The impact of costs budgeting on detailed assessments: the great uncertainty?

Tue, 19 Feb 2019

Costs budgeting has been going on for years now with Costs Management Orders handed out like confetti is thrown at weddings.

Budgets are agreed, approved, amended, filed and served while, years later, the detailed assessment takes place – but what was the practical impact and intended purpose of this system?

Firstly, to reduce the number of detailed assessments which run the distance. Secondly, if there has to be a detailed assessment, to reduce the number of issues and thereby the court time required to deal with them. Thirdly, to increase the certainty that litigants can have as to the likely costs they will recover if they win or pay if they lose. 

Indeed, litigants do have greater certainty as to the likely sum they will have to pay or which they will receive. They know that after Harrison-v-University Hospitals Coventry and Warwickshire NHS Trust[1], unless ‘good reason’ is shown, there will be no departure, upwards or downwards, from the budgeted phases in a costs budget. That has enabled them to make better Part 36 offers than they were previously able to do.

Incurred costs are still being dealt with in the usual way and that includes consideration of matters such as hourly rates. 

Once the incurred costs have been assessed, costs judges are ‘despatching’ the assessment of the budgeted phases of a Bill in relatively short order. If the Bill shows that the party is within the budgeted phase, that is often the end of the discussion. If it is contended that there should be a departure, the focus will be on the reasons for that and a decision will be made as to whether any increase or decrease should be allowed. Parties are sensibly setting out their reasons for and against in the narrative of the Bill, or in the Points of Dispute, as appropriate.

It means that care must be taken when considering how long it might take the court to deal with a detailed assessment.

If, for example, the incurred costs are 75,000 and the budgeted costs are 400,000, previously, you might have been justified in asking for a multiple day hearing. However, that does not apply now, particularly if neither side advances any good reason to depart from the budgeted phases. Similarly, if you know that the budgeted costs are likely to be allowed in full, you can make a more accurate Part 36 offer at an early stage - and you should do so.

So, what are the likely fighting grounds at a detailed assessment hearing?  Often one party wishes that he had taken more care at the case/costs management conference (CCMC) as to the wording of the Costs Management Order. 

The problem is that the costs judge has no power to go behind it. His function is to give effect to the order. He is no substitute for an appeal out of time and the full impact is yet to be seen of practice direction 3E. 

Equally, should a failure to agree or obtain a revised budget after a significant development negate or reduce the ability of a receiving party to obtain an increase in a budgeted phase?  Something tells us that this is another issue which the Court of Appeal will decide should it ‘safely be left to the individual appraisal and evaluation of costs judges by reference to the circumstances of each individual case’.

This was, of course, what they said in Harrison as to how the courts should deal with the issue of whether there was ‘good reason’ to depart from the budgeted phases in a costs budget. 

It seems the message is clear - the appropriate fighting ground is the costs management conference and the costs budgeting process. Detailed assessment now provides only a limited opportunity to challenge the receiving party’s costs.

So, what might, or might not, constitute ‘good reason’ to depart from the last agreed or approved costs budget? There are few certainties in this process, and much will be down to the individual discretion and judgment of the costs judge. 

What if there is an indemnity order? Costs budgets are prepared on the footing that costs will be assessed on the standard basis.  If costs are to be assessed on the indemnity basis, that must constitute a good reason to depart upwards.

Costs which have been unreasonably incurred or which are unreasonable in amount will never be allowed, whether on the standard or indemnity basis (see CPR Part 44.3(1)).  If the claim for costs falls within a budgeted phase, it is a difficult argument to run that some of those costs were unreasonably incurred or are unreasonable in amount.

Costs judges are reluctant to investigate in any detail how costs, which are within a phase, have actually been incurred. They prefer to hold that the Costs Managing Judge fixed a reasonable and proportionate budget and it does not matter how that budget was spent - but can that always be right?

An agreed or approved costs budget ought not to amount to an unfettered licence to shoehorn costs into a phase which were not incurred in that phase, and certainly not for the purpose of ‘using up’ the phase in question.

All Bills must be certified as being true and accurate in all respects (remember Bailey -v- IBC Vehicles Limited[2]). Nor should it be possible to recover costs which simply ought not to be claimed – courier charges, photocopying costs and ordinary travelling costs etc. Costs which are not usually recoverable on a standard basis assessment ought not suddenly to become recoverable, just because the total of the budgeted phase falls within it.  

It is worth noting that we now have two conflicting first instance decisions as to whether the hourly rates allowed for incurred costs should be applied to budgeted costs to reduce the latter.  The decision in Nash -v- MOD[3] is surely to be preferred, such that they cannot be so applied.   

What if some event took place, after the CCMC, which caused additional costs to be incurred? This is the most common reason for an upwards increase and it often succeeds. 

As noted above, we have yet to see the full effect of practice direction 3E. Often the paying party first finds out about this increase when the Bill is served. Understandably, he considers this to be unfair and argues that he ought to have been told earlier. In many cases, even if he had been told, it would not have made any difference to the way in which he fought the case, nor as to the resources he himself deployed.  At this point, the costs judge may well reach for both the Costs Management Order, and the assumptions which were set out in the receiving party’s approved costs budget, to determine what was, and was not allowed or approved.  Hence, the need to take special care at the CCMC.

There will be many other examples on both sides of the fence which may or may not constitute ‘good reason’ to depart upwards or downwards from the last agreed or approved costs budget. The only certainty is that the business remains, and will remain for some time, a little uncertain.

Paul Joseph View Profile