The case of Kellie v Wheatley & Lloyd Architects Ltd, a recent decision from the Technology and Construction Court, potentially increases the significance of obtaining an order for indemnity costs.

During costs management the Defendant’s costs budget had been reduced from over £140,000 to £91,700. The Defendant was then successful and claimed over £166,000 in costs. In an attempt to circumvent the effect of the cost management order an indemnity basis costs order.

In terms of costs assessments where a cost management order has been made, as per para 7.3 in Practice direction 3E, when reviewing cost budgets the court will consider whether the budgeted costs fall within the range of reasonable and proportionate costs. Whenever a costs management order is made, when assessing costs on the standard basis CPR 3.18 requires the court to have regard to the last approved budget and not to depart from it unless there is good reason to do so.

Coulson J consider this in Elvanite Full Circle Ltd v AMEC Earth & Environment (UK) Ltd and concluded that the approved budget should also be the starting point for an assessment on the indemnity basis. This was because the cost budget was an estimate of all the costs that would be incurred and was therefore the appropriate starting point for both bases of assessment. Also this approach had the benefit of consistency and certainty. If an order for indemnity costs allowed a party to ignore its cost budget, indemnity costs would be applied for every time.

In Kellie, the obiter comments made by Coulson J were not agreed with. It was no quirk of drafting that CPR 3.18 referred only to standard basis assessment.

The budget would only be the appropriate starting point for both bases of assessment if a budget was approved as submitted. However if a budget was approved at a reduced figure as it was in Kellie, it was wrong to suppose a cost management order set a limit as to the reasonable costs, because cost budgeting involves proportionality at that stage as well.

It was also held that Coulson J’s comments went further than was justified by the costs management regime. That regime is not intended to give litigants an expectation that they will not incur a liability for disproportionate costs pursuant to an order for indemnity costs.

Whilst HHJ Keyser’s views in Kellie are also obiter there are two conflicting first instance decisions on this point. Until a Court of Appeal decision clarifying the point is made, the argument is up in the air.