A review of the recent case law addressing whether the hourly rate applied at a detailed assessment on incurred costs should apply to the budgeted costs, where the Court makes a Costs Management order

Good Reason

The basis upon which the Court will assess costs on the standard basis where there has been a Costs Management order made is found at Civil Procedure Rules 3.18 which states:-

3.18

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 3.15(4) or paragraph 7.4 of Practice Direction 3E and recorded on the face of the order.

The Court of Appeal provided guidance on the application of 3.18 in Harrison v University Hospitals Coventry and Warwickshire Hospital NHS Trust (2017) 3 Costs LR 424 when it approved the decision of Carr J in Merrix v Heart of England Foundation NHS Trust [2017] 1 Costs LR 91

In Merrix at paragraph 92, the Court made the following comments:-

“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 part 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 or less than the budgeted sums as where the Receiving Party seeks to recover more or less than the sums budgeted. [Original emphasis].”

In Harrison at paragraph 44, the Court of Appeal provided the following guidance:-

Where there is a proposed departure from a budget – be it upwards or downwards – the court on detailed assessment is empowered to sanction such a departure if it is satisfied that there is good reason for doing so. The 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 principle purposes of costs budgeting and hence the overriding objective. Moreover, in the context of the wording of CPR 3.18(b) is different from that of CPR.9 relating from relief from sanctions, the robustness and relative vigour to be expected in that context (see Denton v White) can properly find the same degree of reflection in the present context. Nevertheless, all that said, the existence of the “good reason” provision gives a value and an 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 [counsel for the Appellant] doom-laden predictions of detailed assessments becoming mere rubber stamps of CMOs and of injustice to paying parties if the approach is to be that adopted in the present case. As to what will constitute “good reason” in any given case, I think it is much better not to seek to proffer any further, necessarily generalised, guidance or example. The matter can safely be left to the individual appraisal and evaluation of Costs Judges by reference to the circumstances of each individual case.

RNB v London Borough of Newham

At the detailed assessment hearing, Deputy Master Campbell addressed the issue of whether the hourly rate claimed for costs incurred before the date of the Costs Management Order (“CMO”), where reduced, to what extent if at all should that reduction be reflected in the budgeted costs.

It was common ground that the Defendant’s submission could only succeed if it satisfied the Court that the reduction in the hourly rate claimed for the incurred costs was a good reason to depart from the figures in the Claimant’s budget.

Mr Clayton, for the Defendant made the following submissions at the detailed assessment hearing:-

  • Practice Direction 7.10 provided that it was not the Court’s role to fix or approve hourly rates. The Court’s role at the CMC stage was simply too approve an amount, which is reasonable, necessary and proportionate.
  • It was irrelevant that the Costs Management Judge had not made any comment about the incurred costs.
  • Hourly Rates had not been approved or agreed until the detailed assessment. Mr Clayton expressed it as “the budget is a budget not a costs cap” meaning that the rate allowed when the reasonableness of the rates came to be assessed at a detailed assessment hearing, needed to be applied equally to the incurred and budgeted costs.
  • An adjustment to the hourly rate was a “good reason” to depart from the budget since rates had not been addressed at the CCMC and the assessment was thus the only opportunity that a paying party would have to challenge them,

Mr Ridgeway for the Claimant responded as follows:-

  • The budget had been put under judicial scrutiny and a figure was set for each phase which is proportionate. It was not the Court’s role to fix an hourly rate or number of hours but rather simply approves a proportionate amount.
  • As a result as long as the party completes the work in each phase within the agreed amount, that sum is proportionate and must be allowed.

Decision

Deputy Master Campbell at paragraph 20 of the Judgment found in favour of the Defendant, that the hourly rate for the incurred costs should be applied to the budgeted costs. The reasoning for this decision was as follows:-

The hourly rate was not approved or disapproved at Case Management Conference. It was not the Court’s job to agree or approve it rather the Court agreed with Mr Clayton that the Court at the CCMC was only to approve an amount which is reasonable, necessary and proportionate.

Deputy Master Campbell stated that the Case Management Conference was not a detailed assessment hearing. The allowances in the costs budget were made by reference to phases without the court having commented upon the hourly rates, either in respect of the incurred or budgeted costs.

At the detailed assessment hearing, the learned Judge had made reductions to the hourly rate and if Costs Management Order for each phase were allowed to stand then this would result in the Claimant recovering significantly more than the Costs Judge deemed reasonable and proportionate.

The Court rejected the submissions of Mr Ridgeway and found that costs allowed in each phase were not to be spent as they want. The hourly rate was mandatory and to allow it not to be scrutinised by the Court would be contrary to paragraph 44 of the Court of Appeal’s decision in Harrison.

Further authority to support the Court’s decision was found in Merrix at paragraph 73, where it stated that it was the Court’s job at a detailed assessment hearing to allow reasonable and proportionate costs in accordance with CPR 44.3(2). This was backed in the Court of Appeal decision of Harrison at paragraph 52

Regional Costs Judge Lumb

In Bains v Royal Wolverhampton NHS Trust, at detailed assessment hearing on 18 August 2017 Michael Fletcher at Glaysiers reported:-

“After submissions, Judge Lumb held that to reduce hourly charging rates for budgeted costs to the same levels as those allowed for the incurred costs, thereby causing a potential departure from the budgeted phase totals, would be to second guess the thought process of Costs Managing Judge and would impute a risk of double jeopardy into the detailed assessment. The Costs Managing Judge was not fixing hourly rates, but may have had regard to them when setting a reasonable and proportionate allowance for each phase of the budget. Absent cogent evidence to the contrary, the Costs Judge simply couldn’t know. The clear philosophy and guidance from the Senior Courts in Merrix and Harrison was to simplify and reduce the scope of detailed assessments. The “good reason” bar was a high one”.

Regional Costs Judge Lumb acknowledged the significant standing and experience of Deputy Master Campbell, however disagreed with his finding in RNB and contended that by reducing the budgeted costs, they were second guessing the decision of the Case Managing Judge. In addition the Costs Managing Judge had not fixed the hourly rate but would have considered them when assessing reasonableness and proportionality. He concluded by noting that the good reason bar was a high hurdle to meet.

Nash v Ministry of Defence (Senior Courts Costs Office)

The case before the SCCO related to a part heard detailed assessment of a fatal accident claim which occurred on 19 November 2013.

Mr Joseph for the Defendant argued where the hourly rate had been reduced in relation to incurred costs, that it was a good reason to apply the same reduced rate to the budgeted costs. He invited court to consider the estimated hours in the claimant agreed budget and apply the assessed rate.

The Court addressed the issue of good reason at paragraph 53 and made the following comments:-

The approach the paying party invites me to take in my view gives rise to a risk of double jeopardy, which would erode elements of the certainty which the costs budgeting regime was designed to introduce.

In addition further consideration was given to the issue in paragraphs 57 to 59 where the learned Judge stated:-

“The case managing judge is aware that the incurred costs are subject to detailed assessment and therefore approves a budget for subsequent costs in the full knowledge that the incurred costs may be reduced on detailed assessment. However, notwithstanding that jeopardy to the eventual receiving party, the amount allowed for subsequent costs follows a mandatory requirement for the case managing judge to take into account incurred costs – a practice which often leads to the budget for subsequent costs being reduced. It follows that whatever amount is allowed for subsequent costs by the case managing judge must, by operation of Costs Practice Direction 3E 7.4, be deemed to be reasonable and proportionate.

As such, if when claimed in a bill of costs those subsequent costs are reduced to a level below that permitted by the costs management order without good reason, it creates a double jeopardy which could only be avoided by having a full detailed assessment of the incurred costs at the budgeting stage – an exercise which would be wholly unsatisfactory and in many cases impractical to the prosecution of the case.

This in my view is a factor which contributes to setting a high bar with respect to what constitutes a good reason.”

The Court was concerned as was Regional Costs Judge Lumb, that allowing a decrease on the budgeted costs on account of the incurred hourly rate being reduced would undermine the order from the Costs Managing Judge. This was further set out at paragraph 65 of the decision, by Master Nagalingam:-

“In effect, Mr Joseph invites me to go behind or second guess how the constituent elements were balanced in order for the court to make a costs management order. Additionally, and absent there having been any significant developments in the case, he asks me to make a decision which would reduce what the case managing judge has already ordered was a reasonable and proportionate sum to spend for future costs in every phase of the budget.”

For these reasons, the learned Judge concluded that the Costs Management order had considered the hourly rate when assessing reasonableness and proportionality and the Defendant was in fact asking for the Court to place the hourly rate above, other considerations, which the Court was not willing to do.

Conclusion

Whilst, it is disappointing that we are still left in a position where there is little certainty regarding whether the hourly rate applied at a detailed assessment on incurred costs should apply to the budgeted costs, where the Court makes a Costs Management order, the decision provided in Nash is a step in the right direction. The judgements of Deputy Master Campbell in RNB and Master Nagalingam in Nash are well thought out and presented. Allowing a reduction in the hourly rate on incurred costs to be a good reason to depart from the budgeted costs, would create a double jeopardy and potentially undermine the Costs Managing Judge.

 

Christopher Stephenson