeted amount.”
Referring [at 41] to comments of Moore-Bick LJ in Henry v Newsgroup Newspapers Limited  EWCA Civ 19,  2 Costs LR 334 Davis LJ said:
“they may well simply relate to costs actually incurred and the consequent application of the indemnity principle (which of course would be capable of being a good reason for departing from the approved budget”
Before Harrison there was Merrix v Heart of England NHS Foundation Trust  EWHC 346 (QB), a decision of Carr J that was approved by the Court of Appeal. In the course of her judgment, Carr J cited  the words of Master Gordon-Saker in Collins v Devonport Royal Dockyard Limited that:
“What may amount to a good reason will depend on the facts of the case. I heard only limited submissions on what may amount to a good reason. There seemed to be agreement that not incurring a liability for the full sum that was approved or agreed is likely to be a good reason, for otherwise there would be a breach of the indemnity principle. However that a phase was not completed at the point of settlement, would not it seems to me necessarily amount to a good reason. If the costs claimed broadly reflect the appropriate proportion of the phase that had been completed by settlement, there would be no point in requiring a line by line assessment of the work done in that phase”
She continued [at 74]:
“if the receiving party has spent less than was agreed or approved in the budget, the need to comply with the indemnity principle would require departure from the budget. There is no question of a party receiving more by way of costs than was actually spent. As District Judge Baldwin sitting as a Regional Costs Judge in Jones commented in this context (at [34(iv)], the incurring of costs lower than were budgeted for would clearly be a good reason for departure from the budget:
“…but, in my judgment, the presumption must then be that the lower figure is even more reasonable and proportionate than the approved amount, and therefore a high burden would remain upon the paying party to show a good reason to award less than the lower figure. The raising of such an argument would only exceptionally, in my view, be a proportionate or appropriate use of scarce court resources.”
“Where costs claimed are less than the budgeted figure, then the inaccuracies will be irrelevant, since the receiving party will only recover the lower figure (because there would be good reason to depart by reason of the indemnity principle).”
And [at 92]:
“here 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 as much where the receiving party claims a sum equal to or less than the sums budgeted as where the receiving party seeks to recover more than the sums budgeted.”
Both Merrix and Harrison were widely interpreted to mean that if costs fell within the budgeted figure “good reason” must be established in order to open those costs up to challenge.
It was recognised in both cases that adherence to the indemnity principle would amount to “good reason” to depart in any case where the costs actually incurred amounted to less than the budgeted figure.
This is uncontroversial and it has been the practice of costs lawyers and costs judges alike to so treat budgeted costs.
It would clearly be wrong to attempt to recover the full budgeted figure where those costs had not actually been incurred.
However, it has not until now been the practice of the courts to go further than allowing the lower sum in place of the full budgeted figure.
Swings and roundabouts
Budgeting is not a perfect science.
It is not uncommon for receiving parties to exceed one or more budgeted phases for reasons outside their control.
In some cases, a successful application under PD3E Para 7.6 (increase by reason of significant development) can be made.
However, these are rare in most cases.
So, these excess costs are lost and the paying party benefits.
The quid pro quo of this has been the ability to recover all costs that fall within budget.
There is a “swings and roundabouts” analogy to be drawn with fixed costs.
In Sharp v Leeds City Council  EWCA Civ 33 Briggs LJ said:
“The fixed costs regime inevitably contains swings and roundabouts, and lawyers who assist claimants by participating in it are accustomed to taking the rough with the smooth, in pursuing legal business which is profitable overall.”
Does this not apply equally to costs budgeted cases?
The burden on a receiving party to establish “good reason” is high.
Does this decision lower the burden upon the paying party to such a degree as to ascribe the budget the “more limited status” referred to by Davis LJ and bring with it the “potentially adverse impact on parties thereafter attempting to agree matters without requiring a detailed assessment” ?
Before we go on, it is relevant to touch upon another area of contention in the arena of costs budgeting, namely hourly rates.
There have been a number of decisions on the treatment of hourly rates in costs budgeted cases. Specifically, in circumstances where hourly rates are reduced in relation to the “incurred costs” part of a bill, can they be similarly reduced in the “budgeted costs” section?
Whilst no higher court authority exists (RNB v London Borough of Newham  EWHC B15 (Costs) settled before it got to appeal), the trend in the Senior Courts Costs Office at least has been to determine that no, they cannot.
In Bains v Royal Wolverhampton NHS Trust, Regional Costs Judge Lumb held that:
“…to reduce hourly charging rates for budgeted costs to the same levels as those allowed for the incurred costs, thereby causing a potential departure from the budgeted phase totals, would be to second guess the thought process of the Costs Managing Judge and would impute a risk of double jeopardy into the detailed assessment.”
In Nash v the MOD  EWHC B4 (COSTS), Master Nagalingham held [at 73] that hourly rates hold no special status in the composition of a budget:
“A proportionate total for each phase of budgeted (future) costs is set based on taking into account a variety of factors, including the incurred costs. A party therefore proceeds with certainty as to what is a proportionate future sum to spend per phase. That certainty is entirely eroded if hourly rates are then given a form of special status which requires rates to be assessed in the estimated phases of a bill of costs.”
So, where does the decision of HHJ Dight leave us?
Well, it raises a few questions.
On a strict interpretation of the decision, “good reason” will be established in every case where a receiving party spends less than the budgeted amount in any given phase, irrespective of whether the anticipated work was completed or not.
This will likely apply to the majority of cases and almost all which settle pre trial.
This would in turn by virtue of CPR 3.18(b) open up all of the costs in that phase to challenge.
Likewise, if a party hits or exceeds the budgeted figure but does not along the way complete every step anticipated for that phase when the budget was set, it would seem that again, per CPR 3.18(b), all of the costs in that phase are open to challenge.
Again, this will likely apply to a large percentage of cases.
How often, for example, do circumstances change? Fewer witnesses statements are prepared or fewer reports obtained than was anticipated when the budget was set, sometimes many months or even years earlier.
Given the emphasis on getting your assumptions right as to how the case will progress at the relatively early stage of costs budgeting, it is likely to be only in the rarest of cases that you will have prophesised the precise direction of the case.
So, one can readily anticipate that “good reason” will be established in the majority of detailed assessments.
Per HHJ Dight’s finding [at 36], once “good reason” has been established under CPR 3.18(b):
“it [is] open to the paying party to challenge the figure which was then being claimed by the receiving party, and they did not have to assert a further good reason to enable the court to do so.”
It is questionable whether this was the intention of the High Court in Merrix or the Court of Appeal in Harrison.
Another question then arises…
Arguably, once CPR 3.18(b) has been invoked, there is no bar to interference with the hourly rates.
Is a costs judge who has reduced hourly rates for incurred costs likely to not do so once the hurdle of CPR 3.18(b) has been overcome?
Does this mean that one could potentially end up with different rates being allowed for different phases of a case dependent on whether you have managed to complete all steps within it, and for no lesser amount than was budgeted?
Does this decision reward the inefficient?
Imagine, for example, that you have completed all of the steps anticipated in a phase, but you are £2,000 under budget.
On the reasoning here, CPR 3.18(b) is automatically invoked.
You are then susceptible to challenge both on the work done and, potentially, the hourly rates.
However, if you spend that further £2,000, there can be no challenge.
Can that have been the intention of the higher courts?
Certainty and reduction in assessments
In Harrison, Davis LJ cited with approval [at 32] the commentary in Cook on Costs (2017 ed, at pages 230-1) that:
“the aims of costs budgeting include a reduction in detailed assessments and of issues raised in points of dispute; and that the element of certainty to clients (in the form of knowing what costs they are likely to face, in terms of payment or recovery) would be removed.”
In Merrix, Carr J also referred with approval a decision of District Judge Hale in Tahera Bhojani v University Hospitals of Leicester NHS Trust who in turn had cited a passage in Cook on Costs [at 61]:
“allowing departure from the budget would also:
a) Overlook that the budgeted costs are already set by reference to reasonableness and proportionality;
b) Ignore the intention expressed by Jackson LJ in his Final Report that “at the end of the litigation the reasonable costs of the winning party are assessed in accordance with the final budget”;
c) Defeat two of the aims of costs budgeting, namely the reduction in the number of assessments and a reduction of the issues raised in points of dispute;
d) Remove the certainty for clients of costs budgeting, namely the ability to make informed decisions at an early stage based on knowledge of the recoverable costs.”
“Finally, real emphasis needs to be placed on the importance of certainty on costs in the context of access to justice. The desirability of predictability was touched on by the Court of Appeal in SARPD Oil (at  already set out above but repeated for ease of reference) and albeit commenting by reference to pre-incurred costs:
“….In such a case, the party who had put forward the costs budget would have been encouraged by the court to litigate on the understanding and with the legitimate expectation that such costs would be likely to be recovered if he were successful, and good reason would need to exist to justify defeating that expectation.”
“Similarly, Jackson LJ in The Reform of Civil Litigation (2016) said this (at paragraph 14-019) :
“Both sides know where they stand financially. They have clarity as to a) what they will recover if they win…and b) what they will pay if they lose (own actual costs + other parties’ recoverable costs) . . . This information is of obvious benefit for those making decisions about the future conduct of litigation.”
And [at 90]:
“Fidelity to the clear words of CPR 3.18, as set out above, will achieve the dual purpose both of reducing the costs of the detailed assessment process and of securing greater predictability on costs exposure/recovery for the parties. Both the receiving and paying party have the benefit of the legitimate expectation. This is a central pillar of access to justice in a world where costs will always be a primary consideration for those contemplating or participating in litigation, and consistent with the overriding objective.
The expensive costs of the detailed assessment procedure are reduced and the case is dealt with justly, with both parties knowing from an early stage what their potential costs liability is, absent good reason to depart from the budget.”
There is at the very least a perceived danger that this decision may have the effect of removing the envisaged reduction in assessments and the degree of certainty which costs budgeting had intended to bring about.
At para 37 of his judgment , HHJ Dight says:
“the fact that the phase of the budget relating to experts was – for the reasons given by Mr Hutton – substantially incomplete was capable of being a good reason, and it would have been open to the Master on that basis to consider whether to reduce the figure. In my judgment, he should heard submissions on what the appropriate figure should have been.”
The judge refers here to the fact of a phase being “substantially incomplete” being capable of being a good reason to depart.
However, in the preceding paragraph, the bar is not set so high:
“the fact that the sum claimed is lower than the budgeted figure, because of the indemnity principle, is itself capable of being a good reason.”
Wherever the bar is set, it seems overwhelmingly likely that paying parties will now in every case where costs fall under the budgeted amount seek to argue that this amounts to a good reason to depart from the budget.
Does that mean that a line by line assessment will follow in every case?
HHJ Dight continues [at 37]:
“That does not mean that it should have resulted in a line-by-line assessment. The Master could have taken whatever appropriate course he thought sensible in the light of his case-management powers to arrive, in the course of that detailed assessment, at the sum which was to be paid in respect of experts.”
So, having established that “good reason” exists by reason of the indemnity principle, it is open to the costs judge to determine whether to:
- Make no further reduction;
- Substitute a lower figure; or
- Carry out a line by line assessment
With options such as this on the table in the majority of cases, a reduction in the number of assessments taking place seems unlikely, especially where large sums of money are at stake.
It remains to be seen how this decision plays out.
At the very least it appears to have brought a degree of uncertainty and subjectivity back into assessments.
- What, for example, amounts to “substantially incomplete”?
- What course of action will the costs judge take once CPR 3.18(b) is invoked?
- Are your post budget hourly rates safe, or will these be adjusted in all incomplete phases?
Paying parties have little to lose in taking the “good reason” point in every case.
And the task of predicting the outcome may just have become that bit more difficult for receiving parties.
Watch this space.
Link to Judgment on www.civillitigationbrief.com