Costs budgeting after Harrison I

The most significant decision in the last four years on costs budgeting was handed down by the Court of Appeal in the case of Harrison v University Hospitals and Coventry and Warwickshire NHS Trust [2017] EWCA Civ 792. This was an appeal from a decision of Master Whalan, made on a detailed assessment.

The only substantive judgment was given by Davis LJ with evident asperity as he plainly wondered why some of the points which were being run were being argued before him: I suspect he had forgotten that counsel do not choose the cases they take on, and often do not choose the points they are asked to argue.

Be that as it may, the issues were described in these terms:

1.This appeal raises issues of some general importance in the context of costs. In particular, the two principal issues are ones which concern the relationship between costs budgeting and detailed assessment and which appear to have attracted sharply divided views among those specialising in this area. Ultimately, they are to be resolved by a process of interpretation of the relevant Rules and related Practice Directions.

2. The first issue can be summarised in this way. Where a Costs Management Order (“CMO”) approving a costs budget has been made in the course of civil proceedings is a costs judge on a subsequent detailed assessment precluded from going below the budgeted amount unless satisfied that there is good reason for doing so? Or is there an entitlement to do so without any prior requirement of good reason for going below the budgeted amount?

3. The second issue is whether, with regard to costs incurred prior to the budget (“incurred costs”), there is or is not a like requirement of good reason if a costs judge on a subsequent detailed assessment is to depart from the amount put forward at the relevant costs management hearing.

4. A third, and entirely discrete, point is also raised. This is as to when, for the purposes of the transitional provisions relating to proportionality contained in CPR 44.3 (7), a case is to be treated as “commenced”.

The actual decision of Master Whalan was summarised as follows:

17. Master Whalan took the view that so far as budgeted costs were incurred CPR 3.18 precluded him from subjecting them to a “conventional” detailed assessment at the behest of the appellant as paying party unless good reason for doing so was shown. (At the same time, however, he indicated that he was receptive to arguments on individual items to the effect that good reason did exist.) As to incurred costs, Master Whalan – to an extent founding himself on some observations of Sales LJ giving the judgment of the court in Sarpd Oil International Limited v Addax Energy SA [2016] EWCA Civ 120, [2016] 2 Costs LR 227 – said that although incurred costs could not themselves have been approved as such at the case management conference nevertheless they would have featured in the overall budget put forward at the conference and thus had a “certain status”. Master Whalan indicated that, with regard to the incurred costs, it was “in practical terms” required that good reason likewise should be shown if there was to be a departure from what was set out in

Precedent H. As to the date when the case commenced, Master Whalan held that in the present case that was when the letter was sent (on 27 March 2013) by a prescribed method which would lead to next-day delivery and so was prior to 1 April 2013. In the result, Master Whalan assessed the recoverable costs at £420,168 (including success fee and ATE premium). He ordered the appellant to pay the costs of the assessment.

I therefore turn to consider the first issue.

The resolution of the first issue for anyone who actually reads the rules and Practice Direction would seem to be “bleeding obvious” as I observed in an earlier post http://costsbarrister.co.uk/uncategorized/the-bleeding-obvious/ in relation to the case of  Merrix but which was approached by the court in the following way:

25. So far as the first issue before us is concerned, that was precisely the point that fell for decision in the case of Merrix, decided on 24 February 2017 by Carr J. There is no room for distinction on the facts: either that case was rightly decided or it was wrongly decided. Mr Latham (of course) said that it was rightly decided. Mr Hutton (of course) said that it was wrongly decided. Certainly it is not a decision binding on this court.

26. Mr Hutton noted that by her decision Carr J had on appeal departed from the decision of a very experienced regional costs judge (A908M096): whose decision at first instance had itself in the interim been followed, albeit “with some hesitation”, by another very experienced regional costs judge in another case (A90LE252).

27. Since the decision of Carr J is reported and readily available to anyone interested in questions of costs I do not propose here to detail her reasoning. She set out fully the background of the proposals of Sir Rupert Jackson; the contents of the relevant Rules and Practice Directions; and the competing arguments of counsel (which in truth appear to have tracked the competing arguments advanced to us). She reviewed a number of authorities cited to her. The core of her conclusion perhaps finds its clearest summation in paragraphs 67 and 68 of her judgment. She considered it plain from the wording of CPR 3.18 that no distinction was made between the situations where it was claimed on detailed assessment that the budgeted figures were or were not to be exceeded. At a later stage, she indicated that she accepted that costs budgeting was not an advance detailed assessment; but, as she put it at paragraph 78, there was no suggestion that there should not be any detailed assessment: “on the contrary, the question is how that assessment should be conducted”.

The Court of Appeal then went on to approve the approach taken by Carr J in the Merrix decision:

28. I am in no real doubt that Master Whalan reached the right conclusion on this issue and that the conclusion of Carr J in Merrix was also correct, for the reasons which she gave.

Davis LJ deprecated the arguments advanced which were said to be supported by various extra-judicial sources:

29. I have to say that I was a bit bemused by some of the aspects of the arguments advanced before us. At times the citation not only of authorities but also of what were described as “extra-judicial documents” almost descended into a kind of arms race in collecting views or comments which might lend support to one point of view with regard to costs budgeting in preference to another. Indeed at one stage we were taken by counsel to a number of comments of Sir Rupert Jackson himself, writing extra – judicially, seemingly with an aim on the part of counsel to extracting some kind of clue as to what he had intended or what he would have intended or what he understood had been intended. This is, with respect, beside the point. What we have to do is construe the wording of CPR 3.18 (produced, no doubt, under the auspices of the Civil Procedure Rule Committee): thus on basic and ordinary principles the legislative intention is to be gathered from the words used. For this reason alone, therefore, I was not much moved by Mr Hutton’s courteous but firm insistence that to understand the rule one has to understand the “realities”; and for that purpose one had, he said, to be at the “coal-face” of costs management decision making (which virtually all appellate and many High Court judges are, I accept, not).

An interesting raised in the course of the appeal, but which the Court plainly thought was neither here nor there, was the whether the degree of scrutiny provided to costs budgets when a costs management order was made, was appropriate.

In years gone by, I recall undertaking detailed assessments lasting three days, where a bill of costs was no more than £150,000. Last year, I undertook a summary assessment of a schedule of costs claiming £140,000 in the Commercial Court, where the costs were assessed within 15 minutes. As is well known, on a provisional assessment of a bill of costs of up to £75,000, the court service allows a costs judge only 40 minutes.

The point is that, a philosophical shift has been adopted by the judges, that rather than spend days or even hours, agonising over a claim for costs they will administer “rough justice” when making decisions.

30. In many ways, Mr Hutton’s submissions in fact came close to an attack if not on the whole principle of costs budgeting then at all events on the efficacy in practice of costs budgeting. That of course has been the subject of extensive debate over recent years. But I do not need to go into the competing arguments – themselves discussed both in, for example, the Civil Courts Structure Review: Final Report of Lord Justice Briggs (2016) and in Sir Rupert Jackson’s own recent book on The Reform of Civil Litigation (2016) – simply because, put shortly, the system is now enshrined in the Civil Procedure Rules. At all events Mr Hutton asserted – and assertion is what it was – that the whole costs management system not only has been but still is “creaking”. He further said that if a CMO were to convey the notion that, for any subsequent detailed assessment, the matter was in effect to be regarded as already determined by the approval of budgets in the CMO then that would cause parties to devote even more time and resources and argument to costs management hearings, to the detriment of the prompt processing of the litigation and at the risk of overwhelming the courts: whereas if all were left to detailed assessment then matters could, he sought to say reassuringly, be assessed fully and fairly and properly by expert costs judges on an itemised basis , and with an informed view of issues such as proportionality.

31. The premise underpinning Mr Hutton’s argument thus was that CMOs in effect are but summary orders which at best give no more than a snapshot of the estimated range of reasonable and proportionate costs: often reached, as Mr Hutton would have it, on a broad brush or rough and ready judicial approach after a hearing which would have been limited in time, rushed in argument and incomplete in the information advanced.

Accordingly a “light touch” approach to costs management can be seen to be very much part of the zeitgeist when it comes to assessing costs and not something that the Court of Appeal regards as objectionable or even out of the norm.

This decision also marks the resurrection of Cook on Costs as an authoritative source of costs wisdom: under the new authorship of Master Rowley and District Judge Middleton, the text has regained its authority, that certainly I think had declined in recent years, as the following passage makes clear from the judgment in Harrison.

32. It is to be noted that this sceptical appraisal, although no doubt shared by some, is not shared by others who undoubtedly can be said to be at the “coal-face”. Indeed, it is roundly said in the latest edition of Cook on Costs (2017 ed, at pages 230-1) that to sanction, at detailed assessment, a departure from the budget in the absence of good reason would overlook (among other things) that budgeted costs are already required to have regard both to reasonableness and to proportionality; that the aims of costs budgeting include a reduction in detailed assessments and of issues raised in points of dispute; and that the element of certainty to clients (in the form of knowing what costs they are likely to face, in terms of payment or recovery) would be removed. As also posed by Master Gordon-Saker in the case of Collins v Devonport Royal Dockyard Limited (8th February, 2017: AGS/1602954), to which we were referred in the written arguments: “… what would be the point of costs budgeting (and the considerable resources it has required) if the resulting figures amount to nothing more than a factor, guidance or cap at detailed assessment?” He rejected in that particular case the argument of the defendant, in seeking on detailed assessment to reduce an agreed budget figure, that an agreed or approved budget was, for the purposes of detailed assessment, nothing more than guidance.

The court did however note that the requirement of proportionality should be specifically addressed, when setting a costs budget: and specifically mentioned the value of the claim.

This could be quite important: in my experience, decisions on costs budgeting in practice chiefly focus on what legal spend needs to be, to complete a phase: when the emphasis in the rules, that costs can be both reasonable and necessary, but still disproportionate might indicate that a better starting point is to look at the overall value of the case, consider what the overall level of costs should be, and then divide the total by phases. But this is not happening in practice.

33. These sentiments are also reinforced by, for example, the requirement that a costs budget has to be signed and certified as being a fair and accurate assessment of the costs which it would be reasonable and proportionate for the client to receive; and by the requirement under the Rules and Practice Directions for revised budgets, upwards or downwards, to be filed and approved where the estimates change. In this regard, it is also in my view particularly important overall to bear in mind that a judge who is being asked to approve a budget at a costs management hearing must take into account, in assessing each budgeted phase, considerations both of reasonableness and of proportionality. Proportionality may be, to give but one example, of particular potential relevance where the costs prospectively claimed are very large and the amount at stake in the claim relatively small.

The Court of Appeal also seems quite relaxed by the concept of a 30 minute detailed assessment: the effect of its ruling should be, to reduce large parts of a detailed assessment to arguments (if there are any) that there is a good reason to depart from an approved costs budget.

34. Moreover, if approval of a costs budget by a CMO has the more limited status which the appellant would ascribe to it then that would have a potentially adverse impact on parties thereafter attempting to agree matters without requiring a detailed assessment. Although Mr Hutton queried if that was one of the perceived prospective benefits of the costs budgeting scheme, it seems to me – as it did to the editors of Cook on Costs – wholly obvious that it was indeed designed to be one of the prospective benefits of cost budgeting that the need for, and scope of, detailed assessments would potentially be reduced.

The nub of the case was that the Court of Appeal decided, unsurprisingly, that on conventional principles of construction, the words of the rules and Practice Direction mean exactly what they say.

35. Against that context, I turn to the critical issue of the actual wording of CPR 3.18 (b). Mr Hutton’s arguments were to the effect that there is a degree of ambiguity in the language used, justifying a purposive approach to its interpretation. Since, for the reasons I have sought to give above, the purposive approach which he advocates rests on very shaky foundations that hardly assists him. But in any event I do not consider there to be any real ambiguity in the words at all.

36. The appellant’s argument has this initial, and unattractive, oddity. If it is right, it involves a most unappealing lack of reciprocity. It means that a receiving party may only seek to recover more than the approved or agreed budgeted amount if good reason is shown; whereas the paying party may seek to pay less than the approved or agreed budgeted amount without good reason being required to be shown. It is difficult to see the sense or fairness in that. Nor does this argument show much appreciation for the position of the actual parties to the litigation – not just the prospective paying party but also the prospective receiving party – who need at an early stage in the litigation to know, as best they can, where they stand: precisely one of the points validly made in Cook on Costs (cited above).

37. The appellant’s argument requires that the word “budget”, as used in the then version of the Rule, merely connotes an available fund. But given that “good reason” is, as conceded, required if the amount claimed on detailed assessment exceeds the approved budget that of itself surely carries with it the notion that the word “budget” comprehends a figure. Moreover, the words “depart from” are wide – or, to put it another way, open-ended. As Mr Latham pointed out, had the intention really been that good reason is required only in instances where the sum claimed exceeds the approved budget then the Rule could easily and explicitly have said so. Further, the Rules in any event provide elsewhere for costs capping cases: it seems odd indeed to include a further variant of costs capping by this route. Yet further, and as indicated above, the appellant’s argument bases itself almost entirely on the perceived advantages to the paying party with scant, if any, regard to the position of the receiving party: who no doubt will have placed a degree of reliance on the CMO. From the perspective of the receiving party it is all too easy to see that the paying party is indeed seeking to “depart from” the approved budget in endeavouring to pay less than the budgeted amount.

38. There is also nothing, in my view, in CPR 44.4 (3)(h) to tell against this interpretation. In fact, to read that sub-rule as requiring the approved or agreed budget to be considered only as a guide or factor and no more would involve a departure from the specific words of CPR 3.18. In this respect, it is in fact to be noted that the words of CPR 3.18 (a) positively mandate regard to the last approved or agreed budgeted cost for each phase of the proceedings. The two Rules are perfectly capable of being read together.

39. Consequently, since the meaning of the wording is clear and since it cannot be maintained that such a meaning gives rise to a senseless or purposeless result, effect should be given to the natural and ordinary meaning of the words used in CPR 3.18. In truth, that natural and ordinary meaning is wholly consistent with the perceived purposes behind, and importance attributed to, costs budgeting and CMOs.

40. Such a conclusion also accords with authority (albeit none binding on this court): not only in the form of the decisions in Merrix and Collins but also in the form of the remarks of Coulson J in McInnes v Gross [2017] EWHC 127 (QB). In that case, in the context of considering an interim payment on account of costs, Coulson J in terms said, at paragraph 25, that the significance of CPR 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.

43. I therefore consider that, overall, the costs judge was right in his conclusion on this particular point.

The Court of Appeal then declined to give guidance on what is a “good reason”, in the sense of listing even illustrative examples of what might be a good reason for a departure from the budget. This is to be welcomed. It now gives a blank canvass to costs lawyers upon which they can paint a masterpiece, to argue that any number of scenarios, constitute a “good reason” to depart from the budget.

Obvious ones, include the non-completion of a phase, the value of a case budgeted on certain assumptions, collapsing at trial, or something akin to an “unknown unknown” arising during the course of the litigation. However a practical constraint on these arguments, may well be the facility to have a budget varied, should unforeseen consequences arise. The facility to vary a budget, does generate a tension with the concept that the budget sets the parameters of costs incurred in a case from start to finish.

44. Further, Mr Hutton’s argument seemed to me to have two potential wider weaknesses. First, aspects of it seemed to be almost asserting that unless the Rules were interpreted as he argued a CMO approving a budget would operate in effect to replace the detailed assessment. That clearly is not right: as Carr J pointed out in Merrix. The effect, rather, is as to how the detailed assessment is conducted. Second, and linked to the first point, the whole argument, in my opinion, tends to downplay the significance of the “override” built into the wording of CPR 3.18 (b). 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 3.18 (b) is different from that of CPR 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 Limited [2014] EWCA Civ 906, [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 doomladen 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.

In short, detailed assessment has not been abolished: its utility remains, but what perhaps Harrison will do through the resolution of this first issue, is recast the arguments from ones of reasonableness of incurring a particular item of costs, to arguments as to “good reason” to depart from figures which were floated and set at the start of the case.

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