UPDATES – What is a good reason to depart from a budget??

Since Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] EWCA Civ 792 and the ruling that a budget will only be departed from (up or down) if there is good reason to do so, there has existed the issue of what a good reason to depart from a budget upon detailed assessment is. Case law provides authority for what does and does not amount to a good reason, and there has now been time to reflect on this.

The matter of what constitutes a good reason is still subject to much questioning and debate, as there is no distinct definition of what amounts to ‘a good reason’.

The case of RNB v London Borough of Newham [2017] EWHC B15 (Costs), which followed that of Harrison and Deputy Master Campbell, decided that departing from the hourly rates was a good reason to depart from the budget. However, this decision faced criticism, in that the Judges’ role in the budgeting process is to set a total for each phase in the budget and is not to approve or fix the hourly rates.

Therefore, for all intents and purposes, it is irrelevant what the hourly rate is for those budgeted costs, at the time that the budget is set. A Judge may look at it like this: whether a party spends 15 hours at £200.00 per hour, or 20 hours at £150.00, for a total phase of £3,000.00 – the figure is still the same. The total phase is just that: a total amount which the Court believes is appropriate for the work required.

The issue of hourly rates – and a good reason to depart from a budget – was revisited in Bains v Royal Wolverhampton NHS Trust. This decision went against RNB, as it ruled that to reduce the hourly rates in line with reductions made to those of the incurred costs would be to second guess what the Judge was thinking at the point of costs management.

Nash v Ministry of Defence [2018] EWHC B4 (Costs), a high court decision following the decision of Bains, ruled that, if the change in hourly rate for incurred costs was a good reason to depart from the budgeted figures, it would bring about a case of double jeopardy. Thus, the only way to combat this, would be to undertake an assessment of the incurred costs at the costs case management hearing.

Jallow v Ministry of Defence [2018] EWHC B7 (Costs) highlighted matters that do not amount to a good reason to depart from the budget, and how the costs management order (CMO) can impact the detailed assessment. Master Rowley commented that the two factors brought in front of him, namely the settlement figure in comparison to the pleaded value, and the reduction in the hourly rates, do not amount to good reasons for departing from the budget.

The Master concluded that a reduction to rates for incurred costs do not amount to a good reason to depart. To amount to a good reason, something specific is needed to have happened. The change in the hourly rates did not amount to something specific and had it done so, it would have set a precedent for parties to argue good reason every time rates have been reduced, as it is in many cases.

A more recent decision of an appeal case, Barts Health NHS Trust v Salmon (unreported) (2019)delves further into the matter of good reason and provides authority on departing down from the budget where the phase has not yet been completed. HHJ Dight concluded that, where the phase has not been completed, and the receiving party has claimed less than the total figure for that phase, then this amounts to a good reason to depart from the budgeted figure, in order that the indemnity principle not be breached. Interestingly, HHJ Dight then went on to say that once good reason has been established, then the paying party need not put forward any further good reason when additionally challenging the level of the total figure claimed and attempting to reduce the phase.

This raises some significant questions about the importance of the assumptions of the budget, following approval of the figures at the costs case management conference. The only page required for filing is the front page of the approved budget. However, should it now be required to submit updated assumptions, to reflect what the figures are based on, should any part argue a good reason to depart in relation to whether a phase has been completed. I suspect, as further good reasons become apparent, the use of the assumptions to show what the phase total was based on will become a much more widely used tool, in proving good reasons to depart, where assumptions widely differ from the actual outcome, and could come to benefit both receiving and paying parties, For example, where there has been more work assumed than has actually been undertaken, regardless of a party is claiming the total of the phase, or where the total of the phase is much lower than budgeted, regardless of whether the number of witnesses was much lower than the number anticipated.

There remains uncertainty as to what does amount to a good reason. With some guidance, I suspect there will be many more cases to come; however, will reluctance be shown by Judges to make those decisions given the gravity of those rulings?

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Good news for those that prepare an accurate costs budget

Following on from the Court of Appeal decision in Jacqueline Dawn Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] WECA Civ 792 where the Court of Appeal found that:

  • The budgeted costs will not be departed from in the absence of a “good reason”;
  • Incurred costs do not form part of the budgeted costs;
  • The good reason test does not apply to those incurred costs;
  • The proportionality test can be applied to the final claim for costs, despite the proportionality test having been applied when the costs budget was approved.

As predicted, we have seen that in practical terms this is good news for those that prepare accurate budgets, but not so for those that don’t. The practical implications of this Court of Appeal decision has an impact on the recovery of your legal fees, as follows:

If the budget has not been exceeded:

  • The budgeted costs will be allowed in full unless a good reason is demonstrated to depart from the budget;
  • A detailed assessment of the budgeted costs can be avoided.

If the budget has been exceeded:

  • The budgeted costs will be restricted to the amount of the budgeted costs that were approved, unless good reason can be demonstrated to depart from the budget.

Win win for those with well prepared budgets. In addition, following approval of the budget, further consideration should be given to the budget throughout the lifetime of the claim. Examples of which are as follows:

Q1. Is it necessary to consider the budget in preparation for the trial?

Answer – yes.

If you win and your budget has not been exceeded:

  • Ask the court to order that the budgeted costs claimed are allowed in full;
  • Only incurred costs will be assessed by way of detailed assessment;
  • If the trial is less than one day, ask the court to summary assess the incurred costs. The court may assess the budgeted costs, however if the costs fall within budget, these should be allowed in full. Present your budgeted costs in phases to demonstrate to the court that the budget has not been exceed on a phase by phase basis;
  • Assess any potential good reasons that your opponent may raise to depart downwards from your budget and be ready to defend those arguments;
  • Ask for a payment on account of the incurred costs, these remaining costs being subject to assessment.

If you win and your budget has been exceeded:

  • If no good reason can be demonstrated to depart from your budget, the court should limit your claim for costs to the approved budget amounts;
  • Therefore establish a good reason to depart from the budget so that the costs can be assessed by way of detailed assessment rather than being restricted to the approved amount of the budget. This will provide you more of an opportunity to justify your costs and overspends;
  • Request a payment of the approved costs, payable within 14 days;
  • Request a payment on account of the remaining incurred costs, payable within 14 days.

If you lose and your opponent’s budget has been exceeded, their budgeted costs should be limited to the budget:

  • The winner can obtain costs in excess of the budget if they can show a good reason to depart from the budget, so be ready so defend any good reasons that the winner may raise to depart from the budget.

If you lose and your opponent’s budget has not been exceeded, their budgeted costs should be limited to the budget:

  • A good reason is required to depart from the budget, therefore if you can identify a good reason to depart from the winner’s budget you can secure a reduction to the winner’s budgeted costs.

Q2. What are examples of a good reason?

Answer – examples of a good reason to depart down are:

  • Did the winner undertake all the work that was provided for in the budget?
  • Were there any adverse costs orders, amount needs to be excluded from the budget?
  • Proportionality test – does the proportionality test that was applied at the CCMC require revisiting?

Q3. Why raise those good reasons at the trial?

Answer

  • Defers the assessment of costs to detailed assessment, if deemed beneficial;
  • Minimises the amount of the payment on account;
  • Minimise the amount of budgeted costs payable.

Remember, incurred costs are subject to detailed assessment in the normal way – ensure that the court is aware that this is only applicable to budgeted costs.

Q4. What role does the budget have in securing a Payment on Account?

Answer – the court will scrutinise the amount that was approved in the budget when determining the amount of the payment on account.

  • If the court refuses to order the payment of your budgeted costs in full, and opts to order a payment on account instead, request the following amounts:
    • Thomas Pink Ltd v Victoria’s Secret UK Ltd [2014] EWHC 3258 (Ch) (31 July 2014) – POA of 90% of budget;
    • Cleveland Bridge UK Ltd v Sarens (UK) Ltd [2018] EWHC 827 (TCC) – POA of 70% incurred costs and 90% estimated costs.
  • Be ready to defend any good reason to depart from the budget that your opponent may raise, this will assist in securing the maximum payment on account, conversely remember to raise any good reason arguments to depart down if you are payer rather than payee.

Q5. What role does the budget have at the mediation or settlement meeting?

Answer – the budget enables parties to be fully aware of their costs exposure, so an informed decision can be made when determining whether to settle. Update the budget for the ADR meeting so that costs may be agreed at the same time and be ready with the same arguments in terms of departure from the budget that would be applied at the trial.

Any questions? Please contact me at sue.fox@clarionsolicitors.com or call me on 0113 336 3389.

Sue Fox considers the practical effect of the Harrison budgeting decision

In the eagerly awaited decision in Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] WECA Civ 792 (seearticle, page 8), the key findings of the Court of Appeal were that (1) budgeted costs will not be departed from in the absence of a ‘goodreason’; (2) incurred costs do not form part of the budgeted costs; and (3) the good reason test does not apply to those incurred costs. So, what does this decision mean in practice, and what further observations can we make?

Of particular interest is how the courts will deal with ‘incurred costs’. During the Court of Appeal case, thecourt’s attention was drawn to incurred costs when the respondent presented what was described by Davis LJ as ‘an ingenious argument’ regarding incurred costs being potentially approved ‘through the back door’ at the budgeting stage. The respondent submitted that: ‘The incurred costs will have acquired a special status:
in that, while not “approved” as such, they will have been taken into account by the court at the costs management hearing in managing the future estimated costs.’ Please click here to read the full article.

Sue Fox is a Senior Associate and the Head of Costs Budgeting in the Costs and Litigation Funding Department at Clarion Solicitors. You can contact her at sue.fox@clarionsolicitors.com and 0113 336 3389, or the Clarion Costs Team on 0113 246 0622.

 

The importance of the precedent H Costs Budget! Harrison on appeal – no second bite of the cherry.

Jacqueline Dawn Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] WECA Civ 792 – the Court of Appeal has found that the budgeted costs will not be departed from in the absence of a “good reason”. Davis LJ further found that incurred costs do not form part of the budgeted costs and the good reason test does not apply to those incurred costs. Davis LJ confirmed that the proportionality test can be applied to the final claim for costs. This is despite the proportionality test having been applied when the costs budget was approved, this may result in claims for costs being subject to detailed assessment on the issue of proportionality alone.

Davis LJ summarised the Applicant’s submissions regarding what reliance should be placed on the budget at detailed assessment, as follows:

“The premise underpinning Mr Hutton’s argument thus was that CMOs in effect are but summary orders which at best give no more than a snapshot of the estimated range of reasonable and proportionate costs: often reached, as Mr Hutton would have it, on a broad brush or rough and ready judicial approach after a hearing which would have been limited in time, rushed in argument and incomplete in the information advanced”.

Davis LJ considered this to be a sceptical appraisal, commenting:

“that to sanction, at detailed assessment, a departure from the budget in the absence of good reason would overlook (among other things) that budgeted costs are already required to have regard both to reasonableness and to proportionality; that the aims of costs budgeting include a reduction in detailed assessments and of issues raised in points of dispute; and that the element of certainty to clients (in the form of knowing what costs they are likely to face, in terms of payment or recovery) would be removed.

Moreover, if approval of a costs budget by a CMO has the more limited status which the appellant would ascribe to it then that would have a potentially adverse impact on parties thereafter attempting to agree matters without requiring a detailed assessment.  Although Mr Hutton queried if that was one of the perceived prospective benefits of the costs budgeting scheme, it seems to me – as it did to the editors of Cook on Costs – wholly obvious that it was indeed designed to be one of the prospective benefits of cost budgeting that the need for, and scope of, detailed assessments would potentially be reduced.”

The court’s attention was then drawn to incurred costs. The respondent presented what was described by Davis LJ as an ingenious argument to the court regarding incurred costs being potentially, in essence, approved ‘through the back door’. The respondent submitted that:

the incurred costs will have acquired a special status: in that, while not “approved” as such, they will have been taken into account by the court at the costs management hearing in managing the future estimated costs.”

Davis LJ disagreed and found that:

With respect, this will not do.  Either incurred costs are within the ambit of CPR 3.18 (b) or they are not.  Since they are not approved budgeted costs, by the terms of paragraph 7.4 of PD 3E and of the Rules, they are not within that sub-rule.”

Davis LJ recognised that practical problems remained surrounding incurred costs and advised that the CPR committee’s intention was to amend the rules to decouple incurred costs from budgeted costs.

In summary, a good reason is required to depart from the budget, the proportionality test can be applied to budgeted costs, thus a reason to escape the restrictions of the budget; incurred costs should be considered in isolation to the budgeted costs and the rules still require amendments regarding incurred costs to ensure that costs management works.

It is therefore essential that an accurate budget is presented to the court, this Court of Appeal decision has ruled that a budget cannot be departed from unless there is a good reason to do so, this is a difficult test to overcome. There is no second bite of the cherry.

Sue Fox is a Senior Associate and the Head of Costs Budgeting in the Costs and Litigation Funding Department at Clarion Solicitors. You can contact her at sue.fox@clarionsolicitors.com and 0113 336 3389, or the Clarion Costs Team on 0113 246 0622.