And you thought cost budgets were important last week…
Summary
The matter was first heard before District Judge Lumb sitting as a Regional Costs Judge in October 2016, our case summary of the decision on first instance can be found here. In a nutshell, the Judge determined that cost budgeting was not intended to replace detailed assessment. As such, the approved or agreed budget was to be considered an ‘available fund’ but was not binding at assessment. Instead the budget is one factor for the court to consider.
‘the powers and discretion of a cost judge on detailed assessment are not fettered by the cost budgeting regime, save that the budgeted figures should not be exceeded unless good reason can be shown.’
This Appeal relates to the same preliminary issue, namely:
‘To what extent, if at all, does the cost budgeting regime under CPR Part 3 fetter the powers and discretion of the cost judge at a detailed assessment of costs under CPR Part 47?’
Hearing the Appeal in the Queen’s Bench Division of the High Court, Justice Carr in a detailed and considered judgment (well worth a read in its own right) allowed the Appeal. Justice Carr ruled that approved budgets are binding at detailed assessment and a cost judge at assessment should not depart from the last approved or agreed budget without good reason.
‘Approved budgets are binding at detailed assessment and a cost judge at detailed assessment should not depart from the last approved or agreed budget without good reason.’
Background
In his Final Report (2010) Lord Justice Jackson laid out the fundamental principles of cost management. At paragraph 1.4 under the heading “The essence of cost management” he states:
‘(iv) At the end of the litigation, the recoverable costs of the winning party are assessed in accordance with the approved budget.’
At paragraph 1.5, Jackson LJ highlighted that it would need to be established whether cost budgets are to be treated as binding and if so to what extent the budget should be treated as an ‘upper limit’ or an ‘assessment in advance’. The Decision on Appeal in Merrix goes some way to addressing these issues.
The Rules
The argument revolves around the correct interpretation of CPR 3.18, and Practice Direction 3E D paragraph 7.3 which to date have been inconsistently applied.
CPR 3.18 In any case where a cost management order has been made, when assessing costs on the standard basis, the court will –
- Have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings; and
- Not depart from such approved or agreed budget unless satisfied that there is good reason to do so.
PD 3E
- Cost management orders
7.3 If the budget or parts of the budgets are agreed between all parties, the court will record the extent of such agreement. In so far as the budgets are not agreed the court will review them and, after making any appropriate revisions, record its approval of those budgets. The court’s approval will relate only to the total figures for each phase of the proceedings, although in the course of its review the court may have regard to the constituent elements of each total figure. When reviewing budgets, the court will not undertake a detailed assessment in advance, but rather will consider whether the budgeted costs fall within the range of reasonable and proportionate costs.
Also of importance is the above rules’ interaction with CPR 44.4 regarding the factors to be considered when deciding the amount of costs to be awarded at assessment, particularly:
CPR 44.4 (3) The court will also have regard to –
…
(h) the receiving party’s last approved or agreed budget.
The Receiving Party’s (Appellant’s) Argument
To paraphrase the Appellant’s arguments serves only to dilute the same. The grounds of Appeal are as follows:
- The provision of CPR 3.18(a) and (b) shift the burden to the paying party to show good reason at detailed or summary assessment why the budget should not be departed from;
- The provisions of paragraph 7.3 of Practice Direction 3E relate to approving a total phase (which may include incurred costs), in order that the court can identify what is a reasonable and proportionate amount to spend on each phase of the litigation;
- The consideration of a cost budget at a costs management hearing is not only to establish an available fund, but to give the parties an indication as to what is reasonable and proportionate to spend in prosecuting or defending their claim. Therefore what is reasonable and proportionate at a detailed assessment, unless the paying party can show good reason as to why this is not the case, should be in accordance with any budget set.
So, the Appellant argues that the appropriate starting point at assessment is that the amount in the approved or agreed budget for any given phase has already been determined as being within the range of reasonable and proportionate costs. As such, in accordance with CPR 3.18 the court should not depart from the same without good reason. Ultimately CPR 3.18 is simple and clear, and means what it says.
The Paying Party’s (Respondent’s) Argument
The Respondent argues that CPR 3.18 only applies if the receiving party seeks to recover more than the sums budgeted. The court is not obliged to allow the full sum of an agreed or approved phase without conducting an assessment of the costs, exactly as they would in a non-cost managed claim.
By the Respondent’s reasoning, a budget is a fund (no doubt they avoided using the word ‘cap’ to circumvent Jackson LJs clear guidance that cost management is specifically not a cost capping exercise), from which the receiving party can ‘draw’ costs. There is therefore no departure from the budget if on assessment a judge awards less than the approved or agreed figure, there is only a departure if a party seeks recovery in excess of the budget.
Practice Direction 3E specifically states that a judge at a cost management conference will not perform a detailed assessment. Not least for the practical reason that not all of the ‘pillars’ in CPR 44.4 can be applied prospectively. Practically, if a detailed assessment doesn’t take place upon conclusion and if in accordance with PD 3E it does not take place at the cost management conference, detailed assessment would effectively have been dispensed with; a position which is not supported by the rules, policies or authorities on budgeting and cost management to date.
‘If a detailed assessment doesn’t take place upon conclusion and if in accordance with PD 3E it does not take place at the cost management conference, detailed assessment would effectively have been dispensed with’
The Judgement
Justice Carr starts her analysis with a statement:
The words (CPR 3.18) are clear. The court will not – the words are mandatory – depart from the budget, absent good reason. On a detailed assessment on a standard basis, the costs judge is bound by the agreed or approve cost budget unless there is good reason to depart from it.
The decision is based on Justice Carr’s understanding of the intent behind the implementation of cost management i.e. to ‘reduce the scope and need for detailed assessment’. The result of this ruling is both clear and impactful. If costs are claimed in accordance with the approved or agreed budget, they are to be treated as reasonable unless the paying party can provide good reason to the contrary. There is nothing in the rules which supports the Respondent’s submission that this only applies when a budget has been exceeded nor is there anything in CPR 44 which overrides the clear rule in CPR 3.18.
‘If costs are claimed in accordance with the approved or agreed budget, they are to be treated as reasonable unless the paying party can provide good reason to the contrary.’
According to Justice Carr, the cost budgeting exercise has already taken into account reasonableness and proportionality. The Judge when approving a budget is not applying a cap, or indicating the maximum recoverable amount, rather:
‘He/she is identifying what future costs are reasonable and proportionate.’
The approved agreed budget figures have to be binding in order to reduce the cost of the detailed assessment process and thereby achieving the ‘clear intention of cost management’.
As the Appeal was on a preliminary issue only, the decision does not contain many specifics regarding how the decision will be implemented. There are however a couple of points made by Justice Carr, beyond the decision itself which are worth noting.
Indemnity Principle – (paragraph 74) Justice Carr explains that if the receiving party has incurred less than the amount within a particular phase, this is good reason to depart from the budget i.e. the indemnity principle will still apply.
Proportionality – (paragraph 82) The approach taken does not render a ‘step back’ assessment of proportionality on conclusion impossible. Proportionality should be considered when the budget it set, and once pre incurred costs have been assessed this should be added to the budget allowing an overall assessment of proportionality. Justice Carr outlies that this approach will have the following outcome:
‘Unless there is good reason to depart from the budget, the overall (assessed) figure can never be less than the budget, but it can be less than the total of the budget sum plus the reasonably incurred and reasonable in amount non budgeted sum.’
As if the consequences of failing to file a budget weren’t severe enough already, this adds a further level of importance to the budget. It gives a degree of protection against a severe proportionality finding.
Early Analysis
It is worth highlighting that the Court of Appeal is due to consider the issue in May of this year, and that the Respondent in this matter are understood to be Appealing the decision further. Nevertheless, as it stands the case has fundamentally changed the approach which needs to be taken to cost management all the way through to detailed assessment.
‘The case has fundamentally changed the approach which needs to be taken to cost management all the way through to detailed assessment.’
What will be considered good reason to depart from a budget?
This will be key in determining whether Justice Carr’s interpretation of the cost management rules has any real chance of achieving the desired savings with regard to assessment. If ‘good reason’ emerges as a high barrier to overcome, detailed assessments could well be streamlined considerably; with non-exceeded phases likely to be agreed before the assessment. On the other hand, if ‘good reason’ is a low barrier then the new interpretation may become little more than a synonym for detailed assessment, with no significant reduction in the arguments being heard.
What will need to be done at cost management conference now?
While Jackson LJ and Justice Carr both indicate that the additional considerations required should not add considerably to the time and complexity of the conference, in reality it is difficult to see how this will be the case. With the decisions at the CMC binding, both sides have an enormous interest in the outcome and are likely to want to argue tooth and nail over anything which affects the final approved figures. Justice Carr indicates that with ‘proper and realistic cooperation and engagement’ between the parties, the cost management conferences should not be more expensive or timely. But in reality the decision is likely to result in far less phases being agreed prior to the conference, which will therefore require consideration at the same.
With the added importance placed on the outcome of the case management conference, it would be wise to prepare for the conference not only by considering the overall budgeted figures, but by considering reasonableness and proportionality in detail much as would be done in preparation for a detailed assessment.
‘Prepare for the cost management conference much as would be done in preparation for a detailed assessment.’
As a receiving party, what impact will this have on detailed assessment?
The outcome of the Appeal has only served to improve the receiving party’s position at detailed assessment. Prior to this decision it was already established that if a receiving party had gone over budget they would need to show good reason to depart from the approved figures, this has not changed. If on the other hand a receiving party’s costs have come in less than the approved or agreed budget; strong arguments should be presented that the judge is bound by the approved figures and should not award less than the same unless the paying party shows there is ‘good reason’ to do so.
Will this affect momentum behind the implementation of ‘fixed costs’?
An article in the Gazette, quoting Mr Frieze who represented the Appellant in this case, heavily suggests that the case can be interpreted as a shift regarding support for the proposed expansion of fixed costs across litigation. The suggestion is, that with a clear and cost effective cost management procedure in place, the need for an inflexible fixed costs regime is negated. While this will no doubt give hope to many practitioners concerned at the potential impact of fixed costs, I am not entirely convinced. Jackson LJ is clearly an advocate for the benefits of fixed costs and in his final report fixed costs and cost management were recommended to run side by side. He continues to praise the success of the fixed cost regimes implemented to date and it seems unlikely that a decision bringing cost management closer to what he initially intended will weaken his ongoing resolve.
Bring on the next instalment of this saga in May!