Civil practice and procedure update
Civil practice and procedure update:
costs budgets and detailed assessment
Sue Fox explains why Harrison v University Hospitals Coventry & Warwickshire NHS Trust is important reading in relation how a costs budget affects detailed assessment.
About the author
Sue Fox is head of costs budgeting at Clarion Solicitors, Leeds.
In the eagerly awaited decision in Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] EWCA Civ 792, the Court of Appeal found that the budgeted costs will not be departed from in the absence of a ‘good reason’ (para 44). Davis LJ further found that incurred costs do not form part of the budgeted costs, and the good reason test does not apply to those incurred costs. Davis LJ confirmed that the proportionality test can be applied to the final claim for costs. This is despite the proportionality test having been applied when the costs budget was approved, this may result in claims for costs being subject to detailed assessment on the issue of proportionality alone.
The history surrounding the application of the good reason test to depart from the budget was initially heard in the case of Merrix v Heart of England NHS Foundation Trust ([ 2016] EWHC B28), which was subsequently appealed ([ 2017] EWHC 346 (QB)). In the first instance decision, District Judge Lumb, sitting as a regional costs judge, was asked to consider the preliminary issue of ‘to what extent, if at all, does the costs budgeting regime under [Civil Procedure Rule] CPR 3 fetter the powers and discretion of the costs judge at a detailed assessment of costs under CPR 47’ ([ 2016] EWHC B28 (QB), para 2). He concluded that the 'budget and the bill of costs were different tools for courts to manage costs, which were applied at different times', and ‘just because a party has incurred costs that come in at under the total for a phase is not a departure from the budget’ (para 53).
... the Court of Appeal found that the budgeted costs will not be departed from in the absence of a ‘good reason’
Consequently, despite the costs claimed being less than the budget, District Judge Lumb ordered that detailed assessment was appropriate. He refused to accept that the provision within the CPR regarding departure from the budget related to a downward departure as well as instances where a party exceeds phases in the budget.
The receiving party requested permission to appeal District Judge Lumb’s findings, and the costs judge granted permission stating that:
… the issue is the subject of signficant debate in the legal profession with wide-ranging views and interpretations. There is no direct case authority on the point. An authority on the point would be highly desirable and as a matter of urgency. Already several detailed assessments have been adjourned pending this first instance decision ([ 2017] EWHC 346 (QB), para 1).
The appeal of District Judge Lumb’s findings was heard in February 2017. The appellant was claiming costs at or less than the budgeted figure, and arguments were raised that these costs should be assessed as claimed. The respondent disagreed, the trust contended that it was entitled to benefit from a full detailed assessment, with the costs budget being but one factor in determining reasonable and proportionate costs on detailed assessment.
The first instance decision in Merrix fought with the essence of the reforms and LJ Jackson’s view of how cost budgeting would work, which was explained at Chapter 40 para 1.4(iv) of his report: ‘At the end of the litigation, the recoverable costs of the winning party are assessed in accordance with the approved budget.’* In addition:
If costs management becomes a feature of civil litigation in the future, many issues must be considered before any set of costs management rules is drawn up. In particular: (iv) In so far as the last approved budget is binding, should it operate as an upper limit upon recoverable costs or should it operate as a form of assessment in advance? And (vi) What steps should be taken to ensure that the process is cost effective, i.e. that the litigation costs saved exceed the costs of the process (Chapter 40 para 1.5).
The first instance decision in Merrix created uncertainty regarding the role of the budget. This conflict with LJ Jackson’s report and the earlier decisions regarding departure from the budget, opened the floodgates to numerous requests for the courts to consider whether the good reason test applied to both the downward and upward departure from the budget.
Before the appeal of Merrix, the courts had previously heard this same argument in MacInnes v Gross [2017] EWHC 127 (QB); Collins v Devonport Royal Dockyard Ltd [AGS/16029/54]; and Harrison v Coventry NHS Trust, 16 August 2016 unreported. Despite the first instance decision, the courts did not agree with District Judge Lumb’s decision and found that the departure from the budget does relate to downward departures.
In Merrix, HHJ Carr considered these cases when making her findings, and commented that:
The intention of costs management was to control costs. The obvious intention of CPR 3.18(b) was to reduce the scope of and need for detailed assessment. Rhetorically, what would be the point of costs budgeting (and the considerable resources that it has required) if the resulting figures amounted to nothing more than a factor, guidance or cap at detailed assessment? (para 62).
The judge further said:
The obvious intention of CPR 3.18 was to reduce the scope of and need for detailed assessment. The respondent’s approach would defeat that object (para 67).
HHJ Carr found that District Judge Lumb’s decision was wrong, and
... 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 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 (para 92, emphasise in original)
The appeal was allowed. HHJ Carr embraced the essence of LJ Jackson’s reforms, referring to them regularly throughout her judgment, and indeed quoting from his reforms on numerous occasions, for example: ‘costs management, if done properly, would save substantially more costs than it would generate’ (para 11).
This decision fell in line with LJ Jackson’s report and the cases of (1) Slick Seating Systems (2) GL Events SA v (1) Adams (2) Leamark Ltd (3) La Structures (4) Jones [2013] EWHC B8 (Mercantile), and Safetynet Security Ltd v (1) Coppage (2) Freedom Security Solutions Ltd [2012] EWHC B11.
There was speculation that the appeal decision in Merrix would be appealed to the Court of Appeal. However, the decision in Harrison was listed to be heard in the Court of Appeal and was addressing the same points of principle, therefore the decision was made to not appeal Merrix and, instead, await the outcome of Harrison.
In the appeal of Harrison, the appellant trust made submissions regarding what reliance should be placed on the budget at detailed assessment, and Davis LJ summarised the submissions as follows:
The premise underpinning Mr Hutton’s argument thus was that [costs management orders] CMOs in effect are but summary orders which at best give no more than a snapshot of the estimated range of reasonable and proportionate costs: often reached, as Mr Hutton would have it, on a broad brush or rough and ready judicial approach after a hearing which would have been limited in time, rushed in argument and incomplete in the information advanced (para 31).
Davis LJ considered this to be a sceptical appraisal, commenting:
... that to sanction, at detailed assessment, a departure from the budget in the absence of good reason would overlook (among other things) that budgeted costs are already required to have regard both to reasonableness and to proportionality; 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 …
Moreover, 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 - as it did to the editors of Cook on Costs - 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 (paras 32 and 34).
The court’s attention was then drawn to incurred costs. The respondent presented what was described by Davis LJ as an ingenious argument to the court regarding incurred costs being potentially, in essence, approved ‘through the back door’. The respondent submitted that ‘the incurred costs will have acquired a special status: in that, while not ‘approved’ as such, they will have been taken into account by the court at the costs management hearing in managing the future estimated costs’ (para 48).
Davis LJ disagreed. He found that:
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 [Practice Direction] PD 3E and of the Rules, they are not within that sub-rule (para 49).
Davis LJ did, however, recognise that practical problems remained surrounding incurred costs, and advised that the CPR committee’s intention was to amend the rules to decouple incurred costs from budgeted costs.
The decision in Harrison has confirmed that a good reason is required to depart from the budget, meaning that a good reason is required for a party to receive less or more than its budgeted costs; the proportionality test can be applied to budgeted costs, thus a reason to escape the restrictions of the budget; and incurred costs should be considered in isolation to the budgeted costs.
Does the finding in Harrison deny the paying parties an opportunity to challenge potentially unreasonable costs, despite it being their responsibility for the costs of challenging those costs? At the moment – yes.
Should it be ‘just’ for the receiving party to request its costs in full simply because they have been incurred and fall within the parameters of the budget? What safety mechanism is in place to ensure that any receiving party does not include unreasonable and disproportionate costs in its claim for costs, simply justified on the basis that they ‘fall within budget’ ?
HHJ Carr felt that the indemnity principle was sufficient, but perhaps not as unreasonable costs can be claimed from the client (hence the need for Solicitors Act 1974 assessments). Or, alternatively, the client may have little regard to the constraints of the budget and request that ‘out of scope’ or disproportionate and unreasonable costs are incurred in any event. How can restraints be imposed on a spendthrift client with deep pockets and, at the same time, discourage a paying party from being overzealous in its requests for detailed assessment?
* Review of civil litigation costs: final report, available at: http://tinyurl.com/go6s5co