COST BITES 195: THE IMPORTANCE OF KEEPING TO COSTS BUDGETS: “GOOD REASONS” FOR DEPARTING AND PART 36 ISSUES

In  A & V Building Solution Ltd v J & B Hopkins Ltd [2024] EWHC 2914 (TCC)  Mr Roger Ter Haar KC considered the circumstances in which a successful party can go outside the scope of budgeted costs.

“… the assessment of J&BH’s costs is being carried out in the context of A & V’s failure to beat a Part 36 offer. In a commercial case such as this, a party deciding whether to accept a Part 36 offer (whether within the initial time period for acceptance or after that period on the usual basis as to costs) is entitled, and should be expected, to make such a decision on the basis that the cost estimate is a competently and thoroughly prepared estimate of the offering party’s future costs, and an accurate statement in good faith of the costs already incurred.”

THE CASE

This was the 8th judgment in a series of complex court proceedings.   The claimant had failed to beat a Part 36 offer.  The court had to consider the costs consequences of this for a period in which the court had made a costs management order.  The budgeted costs were £82,535.50, the costs allowed were £88,956.50

THE CONSEQUENCES OF THE CASE BEING BUDGETED

The judge held that it was for the receiving party to show a “good reason” to depart from the budgeted costs. This was a high bar.  In relation to many of the items claimed outside the budgeted costs they were not accepted.

THE JUDGMENT ON BUDGETED COSTS

The judge reviewed the budget and the principles relating to the assessment of costs after a case had been budgeted.  He only allowed the budget to be exceeded to a very limited extent.

1. 1. On 26 March 2024 I made a Costs Management Order. That order was reflected in a Cost Estimate dated 3 April 2024.

1. 1. As I understand the position, the following phases covered by the Cost Estimate were outstanding at 1^st March 2024:

1. 1. The amount claimed by J&BH for the period since 1 March 2024 is £153,742.84, being disbursements of £80,568.84, invoiced time costs of £60,674 and work in progress of £12,500.

1. 1. Thus the amount claimed is 86% higher than the amount estimated as late as 3 April 2024.

1. 1. I note that the total estimated in the 3 April 2024 Cost Estimate for the whole case is £166,359.02.

1. 1. In a case where a cost management order has been made, CPR Part 3.18 applies:

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 budgeted costs for each phase of the proceedings;

b) not depart from such approved or agreed budgeted costs unless satisfied that there is good reason to do so; and

c) take into account any comments made pursuant to rule 3.17(3) and recorded on the fact of the order.

1. 1. In the White Book at paragraph 3.18.3 the following guidance is given:

In Harrison the Court of Appeal decided not to proffer any guidance as to what will constitute a “good reason” for departing from an agreed or approved budget, stating that this can safely be left to the individual appraisal and evaluation of costs judges by reference to the circumstances of each approach to the need to find “good reason”. Costs judges should approach this topic having in mind the three-stage test known as the Denton principles …. Accordingly, the assessing court might consider the significance of the case including in particular (a) the need for litigation to be conducted efficiently and at proportionate cost and (b) the need to enforce compliance with rules, practice directions and court orders.

1. 1. In the case referred to in the White Book, Harrison v University Hospitals Coventry & Warwickshire NHS Trust^[9], Davis LJ said:

“… Where there is a proposed departure from budget be it upwards or downwards the court on a detailed assessment is empowered to sanction such a departure if it is satisfied that there is good reason for doing so. That of course is a significant fetter on the court having an unrestricted discretion: it is deliberately designed to be so. Costs judges should therefore be expected not to adopt a lax or over-indulgent approach to the need to find “good reason”: if only because to do so would tend to subvert one of the principal purposes of costs budgeting and thence the overriding objective. Moreover, while the context and the wording of CPR r 3.18(b) is different from that of CPR r 3.9 relating to relief from sanctions, the robustness and relative rigour of approach to be expected in that context (see Denton v TH White Ltd (De Laval Ltd, Part 20 defendant) (Practice Note) [2014] 1 WLR 3926) can properly find at least some degree of reflection in the present context. Nevertheless, all that said, the existence of the “good reason” provision gives a valuable and important safeguard in order to prevent a real risk of injustice; and, as I see it, it goes a considerable way to meeting Mr Hutton’s doom-laden predictions of detailed assessments becoming mere rubber stamps of CMOs and of injustice for paying parties if the approach is to be that adopted in this present case. As to what will constitute “good reason” in any given case I think it much better not to seek to proffer any further, necessarily generalised, guidance or examples. The matter can safely be left to the individual appraisal and evaluation of costs judges by reference to the circumstances of each individual case.”

1. 1. In my judgment, in the present case, the following matters are particularly important:

1) That a party seeking to recover more than the amount set out in its cost estimate has to establish “good reason” why it should be allowed to do so;

2) The need to enforce compliance with rules, practice directions and court orders;

3) That the cost management system can only work if those providing cost estimates to the Court exercise considerable care in formulating the costs estimates;

4) That if the Court extends parties latitude in forgiving mistakes in costs estimates, the cost management structure is liable to be undermined;

5) That parties should not be held to cost estimates in respect of costs which could not have been anticipated with the exercise of reasonable diligence;

6) That, in the language of a distinguished American politician, there are “known unknowns” and “unknown unknowns”. In the context of cost estimates, the parties presenting a cost budget to the Court have the option of informing the Court of uncertainties of which they are aware in estimates put forward in their skeleton arguments, in oral submissions or in contingencies or footnotes in the cost estimate;

7) That the closer the production of the cost estimate is to the time when the relevant costs will be incurred, the less latitude will be giving to a party which makes what turns out to be an erroneous assessment of the costs to be incurred: in this case the cost management exercise was carried out unusually close to trial;

8) That in this case, the assessment of J&BH’s costs is being carried out in the context of A & V’s failure to beat a Part 36 offer. In a commercial case such as this, a party deciding whether to accept a Part 36 offer (whether within the initial time period for acceptance or after that period on the usual basis as to costs) is entitled, and should be expected, to make such a decision on the basis that the cost estimate is a competently and thoroughly prepared estimate of the offering party’s future costs, and an accurate statement in good faith of the costs already incurred.

1. 1. Given the very limited scope for a party who is paying the other party’s costs under the Part 36 regime to avoid the consequence of the “separate, self-contained” Part 36 code, it seems to me only just that the Part 3.18 regime should be applied somewhat carefully.

1. 1. In this case, of the figures set out in the Cost Estimate, the following sums were not in the event incurred:

1. 1. If the figure of £3,558 is deducted from the Cost estimate total of £82,535.50, the figure is reduced to £78,977.50.

1. 1. The starting point for my assessment is therefore the figure of £78,977.50. I can only depart from that figure (up or down) if I am satisfied that there is good reason to do so.

1. 1. The first reason put forward in support of its submission that J&BH should be entitled to more than this minimum, J&BH submits in its Submissions on Costs:

57. Firstly, the Defendant’s incurred costs in this period include costs incurred between 1 March 2024 and 26 March 2024, which are not therefore within the approved estimated costs. The costs incurred between 1 March 2024 and 26 March 2024 total £24,922.27 (time costs: £10,405 and disbursements: £14,517.27)…..

1. 1. The Cost Management Order was made by me at a hearing before me on 26 March 2024. For the purposes of that hearing Mr Frampton submitted a Note which submitted as follows:

23. The Defendant has filed a cost budget at [131]. In summary:

23.1 The Defendant’s incurred costs (up to 4 March 2024) are: £69,297.52.

23.2 The Defendant’s estimated costs (from 4 March 2024 are: £94,941.50.

24. As at the date of the CCMC, the incurred costs will have increased (full CCMC phase and most of the expert phase), with the estimated costs for those phases reduced.

25. The estimated costs will be reduced further if there is no PTR. If there is no PTR, the Defendant estimate is for 3 hours of time costs.

1. 1. This made clear that costs between 4 March and 26 March 2024 had been incurred but not been included in the incurred costs column. The assumption therefore was that those incurred costs were allowed for in the estimated costs column.

1. 1. I asked J&BH for a reconciliation of the figures. This was helpfully provided as follows:

13. …. £24,922.27 is the costs in fact incurred between 1 March 2024 and 26 March 2024 (the date of the CCMC). That figure includes costs recorded as incurred costs in the cost budget. The breakdown to the £24,922.27 figure is as follows:

13.1 Costs incurred between 1 March 2024 and 3 March 2024. These are costs that had already been included in the incurred costs set out in the 4 March 2024 costs budget. These costs are not reflected in the £14,526 adjustment to the incurred costs figure following the CCMC. These costs total £837.00. This is the total of the invoiced costs entries for 1 March 2024 – 3 March 2024 (inclusive) (see March 2024 invoice) [Defendant’s Costs Submissions Bundle p37].

13.2 The additional incurred costs between 4 March 2024 and 26 March 2024 discussed at the CCMC and reflected in the approved budget dated 3 April 2024 of £14,526 (as above).

13.3 An invoice from Matthew Geale dated 26 March 2024 for £8,951.25. This was not received until after 5pm on 26 March 2024 and was therefore not in contemplation at the CCMC. This was not added to the incurred costs column for the 3 April 2024 budget as it had not been discussed with / approved by the Court.

14. The total of the above elements is £24,314.20. Subject to a small discrepancy (which JBH is unable to precisely identify the cause of) of £608.07, this aligns with the costs claimed by JBH for the period 1 March 2024 to 26 March 2024 per JBH’s Submissions on Costs dated 27 September 2024.

15. …. the reduction in estimated costs was made by the Court during oral submissions at the CCMC to account for the increase in incurred costs of £14,526. This reflected costs incurred between 4 March 2024 and the time of the CCMC on 26 March 2024. The revised budget was filed on 3 April 2024 as that was the date by which it was to be filed, however it did not capture incurred costs after 26 March 2024 because the date of the Costs Management Order was 26 March 2024.

1. 1. After the hearing before me on 26 March 2024 the Cost Estimate dated 3 April 2024 to which I have already referred was produced. As set out in the reconciliation above, the figure for incurred costs was increased from £69,297.52 to £83,823.52, an increase of £14,526. The Cost estimate reduced the estimated costs from £94,941.50 to £82,535.50, a reduction of £12,406. This increase in incurred costs and reduction in estimated costs reflected changes between 4 March 2024 and 3 April 2024.

1. 1. Accordingly, if I take the figures in the 3 April 2024 Cost Estimate as my starting point in accordance with CPR Part 3.18, it allows for the costs up to 3 April 2024 subject to:

1) £837 in respect of invoiced costs between 1 and 3 March 2024;

2) An invoice from Mr Geale in the sum of £8,951.25;

3) An unexplained discrepancy of £608.07.

1. 1. I am required by CPR Part 3.18 (b) to consider whether there was good reason to depart from the approved cost budget. In the circumstances set out above, I see no reason why the costs incurred between 1 and 3 March 2024 were not reflected in the cost budget placed before the Court on 26 March 2024, perhaps at least by a footnote, or in the 3 April 2024 Cost Estimate.

1. 1. For these reasons I decline to increase the amount allowable by the costs said to have been incurred by J&BH between 1 and 3 March 2024.

1. 1. A discrepancy for which there is no explanation cannot fall within the exception “for good reason”.

1. 1. This leaves the invoice from Mr Geale.

1. 1. In the Cost Estimate the incurred disbursement is £5,000. This can be correlated with Mr Geale’s invoice of 26 February 2024.

1. 1. In the Cost Estimate the estimated disbursement is £9,000. This can be correlated with Mr Geale’s invoice of 26 March 2024 in the sum of £8,951.25, thus it is allowed for sufficiently in the Cost Estimate.

1. 1. In the circumstances I do not consider that there is good reason to depart from the Costs Estimate in respect of costs incurred between 4 March and 26 March 2024.

1. 1. J&BH seeks to increase the figure for future expert reports from £10,000 to £17,541.50. The reason given in paragraph 59.1 of J&BH’s Submissions on Costs was as follows:

The Defendant’s estimate assumed that there would be only 1 report from Mr Geale. The Defendant did not anticipate that (i) Mr Paduraru would challenge the veracity of Mr Geale’s qualifications, requiring time to be spent on correspondence and retrieving his certificates; (ii) Mr Geale would file a supplemental report in relation to a further statement from Mr Paduraru, and (iii) the Claimant would raise written questions of Mr Geale and allege that he has not responded to them. These are good reasons to depart the budget. The overall expert reports phase of £32,354.50 are reasonable and proportionate given the issues covered and the significant value of the claims they addressed.

1. 1. Mr Geale’s invoice of 22 May 2024 claims a total sum of £13,959.37. This is made up of four elements.

1. 1. The first part is a bill of £1,979.00. Mr Geale described the work done as follows:

Preparing our supplementary report for disclosure dated 26 April 2024

Reviewing the witness statement from Alex Paduraru, dated 17 April; discussing this with HK in a Teams call on 19 April and undertaking all work necessary in preparing and finalising the supplementary report for disclosure dated 26 April.

1. 1. I accept that an additional report was adduced from Mr Geale which was reasonably required and not anticipated at the time that the Cost Management Order was made. I accept that the cost estimate should be increased by the amount of £1,979.

1. 1. The second part is a bill of £5,144.50. Mr Geale described the work done as follows:

Preparing for trial, conference with Counsel, travelling to London and assisting at trial.

All works necessary in preparing for and attending conference with Counsel on 13 May 2024; reviewing relevant sections of the Court bundles; reading Claimant and Defendant’s opening submissions sent with your email on 13 May; preparing the list of questions for Counsel to ask the Claimant, as discussed in conference, in my email of 13 May; reviewing the Claimant’s updated skeleton argument and the supplementary bundle; responding to your emails of 14 May; preparing my email of 14 May setting out my views of the negative creditor; research into tax treatment of DLAs; reviewing the new disclosure from the Claimant regarding sub-contractors and preparing an analysis of this; preparing detailed analysis of the Claimant’s personal expenditure for inclusion in the court bundle; review of further disclosure from the Claimant of A&V tenders.

1. 1. None of the work described is within the description given in paragraph 59.1 of J&BH’s Submissions on Costs. Indeed this work all appears to be of a nature which J&BH’s solicitors should have anticipated when preparing the Cost Estimate.

1. 1. Accordingly I do not regard the charge of £5,144.50 as being a cost which can be recovered in addition to the amount in the approved Cost Estimate.

1. 1. I return to the other two elements below.

1. 1. J&BH seeks to increase the figure for trial preparation from £34,572.50 to £48,833.45. The reason given in paragraph 59.2 of J&BH’s Submissions on Costs was as follows:

The additional trial preparation costs related to the following unanticipated events: (i) on 30 April 2024, the Claimant sought an order that Mr Geale had not answered questions of him under CPR 35.6 and sought an order under CPR 35.6(4) that the Defendant could not rely on his evidence or recover the cost of his evidence, (ii) the Claimant sought disclosure of Mr Geale’s instructions, (iii) on 10 May 2024 the Claimant sought disclosure of the Principal Contract which had to be retrieved and then was disclosed, (iv) time was spent identifying and removing duplicated documents from the prior bundles included in the trial bundle, and (iv) the Defendant’s solicitors produced a schedule identifying the bundle page references for the marked up drawings at bundle pages 2208 to 2210.

1. 1. I have seen no reflection of any significant additional time spent by Mr Geale on these matters. However, I do accept that these matters were likely to have increased the time spent by J&BH’s solicitors. However, having examined the relevant invoice for the period from 30 April 2024 to the start of trial I find it difficult to accept that these matters themselves would have led to an increase of over £14,000 in solicitors’ time – at £250 per hour this would be 56 additional hours. Doing the best I can on the information available, I allow an additional £5,000.

1. 1. J&BH seeks to increase the figure for trial from £26,320 to £41,160.37. The reason given in paragraph 59.3 of J&BH’s Submissions on Costs was as follows:

The additional trial costs reflected (i) Mr Geale having to attend the trial for 2 days, as opposed to the 1 day estimated, (ii) the additional and late disclosure provided by the Claimant during the trial which required review and taking of instructions, (iii) time spent preparing the chronological bundle of key documents requested and provided to the Court following the Judgment, (iv) the unanticipated several rounds of further submissions and judgments post Judgment No. 5.

1. 1. I return to Mr Geale’s 22 May 2024 invoice. The third element of £6,000 was in respect of Mr Geale attending Court for two days at £3,000 per day. The fourth element of £835.87 relates to train travel (£250.89), a hotel for two night (£534.98) and subsistence (£50).

1. 1. The costs on Mr Geale attending for one day is included in what J&BH accept they anticipated. As to the second day, nothing happened at the trial that could not and should not have been anticipated at the time the Cost Estimate was prepared. Accordingly I do not accept that J&BH has made out good reason in that respect to increase the amount allowed under the Cost Management Order.

1. 1. As to the other matters raised in paragraph 59.3 of J&BH’s Submissions on Costs, reason (v) relates to matters after Judgment No 5, a phase in which I have held that both parties must bear their own costs. I have dealt with reason (i) above.

1. 1. As to the other matters, I accept that preparation of an additional bundle was an additional cause of work which appears to have generated possible £2,000 by way of additional profit costs between 20 and 30 May 2024. I accept that there was some additional disclosure during trial. It is difficult clearly to identify what time was spent on this, but I would allow £1,000 to reflect this. Thus there is an additional £3,000 to be added to the trial phase.

1. 1. Accordingly I allow: