Costs budgets – the importance of good reason

The Court of Appeal has handed down judgment in the case of Harrison -v- University Hospitals Coventry and Warwickshire NHS Trust [2017] EWCA Civ 792. Paul Edwards considers how the decision affects the relationship between costs budgeting and detailed assessment and how it will change the approach to costs management.

The claimant brought a claim for clinical negligence against the defendant. The claim was limited to a value of £50,000. The defendant disputed liability. At the costs management hearing (CMH) the claimant put forward incurred and future costs at a total of £197,000, excluding additional liabilities. The judge recorded no comment on the incurred costs that came to circa £108,000 of the figure.

The claim later settled for £20,000, plus costs on the standard basis. The claimant’s solicitors served a bill for over £467,000 including success fee and ATE premium.

The case raised three issues:

1 – In cases in which a costs management order (CMO) is made, will a costs judge on a subsequent detailed assessment be precluded from going below the budgeted amount unless satisfied that there is good reason to do so? Or, is the judge able to order a lesser amount without ‘good reason’?

2 – Will a similar requirement of ‘good reason’ be necessary to depart from the sum put forward for costs incurred prior to the costs management hearing (CMH)?

3 – When should a case be treated as ‘commenced’ for the purposes of the transitional provisions relating to proportionality? This is a discrete issue and not discussed here.

First instance

The court at first instance reviewed the legislative framework for costs management set out in CPR 3.12 - CPR 3.18, highlighting specifically the wording of CPR 3.18 which provides that:

‘when assessing costs on the standard basis, the court will:

(a) have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings;

(b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so.’

The court also referred to the relevant practice directions, specifically PD7.3 and PD7.4 that: 

PD7.3 ‘The court’s approval will relate only to the total figures for each phase of the proceedings, although in the course of its review the court may have regard to the constituent elements of each total figure. When reviewing budgets, the court will not undertake a detailed assessment in advance, but rather will consider whether the budgeted costs fall within the range of reasonable and proportionate costs.’

PD7.4 that the ‘court may not approve costs incurred before the date of any budget. The court may, however, record its comments on those costs and will take those costs into account when considering the reasonableness and proportionality of all subsequent costs.’

Master Whalan held that CPR3.18 precluded him from carrying out a conventional detailed assessment of the CMO unless there was good reason for doing so, which in this case there was not. He also held that while incurred costs were not approved as such at the CMH, they would have formed part of the overall budget put forward and were therefore afforded a certain status. A similar requirement of ‘good reason’ would be needed to depart from those incurred.

Appeal

The defendant (appellant) appealed on the basis that CPR 3.18 refers to an approved budget as a ‘cap’ on costs and did not require the paying party to show ‘good reason’ to assert that the recoverable costs should be below the budgeted amount. The appellant also submitted that judges have insufficient resource to be able to deal with costs budgeting to make it fair that approval will stand unless there is good reason to depart, and this applies equally to incurred costs for which it is not expected that judges will have time to deal at the CMH stage. Further, the issue of proportionality can only properly be considered at the conclusion of the case.

Lord Justice Davis, giving the leading judgment considered the decision in Merrix in which the judge on appeal made clear that CPR 3.18 made no distinction between situations in which the budgeted figures were or were not exceeded.

The budget

Davis LJ made it clear that the master at first instance, and the judge in Merrix had reached the right conclusion. The extra judicial documents on which the appellant sought to rely were not relevant; the key issue was the construction of CPR3.18. To depart from an agreed budget in the absence of good reason would overlook that budgeted costs are already required to have regard to both reasonableness and proportionality and the aim of costs budgeting is to reduce the time spent on detailed assessments. It would be unjust if a receiving party must show good reason to recover more than the approved budget but a paying party does not have to show good reason to pay less.

A purposive approach to CPR3.18 would not be appropriate and the section should be given its natural and ordinary meaning in conjunction with CPR44.4. The existence of the ‘good reason’ provision is an important safeguard against injustice, although Davis LJ declined to proffer any examples of what would be ‘good reason’ in any given case.

The appellants appeal on this point was dismissed.

Incurred costs

The second issue was how costs incurred up to the CMH should be dealt with. It is clear from the wording of CPR3.18 that the costs incurred before the CMH do not form part of that approved budget as CMOs are restricted to costs that are to be incurred in the future. Whilst incurred costs would be relevant to guide the court in its assessment of proportionality and comments may be recorded to assist the court later, paragraph 7.4 of PD 3E is specific in that ‘the court may not approve costs incurred before the date of the budget costs management conference’. Incurred costs are to be dealt with by way of detailed assessment in the usual way and do not require ‘good reason’ for departure.

Comment

Paragraph 52 of the judgment contains a useful summary of how a costs judge should approach assessment, with particular emphasis on proportionality. A cost judge should:

  • assess incurred costs in the usual way;
  • consider budgeted costs and only depart from them if there is ‘good reason’; and
  • look at matters in the round to consider whether the resulting aggregate figure is proportionate, having regard to CPR 44.3 (2)(a) and (5).

This latter point means that where costs are deemed disproportionate the overall amount of costs payable can still be reduced regardless of what was in the budget.

It is likely that this decision will have wide spread consequences and lead to further litigation.

Defendants will need to scrutinise a claimant's budget at the CMH stage to ensure that all appropriate arguments are made as a failure to do so could mean that the chance to challenge will be lost.

There is also likely to be further litigation to clarify what will constitute a ‘good reason’ to depart from the approved budget. This will apply to cases in which conduct is relevant, where the time claimed is grossly excessive or where the matter settles for a sum far less than it was pleaded for. We are also likely to see further case law develop on how the global proportionality test should be applied.