COST BUDGETING: THE PARTIES MUST KNOW WHERE THEY STAND: LEAVING HOURLY RATES “OPEN” IS INAPPROPRIATE

I am grateful  Sam Hayman from Bolt Burdon Kemp to for sending me a copy of the decision of Mr Justice Jacobs in Yirenki -v- Ministry of Defence [2018] EWHC 3102 (QB).  The judge allowed an appeal against a cost budgeting order that left hourly rates “open” to be debated on detailed assessment.  The judgment is clear that this is an inappropriate approach to budgeting and contained a number of vices.

“The ultimate aim of the cost budgeting exercise is that both the receiving and the paying party should know where they stand: they know the figure is fixed and cannot be changed absent good reason”

KEY POINTS

  • It is inappropriate, when costs budgeting, to leave the hourly rates “open” as an issue for detailed assessment.
  • The appropriate approach is to budget a figure for each phase and leave it to the party involved to work within that budget.

THE CASE

A Master had made a costs order in a personal injury case.  The order made contained paragraph that stated:-

“Save that the parties reserve their positions as to incurred costs and as to hourly rates, the Master approved the budgets subject to the proviso that it remains open to them to dispute those matters (and to that extent the figure for each phase) at a detailed assessment, the claimant’s cost budget is approved in the total sum of £206,669.72 and the defendant’s cost budget is approved in the total sum of £100,639.”

BOTH PARTIES SUPPORTED THE APPEAL

The claimant appealed. It was argued that the Master should not have approved a budget subject to the possibility of debate of hourly rates (or anything else) at a later stage.   The defendant supported the claimant’s appeal.

THE HIGH COURT JUDGMENT ON WHY THE MASTER WAS WRONG

10. The reason that the Master is wrong, in my judgment (as Mr Mallalieu submitted) is that his approach is clearly contrary to the Practice Direction to CPR Part 3. By way of background, I start by referring to CPR 3.15 and the paragraph to which I have already referred, 3.15(2)(b). That provides that:
“By a costs management order the court will … (b) in respect of the budgeted costs which are not agreed, record the court’s approval after making appropriate revisions”
11. That indicates that the figure that is going to be approved, after the discussion as to what figures were appropriate, would be a final figure rather than a provisional figure that, to put it colloquially was up for grabs later. That this is the correct approach is made clear by the Practice Direction 3E and in particular paragraphs 7.3 and 7.10. Paragraph 7.3 provides as follows:
“If the budgeted costs or incurred costs are agreed between all parties, the court will record the extent of such agreement. In so far as the budgeted costs are not agreed, the court will review them and, after making any appropriate revisions, record its approval of those budgeted costs. The court’s approval will relate only to the total figures for budgeted costs of 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 budgeted costs, 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.
12. It is clear from that paragraph that the ultimate goal of the cost budgeting exercise is for there to be a figure which is given for the costs for each phase of the proceedings. The constituent elements are part of the road to reaching that goal, but they are not an end in themselves, and those constituent elements are not the subject of approval. That that is the correct approach is put beyond doubt by paragraph 7.10 of the Practice Direction which reads as follows:
“The making of a costs management order under rule 3.15 concerns the totals allowed for each phase of the budget. It is not the role of the court in the cost management hearing to fix or approve the hourly rates claimed in the budget. The underlying detail in the budget for each phase used by the party to calculate the totals claimed is provided for reference purposes only to assist the court in fixing a budget.”
13. Again, those words are quite clear and show that the approach of the Master in this case cannot be supported. I was also referred in that context to a helpful passage in the Costs & Funding following the Civil Justice Reforms: Questions & Answers (4th edn) edited by Peter Hurst, Simon Middleton and Mr Roger Mallalieu. The relevant passage is at page 115 and the author, Mr Middleton, says:
“… it is imperative that the exercise itself does not become disproportionate. The adoption of the broad-brush of setting one total sum per phase is required under CPR r.3 PD E 7.3 combined with the avoidance of arguments of the type routinely raised at the assessment stage, seems to meet this requirement both in respect of the proportionality of the exercise for the parties and for the court in allocating its resources between cases.”….
16. There are a number of vices to the Master’s approach. The first is this that it results in matters being left over for argument at a later stage on hourly rates. It means that there is no certainty as to what the approved budget is. But it is clear, as explained by the Court of Appeal in the decision in Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] EWCA Civ 792 that both parties, both the receiving and the paying party:
“need at an early stage  in the litigation to know, as best they can, where they stand.”
17. The vice of the Master’s approach  is that the parties do not know at an early stage where they stand. The rules do provide, of course, for the possibility of a departure from the agreed budget, so to that extent the parties do not have absolute certainty as to where they stand. Under CPR 3.18(b), however, that departure can only occur if there is good reason. Thus, under the approach which is required by the rules, the parties do end up by having very substantial certainty; particularly if one follows the approach advocated by Davis LJ in Harrison, namely that masters are not lax or overindulgent in permitting any departure. The ultimate aim of the cost budgeting exercise is that both the receiving and the paying party should know where they stand: they know the figure is fixed and cannot be changed absent good reason. That also has a knock-on advantage in that since the parties know where they stand at the start, it increases the probability that a detailed assessment with all its complexity and possible cost is avoided.
18. I have so far focused on the Master’s decision to leave the rates open for argument with the consequence that the parties have a lack of certainty. But there are further objections to the approach which he took, which was to approve hours and to some extent disbursements on a detailed basis. I agree with the appellant that it is wrong to approve the budget by reference to constituent parts. The idea of the budget, as is made clear by paragraph 7.3 of Practice Direction 3E, is that figures should be given, for each phase of the proceedings, which fall within the range of reasonable and proportionate costs. That is the aim of the exercise. A party then has the advantage of knowing what his budgeted figure is although it is, as I have said, subject to the possibility of review in due course but only if there is good reason for a departure.
19. It is important to bear in mind that the figures which are given at these costs management hearings are given well in advance of the costs actually being incurred. They are therefore estimates based on attempts to give best estimates. Anyone involved in litigation knows that it is difficult to work out and predict in advance exactly who is going to be doing what and for how long. Take, by way of example, the preparation of witness statements. A party may estimate that: a grade A fee earner will have to spend 20 hours; counsel 10 hours; and a grade B fee earner 30 hours. But it may turn out, as matters progress, that the allocation of resources could be more efficient or needs to be done differently. For example, it may be more useful to have a few more hours of counsel’s time and fewer hours of the grade B fee earner’s time, or indeed vice-versa.
20. The Master’s approach of approving hours in advance seems to have the effect of removing the flexibility of the party in deciding how to spend the budget in the light of the way the case develops. The reason it removes this flexibility is that once the party departs from a particular approved pattern – for example the grade A fee spends 25 hours rather than 20 hours – then that party runs the risk that it will be said that he is outside the budget, subject only to the question of good reason for departure. Those problems are avoided if, as the Practice Direction requires, an overall figure is set for the phase rather than a budget being set for constituent parts. 
21. The final vice, which is apparent from what I have already said, is that the process of setting the budget, and then the question at a detailed assessment of comparing how the budget was spent, becomes something which is being micromanaged by the court. That is something to be avoided. Paragraph 7.3 of the Practice Direction indicates that the ultimate aim is to arrive at budgeted costs which fall within the range of reasonable and proportionate costs. None of that means, of course, that it is not appropriate for the Master, when setting the budget and approving the figures, to look at the constituent parts. Indeed, it is impossible to see how a Master can sensibly come to figures without looking to see how they have been calculated by the party putting them forward. In so doing, the Master would use his or her experience as to how much time should be spent, the type of people who should be doing the relevant work, and his or her experience of hourly rates. However, all of those matters feed in to the identification of all of a reasonable and proportionate figure. They do not feed in to a finding as to the specific number of hours which are to be spent in the future,  or a finding as to specific figure for disbursements to be incurred in the future.
22. So, for those reasons, I agree with the submission of both parties, namely that the Master’s decision cannot stand. The parties were agreed as to the consequences in terms of the order, namely that the Master’s order in paragraph 19 and also paragraph 20 should be set aside. For reasons which were explained in the course of argument that the parties were agreed that any further costs management hearing should be dispensed with.