Court of Appeal backs Merrix, whilst disagreeing with itself in Sarpd Oil in a mixed judgement for Claimant and Defendants
The Court of Appeal had now given the eagerly awaited decision in Harrison v University Hospitals Coventry & Warwickshire NHS Trust  EWCA Civ 792. The case considered two issues, firstly departure from the costs budgeted amount and good reason to do so, and secondly the position with regard to incurred costs. Both of these issues feed directly into how a costs managed case which proceeds to detailed assessment is to be assessed and the application of proportionality on such as assessment.
On the first point the Court of Appeal has backed judgment of Carr J in in Merrix v Heart of England NHS Foundation Trust  EWHC 346 (QB) (which had been successfully appealed from the earlier ruling of Regional Costs Judge Lumb (Merrix v Heart of England NHS Foundation Trust  EWHC B28 (QB)), in holding that future estimated costs which had been agreed or approved should not be departed from, either upward or downward, without good reason.
On the second point the Court went against both the Court below (on this point specifically) as well as previous decision of a differently constituted Court of Appeal in Sarpd Oil International Ltd v Addax Energy SA & Anor  EWCA Civ 120 in holding that the costs incurred at the time of budgeting and costs management are without the scope of costs management and detailed assessment applies in the usual way to such costs without fetter.
Sarpd Oil, incurred costs and phase totals
In Sarpd Oil International Ltd v Addax Energy SA & Anor  EWCA Civ 120 the parties’ costs budgets contained both the incurred and future estimated costs and the whole budget, including both incurred and future estimated costs, was relied upon in an application for security for costs. The budgets had been agreed and the Court had approved the same at the first CMC. Sarpd Oil essentially argued that any security in relation the incurred costs should be reduced from the amount within the budget in relation to incurred costs. Addax argued Sarpd Oil should not be allowed to go behind the costs management order which had been agreed and approved by the court in relation to both incurred and future estimated costs.
At first instance Smith J found in favour of Addax in agreeing that Sarpd Oil was not entitled to go behind the budgeted figures which had been agreed and approved, stating that the time of challenging the incurred costs was at the CMC – a decision that was later upheld by the Court of Appeal. Whilst it was acknowledged that, strictly speaking, the Court did not approve the incurred costs but could record comments on such costs it was held that, viewing the process as a whole, it could be assumed that the Court was content to approve the overall budget and had essentially approved the reasonableness and proportionality of the incurred costs as well as the future estimated costs.
The decision was heavily criticised as it effectively invited full blooded costs disputes on incurred costs at the costs management stage and the position was essentially reversed by amendments to the CPR at rr. 3.15 and 3.18 introduced on 6th April 2017 (Civil Procedure (Amendment) Rules 2017 SI 2017/95) at the same time as changes following and recommended by the Court of Appeal in Qader. The amendment made clear that the Court may only manage the costs to be incurred, i.e. the future estimated (or budgeted) costs. The phrase “budgeted costs” was inserted several times so as to remove any doubt that the costs management process was focussed and had regard to those future estimated costs to be incurred and the Court had no power to manage, budget or fix the level of incurred costs – save to “record on the face of any costs management order any comments about the incurred costs which are to be taken into account in any subsequent assessment proceedings” as per CPR 3.15.
Merrix, departure and good reason
In Merrix v Heart of England NHS Foundation Trust  EWHC B28 (QB)the Claimant argued that if costs claimed at the end of a matter were at or under the approved budget then such costs should be assessed as claimed unless the Defendant could meet the “good reason” test to depart from the agreed or approved budget. The Defendant disagreed and argued that budgeting and costs management was only one factor to be considered in the assessment of costs. DJ Lumb, sitting as Regional Costs Judge, held that the budget was an “available fund”, essentially that the budget was a pot of money and, whilst the Claimant did not have to spend it all - and indeed the Court could later decide that it was not necessary or reasonable to do so -, the Claimant could not spend more than what was in the pot without good reason. The key quote can be found at paragraph 61;
“the powers and discretion of a costs judge on detailed assessment are not fettered by the costs budgeting regime save that the budgeted figures should not be exceeded unless good reason can be shown.”
Essentially, DJ Lumb decided that the receiving party needed good reason to depart upward from the Budget, but the paying party did not need good reason to seek to depart downward.
The decision was appealed successfully with Mrs Justice Carr ruling that departure and “good reason” goes both ways in Merrix v Heart of England NHS Foundation Trust  EWHC 346 (QB). The key paragraph in the Appeal judgment can be found at paragraph 92;
“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.”
Carr J acknowledged that the decision of DJ Lumb was “the carefully reasoned thinking of an experienced specialist costs judge, which naturally deserves respect”; however nevertheless disagreed that there could be departure from the budget in one direction but not the other. In concluding her judgment Carr J also warned that her judgment would not end the debate and referred to the case of Harrison which had already been listed before the Court of Appeal.
Harrison, costs management and proportionality
Harrison v University Hospitals Coventry & Warwickshire NHS Trust  EWCA Civ 792 is the latest in the above series of costs management and budgeting judgements and, as mentioned above, sought to provide some certainty to a relatively area of costs law.
The case considered the same point has had been raised in Merrix i.e. where the receiving party claimed costs at as some at or below the budgeted amount, then the paying party must show good reason to make reductions.
Essentially, the decision of Master Whalan at first instance (on this issue) was upheld and the judgement of Carr J in Merrix approved: departure from a budget applies both ways and good reason is needed by a paying party to justify a departure downwards just as it is needed by a receiving party to justify a departure upwards. One of the key quotes is at paragraph 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.”
Departure and “good reason”, however, was not the only issue before the Court and, in a break with the decision below of Master Whalan that if costs at assessment stage came within the “phase total” then such costs should be allowed, as well as in disagreement with the previous decision of a differently composed Court of Appeal in Sarpd Oil, David LJ (with agreement from the other two judges on the Court, Sir Terence Etherton MR and Black LJ – with Master Gordon-Saker sitting as assessor) ruled that incurred costs, which are not within the purview of costs management or the judge at the CCMC, remain open for assessment unfettered by the budgeting process.
This decision does not provide the clarity that some had hoped it would, or indeed first believed it had. Although we may now have more guidance on the complicated interplay between budgeting and assessment we are left in a more uncertain position when it comes to how the Court will conduct costs management and set “phase totals” as well as the application of proportionality to budgeted costs, including those costs which we have just been told should not be departed from without good reason.
Litigants must be aware and prepared for costs management during which the Court will take into account costs incurred in managing future estimated costs (PD 3E paragraph 7.4). Although, as we know from the cases above, the Court has no discretion on managing costs already incurred, many judges at case management will take into account incurred costs when deciding what future estimated costs to allow. This approach could be damaging given the different approaches that the Court will now take at both costs management and assessment may lead to a ‘double reduction’.
Incurred costs which appear to be unreasonable or disproportionate at costs management stage may lead to future estimated costs being managed down whilst when the matter then reaches assessment, and regardless of if the phase/bill coming in at or under budget, the incurred pre-budget costs will then fall to be assessed down. The receiving party will have had a first reduction of the future estimated budgeted costs at the CMC stage and a second reduction of the incurred costs at the assessment.
In addition despite the Court having already essentially considered the reasonableness and proportionality of costs at the budgeting stage, the Court of Appeal made clear that the judge on detailed assessment will still ultimately consider the costs as a whole again with proportionality in mind “and consider whether the resulting aggregate figure is proportionate, having regard to CPR 44.3 (2) (a) and (5): a further safeguard, therefore, for the paying party” – (paragraph 52, Harrison).
Essentially, despite many receiving parties pointing out that if the matter has been budgeted then the costs surely can’t be unreasonable or disproportionate, the Court will then be able to apply the proportionality test to the whole of the costs and make a further reduction to a “proportionate amount”. All in the interest of safeguarding the paying party.
If one thing has become clear following Harrison it is that a lot more importance must be placed on budgeting and costs management and receiving party’s should take seriously the instruction of skilled costs professional.
Written by Liam McKee - Costs Draftsman
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