CPR 3.18(b) | Is Underspend Good Reason To Depart?
In March last year we reported on the decision in Salmon v Barts Health NHS Trust  wherein HHJ Dight held that if the sum claimed on assessment in any given phase of a bill is lower than the budgeted figure for that phase, because the anticipated work had not been completed and/or by virtue of the indemnity principle, this is, in and of itself, capable of being a ‘good reason to depart’ under CPR 3.18(b) thus opening that phase to a traditional line by line assessment.
“Awarding the lower figure would be, in my judgment, a departure from the budget, which requires a good reason to be established: in this case, once that had been done it was 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.”
At the time we remarked that the decision “may surprise some” as, in our view, it ran contrary to the decisions of Mrs Justice Carr in Merrix v Heart of England NHS Foundation Trust  EWHC 346 (QB) and Davis LJ in Harrison v University Hospitals Coventry and Warwickshire NHS Trust  EWCA CIV 792 and undermined one of the primary aims of costs budgeting, ie a reduction in detailed assessments.
In respectful disagreement with HHJ Dight we opined that his decision was wrong as “on a strict interpretation ‘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.”
We acknowledged that “budgeting is not a perfect science”.
Swings and roundabouts
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” ?
It seemed to us that the decision, if followed, would reward the inefficient as there would be an incentive to exceed the budgeted amount in every phase in order to prevent a “good reason” challenge being mounted.
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?
We were concerned that:
“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… 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… Paying parties have little to lose in taking the “good reason” point in every case.”
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.
Well, as predicted, in the vast majority, if not almost every, budgeted case that we have seen since the decision in Salmon v Barts Health the paying party has taken this argument, seeking to persuade the court to disregard the costs budgeted figure and instead conduct a line by line assessment of all of the costs by reason of the fact that a phase had not been completed.
This has done little to reduce the scope for argument on assessment and has unavoidably brought a degree of uncertainty into each case. Fortunately, in our experience, the argument has gained little traction. However, a varying degree of uncertainty remains in each case.
As first reported by Gordon Exall of civillitigationbrief.com, this argument has now been considered, and rejected, by Regional Costs Judge Lumb, who expressed some of the same concerns.
“It is not the role of the Costs Judge at Detailed Assessment to carry out a calculation of what, in his view, is the level of the proportion of a budgeted phase that a prudent receiving party would have incurred where that phase has not been completed. Such an approach would completely undermine the whole purpose of costs budgeting in the first place. One of the principal objectives of the budgeting regime was to reduce the number of Detailed Assessments. Such an approach would potentially lead to a Detailed Assessment of budgeted costs in every case that settled before trial. That consequence was clearly one that the Court of Appeal judgment in Harrison was warning against even if the Costs Judge were to approach the assessment in a more nuanced way as advocated by the paying party in that case.
“In so far as HHJ Dight at paragraph 36 of his judgment in Salmon has concluded that if a party has not spent the totality of the budgeted figure for a phase that amounts to a good reason per se and the door is therefore open for the paying party to make further submissions on an appropriate figure for the phase, I respectfully disagree. If that approach was correct virtually every case would go to Detailed Assessment and there would be a perverse incentive to a prospective receiving party to overspend and marginally exceed every phase in order to avoid a Detailed Assessment.”
Regional Costs Judge Lumb is President of the Association of District Judges.
Will his decision have the effect of reducing these arguments?
Watch this space.