This was a decision on the amount of payment to be made by Sarens to CBUK on account of costs pursuant to CPR 44.2(8) following judgment in favour of CBUK.
CBUK had incurred in the region of £140,000, but took as its starting point the figure of £128,124.54, being the total figure in its agreed costs budget. From that figure, it first deducted costs that it said were never in fact incurred (amounting to £24,010) to leave £104,114.54. It then added the costs of two applications in December 2017 (“the December Applications”) which Sarens accepted in principle it had to pay, in the sums of £6,866 and £13,409.50 respectively. This exercise produced a total figure of £124,390.04 (“the Adjusted Figure”).
CBUK contended that it was entitled to a payment on account of costs from Sarens of 90% of the Adjusted Figure, amounting to £111,951.04.
Argument and Decision
Sarens opposed a payment on account of costs at the level sought by CBUK, contending, in short, that it was not justified on the authorities and that there was every reason to think that the Adjusted Figure would be reduced on a detailed assessment. They argued that they should not be required to pay more than £74,634.02 on account, being 60% of the total adjusted amount of £124,390.04, or as approximately 80% of the realistic highest starting point for CBUK’s costs taking into account two main criticisms:
- Firstly, the hourly rates of CBUK’s solicitors were excessive and that there would be a good reason on a detailed assessment for reducing the partner hourly rate in respect of both incurred and estimated costs in CBUK’s agreed Budget, together with the partner time set out in the two costs schedules for the December Applications by approximately 30%;
- Secondly, there was reason to think that CBUK would not recover the entirety of its incurred costs of £47,859.54 (as set out in its agreed Budget) on a detailed assessment owing to the fact:
(i) this figure included £6,428.54 for costs incurred by Bond Dickinson, a firm of solicitors which acted for CBUK in the adjudication but not in these proceedings; and
(ii) this figure included a further sum of £7,307 for pre-action costs in circumstances where there was no pre-action correspondence and a substantial sum had been incurred on the issues/statements of case phase, notwithstanding that CBUK had always maintained that the case was straight-forward.
CBUK relied on the decision of Coulson J in MacInnes v Gross  EWHC 127 (QB), at paragraphs -, which they said should be applied as an over-arching principle when dealing with an application for a payment of costs on account in a case where there was an agreed or approved costs budget. In that case the defendant had succeeded at trial and its approved costs budget amounted to £570,000, although its total costs were said to be very much higher than that. Coulson J said this at -:
25…In my view, the first defendant’s approved costs budget is the appropriate starting point for the calculation of any interim payment on account of costs. CPR 3.18 makes plain that, where there is an approved or agreed costs budget, when costs are assessed on a standard basis at the end of the case, “the court will…not depart from such approved or agreed budget unless satisfied that there is good reason to do so”. The significance of this rule cannot be understated. It means that, when costs are assessed, the costs judge will start with the figure in the approved costs budget. If there is no good reason to depart from that figure, he or she is likely to conclude the assessment at the same figure: see Silvia Henry v News Group Newspapers Ltd  EWCA Civ 19.
26. One of the main benefits to be gained from the increased work for the parties (and the court) in undertaking the detailed costs management exercise at the outset of the case is the fact that, at its conclusion, there will be a large amount of certainty as to what the likely costs recovery will be. One consequence is that, for the purposes of calculating the interim payment on account of costs, the starting point will almost always be the payee’s approved costs budget. Another consequence is that the court assessing the interim payment can ignore the fact that, as here, there may have been significant expenditure on costs by the payee above the budget figure: any increase is a matter for the costs judge and the relatively onerous burden of recovering more than the budget figure is on the payee: see Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd (No 2)  EWHC 1643 (TCC).
27. So when making an interim payment on account of costs in a case with an approved costs budget, the days of the educated guesswork identified by Jacob J in Mars UK Limited v TeKnowledge Limited  2 Costs LR 44 are now gone. Instead the court can be confident that there is a figure for costs which, because it has already been approved, is both reasonable and proportionate.
Accordingly, in MacInnes v Gross Coulson J took as his starting point the approved costs budget figure of £570,000 and made a reduction of 10% which he said he regarded as “the maximum deduction that is appropriate in a case where there is an approved costs budget“. CBUK sought to persuade the court to adopt the same approach, submitting that the dicta of Coulson J in MacInnes v Gross had subsequently been approved by the Court of Appeal in Harrison v University Hospitals Coventry & Warwickshire NHS Trust  1 WLR 4456. In that case Davis LJ found that:
- Firstly, a costs judge carrying out a detailed assessment was precluded from going below the budgeted amount in a costs budget which had been approved by a costs management order unless satisfied that there is good reason for doing so; and
- Secondly, incurred costs were to be the subject of detailed assessment in the usual way, without any added requirement of “good reason” for departure from the approved budget.
CBUK referred to the fact that when dealing with the first issue, Davis LJ had expressly agreed with certain observations made by Coulson J in paragraph 25 of his judgment in MacInnes v Gross :
…in the context of considering an interim payment on account of costs, Coulson J in terms said that the significance of CPR r. 3.18 “cannot be understated” and meant that, where costs are assessed, the costs judge “will start with the figure in the approved costs budget”. He roundly rejected the argument of the paying party that detailed assessment will “start from scratch”. I agree with those observations of Coulson J.
Sarens argued that in MacInnes v Gross, Coulson J was only dealing with budgeted (or estimated) costs (which had been specifically approved) and was not dealing with costs which had already been incurred as at the date of that approval and that he cannot have intended to impose a general rule of payment of 90% of the approved budgeted costs (including incurred costs) on account in every case; such a rule, they argued, would fail to appreciate the clear distinction between the approach adopted by the court on detailed assessment to incurred costs and the approach adopted to estimated costs.
It was further submitted on behalf of Sarens that the approval by the Court of Appeal in Harrison of paragraph 25 of Coulson J’s judgment in MacInnes v Gross was concerned only with his approach insofar as it related to budgeted/estimated costs and that in dealing with the second issue as to incurred costs Davis LJ had made it clear that incurred costs are not “approved” by a costs management order:
46. …On the contrary the focus of a judge making a CMO is on estimating the costs reasonably and proportionately to be incurred in the future: as the opening words of CPR r 3.15(1) make clear. In undertaking this exercise the court may have regard to costs stated already to have been incurred: and that may in turn impact on its assessment of what may be reasonable or proportionate for the future. But paragraph 7.4 of Practice Direction 3E is quite specific: as part of the costs management process the court may not approve costs incurred before the date of the budget costs management conference. What it can do is record in the CMO its comments (if any) on such costs: which are then to be taken into account when considering reasonableness and proportionality: a direction now enshrined in the amended CPR r 3.15(4) and CPR r 3.18(c) with effect from 1 April 2017.
47. It follows in my view, that incurred costs are not as such within the ambit of CPR r 3.18 (in its unamended form) at all. Accordingly, such incurred costs are to be the subject of detailed assessment in the usual way, without any added requirement of “good reason” for departure from the approved budget.