An important decision in the changing world of cost budgeting.
The Appellant bought a claim against the Respondent for damages for clinical negligence. Proceedings were commenced and the Appellant’s budget was approved at a CCMC. Following the exchange of lay and witness evidence, but before the parties had prepare for the trial, the parties compromised the claim. The Appellant produced a costs bill that was less than the total approved budget (unsurprising given the matter had settled before trial).
At first instance, District Judge Lumb sitting as a Regional Costs Judge in Birmingham District Registry was asked to determine a preliminary issue before considering either the Appellant’s budget or costs bill. The preliminary issue was: “To what extent, if at all, does the costs budgeting regime under CPR Part 3 fetter the powers and discretion of the costs judge at a detailed assessment of costs under CPR Part 47?”
DJ Lumb decided that 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 show. However; although the budget would not be binding on the court, it would act as a strong guide as to what should be allowed on a detailed assessment.
The three issues raised on appeal were as follows (however; ultimately, Carr J considered the central question to be whether or not the DJ’s answer to the preliminary issue was correct):
- Did the provisions 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;
- Did 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?
- Was the consideration of a costs budget at a costs management hearing not only to establish an available fund but also to give the parties an indication as to what is reasonable and proportionate to spend in prosecuting or defending their claim?
The appeal was allowed. Carr J determined that the correct answer to the preliminary issue was 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 considered the wording of CPR r. 3.18 to be clear and mandatory: the court would not, absent good reason, depart from the budget. Carr J declined to consider what might, or might not, be a good reason to depart from the cost budgets. She did acknowledge that the need to comply with the indemnity principle would require departure from the budget where the receiving party’s costs budget was less than the agreed or approved budget.
This decision effectively elevates agreed or approved budget sums to the status of rebuttable entitlements rather than merely rebuttable caps.
This makes the outcome of costs budgeting much more important than might previously have been thought: budget hearings are to be more of a main event than a dress rehearsal. The consequence is that budget hearings are likely to become more contested and so more complicated notwithstanding the Appellate Court’s desire that this would not be the case. It is also likely that the parties will need to ensure the assumptions are clear in terms of the additional work each assumption may create. If the receiving party has not had to undertake certain assumed activities, this may constitute a good reason to depart from the budget (albeit this decision sheds no light on this point as the Judge declined to examine what may or may not constitute a good reason).
This could also be very good news for claimants. Solicitors’ hourly rates are liable to be significantly reduced on assessment in any event. This might make it almost impossible to challenge the time spent (even if there is an overspend) given that the budget only sets total figures for each phase (PD 3E 7.3).
Whilst Defendants may not be able to challenge the hourly rates at budget hearings, it is likely there will be more arguments as to the level of fee earner that should be undertaking various aspects of the work to reduce the overall amount in each phase.
There will certainly be scope for argument that a reduction in the hourly rates is good reason for a downwards departure from the budget figure as there is a distinct tension between the rules that on the one hand budget figures are prima facie determinative of the proper level of costs and on the other that the single most important factor in the quantum of costs (hourly rates) cannot be considered at the budgeting stage. We can expect to see further decisions on this issue in the future should this decision stand.
It is unclear how this decision ties in with the modern proportionality test. After the application of item by item reductions (i.e. the entry point for budgets), if the overall costs remain disproportionate, the costs judge is obliged to reduce the overall figure to a proportionate one; May v Wavell Group Plc  3 Costs L.O. 455. Thus in May, although the item by item exercise produced a figure of c. £95,000, Master Rowley considered the proportionate overall figure to be £35,000, and that was all that was allowed.
It seems unlikely that budgeting could displace this. Whilst it constitutes a rebuttable finding that the budgeted costs are proportionate, this only applies to future costs (SARPD Oil having been reversed by the rules committee) and it is the proportionality of the entire bill which will be considered.
There is also, at the budget hearing stage, a possible tension with PD 3E para. 7.3:
… 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.
In conclusion, the effect of this decision is that budget hearings are likely to be become much more important and, consequently, more contested and complicated. However, it is uncertain how long this decision will remain good law as Carr J acknowleged that the Court of Appeal has granted permission to appeal the decision of Costs Judge Master Whalan in Harrison v Coventry NHS Trust (16th August 2016) (unreported) where he reached the same conclusion. That appeal is due to be heard in May 2017 and so we will need to wait with bated breath for the Court of Appeal’s ruling on this point later in the year.