THE CLEVELAND BRIDGE CASE: A SECOND CROSSING: PAYMENTS ON ACCOUNT OF COSTS

Judgments dealing with payments on account of costs are rare, but illuminating.  Particularly when the costs budget is taken as the starting point. There is a detailed consideration of this issue in Cleveland Bridge UK Ltd v Sarens (UK) Ltd [2018] EWHC 827 (TCC). In particular the view that the court should take in relation to incurred costs in the costs budget, those costs not having been subject to judicial scrutiny. (The judgment on the costs of the hearing about costs is also illuminating).

THE CASE

The claimant had succeeded in its case at trial. It was accepted that the defendant had to pay the claimant’s costs. The issue arose as to what sum should be paid.

THE JUDGMENT
    1. CBUK says that it has incurred in the region of £140,000 in costs, but it takes as its starting point the figure of £128,124.54, being the total figure in its agreed costs budget. From that figure, it has, first, deducted costs that were never in fact incurred (amounting to £24,010) to leave £104,114.54. Second, it has added the costs of two applications in December 2017 (“the December Applications“) which Sarens accepts in principle that it must pay, in the sums of £6,866 and £13,409.50 respectively (as set out in its costs schedules served for the purposes of the December Applications). This exercise produces a total figure of £124,390.04 (which I shall refer to as “the Adjusted Figure“).
    2. CBUK contends that it is entitled to a payment on account of costs from Sarens of 90% of the Adjusted Figure, amounting to £111,951.04.
    3. Sarens opposes a payment on account of costs at this level, contending, in short, that it is not justified on the authorities and that there is every reason to think that the Adjusted Figure will be reduced on a detailed assessment. Sarens says that it should not be required to pay more than £74,634.02 on account, explained as 60% of the total adjusted amount of £124,390.04 in a letter from Freeths LLP dated 6 April 2018 acting on behalf of Sarens, or as approximately 80% of the realistic highest starting point for CBUK’s costs taking into account the detailed criticisms of those costs raised in Ms Bodnar’s Note for the hearing.
    4. Those criticisms are twofold: first that the hourly rates of CBUK’s solicitors are excessive and that there would be a good reason on a detailed assessment for reducing the partner hourly rate in respect of both incurred and estimated costs in CBUK’s agreed Budget, together with the partner time set out in the two costs schedules for the December Applications by approximately 30%; and second that there is reason to think that CBUK will not recover the entirety of its incurred costs of £47,859.54 (as set out in its agreed Budget) on a detailed assessment owing to the fact (i) that this figure includes £6,428.54 for costs incurred by Bond Dickinson, a firm of solicitors which acted for CBUK in the adjudication but not in these proceedings; and (ii) that this figure includes a further sum of £7,307 for pre-action costs in circumstances where there was no pre-action correspondence and a substantial sum has been incurred on the issues/statements of case phase, notwithstanding that CBUK has always maintained that the case is straight-forward.
    5. Taking account of these likely deductions, says Sarens, reduces CBUK’s Adjusted Figure to £94,540.90, the realistic highest starting point for CBUK’s costs.
Is CBUK entitled to a 90% payment on account of its costs?
    1. In support of the proposition that CBUK is entitled to 90% of the Adjusted Figure, Mr Lixenberg, on behalf of CBUK, relies on the decision of Coulson J in MacInnes v Gross [2017] EWHC 127 (QB), at paragraphs [23]-[28], which he says should be applied as an over-arching principle when dealing with an application for a payment of costs on account in a case where there is an agreed or approved costs budget, as is the case here. Cost budgets were agreed pursuant to the terms of the Order of Fraser J dated 18 September 2017. (As an aside I should say that there was an attempt on the part of Sarens to suggest that there was no costs management order in this case and that the court had not approved the parties’ agreement, but given the terms of Fraser J’s Order, I cannot see that such an argument is sustainable – in my judgment his Order was plainly intended to indicate the court’s approval of the parties’ budgets insofar as they could be agreed).
    2. In MacInnes v Gross, the defendant had succeeded at trial and its approved costs budget was in the sum of £570,000, although its total costs were said to be very much higher than that. Coulson J said this at [25]-[27]:

25…In my view, the first defendant’s approved costs budget is the appropriate starting point for the calculation of any interim payment on account of costs. CPR 3.18 makes plain that, where there is an approved or agreed costs budget, when costs are assessed on a standard basis at the end of the case, “the court will…not depart from such approved or agreed budget unless satisfied that there is good reason to do so”. The significance of this rule cannot be understated. It means that, when costs are assessed, the costs judge will start with the figure in the approved costs budget. If there is no good reason to depart from that figure, he or she is likely to conclude the assessment at the same figure: see Silvia Henry v News Group Newspapers Ltd [2013] EWCA Civ 19.

26. One of the main benefits to be gained from the increased work for the parties (and the court) in undertaking the detailed costs management exercise at the outset of the case is the fact that, at its conclusion, there will be a large amount of certainty as to what the likely costs recovery will be. One consequence is that, for the purposes of calculating the interim payment on account of costs, the starting point will almost always be the payee’s approved costs budget. Another consequence is that the court assessing the interim payment can ignore the fact that, as here, there may have been significant expenditure on costs by the payee above the budget figure: any increase is a matter for the costs judge and the relatively onerous burden of recovering more than the budget figure is on the payee: see Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd (No 2) [2013] EWHC 1643 (TCC).

27. So when making an interim payment on account of costs in a case with an approved costs budget, the days of the educated guesswork identified by Jacob J in Mars UK Limited v TeKnowledge Limited [1999] 2 Costs LR 44 are now gone. Instead the court can be confident that there is a figure for costs which, because it has already been approved, is both reasonable and proportionate.

    1. Accordingly, Coulson J took as his starting point the approved costs budget figure of £570,000 and made a reduction of 10% which he said he regarded as “the maximum deduction that is appropriate in a case where there is an approved costs budget” [28].
    2. Mr Lixenberg says I should adopt the same approach and he submits that the dicta of Coulson J in MacInnes v Gross has subsequently been approved by the Court of Appeal in Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] 1 WLR 4456, a case concerned with various issues in the context of costs. The first issue was whether a costs judge carrying out a detailed assessment was precluded from going below the budgeted amount in a costs budget which had been approved by a costs management order unless satisfied that there is good reason for doing so; on which the court concluded in the affirmative. The second issue was whether, with regard to costs incurred prior to the budget (“incurred costs“) there was a like requirement of good reason before a costs judge on a detailed assessment could depart from the figure put forward at the costs management hearing; on which the court concluded that incurred costs were to be the subject of detailed assessment in the usual way, without any added requirement of “good reason” for departure from the approved budget.
    3. In dealing with the first issue, Davis LJ, giving the judgment of the court, expressly agreed with certain observations made by Coulson J in paragraph 25 of his judgment in MacInnes v Gross [40]:

“…in the context of considering an interim payment on account of costs, Coulson J in terms said that the significance of CPR r. 3.18 “cannot be understated” and meant that, where costs are assessed, the costs judge “will start with the figure in the approved costs budget”. He roundly rejected the argument of the paying party that detailed assessment will “start from scratch”. I agree with those observations of Coulson J“.

    1. In addressing CBUK’s overarching argument, Ms Bodnar submitted that in MacInnes v Gross, Coulson J was only dealing with budgeted (or estimated) costs (which had been specifically approved) and was not dealing with costs which had already been incurred as at the date of that approval. She pointed out that there is no description in his judgment of the breakdown of the total budgeted amount and thus no discussion of the difference between incurred and estimated costs or the distinction between the rules applicable to the assessment of these costs. She argued that Coulson J cannot have intended to impose a general rule of payment of 90% of the approved budgeted costs (including incurred costs) on account in every case; such a rule, she said, would fail to appreciate the clear distinction between the approach adopted by the court on detailed assessment to incurred costs and the approach adopted to estimated costs.
    2. Ms Bodnar further submitted that the approval by the Court of Appeal in Harrison of paragraph 25 of Coulson J’s judgment in MacInnes v Gross was concerned only with his approach insofar as it related to budgeted/estimated costs. I agree. As I have set out above, the relevant passage in Davis LJ’s judgment fell within his analysis of the first issue, which related only to the correct approach to take to budgeted costs pursuant to CPR 3.18. In dealing with the second issue as to incurred costs Davis LJ made it clear that incurred costs are not “approved” by a costs management order:

“46. …On the contrary the focus of a judge making a CMO is on estimating the costs reasonably and proportionately to be incurred in the future: as the opening words of CPR r 3.15(1) make clear. In undertaking this exercise the court may have regard to costs stated already to have been incurred: and that may in turn impact on its assessment of what may be reasonable or proportionate for the future. But paragraph 7.4 of Practice Direction 3E is quite specific: as part of the costs management process the court may not approve costs incurred before the date of the budget costs management conference. What it can do is record in the CMO its comments (if any) on such costs: which are then to be taken into account when considering reasonableness and proportionality: a direction now enshrined in the amended CPR r 3.15(4) and CPR r 3.18(c) with effect from 1 April 2017.

47. It follows in my view, that incurred costs are not as such within the ambit of CPR r 3.18 (in its unamended form) at all. Accordingly, such incurred costs are to be the subject of detailed assessment in the usual way, without any added requirement of “good reason” for departure from the approved budget“.

    1. Reading the judgment of Coulson J in light of the decision in Harrison, it seems to me that Ms Bodnar is also right in her submission that Coulson J cannot have intended to put in place a general rule of 90% payment on account in respect of sums that are not to be treated as approved in the costs budget.
    2. Ms Bodnar is right to point out that there was no argument before Coulson J as to the distinction between incurred and estimated/budgeted costs (or at least no such argument is recorded in the judgment), and at the heart of Coulson J’s analysis is his interpretation (approved in Harrison) of CPR 3.18 with its requirement for good reason before the court can depart from an approved or agreed budget. As is clear from Harrison, this requirement does not apply to incurred costs, which are also not to be viewed as “approved” by the court, notwithstanding that a costs management order has been made. I note in particular, the final sentence of paragraph 27 of Coulson J’s judgment in which he expressly refers to the fact that “the court can be confident that there is a figure for costs which, because it has already been approved, is both reasonable and proportionate” (emphasis added). He again refers to the “approved costs budget” in dealing with the maximum deduction in paragraph 28. However, it is clear from Harrison that this does not apply to incurred costs, which are not treated as approved and are to be assessed in the usual way. It follows that there can be no similar degree of confidence in relation to incurred costs.
    3. Mr Lixenberg drew my attention to a passage at 44.2.12 of Volume 1 of the White Book 2018 at page 1360 as follows:

In cases where the court has made a costs management order under r. 3.15, the receiving party’s budget, insofar as it has been agreed between the parties or approved by the court, may be a sensible starting position for determining the ‘reasonable sum’ to be paid on account under r. 44.2(8). That is because, on detailed assessment, the court will not depart from an agreed or approved budget unless satisfied that there is good reason to do so (r.3.18(b))(see Thomas Pink Ltd v Victoria’s Secret UK Ltd [2014] EWHC 3258 (Ch), 31 July 2014, unrep. (Birss J), where payment on account ordered in sum amounting to 90 per cent of the claimant’s approved budget)“.

    1. However, again, this passage does not distinguish between the different approach that the court must take to the assessment of incurred and budgeted costs and a reading of the decision in Thomas Pinkestablishes that the arguments advanced before Birss J focussed on the effect of CPR 3.18, but did not seek to draw any distinction between incurred costs which are not capable of being approved and estimated or budgeted costs. Indeed, Birss J explained his decision to order a payment on account of 90% of the claimant’s approved budget in that case by reference to the fact that “unless there is good reason to depart from the budget, the budget will not be departed from” [60].
    2. Further, Mr Lixenberg argues that it makes sense, as a matter of principle and practice, to take a consistent approach to approved budgets, which need no longer involve any form of guesswork or half-hearted detailed assessment, in light of the decision in MacInnes v Gross. He points to the inter-relationship between incurred costs and estimated costs, in particular that, when making a costs management order, the court may take incurred costs into account when considering the reasonableness and proportionality of all estimated costs and may also record its comments on those costs (3EPD.4 at 7.4). He says these considerations militate in favour of there being a general rule applicable in cases involving agreed or approved costs budgets.
    3. I of course accept both the desirability of consistency of approach and the undesirability of the court engaging in any form of shadow detailed assessment when seeking to determine an application for payment of costs on account. It is well established that the court should guard against the risk of being drawn in to costly and time-consuming satellite litigation on this subject. I also accept that insofar as the costs budget can properly be regarded as “approved” it is appropriate to take the approved figure (which will be the estimated/budgeted costs) as the starting point when seeking to determine an appropriate payment on account in respect of those costs and the maximum deduction in such a case should be 10%; that is what I understand Coulson J to have decided in MacInnes.
    4. However, I do not accept that this is necessarily the approach that the court should adopt to incurred costs, which are, by definition, not approved costs, a point on which Coulson J’s judgment did not focus. As to these, it seems to me that (consistent with the approach taken in cases where there is no approved costs budget) the court must determine in every case, a reasonable sum by reference to an estimate which will be dependent upon the circumstances, including the fact that there has as yet been no detailed assessment and thus there remains an element of uncertainty, the extent of which may differ widely from case to case, as to what will be allowed on detailed assessment (see the notes at 4.2.12 of Volume 1 of the White Book 2018). Accordingly, in my judgment, a reasonable sum in respect of incurred costs will often be one that is an estimate of the likely level of recovery subject to an appropriate margin to allow for error.
The Consequence of my Decision
    1. The consequence of my decision on this over-arching point, seems to me to be that CBUK is entitled to recover 90% of its estimated/budgeted costs (following the decision in MacInnes v Gross) and that I must then seek to determine a reasonable sum in respect of incurred costs. In addition, it seems to me that I must also determine a reasonable sum in respect of the costs incurred on the December Applications, which do not form part of the estimated costs and cannot on any view be said to fall within CBUK’s agreed costs budget.
Costs On Account in relation to Estimated Costs in the Agreed budget
    1. Of the Adjusted Figure, CBUK’s total estimated costs amount to £56,255, 90% of which is £50,629.50. In deciding to make an order for costs on account (of estimated costs) in this sum, I disregard Ms Bodnar’s submissions as to partner hourly rates in relation to those estimated costs. The purpose of the principle articulated by Coulson J in MacInnes was to allow for a consistent approach where budgeted costs had been approved, thereby avoiding the need to engage in detailed argument about what may or may not be disallowed for good reason on detailed assessment. As I understand it, the maximum deduction of 10% envisaged by Coulson J is designed to take account of the possibility that there may be deductions for good reason, and I have applied that deduction.
    2. I should record that there was some argument as to whether excessive hourly rates were capable of amounting to good reason for departing from a costs budget in respect of estimated costs. Ms Bodnar relied on the decision of Deputy Master Campbell in RNB v London Borough of Newham (which appears to be unreported) and which concerned the question of whether a reduction in hourly rates made on a detailed assessment to incurred costs should also be carried through into the estimated costs on the grounds that there was “good reason” to make that reduction. The Deputy Master found that excessive hourly rates did amount to a good reason to depart from the costs approved in the budget. Mr Lixenberg relied on Nash (PR of the Estate of Graham Robert Wood (Deceased)) v Ministry of Defence [2018] Lexis citation 18, a contrary decision of Master Nagalingam, who was presented with the very same argument but held that hourly rates are nothing more than an underlying detail of the budget and that, save where they hold a special status in the setting of a budget and subsequent making of a costs management order, they do not present a good reason to depart from the budget.
    3. However, I was informed that there have been other decisions on this topic and much academic comment, none of which was made available to me at the hearing. In the circumstances, I am not going to, and given the decision I have made, do not need to, decide which of these authorities is correct.
Costs on Account in relation to Incurred Costs and the Costs of the December Applications
Hourly Rates
    1. Ms Bodnar makes the same point on partner hourly rates in relation to incurred costs as set out in the agreed Budget and in relation to the costs incurred on the December Applications. In particular, she says that Burness Paull LLP is a Scottish firm with offices in Aberdeen, Edinburgh and Glasgow and that the partner rate of £360 per hour (in excess of even the guideline hourly rate for partners in Central London firms) is disproportionate. She contrasts this rate with the partner rate charged by her own solicitors, Freeths LLP, of £249 per hour and she contends that Sarens will have a good prospect on detailed assessment of achieving a reduction on Burness Paull LLP’s partner rates to a similar figure.
    2. Mr Lixenberg argues that it is impossible for the court to conclude that there is anything objectionable about the rates. He points out that the guideline rates do not extend to Scotland and he draws my attention to a passage at 47.14.8 of Volume 1 of the White Book 2018, to the effect that the costs officer’s general knowledge and experience of local conditions and circumstances remains the only firm basis for reliable and consistent assessment and that the guideline figures are not supposed to replace that experience and knowledge. He also relies on a decision of HHJ Mackie QC in Amadeus IT Group SA v Lycamobile UK Limited [2015] EWHC 677 (Comm) at [22] to the effect that “the guideline rates do not apply much in this court“.
    3. I have a great deal of sympathy with Mr Lixenberg’s arguments, but it seems to me that without carrying out a detailed analysis of the type that the court is discouraged from undertaking (and indeed is not adequately equipped to undertake) on an application of this sort, I cannot rule out the possibility that Burness Paull LLP’s partner hourly rate may be reduced on detailed assessment.
Pre-Action Costs
    1. As to incurred costs at the pre-action stage, I am told by Ms Bodnar that there is no basis for any claim for costs in relation to Bond Dickinson’s fees and that there was no pre-action work which could properly have incurred fees. These are not issues on which I can sensibly form a view. CBUK’s costs budget is verified (as required) by a statement of truth and, as Mr Lixenberg rightly points out, I am not in a position to determine that pre-action fees either were not, or should not reasonably have been, incurred.
    2. It seems to me that all I can sensibly do at this stage is record that there is an argument that Sarens is entitled to a reduction in relation to Pre-Action costs.
    3. Doing the best I can in the exercise of my discretion to arrive at a reasonable sum (with sufficient margin for error) on account of incurred costs and the costs of the December Applications (and also bearing in mind that it is suggested by Sarens that there may be other reductions for incurred costs and in respect of the costs of the December Applications), I intend to apply a 30% reduction. By my reckoning, total incurred costs amount to £47,859.54 while the costs of the December Applications amount to £20,275.50, together £68,135.04. Reducing this figure by 30% leaves £47,694.53.
The Order for Payment on Account and the Costs of the Hearing
    1. In all the circumstances, I shall make an order for a payment on account of £98,000 (and have arrived at this figure by rounding down the figure of £98,324.03 which is the total sum of £47,694.53 + £50,629.50).
    2. Further to sight of a draft of this judgment both parties provided me with short submissions on the costs of the consequentials hearing.
    3. CBUK says that it should have its costs. It provided Sarens with a draft order promptly after receiving my original judgment but Sarens took a week to respond on that draft and when it did respond to object to the proposed quantum of the payment on account of costs, it did not raise the point on which it ultimately succeeded at the hearing, namely the distinction between incurred and estimated costs. This point, says CBUK, only emerged at about 4pm on the day before the consequentials hearing in Ms Bodnar’s Note, in which the suggestion that there would be an application for permission to appeal was also made for the first time. CBUK says this would have required a hearing and the court cannot reasonably expect that the outstanding issues could have been resolved by agreement between the parties. CBUK points out that, with the exception of the point of principle on incurred costs, the majority of the arguments raised by Sarens did not find favour with the court.
    4. Sarens contends that the correct order should be that the parties each bear their own costs of the hearing (which coincides with the view I expressed in my original draft judgment). It points out that members of its legal team were not available over the Easter break and that its request, through counsel’s clerk, to postpone the handing-down of judgment so as to provide more time for discussion between the parties was rejected by CBUK. It says that the chronology of events set out in Ms Bodnar’s further submissions clearly shows that CBUK would not in any event have been prepared to alter its position that it was entitled to a 90% payment on account of costs even if there had been more time for negotiation and that CBUK had taken a view on the law and was not prepared to accept anything less.
    5. With the exception of a very short application for permission to appeal, which took up no more than 5 minutes of the court’s time and could (had it been the only outstanding issue) have been determined on paper (notwithstanding CBUK’s suggestion to the contrary), the dispute over the proper quantum for the payment of costs on account was the only live issue at the hearing and took up the best part of two hours of court time. This was most unfortunate.
    6. I accept Sarens’ submissions that CBUK appears to have taken the view that it would not back down in its contention that it was entitled to a 90% payment on account of costs and that this made a hearing inevitable. CBUK lost on that point in relation to incurred costs and this required me also to consider Ms Bodnar’s submissions as to factors which might affect the approach to be taken in due course on detailed assessment. My ultimate award fell between the figures for which each party contended.
    7. In all the circumstances, and given that neither party has proved an outright winner on this application, I shall make an order that the parties each bear their own costs of the consequentials hearing.