MERRIX ON APPEAL TO THE HIGH COURT JUDGE: COSTS BUDGETING IS AS DEFINITIVE FOR PAYING PARTY AS IT IS FOR RECEIVING PARTY: JUDGMENT TODAY
In the judgment today in Merrix -v- Heart of England NHS Foundation Trust  EWHC 346 (QB) Mrs Justice Carr allowed an appeal about the significance of costs budgeting when it comes to assessment.
“In my judgment, the answer to the preliminary issue is as follows: 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”
“But the central message is that set out in CPR 3.18, namely that the approved or agreed budget will bind the parties at the detailed assessment stage (on a standard basis) whether the costs claimed are for less than, equal to or more than the sums approved or agreed by that budget, unless there is good reason otherwise.”
The appeal related to the significance of a costs budget when costs came to be assessed. The District Judge held that the figures in the costs budget were not definitive and could be challenged by the paying party on assessment. The claimant appealed. The judgment at first instance was considered in an earlier post.
THE JUDGMENT ON APPEAL
The judge carried out a detailed examination of the history of costs budgeting, the rules relating to budgeting and assessment of costs. She held that previous authorities on this issue had to be treated with caution as they dealt with different, albeit related, issues or were in the context of a different regime.
“3.18 In any case where a costs management order has been made, 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; and
(b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so.”
- The words are clear. The court will not – the words are mandatory – depart from the budget, absent good reason. On a detailed assessment on a standard basis, the costs judge is bound by the agreed or approved costs budget, unless there is good reason to depart from it. No distinction is made between the situation where it is claimed that budgeted figures are or are not to be exceeded. It is not possible to square the words of CPR 3.18 with the suggestion that the assessing costs judge may nevertheless depart from the budget without good reason and carry out a line by line assessment, merely using the budget as a guide or factor to be taken into account in the subsequent detailed assessment exercise. 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.
- This straightforward conclusion reflects the fact that costs budgeting involves the determination of reasonableness and proportionality (see paragraph 7.3 of Practice Direction 3E and paragraph 3 of the Guidance Notes to Precedent H). It is important to remember at the outset (and also in the context of the debate as to the meaning of the word “budget” addressed below) precisely what a judge is doing at the cost-budgeting stage. He/she is not identifying what is the maximum amount by way of future costs considered to be reasonable and proportionate. He/she is identifying what future costs are reasonable and proportionate.
- I reject the Respondent’s suggestion that, on this construction, CPR 3.18(a) is otiose. The conjunctive clauses when read together direct the court that it must take the budget into account by having regard to it by not departing from it, absent good reason.
- Albeit that I accept that the issue has to be decided effectively on first principles, the approach set out above is consistent with the (albeit obiter but very recent) comments of the Court of Appeal in SARPD Oil. Read as a whole (and in particular , , ,  and ) it is clear that the Court of Appeal’s position was that, once a budget was agreed or approved, then Part 3.18(b) applied. The fact that the court only described the budget as “a strong guide as to the likely costs order to be made after trial” reflects that the fact that a court, on an application for security for costs, could not go further than it did. At that stage, it could not be said precisely how the case might evolve, for example as to its ultimate quantum. The wording does not in my judgment provide support for the Costs Judge’s overall conclusion.
- The approach is also consistent with the thinking of Coulson J in MacInnes (at ). Again, he could not go further than he did in the context of an application for an interim payment on account of costs. But, as he commented, the significance of the rule in CPR 3.18 cannot be overstated. The setting of a costs budget is an exercise of fundamental importance: underpinned by the consequences of failure to file a cost budget as required (as set out in CPR 3.14). Its importance is underlined by the detailed provisions within CPR 3 section II, Practice Direction 3E and Precedent H in setting out the exercise that is to be carried out. There is thus, for example, express provision for the updating and revising of the costs budget as the proceedings progress, if necessary and appropriate. It is fair to ask the question that, if it be right that an agreed or approved costs budget is no more than a guide at detailed assessment, even if a strong one, what point there can be in the parties and the court spending so much time on the cost budgeting exercise. The Respondent counters that it will still have value in that it can be a strong guide and so be likely to deter some detailed assessments altogether. But it is still difficult to see why so much time and money would be invested at the costs management stage if the budget were to be no more than a guide in any case where there is an underspend.
- It is also a view which coincides with that of Senior Costs Judge Master Gordon-Saker in Collins, who felt able to resolve the matter in only a few short paragraphs, and the view of Master Whalan in Harrison.
- Nothing in paragraph 7.3 of Practice Direction 3E, where it is stated that when reviewing budgets the court will not carry out a detailed assessment “in advance”, impinges on this approach. The Practice Direction is there setting out the nature of the assessment exercise at the costs budgeting stage. The court will not carry out a detailed assessment at that stage; rather it will consider whether the budgeted costs fall within the range of reasonable and proportionate costs. It is not stating that, whatever costs budget is approved or agreed, there will be an unfettered detailed assessment in due course. The fact that hourly rates are not fixed at the costs budgeting stage is no obstacle to such a conclusion. As the notes to CPR 3.18 in the White Book reflect, the fact that hourly rates at the detailed assessment stage may be different to those used for the budget may be a good reason for allowing less, or more, than some of the phase totals in the budget.
- There is no need for present purposes to examine in any detail what might and might not be a “good reason” for the purpose of CPR 3.18. But clearly, 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.”
- The question of what was and was not a good reason was of course the only point at issue in Henry (see ) and then in circumstances where a party had exceeded the costs budget and not complied with the costs budgeting provisions. I do not consider that the decision in Henry points to a conclusion different to that expressed above. It comes of course from a highly authoritative source, albeit at a very early stage in the development of the costs budgeting regime. The taking of a cautious approach would be understandable. But in any event its focus was on a different issue, namely what was a good reason for departure from a budget, and then on a different factual premise, where the costs being claimed exceeded the budget. There is no reason to suppose that the court heard detailed submissions on the position where the costs being claimed were less than budgeted. It was also a decision in the context of the pilot scheme under CPR 51D which had, for example, no equivalent of CPR 44.3(5) or 44.3(2)(a). Moreover, the comments in  (that where a party is claiming less than budgeted costs, to award no more than has been incurred does not involve a departure from the budget) lead to the same result in practice as if one treats the indemnity principle as a good reason for departure from the budget. It is also right to record that the notes in the White Book at CPR 3.18 (at page 122) following Henry suggest that the authors did not take the view that Henry in any way meant that, where the costs being claimed were less than budgeted, the budget was anything other than binding, absent good reason to depart.
- Both parties understandably placed far less emphasis on the comments of Moore-Bick LJ in Troy. Those comments were made in the context of the granting of permission only without full argument but, more importantly, the appeal again arose in the context of a pilot scheme, this time in the Mercantile and Technology and Construction Courts. Significantly, CPR PD 51G only referred expressly to questions of reasonableness and proportionality in the context of already incurred costs. That is in stark contrast to the clarity of Practice Direction 3E (at paragraph 7.3) where it is clear that questions of reasonableness and proportionality are to be considered when setting each phase of a budget. Moore-Bick LJ also expressed concern that the judge below had not approved figures by reference to reasonableness or proportionality but by reference to whether any figure was not “grossly disproportionate“.
- Nor do the remarks of Warby J in Simpson cut across this approach. Warby J emphasised the importance of adherence to costs budgeting. His comments in  (and ) are again consistent with the notion that breach of the indemnity principle would be a good reason for departure from the budget but that good reason would be needed to depart either upwards or downwards from an agreed or approved budget.
- It is of course right to say that costs budgeting under section II of CPR 3 does not “replace” detailed assessment. It is common ground that, as the Costs Judge remarked (at ), Precedent Q is not an advanced assessment of the recoverable costs. It informs the court, in a readily accessible format, what has been spent compared with the budget. But the Appellant is not contending that there should be no detailed assessment. On the contrary, the question is how that assessment should be conducted. Further and on any analysis, there remains room for detailed assessment outside the budget – for example in relation to pre-incurred costs not the subject of the costs budget; costs of interim applications which were reasonably not included in a budget; where costs are being assessed on an indemnity basis; where the costs judge finds there to be a good reason for departing from the costs budget.
- Equally the addition of the receiving party’s last approved or agreed budget as being a factor to which the court will also have regard (in CPR 44.4 (3)(h)) does not demote the budget to the status of a guide alone. At the risk of repetition, this approach ignores the express words of CPR 3.18 (and, for that matter, perhaps also CPR 44.4(2)). The introduction of CPR 44.4(3)(h) ensured that there was no tension between CPR 3.18(b) and CPR 44.4. The court will be having regard to the receiving party’s last approved or agreed budget by respecting it or finding that there is some good reason to depart from it. Additionally, there will be occasions when the budget is relevant in relation to the assessment of costs falling outside it. Put shortly, there is nothing in CPR 44 that overrides CPR 3.18.
- The fact that CPR 3.18 only draws attention to CPR 44.3(2)(a) and not (b) is also to be noted. It avoids any potential conflict between CPR 3.18 and 44.3(2)(b). In relation to matters the subject of agreement or approval in the costs budget, Part 3.18(b) applies.
- I do not consider the debate as to whether a costs budget is to be seen as an available fund as opposed to a fixed sum to be particularly instructive. The plain meaning of the word “budget” may be said to equate with an available fund. But if costs within an agreed or approved budget can then be reduced on detailed assessment, it is difficult to see how it can be said that the budget is available. Effectively the budget then becomes a cap. Jackson LJ stated in clear terms (adopting what he described as a helpful summary from the Law Society) that budgeting is not costs capping (see paragraph 6.6 of chapter 40 of the Final Report). That then produces the obvious oddity of there being two parallel costs-capping regimes: one in section II of CPR Part 3 and one in section III of CPR Part 3. As Master Gordon-Saker commented in Collins (at ), there would be “no logic” in having two systems of costs capping running in parallel in this way.
- This approach does not make it impossible to apply the proportionality test identified in May or more generally. The proportionality test can be applied at the time of fixing the budget. If there is good reason to depart from that decision, the judge on detailed assessment can do so. Additionally, as the notes to CPR 3.18 in the White Book suggest, once pre-incurred costs have been assessed on the basis of reasonableness and added to the budgeted costs, the total figure is then subject to an overall assessment of proportionality. So, unless there is good reason to depart from the budget, the overall figure can never be less than the budget, but it can be less than the total of the budget sum plus the reasonably incurred and reasonable in amount non-budgeted sum.
- Fundamentally, this conclusion reflects what is in my judgment the clear intention of costs management as set out in CPR 3.18(b), namely to reduce the cost of the detailed assessment process by the treatment of agreed or approved cost budgets as binding, absent good reason to proceed otherwise. If this approach be right, the scope and cost of detailed assessment of costs on a standard basis will indeed be reduced materially. Jackson LJ’s view was that the burden of costs management, if done properly, would save substantially more costs than it generates, even if he reached no final conclusions and made no final recommendations in the Final Report as to how that would be achieved. It is achieved if there is a saving in the time and costs needed for detailed assessment, rather than duplication of time and expense in an unfettered landscape (even if the budget is seen as a strong guide). Such a solution might appear to be an obvious one, even if not one upon which Jackson LJ fixed conclusively in the Final Report.
- The Costs Judge expressed concern that such an approach would, on the other hand, lead to longer and more expensive cost management hearings. With proper and realistic co-operation and engagement between the parties that should not be the case. The costs budgeting exercise already takes up significant amounts of court time and the parties’ time in preparation. There is already a very substantial investment. Further, the costs budgeting exercise is not intended to be a detailed assessment, and the parties and the court should not approach it as such. It is a broad, phase-based assessment which will, albeit performed on a principled and carefully timetabled basis, inevitably be rough and ready in places. The clear intention behind and effect of the cost budgeting regime is that it is nevertheless to result in a budget from which the court will not depart on detailed assessment on a standard basis, unless there is good reason to do so. There is a balance to be struck: on any view, the Respondent’s approach would involve very significant duplication and the added burden of having to cross-refer at each stage to the costs budget as a guide, albeit not a binding one.
- This is of course a topical area, with a growing trend towards the fixing of costs in advance. There is a current consultation by the Department of Health with regard to fixing fees in clinical negligence claims for sums up to £25,000. There is the ongoing review by Jackson LJ with regard to fixed costs in all areas of civil litigation, including clinical negligence and personal injury, for claims up to £250,000. (It goes without saying that the costs budgeting regime, even on the Appellant’s case, is far more refined than a fixed cost regime.)
- Further, as the Appellant points out, complaints by the Respondent as to shortcomings and inevitable inaccuracies in the cost budgeting process cannot avail the Respondent. 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). Equally, where costs claimed were higher, the receiving party would have to show good reason for departure from the budget. Nor is it fair, as the Respondent does, to refer to the judges carrying out the costs budgeting exercise as “neophytes“. As Jackson LJ made clear in the Final Report, with training and experience all civil judges are equal to the task of costs budgeting.
- As already indicated, there is no suggestion by the Respondent that the budgeted figure is not fit for purpose as something not to be departed from without good reason if the sums claimed exceed the budget. No compelling argument has been advanced as to why an approved costs budget is sufficiently good to be adhered to if it is exceeded, but not if the sums budgeted for are not reached. It might even be said that such an approach would act perversely as a disincentive to minimise costs incurred under the budget: the receiving party stands to gain (by avoiding a full detailed assessment) if the budget is exceeded. Nor do I consider that that the result is at odds with a stricter approach to standard basis assessment. The court still has to focus on reasonableness and proportionality.
- 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.”
“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.”
- 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.
- The judgment below was the product of the careful and reasoned thinking of an experienced specialist costs (and clinical negligence) judge, which naturally deserves respect. However, there is on any view legitimate scope for disagreement, as other recent judgments from specialist costs judges have readily demonstrated. For the reasons set out above, I have come to the conclusion that the answer given to the preliminary issue by the Costs Judge was wrong.
- In my judgment, the answer to the preliminary issue is as follows: 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.
- The appeal will therefore be allowed.
- To use a preliminary issue in a factual vacuum for resolution of issues such as this is inevitably to apply a blunt tool. There are so many potential variables and nuances that the answer on any particular given set of facts might require refinement. But the central message is that set out in CPR 3.18, namely that the approved or agreed budget will bind the parties at the detailed assessment stage (on a standard basis) whether the costs claimed are for less than, equal to or more than the sums approved or agreed by that budget, unless there is good reason otherwise.
- One can be confident that this decision on first appeal will not end the debate. I respectfully make the perhaps obvious point that the issue would appear to be ripe for early consideration by the Court of Appeal raising, as it does, an important point of principle or practice. Indeed, I learned only days before the appeal came before me that there is in fact an appeal already listed to be heard in the Court of Appeal this May against Master Whalan’s decision in Harrison (by way of “leapfrog” direction and albeit on a “floating” basis only). It may be that any appeal from this decision could be listed alongside that matter, if that were thought appropriate.
- Whatever the future holds, however, it is important that a growing body of judgments on the same issue does not emerge in piecemeal manner. It is essential that there is procedural co-ordination. The same solicitors and/or counsel are involved in many of these matters in what is a relatively small world. I am told that many stays of detailed assessments are already in place, pending the outcome of this appeal. The parties may accept my judgment as binding for their purposes. Alternatively, it may be that further stays need to be imposed, to prevent unnecessary court and judicial time and expense being devoted to a debate which the Court of Appeal is very shortly going to consider.