Mrs Justice Carr :
Introduction
- This is an appeal from the decision of District Judge Lumb sitting as a Regional Costs Judge ("the Costs Judge") in Birmingham District Registry on 13th October 2016 ([2016] EWHC B28 (QB)). It raises a point of considerable importance arising out of the interplay between the costs budgeting regime under Part 3 of the Civil Procedure Rules (as amended from time to time) ("the CPR") and the detailed costs assessment regime under Part 47 of the CPR. The Costs Judge when granting permission said this:
"The issue is the subject of significant debate in the legal profession with wide-ranging views and interpretations. There is no direct case authority on the point. An authority on the point would be highly desirable and as a matter of urgency. Already a number of detailed assessments have been adjourned pending this first instance decision."
- The Appellant is the successful party in a claim against the Respondent for damages for clinical negligence. A costs management order under CPR 3.15(2) was made on 19th March 2015 when the Appellant's cost budget was approved in the total sum of £128,256. £74,780 of that figure related to future costs. The claim was compromised in September 2015 when the Appellant accepted the Respondent's offer made under CPR Part 36. By then, lay and expert evidence had been exchanged but the case had not been prepared for trial. The bill ultimately served by the Appellant was less than the total approved budget, unsurprisingly since the matter had not gone to trial.
- This appeal is not about the budget in this particular case, nor whether there are good reasons for departing from it. The Costs Judge has not yet considered the budget or the bill. Rather, the appeal relates to the determination of a preliminary issue, formulated by the Costs Judge as follows:
"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?"
- In summary, the Appellant contended that where a receiving party claims costs at or less than the budgeted figure, his or her costs should be assessed as claimed, unless the paying party establishes a good reason to depart from the budgeted figure. The Respondent, by contrast, contended that the paying party is entitled to benefit from a full detailed assessment de novo, with the costs budget being but one factor in determining reasonable and proportionate costs on detailed assessment. The costs judge is not fettered in that assessment by the costs budget. Thus the Respondent's position was (and remains) that a paying party does not need good reason to persuade a court to depart from an approved or agreed budget downwards, but a receiving party needs a good reason to persuade a court to depart from an approved or agreed budget upwards.
- The Costs Judge's "strict" answer was 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 shown (see [61] of the judgment). His "full" answer was, however, more "nuanced" than the Respondent's position of "open season" (see [62] of the judgment). In essence, his conclusion was that the budget, although not binding, will be a strong guide to what will be allowed on a detailed assessment.
- The issue is one that arises in every detailed assessment of costs on a standard basis where a costs management order has been made. The practical significance of the dispute is obvious and reflected in the surrounding debate that has emerged both before and after the judgment below. The Civil Procedure Rule Committee (SARPD Sub-Committee) reported in November 2016 that it had not been able to reach a unanimous decision on the issue (albeit noting that the issue did not fall strictly within its remit). The decision of the Costs Judge has been followed elsewhere in Tahera Bhojani v University Hospitals of Leicester NHS Trust (14th December 2016) (unreported decision of District Judge Hale sitting as a Regional Costs Judge in Nottingham) ("Bhojani"), albeit "with some hesitation". But it has also been criticised recently by District Judge Middleton (another Regional Costs Judge and co-author of Cook on Costs) in an article published in Civil Procedure News (Issue 2/2017). It has been seen by some as an unfortunate decision which robs costs budgeting of much of its merit. The predictability and reduction in the scope of disagreement on assessment that costs budgets should have brought will be rendered illusory. Furthermore, Senior Costs Judge Master Gordon-Saker reached a different conclusion to that of the Costs Judge in Collins v Devonport Royal Dockyard Limited [AGS/16029/54] ("Collins") on 8th February 2017.
Costs budgeting : some history
- The recommendations in the Access to Justice: Final Report (July 1996) implemented by the introduction of the Civil Procedure Rules in 1998 made no express reference to costs management. The emphasis was on active case management as part of the court's duty to meet the overriding objective. However, Jackson LJ's Review of Civil Litigation Costs: Preliminary Report (May 2009) stated that the time had come to elevate the court's costs management powers to rules, and to use the term "costs management" for the purpose of recognising those powers as a feature of case management (see chapter 48 on "costs management").
- Costs budgeting was then piloted under schemes in defamation cases (Practice Direction 51D) and in the Technology & Construction and Mercantile Courts (Practice Direction 51G). (Appropriately enough in the present context, the pilot in the Mercantile and Technology & Construction Courts was run in the Birmingham specialist civil courts.) The scheme under Practice Direction 51D was mandatory, whilst that under Practice Direction 51G was voluntary.
- In his Review of Civil Litigation Costs: Final Report (December 2010) (the "Final Report"), Jackson LJ again devoted a whole chapter (40) to costs management. He had earlier (in chapter 3) proposed a definition of "proportionality", which would come into play when an assessment of "reasonable" costs would result in an excessive figure. This would of itself introduce a new dimension to costs management. At paragraph 1.4 under the heading "The essence of costs management" he stated this:
"The essential elements of case management are the following:
(i) The parties prepare and exchange litigation budgets or (as the case proceeds) amended budgets.
(ii) The court states the extent to which those budgets are approved.
(iii) So far as possible, the court manages the case so that it proceeds within the approved budgets.
(iv) At the end of the litigation, the recoverable costs of the winning party are assessed in accordance with the approved budget."
- He went on to say at paragraph 1.5 under the heading "Issues for consideration":
"If costs management becomes a feature of civil litigation in the future, many issues will have to be considered before any set of costs management rules is drawn up. In particular:
…
(iii) To what extent should the last approved budget be binding, alternatively influential, upon the final assessment of costs?
(iv) In so far as the last approved budget is binding, should it operate as an upper limit upon recoverable costs or should it operate as a form of assessment in advance?
…
(vi) What steps should be taken to ensure that the process is cost-effective, i.e. that the litigation costs saved exceed the costs of the process?"
- Whilst Jackson LJ recognised that costs management is an exercise which generates additional costs and which makes additional demands on the limited resources of the court – both powerful negative factors – he also identified powerful factors in support of costs management: first, case management and costs management go hand in hand; secondly, costs management, if done properly, would save substantially more costs than it would generate (see paragraph 7.1). At paragraph 7.16 he concluded, amongst other things, that effective costs management was well within the abilities of all civil judges if properly trained, and that "effective costs management has the potential to control the recoverable costs, and sometimes the actual costs, of litigation to more acceptable levels."
- The costs management regime in section II of CPR Part 3 was later introduced on 1st April 2013, based on the Final Report and drawing on the experience of the pilot schemes. Various amendments and variations to the rules have been made from time to time. Unless otherwise stated, references to rules and any practice direction below are references to those currently in force.
The CPR : Part 3 : section II : costs management
- By CPR 3.12(1), the costs management regime in section II of Part 3 of the CPR applies to all Part 7 multi-track claims issued after 1st April 2013 except:
"(a) Where the claim is commenced on or after 22nd April 2014 and the amount of money claimed as stated on the claim form is £10million or more; or
(b) Where the claim is commenced on or after 22nd April 2014 and is for a monetary claim which is not quantified or not fully quantified or is for a non-monetary claim and in any such case the claim form contains a statement that the claim is valued at £10million or more; or
(c) Where in proceedings commenced after 6th April 2016 a claim is made by or on behalf of a person under the age of 18; or
(d) Where the proceedings are the subject of fixed costs or scale costs; or
(e) The court otherwise orders."
- It will also apply to any other proceedings (including applications) where the court so orders (see CPR 3.12 (1A)). A good example of such an order is the decision of Coulson J in CIP Properties (AIPT) Ltd v Galliford Try Infrastructure Ltd [2015] EWHC 481 to exercise the court's discretion to make a costs management order even though the stated claim value exceeded £10million.
- By CPR 3.12(2), the purpose of costs management is that the court should manage both the steps to be taken and the costs to be incurred by the parties to any proceedings so as to further the overriding objective, namely to deal with cases justly and at proportionate cost (see CPR 1.1). Dealing with a case justly and at proportionate cost includes, so far as practicable, ensuring that the parties are on an equal footing and saving expense.
- Thus costs management is to be prospective (see CPR 3. 12(2), 3.15(1), 3.15(3), and Practice Direction 3E at paragraphs 7.4 and 7.6). However, the court may record its comments on costs already incurred and take them into account when considering the reasonableness and proportionality of all future costs (see Practice Direction 3E at paragraph 7.4). This was the approach taken in CIP Properties (supra), where the claimant had filed a budget totalling almost £9.5million of which about £4.3million had already been incurred. The Court of Appeal in SARPD Oil International Ltd v Addax Energy SA [2016] EWCA Civ 120 ("SARPD Oil") (at [44]) held that parties coming to the first case management conference to debate their respective costs budgets should know that that was the appropriate occasion to contest the budgets, not only in respect of estimated but also incurred costs elements. Following those comments, amendments to paragraphs 7.3, 7.4 and 7.7 of Practice Direction 3E are to be introduced on 6th April 2017. They confirm that when setting a costs budget, a court is dealing only with prospective costs. There is an ability, but no requirement, to comment on costs already incurred. Additionally, costs of the case management conference are to be treated as costs already incurred.
- CPR 3.13 provides for all parties (except litigants in person) to file and exchange budgets within certain prescribed time limits. For claims where the stated value on the claim form is less than £50,000 and a budget is filed, an agreed budget discussion report must be filed by all parties (other than litigants in person) no later than 7 days before the first case management conference. A failure to file a budget despite being required to do so is, by virtue of CPR 3.14, to be treated as having filed a budget comprising only the applicable court fees "unless the court otherwise orders". The consequences of a failure to file a budget within time are thus draconian – see Mitchell v News Group Newspapers Ltd [2014] 1 WLR 795 at [30]. The merit of the rule is that it sets out a stark and simple default sanction: see Mitchell at [58].
- CPR 3.15 provides that the court may manage costs to be incurred by any party. It goes on to state as follows:
"(2) The court may at any time make a "costs management order". Where costs budgets have been filed and exchanged the court will make a costs management order unless it is satisfied that the litigation can be conducted justly and at proportionate cost in accordance with the overriding objective without such an order being made."
- A costs management order is a recording of the extent to which budgets are agreed between the parties or in respect of budgets or parts of budgets which are not agreed, a record of the court's approval after making appropriate revisions. Once a costs management order has been made the court will thereafter control the parties' budgets in respect of recoverable costs (see CPR 13.15 (3)).
- CPR 3.16 states that a hearing convened solely for the purpose of costs management is to be referred to as a "costs management conference" and is to be conducted by telephone or in writing where practicable.
- CPR 3.17 provides that when making any case management decisions the court will have regard to any available budgets of the parties and will take into account the costs involved in each procedural step, irrespective of whether any costs management order has been made.
- CPR 3.18 is central to the present dispute and provides as follows:
"Assessing costs on the standard basis where a costs management order has been made
3.18 In any case where a costs management order has been made, when assessing costs on the standard basis, the court will –
(a) have regard to the receiving party's last approved or agreed budget for each phase of the proceedings; and
(b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so.
(Attention is drawn to rules 44.3(2)(a) and 44.3(5), which concern proportionality of costs.)"
- The rule makes it clear that the assessment is to be by reference to the budget phases rather than the total budget. The notes to CPR 3.18 in the White Book suggest that the reference to CPR 44.3(2)(a) and 44.3(5) indicates that once pre-incurred costs outside the budget are assessed on the basis of having been reasonably incurred and reasonable in amount, and then added to the budgeted costs, the total figure is still subject to an overall assessment of proportionality.
- Practice Direction 3E supplements the rules, as already referred to above. It provides, amongst other things, as follows:
"D. Costs management orders
…
7.3 If the budgets 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.
…
7.6 Each party shall revise its budget in respect of future costs upwards or downwards, if significant developments in the litigation warrant such revisions. Such amended budgets shall be submitted to the other parties for agreement. In default of agreement, the amended budgets shall be submitted to the court, together with a note of (a) the changes made and the reasons for those changes and (b) the objections of any other party. The court may approve, vary or disapprove the revisions, having regard to any significant developments which have occurred since the date when the previous budget was approved or agreed….
7.7 If interim applications are made which, reasonably, were not included in a budget, then the costs of such interim applications shall be treated as additional to the approved budgets.
…
7.10 The making of a costs management order under rule 3.15 concerns the total allowed for each phase of the budget. It is not the role of the court in the costs management hearing to fix or approve the hourly rates claimed in the budget. The underlying detail in the budget for each phase used by the party to calculate the totals claimed is provided for reference purposes only to assist the court in fixing a budget."
The CPR : Parts 44 and 47
- Detailed assessment is defined in CPR 44.1 as follows:
"44.1 – (1) In parts 44 to 47, unless the context otherwise requires–
…
"detailed assessment" means the procedure by which the amount of costs is decided by a costs officer in accordance with Part 47;"
- CPR 44.3(1) provides that, whether assessment of costs is on the standard or indemnity basis, the court will not in either case allow costs which have been unreasonably incurred or which are unreasonable in amount. CPR 44.3(2) goes on to provide :
"(2) Where the amount of costs is to be assessed on the standard basis, the court will-
(a) only allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred; and
(b) resolve any doubt which it may have as to whether costs were reasonably and proportionately incurred or were reasonable and proportionate in amount in favour of the paying party.
…
(5) Costs incurred are proportionate if they bear a reasonable relationship to –
(a) the sums in issue in the proceedings;…"
- By CPR 44.3 standard basis assessment requires the court to assess the costs claimed by the beneficiary of a costs order both on a global basis (to see if the costs overall appear disproportionate) and on an individual basis (to determine whether the specific items of costs claimed are reasonably and proportionately incurred and reasonable and proportionate in amount).
- CPR 44.4 provides:
"Factors to be taken into account in deciding the amount of costs
44.4 - (1) The court will have regard to all the circumstances in deciding whether costs were-
(a) if it is assessing costs on the standard basis -
(i) proportionately and reasonably incurred; or
(ii) proportionate and reasonable in amount…
(2) In particular, the court will give effect to any orders which have already been made.
(3) The court will also have regard to -
(a) the conduct of all the parties, including in particular-
(i) conduct before, as well as during, the proceedings; and
(ii) the efforts made, if any, before and during the proceedings in order to try to resolve the dispute;
(b) the amount or value of any money or property involved;
(c) the importance of the matter to all the parties;
(d) the particular complexity of the matter or the difficulty or novelty of the questions raised;
(e) the skill, effort, specialised knowledge and responsibility involved;
(f) the time spent on the case;
(g) the place where and the circumstances in which work or any part of it was done; and
(h) the receiving party's last approved or agreed budget."
- CPR 47 sets out the procedure for detailed assessment including provisional assessment cases and provides that the parties must comply with the procedure set out in that part.
The judgment of the Costs Judge
- Having rehearsed the parties' respective arguments, the Costs Judge's analysis flowed as follows (in summary only):
i) Costs budgeting was not intended to replace detailed assessment. So much is made clear by the fact that the amendment to CPR 44 was simply to include costs budgeting as an additional factor ((h)) in the "pillars of wisdom" under CPR 44.4(3). The receiving party's last agreed or approved budget is just another factor for the court to consider. The Costs Judge relied on the reference in [52] of SARPD Oil to budgets being a "strong guide" on "likely costs" and on Practice Direction 3E (in particular the words "in advance" in paragraph 7.3) as providing support for this approach. See [47] to [50];
ii) What was intended was that effective costs and case management would greatly reduce the need for detailed assessment of some or all of the parties' costs by ensuring that the costs budgets were within the range of reasonable and proportionate costs for each phase. In so doing, the scope for disagreement should be reduced to a level where a paying party would be unwise to risk incurring the significant costs of the detailed assessment procedure. See [50];
iii) Although the factors in CPR 44.4(3) apply both at the budgeting and assessment stages, because they are applied at different stages, there is no certainty that they will produce identical results. The most obvious difference is the need to apply the new proportionality test, as explained in May and May v Wavell Group plc and another [2016] EWHC B16 (Costs) ("May"). See [51];
iv) "Budget" does not mean either a cap or a fixed amount. The ordinary meaning is more "of an available fund". It is therefore not helpful to consider "departure" within the meaning of CPR 3.18 as being upwards or downwards. The budget is not intended to be some advanced assessment of the recoverable costs. It is a living document. In the context of CPR 3.18, where the budget has not been revised by the court pre-assessment, a departure in practical terms has to be something outside the original budget which can only be to a sum in excess of the amount allowed for a phase and therefore must be upwards only. A budget is not a fixed sum, but a "landscape". This is consistent with the comments of Warby J in Simpson v MGN Ltd [2015] EWHC 126 ("Simpson"). By contrast, assessment surveys "the terrain within that landscape in more detail". Such an approach is consistent with the judgments of Moore-Bick LJ in Henry v News Group Newspapers Ltd [2013] 2 All ER 840 ("Henry") and Troy Foods v Manton [2013] EWCA Civ 615 ("Troy") and the comments of the Court of Appeal in SARPD Oil at [52] to [60].
- Thus the strict answer to the question is that the discretion of a costs judge is not fettered by the costs budgeting regime, save that the budgeted figures should not be exceeded unless good reason be shown. But the full answer is that the Respondent does not have "complete discretion to attack a bill on detailed assessment" (see [61] and [62]).
- The Costs Judge took the view that the preliminary issue as posed was based on a misunderstanding of the objectives and function of costs budgeting, which is a different costs management tool from costs assessment. If the Appellant's arguments were correct, with the result that for large sections of a party's costs the only opportunity to challenge would be at the costs management conference, those hearings would be at risk of being far lengthier than they already are. That could not be consistent with the overriding objective. With realistic engagement by the parties and an experienced case managing judge, it should be possible, in most cases, to produce a proportionate budget that is so accurate when compared to the actual, yet still proportionate costs, incurred at the conclusion of the case that the difference between the parties should be so negligible that pursuit of a detailed assessment would not be worthwhile (see [63] and [64]).
This appeal : the parties' respective positions
The Appellant's position
- Three grounds of appeal are raised :
a) 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;
b) 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;
c) The consideration of a costs 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 cost budget set.
- In summary, the Appellant contends that the starting point at a detailed assessment is the sum allowed in the relevant phase of the agreed or approved budget and the costs judge should only depart from that sum for good reason. CPR 3.18 (b) is decisive. It is expressed in simple and unequivocal language and means what it says. The agreed or approved budget figures provide the starting point because, on the information available at the time of the budget, they were deemed within the range of reasonable and proportionate costs and so can be accepted, subject to good reason. The issue of good reason has to be raised and established by the party asserting it.
- There is no conflict between CPR 44.3(2)(b) and CPR 3.18, which expressly refers to CPR 44.3(2)(a) but not (b). CPR 44.3(2)(b) cannot override CPR 3.18. As for CPR 44.4(3)(h), the court has regard to the last approved or agreed budget by considering whether there is any good reason to depart from it.
- The Appellant relies on SARPD Oil at [41] to [52]. When read as a whole, it is plain that the Court of Appeal there was saying that, once the budget was agreed or approved, CPR 3.18 (b) was engaged. Anything else would be unfair, all the more so if there is a success fee to be deducted from damages or if funding is by way of a damages based agreement.
- The Costs Judge's approach ignored the separate rule specifically informing the Court how to deal with approved or agreed budgets. The reference to the costs budget at the end of CPR 44.4(3) was simply a convenient way of making the amendment. The Costs Judge was wrong to state that it would otherwise be impossible to apply the proportionality test as explained by Master Rowley in May. The budget will have established, subject to good reason to depart, that the costs are within a proportionate range. If there is good reason to depart from the budget, the costs judge can make that determination at the detailed assessment as before.
- The Costs Judge was wrong to suggest that the judgment of Warby J in Simpson was consistent with a departure for the purpose of CPR 3.18 being a departure from an available fund as opposed to a departure from a fixed sum or a sum claimed in a bill that happened to be within the budget.
- In conclusion, on a detailed assessment, the costs judge should consider if there is good reason to depart from the budget. If there is, he should vary the costs as appropriate. An underspend would be a good reason to depart from the approved figure, but the approach should then be that identified by District Judge Baldwin sitting as a Regional Costs Judge in Jones v Harding (unreported decision of 29th September 2016) ("Jones"). At [34(iv)], having stated that an underspend would clearly be a good reason for departure from the budget, the Judge said this:
"…but, in my judgment, the presumption must then be that the lower figure is even more reasonable and proportionate than the approved amount, and therefore a high burden would remain upon the paying party to show a good reason to award less than the lower figure. The raising of such an argument would only exceptionally, in my view, be a proportionate or appropriate use of scarce court resources."
The Respondent's position
- In summary, the Respondent contends that the rule in CPR 3.18 only applies if the receiving party seeks to recover more than the sums budgeted. Its effect is not to constrain the costs judge, absent good reason to the contrary, to allow the full sum provided for in the budget without conducting an assessment of the costs actually incurred in the normal way.
- The Respondent contends that the Costs Judge was right, essentially for the reasons that he gave. A budget is a fund, not a single figure. There is therefore no "departure" from a budget so as to engage CPR 3.18 if, on detailed assessment, a costs judge decides that less than the full budget needed to be spent. Only if a party tries to recover in excess of its budget is the rule applicable. This follows as a matter of ordinary language but is also consistent with the wider shape of the rules and previous authority, and with the policies and practicalities which underpin the budgeting and assessment processes.
- The Respondent submits that nothing in CPR 44 disapplies the need for a conventional detailed assessment where a case has been submitted to costs budgeting. There are good reasons for this:
a) It is impossible to carry out a detailed assessment at the cost budgeting stage. For example, even where work has been done or case plans are in existence, the full working papers cannot be before the court because of privilege;
b) Some of the "pillars of wisdom" in CPR 44.4(3) cannot be applied prospectively.
- On the contrary, the existence of a budget is simply identified in CPR 44.4(3) as one of a series of matters which the court will take into account in assessing whether costs are reasonably and proportionately incurred and reasonable and proportionate in amount. The factors are ones which the court is mandated to take into account. Thus the Respondent submits that a costs budget in no sense dispenses with the need for an item by item assessment of a party's costs. Nothing in the Final Report supports the notion that Jackson LJ intended to displace the detailed assessment exercise through the costs budgeting regime, and several of the costs judgments to date have proceeded on the false premise that he did so intend.
- It is said that the difficulty for the Appellant lies in the fact that, on her case, there is no "pre hoc" detailed assessment and no "post hoc" detailed assessment. This is a remarkable position – the abolition of traditional detailed assessment – in circumstances where there have been no previous signposts or public consultation, all the more so since the regime was brought into force very soon after Henry, where the Court of Appeal referred only to the costs budget as a "prima facie limit" (see [28]).
- Practice Direction 3E stresses that costs budgeting is not an advance detailed assessment, but is concerned with identifying the range of reasonable and proportionate costs. It is clear that it is no substitute for detailed assessment. Key issues such as the reasonable hourly rates are not considered at the budgeting stage. The intention is to certify a range within which costs appear reasonable and proportionate. Even the opening words of CPR 3.18 make it clear that the court still conducts a standard basis assessment in respect of the budgeted costs.
- Thus the Costs Judge was right in his approach to CPR 44.3 and the concept of a budget, which is suggestive of a figure which costs ought not to exceed without good reason, not of the figure which will automatically be allowed without enquiry. Allowing less than the full budgeted figure is not a departure from the budget. The reference in CPR 3.18 to a departure from the budget can only be a reference to a departure in excess of the budget. The Costs Judge was right to find support for his approach in Henry (at [16] and [28])). Jackson LJ in paragraph 1.5 of his Final Report had identified what was described as a "fork in the road" – as to whether an approved budget should operate as an upper limit upon recoverable costs or as a form of assessment in advance. Moore-Bick LJ clearly adopted the former approach. Such an approach was quite consistent with the affording of protection to a paying, but not a receiving party. The court should focus on what was said in Henry. None of what was said in Jones, Collins, SARPD Oil or MacInnes v Gross [2017] EWHC 127 (QB) ("MacInnes") assists, being either cases where the issue was not contested or directly before the court, or because the judge in question proceed on the false assumption that Jackson LJ was concerned to reduce the costs of detailed assessment.
- Finally, in policy terms it would be most unsatisfactory if costs budgeting, which occupies a short amount of time and which is not conducted by specialist judges, and which occurs at a time when the court cannot apply the CPR 44.4 criteria, were to lead to a figure which would usually constitute the amount of costs allowed, rather than the maximum costs to be allowed without good reason being shown for extra. Such an approach would undermine a core principle of the Jackson reforms, which is that there should be a stricter approach to costs on standard basis assessment and lead to costs budgeting hearings becoming longer and more expensive, and the Costs Judge was right to be concerned in this regard.
The authorities
- In my judgment, many of the authorities to which reference has been made need to be approached with a degree of caution. Several are either addressing a different, even if related, issue and/or are set in the context of a different regime. I refer to them below in chronological order.
- In Henry the Court of Appeal was considering whether there was a good reason to depart from the approved budget, which was less than the amount being claimed by the receiving party, all in the context of the pilot scheme under Practice Direction 51D. This was a "leapfrogged" appeal heard on an expedited basis, and its result was widely promulgated at the time. There were at the time significant concerns as to the level of costs being incurred in defamation cases.
- Paragraph 1.3 of Practice Direction 51D provided :
"The Defamation Proceedings Costs Management Scheme provides for costs management based on the submission of detailed estimates of future base costs. The objective is to manage the litigation so that the costs of each party are proportionate to the value of the claim and the reputational issues at stake and so that the parties are on an equal footing."
- Paragraph 5.6 of Practice Direction 51D provided :
"When assessing costs on the standard basis, the court-
(1) will have regard to the receiving party's last approved budget; and
(2) will not depart from such approved budget unless satisfied that there is good reason to do so."
- At [16] Moore-Bick LJ said this :
"I can now return to the question raised by the preliminary issue. It is implicit in paragraph 5.6 of the practice direction that the approved costs budget is intended to provide the framework for a detailed assessment and that the court should not normally allow costs in an amount which exceeds what has been budgeted for in each section. That makes good sense if the proper procedure has been followed and the costs have been managed in a way that ensures that they are restricted to an amount which keeps the parties on an equal footing and is proportionate to what is at stake in the proceedings. However, paragraph 5.6 expressly recognises that there may be good reasons for departing from the budget and allowing a greater sum. On the other hand, costs budgeting is not intended to derogate from the principle that the court will allow only such costs as have been reasonably incurred and are proportionate to what is at stake; it is intended to identify the amount within which the proceedings should be capable of being conducted and within which the parties must strive to remain. Thus, if the costs incurred in respect of any stage fall short of the budget, to award no more than has been incurred does not involve a departure from the budget; it simply means that the budget was more generous than was necessary. Budgets are intended to provide a form of control rather than a licence to conduct litigation in an unnecessarily expensive way. Equally, however, it may turn out for one reason or another that the proper conduct of the proceedings is more expensive than originally expected."
- At [24] he went on to say :
"I would accept that costs estimates fall at one end of the scale that runs through costs budgets to cost caps. Clearly the very fact that the court has responsibility for approving budgets as a means of managing costs is an indication that budgets are intended to provide some constraint. On the other hand, the budget is not intended to act as a cap, since the court may depart from it when there is good reason to do so. The question in the present case is whether there was indeed good reason to depart from the approved budget. In my view it is open to a costs judge when answering that question to take into account all the circumstances of the case. However, it will rarely, if ever, be appropriate to depart from the budget if to do so would undermine the essential object of the scheme…."
And at [28] :
"In the light of the experience gained from those pilots the Rule Committee decided to adopt Sir Rupert Jackson's recommendation that the management of costs by the court should in future form an integral part of the ordinary procedure governing claims allocated to the multi-track. Those rules, which will become effective from 1st April 2013, differ in some important respects from the practice direction with which this appeal is concerned. In particular, they impose greater responsibility on the court for the management of the costs of proceedings and greater responsibility on the parties for keeping budgets under review as the proceedings progress. Read as a whole they lay greater emphasis on the importance of the approved or agreed budget as providing a prima facie limit on the amount of recoverable costs. In those circumstances, although the court will still have the power to depart from the approved or agreed budget if it is satisfied that there is good reason to do so, and may for that purpose take into consideration all the circumstances of the case, I should expect it to place particular emphasis on the function of the budget as imposing a limit on recoverable costs. The primary function of the budget is to ensure that the costs incurred are not only reasonable but proportionate to what is at stake in the proceedings. If, as is the intention of the rule, budgets are approved by the court and revised at regular intervals, the receiving party is unlikely to persuade the court that costs incurred in excess of the budget are reasonable and proportionate to what is at stake."
- A few months later, in Troy, Moore-Bick LJ was concerned with an application for permission to appeal a costs management decision under CPR PD 51G. The defendant sought to challenge the decision to approve the claimant's costs for witness statements and the hourly rate for counsel because the judge had not had sufficient concern for the effect that setting the budget had on subsequent detailed assessments on a standard basis. Concern was necessary as it was likely that the costs judge would treat the approval of the budget as establishing that costs then incurred would be reasonable if they fell within the approved budget. Moore-Bick LJ granted permission commenting :
"…it follows that I do not accept that costs judges should or will treat the court's approval of a budget as demonstrating, without further consideration, that the costs incurred by the recovering party are reasonable or proportionate simply because they fall within the scope of the approved budget."
- In Slick Oil Seating Systems and another v Lea Adams and others [2013] WL 2460256 HHJ Simon Brown QC in the Birmingham Mercantile Court was prepared summarily to assess costs by reference to the receiving party's costs budget (see [8] and [9]), subject to the question of costs being awarded on an indemnity basis and albeit in circumstances where the paying party was unrepresented.
- In Simpson the focus of the relevant parts of the judgment was on paragraph 7.6 of Practice Direction 3E. The court had to view "good reason" in CPR 3.18 (b) by reference to the overriding objective and the specific aims identified in CPR 1.1(2). The conclusion was that a just and proportionate sanction in the circumstances of the case should apply for a failure to comply with paragraph 7.6 of Practice Direction 3E, providing an incentive for the parties to comply with the CPR. Warby J concluded at [23]:
"The approach I took to the assessment of costs……involves a sanction for the claimant's failure to comply with the Practice Direction which is in my judgment just and proportionate in the circumstances of this case, and on which in more general terms provides a sufficient incentive to parties to comply. That approach involves an assessment which makes every assumption against the party which has failed to submit an amended budget, and properly compensates the defendant for the additional costs involved."
- Earlier at [19] and [20] Warby J said this :
"19. It is clear that if cost management is to work conclusions reached upon reviewing costs budgets must be adhered to, and not second-guessed at a later stage. The wording of CPR 3.18(a) focuses attention on budgets for phases of the litigation. It is clear from CPR 3.18(b) that if a figure has been agreed or approved for a particular phase of proceedings the amount recoverable by the receiving party in respect of that phase will be capped at that figure, unless there is good reason to depart upwards. (If the receiving party has incurred costs less than budgeted there will be good reason to depart downwards). If significant developments have taken place which increase the cost of a phase, or add an element of cost, a revised figure should be discussed, and if not agreed submitted for approval, if time allows: PD3E paragraph 7.6. Time may now allow. Equally, if a party's budget for a particular phase has been reviewed and assessed at nil, there would need to be a good reason to award any costs at all.
20. The application of the wording of CPR 3.18(b) is not so straightforward in the circumstances of the case where (a) the receiving party has put forward a budget for this phase of the litigation but one that is not agreed or approved, or disapproved but considered inapplicable; and (b) the paying party has prepared a budget for this phase which has been agreed. I am inclined to think that the wording of CPR 3.18 was not aimed at such a situation, but rather at ensuring that once the court has reached a decision on what it is reasonable for a party to spend on a given phase that conclusion should be final in the absence of some good reason. However, that was not a point addressed in argument and I reach no conclusion on it.… "
- In SARPD Oil the Court of Appeal heard an appeal arising out of an application for security for costs in an international purchase contract claim proceeding in the Commercial Court. At first instance Andrew Smith J had indicated that, had he ordered security, he would have done so by reference to the approved costs budget. The providing party contended that he was wrong to do so. The judge should have gone behind the budget and ascertained for himself whether pre-incurred costs were reasonable and proportionate. The Court of Appeal disagreed.
- In considering the relevance of costs budgets, the Court of Appeal said this:
"41. It may thus be seen that although a costs budget sets out the incurred cost element and the estimated costs element, as a result of para. 7.4 of PD3E the court does not formally approve the incurred costs element but only the estimated costs element; and it is only in relation to that approved estimated costs element that the specific rule of assessment in Part 3.18(b) applies, namely that the court will not depart from the approved budget "unless satisfied that there is good reason to do so". It should be noted that there is no restriction in the Practice Direction regarding parties agreeing costs budgets as set out in the form of Precedent H, so in a case where the parties agree a costs budget in whole or in part and that is recorded in the relevant costs management order (as contemplated by Part 3.15(2)(a)), the rule in Part 3.18(b) applies both to the agreed incurred costs element and to the agreed estimated costs element.
42. However, even though in a case where court approval of a budget is in issue the approval does not apply to the incurred costs element (see the first sentence of para. 7.4 of PD3E), the court may still record its comments on those costs (in particular, regarding the court's view whether they are reasonable and proportionate) as well as take them into account when considering the reasonableness and proportionality of items in the estimated costs element in the budget: see the second sentence of para. 7.4. If the court does record comments about the incurred costs, they will carry significant weight when the court comes to exercise its general discretion as to costs under CPR Part 44 at the end of the trial.
43. For example, if a court has commented that incurred costs in a costs budget appear to be reasonable and proportionate, it would usually require good reason to be shown why such costs should not be included in an award of costs on the standard basis at the end of the trial. In such a case, the party who had put forward the costs budget would have been encouraged by the court to litigate on the understanding and with the legitimate expectation that such costs would be likely to be recovered if he were successful, and good reason would need to exist to justify defeating that expectation. Therefore, depending on what is said by the court by way of comment, the practical effect of a comment on already incurred costs made by a court pursuant to para. 7.4 of PD3E may be similar to the effect under Part 3.18(b) of formal approval of the estimated costs element in a cost budget.
44. Parties coming to the first CMC to debate their respective costs budgets therefore know that that is the appropriate occasion on which to contest the costs items in those budgets, both in relation to the incurred costs elements in their respective budgets and in relation to the estimated costs elements. The rubric at the foot of Precedent H also makes clear, since it requires signed certification of the positive assertion that "This budget is a fair and accurate statement of incurred and estimated costs which it would be reasonable and proportionate for my client to incur in this litigation".
45. It appears that this was indeed the understanding of each of Sarpd, Addax and Glencore in the lead up to the CMC in this case, as shown by the facts that each of them provided a costs budget which was signed and certified with this statement covering both the incurred costs element and the estimated costs element; they debated the entirety of their costs budgets with each other in advance of the CMC in the usual way; and they then agreed the terms of an order which they sent to Blair J to approve which included in respect of each costs budget a statement that the costs budget was approved in the full relevant total sum covering both the incurred costs element and the estimated costs element.
…
47. Strictly, by reason of para. 7.4 of PD3E the court could not approve the incurred costs element of these costs budgets in a way which would engage the effect of CPR Part 3.18(b). The proper interpretation of the order made in relation to each costs budget, therefore, is that the estimated costs element in each case was approved by the order (so that Part 3.18(b) was engaged in relation to that element) and the court commented on the incurred costs element in each case (and on the total figure which included that element), as it was entitled to do under the second sentence of para. 7.4, to the effect that it agreed the claim made on the face of the costs budget that those costs were reasonable and proportionate costs in the litigation. The effect of this comment was that it was likely that the incurred costs element would be included in any standard assessment of costs at the end of the day, unless good reason was shown why it should not be. There was little if any difference between the practical effect of the court's order in relation to incurred costs and its order in relation to estimated costs.
…
49. Against this background, we consider that the judge was clearly correct to take the approved costs budget of Addax as the appropriate reference point from which to work out the amount of Addax's own costs which should be provided by way of security and that is what we should do. Similarly, in relation to assessing the costs likely to be recovered by Glencore and then passed on to Addax and recovered by it from Sarpd, it is appropriate to use Glencore's costs budget as the relevant reference point.
50. There are two reasons for this…
…
52. Secondly, for reasons explained above, Addax's costs budget and Glencore's costs budget, as "approved" in and appended to Blair J's order, will be a strong guide as to the likely costs order to be made after trial, if Addax is successful, both in relation to the incurred costs element and in relation to the estimated costs elements. It is therefore appropriate that the costs budgets as so "approved" should be used as the relevant reference points for considering the amount which should be ordered for security for costs."
- Lastly I refer to the very recent decision in MacInnes. This was a judgment on consequential matters where, amongst other things, Coulson J had to rule on an application by the successful first defendant for interim payment on account of his costs. He rejected the submission for the paying party that, at assessment by the costs judge, the assessment would "start from scratch". He went on to state as follows :
"25. …In my view, the first defendant's approved costs is the appropriate starting point for the calculation of any interim payment on account of costs. CPR 3.18 makes plain that, where there is an approved or agreed costs budget, when costs are assessed on a standard basis at the end of the case, "the court will…. not depart from such approved or agreed budget unless satisfied that there is good reason to do so." The significance of this rule cannot be [over]stated. It means that, when costs are assessed, the costs judge will start with the figure in the approved costs budget. If there is no good reason to depart from that figure, he or she is likely to conclude the assessment at the same figure: see Silvia Henry v News Group Newspapers Ltd [2013] EWCA Civ 19.
26. One of the main benefits to be gained from the increased work for the parties (and the court) in undertaking the detailed costs management exercise at the outset of the case is the fact that, at its conclusion, there will be a large amount of certainty as to what the likely costs recovery will be. One consequence is that, for the purposes of calculating the interim payment on account of costs, the starting point will almost always be the payee's approved costs budget. Another consequence is that the court assessing the interim payment can ignore the fact that, as here, there may have been significant expenditure on costs by the payee above the budget figure: any increase is a matter for the costs judge and the relatively onerous burden of recovering more than the budget figure is on the payee: see Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd (No 2) [2013] EWHC 1643 (TCC)."
Other decisions of specialist costs judges
- As already indicated, following the judgment, District Judge Hale sitting as a Regional Costs Judge in Bhojani came to the same conclusion as the Costs Judge for essentially the same reasons. He recognised nevertheless that there was merit in elements of both parties' arguments, recording the support to be found in the receiving party's arguments and "clarity of language of CPR 3.18" and a passage in Cook on Costs (then in its 2016 edition) which suggested, amongst other things, that allowing departure from the budget would also:
a) Overlook that the budgeted costs are already set by reference to reasonableness and proportionality;
b) Ignore the intention expressed by Jackson LJ in his Final Report that "at the end of the litigation the reasonable costs of the winning party are assessed in accordance with the final budget";
c) Defeat two of the aims of costs budgeting, namely the reduction in the number of assessments and a reduction of the issues raised in points of dispute;
d) Remove the certainty for clients of costs budgeting, namely the ability to make informed decisions at an early stage based on knowledge of the recoverable costs.
(The equivalent, slightly expanded, section is now to be found at pages 230-231 in the 2017 edition of Cook on Costs.)
- However, on 8th February 2017 Senior Costs Judge Master Gordon-Saker came to the opposite conclusion in Collins. There again the receiving party's bill was in a total sum less than the sum agreed between the parties and approved by the court. Having rehearsed the background and the parties' respective positions he considered the effect of CPR 3.18(b), the wording of which was, in his judgment, clear. He went on as follows :
"23. It seems to me that the words "not depart from" cannot be construed as meaning that the court will treat the approved or agreed budget as a factor or as guidance in the assessment of the costs or that the court should treat the figures in the approved or agreed budget as caps. Had either been intended that could easily have been stated. "Not depart from" can only mean not depart from. The addition in CPR 44.4(3) of the last approved or agreed budget as something to which the court should have regard when deciding the amount of costs, was necessary to give effect to CPR 3.18(b). Otherwise there would have been a tension between the two rules.
24. The intention of costs management was to control costs. The obvious intention of CPR 3.18(b) was to reduce the scope of and need for detailed assessment. Rhetorically, what would be the point of costs budgeting (and the considerable resources that it has required) if the resulting figures amounted to nothing more than a factor, guidance or cap at detailed assessment?
25. Costs capping survived the 2013 amendments to the rules, although the relevant provisions were moved from Part 44 to section III of Part 3. There would seem to be no logic in having two systems of costs capping running in parallel.
26. There was no need for the 2013 amendments to Part 47 to take costs budgeting into account. The consequence of an approved or agreed budget on detailed assessment is made clear by CPR 3.18. It was not necessary to repeat it in Part 47.
27. Accordingly in the present case it seems to me that the Claimant is entitled, in respect of the estimated costs, to the figures for each phase which were approved and agreed by the order of Master Kay QC unless there is a good reason to allow a different figure.
28. At the adjourned hearing of the detailed assessment it will therefore be for the Defendant to show that there is a good reason to depart from any of the figures in the budget.
29. What may amount to a good reason will depend on the facts of the case. I heard only limited submissions on what may amount to a good reason. There seemed to be agreement that not incurring a liability for the full sum that was approved or agreed is likely to be a good reason, for otherwise there would be a breach of the indemnity principle. However that a phase was not completed at the point of settlement, would not it seems to me necessarily amount to a good reason. If the costs claimed broadly reflect the appropriate proportion of the phase that had been completed by settlement, there would be no point in requiring a line by line assessment of the work done in that phase."
- Master Gordon-Saker also referred to [46] to [48] of SARPD Oil and said this :
"30. While, given that the court was concerned with an appeal from a decision not to order security for costs, the passage set out above is obiter dicta, it is unlikely that an inferior court would depart from it."
- Although no judgment as such is available, Costs Judge Master Whalan took the same approach and came to the same conclusion as did Senior Cost Judge Master Gordon-Saker in an unreported (earlier) decision on 16th August 2016 (in Harrison v Coventry NHS Trust) ("Harrison"). He concluded that the wording of CPR 3.18(b) was conclusive; that there would be no line by line assessment, absent good reason, and that costs budgeting would serve no meaningful purpose otherwise. Master Whalan refused permission to appeal but, as indicated below, I understand that permission to appeal has been granted subsequently and the matter is to be heard in the Court of Appeal in May 2017.
- District Judge Baldwin sitting as a Regional Costs Judge in Liverpool in Jones also addressed the question of the relationship between costs budgeting and pre-incurred costs. It was not in issue that the cost budget should not be departed from, absent good reason, even where the costs being claimed were less than the budget. But in his conclusion he stated :
"…(iii) As such, all phases except pre-action costs, are in my judgment, subject to CPR 3.18(b) and the total approved or agreed figure for each phase represents the court's or the parties' view as to a reasonable and proportionate amount for the entirety of that phase…."
Analysis
- The starting point for any analysis must be section II of CPR Part 3 which contains the regime under which costs budgeting was introduced. The effect of a costs management order is addressed in CPR 3.18 :
"3.18 In any case where a costs management order has been made, when assessing costs on the standard basis, the court will –
(a) have regard to the receiving party's last approved or agreed budget for each phase of the proceedings; and
(b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so."
- The words 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 approved costs budget, unless there is good reason to depart from it. No distinction is made between the situation where it is claimed that budgeted figures are or are not to be exceeded. It is not possible to square the words of CPR 3.18 with the suggestion that the assessing costs judge may nevertheless depart from the budget without good reason and carry out a line by line assessment, merely using the budget as a guide or factor to be taken into account in the subsequent detailed assessment exercise. The obvious intention of CPR 3.18 was to reduce the scope of and need for detailed assessment. The Respondent's approach would defeat that object.
- This straightforward conclusion reflects the fact that costs budgeting involves the determination of reasonableness and proportionality (see paragraph 7.3 of Practice Direction 3E and paragraph 3 of the Guidance Notes to Precedent H). It is important to remember at the outset (and also in the context of the debate as to the meaning of the word "budget" addressed below) precisely what a judge is doing at the cost-budgeting stage. He/she is not identifying what is the maximum amount by way of future costs considered to be reasonable and proportionate. He/she is identifying what future costs are reasonable and proportionate.
- I reject the Respondent's suggestion that, on this construction, CPR 3.18(a) is otiose. The conjunctive clauses when read together direct the court that it must take the budget into account by having regard to it by not departing from it, absent good reason.
- Albeit that I accept that the issue has to be decided effectively on first principles, the approach set out above is consistent with the (albeit obiter but very recent) comments of the Court of Appeal in SARPD Oil. Read as a whole (and in particular [41], [43], [47], [49] and [52]) it is clear that the Court of Appeal's position was that, once a budget was agreed or approved, then Part 3.18(b) applied. The fact that the court only described the budget as "a strong guide as to the likely costs order to be made after trial" reflects that the fact that a court, on an application for security for costs, could not go further than it did. At that stage, it could not be said precisely how the case might evolve, for example as to its ultimate quantum. The wording does not in my judgment provide support for the Costs Judge's overall conclusion.
- The approach is also consistent with the thinking of Coulson J in MacInnes (at [25]). Again, he could not go further than he did in the context of an application for an interim payment on account of costs. But, as he commented, the significance of the rule in CPR 3.18 cannot be overstated. The setting of a costs budget is an exercise of fundamental importance: underpinned by the consequences of failure to file a cost budget as required (as set out in CPR 3.14). Its importance is underlined by the detailed provisions within CPR 3 section II, Practice Direction 3E and Precedent H in setting out the exercise that is to be carried out. There is thus, for example, express provision for the updating and revising of the costs budget as the proceedings progress, if necessary and appropriate. It is fair to ask the question that, if it be right that an agreed or approved costs budget is no more than a guide at detailed assessment, even if a strong one, what point there can be in the parties and the court spending so much time on the cost budgeting exercise. The Respondent counters that it will still have value in that it can be a strong guide and so be likely to deter some detailed assessments altogether. But it is still difficult to see why so much time and money would be invested at the costs management stage if the budget were to be no more than a guide in any case where there is an underspend.
- It is also a view which coincides with that of Senior Costs Judge Master Gordon-Saker in Collins, who felt able to resolve the matter in only a few short paragraphs, and the view of Master Whalan in Harrison.
- Nothing in paragraph 7.3 of Practice Direction 3E, where it is stated that when reviewing budgets the court will not carry out a detailed assessment "in advance", impinges on this approach. The Practice Direction is there setting out the nature of the assessment exercise at the costs budgeting stage. The court will not carry out a detailed assessment at that stage; rather it will consider whether the budgeted costs fall within the range of reasonable and proportionate costs. It is not stating that, whatever costs budget is approved or agreed, there will be an unfettered detailed assessment in due course. The fact that hourly rates are not fixed at the costs budgeting stage is no obstacle to such a conclusion. As the notes to CPR 3.18 in the White Book reflect, the fact that hourly rates at the detailed assessment stage may be different to those used for the budget may be a good reason for allowing less, or more, than some of the phase totals in the budget.
- There is no need for present purposes to examine in any detail what might and might not be a "good reason" for the purpose of CPR 3.18. But clearly, if the receiving party has spent less than was agreed or approved in the budget, the need to comply with the indemnity principle would require departure from the budget. There is no question of a party receiving more by way of costs than was actually spent. As District Judge Baldwin sitting as a Regional Costs Judge in Jones commented in this context (at [34(iv)], the incurring of costs lower than were budgeted for would clearly be a good reason for departure from the budget:
"…but, in my judgment, the presumption must then be that the lower figure is even more reasonable and proportionate than the approved amount, and therefore a high burden would remain upon the paying party to show a good reason to award less than the lower figure. The raising of such an argument would only exceptionally, in my view, be a proportionate or appropriate use of scarce court resources."
- The question of what was and was not a good reason was of course the only point at issue in Henry (see [8]) and then in circumstances where a party had exceeded the costs budget and not complied with the costs budgeting provisions. I do not consider that the decision in Henry points to a conclusion different to that expressed above. It comes of course from a highly authoritative source, albeit at a very early stage in the development of the costs budgeting regime. The taking of a cautious approach would be understandable. But in any event its focus was on a different issue, namely what was a good reason for departure from a budget, and then on a different factual premise, where the costs being claimed exceeded the budget. There is no reason to suppose that the court heard detailed submissions on the position where the costs being claimed were less than budgeted. It was also a decision in the context of the pilot scheme under CPR 51D which had, for example, no equivalent of CPR 44.3(5) or 44.3(2)(a). Moreover, the comments in [16] (that where a party is claiming less than budgeted costs, to award no more than has been incurred does not involve a departure from the budget) lead to the same result in practice as if one treats the indemnity principle as a good reason for departure from the budget. It is also right to record that the notes in the White Book at CPR 3.18 (at page 122) following Henry suggest that the authors did not take the view that Henry in any way meant that, where the costs being claimed were less than budgeted, the budget was anything other than binding, absent good reason to depart.
- Both parties understandably placed far less emphasis on the comments of Moore-Bick LJ in Troy. Those comments were made in the context of the granting of permission only without full argument but, more importantly, the appeal again arose in the context of a pilot scheme, this time in the Mercantile and Technology and Construction Courts. Significantly, CPR PD 51G only referred expressly to questions of reasonableness and proportionality in the context of already incurred costs. That is in stark contrast to the clarity of Practice Direction 3E (at paragraph 7.3) where it is clear that questions of reasonableness and proportionality are to be considered when setting each phase of a budget. Moore-Bick LJ also expressed concern that the judge below had not approved figures by reference to reasonableness or proportionality but by reference to whether any figure was not "grossly disproportionate".
- Nor do the remarks of Warby J in Simpson cut across this approach. Warby J emphasised the importance of adherence to costs budgeting. His comments in [19] (and [20]) are again consistent with the notion that breach of the indemnity principle would be a good reason for departure from the budget but that good reason would be needed to depart either upwards or downwards from an agreed or approved budget.
- It is of course right to say that costs budgeting under section II of CPR 3 does not "replace" detailed assessment. It is common ground that, as the Costs Judge remarked (at [53]), Precedent Q is not an advanced assessment of the recoverable costs. It informs the court, in a readily accessible format, what has been spent compared with the budget. But the Appellant is not contending that there should be no detailed assessment. On the contrary, the question is how that assessment should be conducted. Further and on any analysis, there remains room for detailed assessment outside the budget – for example in relation to pre-incurred costs not the subject of the costs budget; costs of interim applications which were reasonably not included in a budget; where costs are being assessed on an indemnity basis; where the costs judge finds there to be a good reason for departing from the costs budget.
- Equally the addition of the receiving party's last approved or agreed budget as being a factor to which the court will also have regard (in CPR 44.4 (3)(h)) does not demote the budget to the status of a guide alone. At the risk of repetition, this approach ignores the express words of CPR 3.18 (and, for that matter, perhaps also CPR 44.4(2)). The introduction of CPR 44.4(3)(h) ensured that there was no tension between CPR 3.18(b) and CPR 44.4. The court will be having regard to the receiving party's last approved or agreed budget by respecting it or finding that there is some good reason to depart from it. Additionally, there will be occasions when the budget is relevant in relation to the assessment of costs falling outside it. Put shortly, there is nothing in CPR 44 that overrides CPR 3.18.
- The fact that CPR 3.18 only draws attention to CPR 44.3(2)(a) and not (b) is also to be noted. It avoids any potential conflict between CPR 3.18 and 44.3(2)(b). In relation to matters the subject of agreement or approval in the costs budget, Part 3.18(b) applies.
- I do not consider the debate as to whether a costs budget is to be seen as an available fund as opposed to a fixed sum to be particularly instructive. The plain meaning of the word "budget" may be said to equate with an available fund. But if costs within an agreed or approved budget can then be reduced on detailed assessment, it is difficult to see how it can be said that the budget is available. Effectively the budget then becomes a cap. Jackson LJ stated in clear terms (adopting what he described as a helpful summary from the Law Society) that budgeting is not costs capping (see paragraph 6.6 of chapter 40 of the Final Report). That then produces the obvious oddity of there being two parallel costs-capping regimes: one in section II of CPR Part 3 and one in section III of CPR Part 3. As Master Gordon-Saker commented in Collins (at [25]), there would be "no logic" in having two systems of costs capping running in parallel in this way.
- This approach does not make it impossible to apply the proportionality test identified in May or more generally. The proportionality test can be applied at the time of fixing the budget. If there is good reason to depart from that decision, the judge on detailed assessment can do so. Additionally, as the notes to CPR 3.18 in the White Book suggest, once pre-incurred costs have been assessed on the basis of reasonableness and added to the budgeted costs, the total figure is then subject to an overall assessment of proportionality. So, unless there is good reason to depart from the budget, the overall 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.
- Fundamentally, this conclusion reflects what is in my judgment the clear intention of costs management as set out in CPR 3.18(b), namely to reduce the cost of the detailed assessment process by the treatment of agreed or approved cost budgets as binding, absent good reason to proceed otherwise. If this approach be right, the scope and cost of detailed assessment of costs on a standard basis will indeed be reduced materially. Jackson LJ's view was that the burden of costs management, if done properly, would save substantially more costs than it generates, even if he reached no final conclusions and made no final recommendations in the Final Report as to how that would be achieved. It is achieved if there is a saving in the time and costs needed for detailed assessment, rather than duplication of time and expense in an unfettered landscape (even if the budget is seen as a strong guide). Such a solution might appear to be an obvious one, even if not one upon which Jackson LJ fixed conclusively in the Final Report.
- The Costs Judge expressed concern that such an approach would, on the other hand, lead to longer and more expensive cost management hearings. With proper and realistic co-operation and engagement between the parties that should not be the case. The costs budgeting exercise already takes up significant amounts of court time and the parties' time in preparation. There is already a very substantial investment. Further, the costs budgeting exercise is not intended to be a detailed assessment, and the parties and the court should not approach it as such. It is a broad, phase-based assessment which will, albeit performed on a principled and carefully timetabled basis, inevitably be rough and ready in places. The clear intention behind and effect of the cost budgeting regime is that it is nevertheless to result in a budget from which the court will not depart on detailed assessment on a standard basis, unless there is good reason to do so. There is a balance to be struck: on any view, the Respondent's approach would involve very significant duplication and the added burden of having to cross-refer at each stage to the costs budget as a guide, albeit not a binding one.
- This is of course a topical area, with a growing trend towards the fixing of costs in advance. There is a current consultation by the Department of Health with regard to fixing fees in clinical negligence claims for sums up to £25,000. There is the ongoing review by Jackson LJ with regard to fixed costs in all areas of civil litigation, including clinical negligence and personal injury, for claims up to £250,000. (It goes without saying that the costs budgeting regime, even on the Appellant's case, is far more refined than a fixed cost regime.)
- Further, as the Appellant points out, complaints by the Respondent as to shortcomings and inevitable inaccuracies in the cost budgeting process cannot avail the Respondent. Where costs claimed are less than the budgeted figure, then the inaccuracies will be irrelevant, since the receiving party will only recover the lower figure (because there would be good reason to depart by reason of the indemnity principle). Equally, where costs claimed were higher, the receiving party would have to show good reason for departure from the budget. Nor is it fair, as the Respondent does, to refer to the judges carrying out the costs budgeting exercise as "neophytes". As Jackson LJ made clear in the Final Report, with training and experience all civil judges are equal to the task of costs budgeting.
- As already indicated, there is no suggestion by the Respondent that the budgeted figure is not fit for purpose as something not to be departed from without good reason if the sums claimed exceed the budget. No compelling argument has been advanced as to why an approved costs budget is sufficiently good to be adhered to if it is exceeded, but not if the sums budgeted for are not reached. It might even be said that such an approach would act perversely as a disincentive to minimise costs incurred under the budget: the receiving party stands to gain (by avoiding a full detailed assessment) if the budget is exceeded. Nor do I consider that that the result is at odds with a stricter approach to standard basis assessment. The court still has to focus on reasonableness and proportionality.
- Finally, real emphasis needs to be placed on the importance of certainty on costs in the context of access to justice. The desirability of predictability was touched on by the Court of Appeal in SARPD Oil (at [43] already set out above but repeated for ease of reference) and albeit commenting by reference to pre-incurred costs:
"….In such a case, the party who had put forward the costs budget would have been encouraged by the court to litigate on the understanding and with the legitimate expectation that such costs would be likely to be recovered if he were successful, and good reason would need to exist to justify defeating that expectation."
- Similarly, Jackson LJ in The Reform of Civil Litigation (2016) said this (at paragraph 14-019) :
"Both sides know where they stand financially. They have clarity as to a) what they will recover if they win…and b) what they will pay if they lose (own actual costs + other parties' recoverable costs) . . . This information is of obvious benefit for those making decisions about the future conduct of litigation."
- Fidelity to the clear words of CPR 3.18, as set out above, will achieve the dual purpose both of reducing the costs of the detailed assessment process and of securing greater predictability on costs exposure/recovery for the parties. Both the receiving and paying party have the benefit of the legitimate expectation. This is a central pillar of access to justice in a world where costs will always be a primary consideration for those contemplating or participating in litigation, and consistent with the overriding objective. The expensive costs of the detailed assessment procedure are reduced and the case is dealt with justly, with both parties knowing from an early stage what their potential costs liability is, absent good reason to depart from the budget.
Conclusion
- The judgment below was the product of the careful and reasoned thinking of an experienced specialist costs (and clinical negligence) judge, which naturally deserves respect. However, there is on any view legitimate scope for disagreement, as other recent judgments from specialist costs judges have readily demonstrated. For the reasons set out above, I have come to the conclusion that the answer given to the preliminary issue by the Costs Judge was wrong.
- In my judgment, the answer to the preliminary issue is 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.
- The appeal will therefore be allowed.
- To use a preliminary issue in a factual vacuum for resolution of issues such as this is inevitably to apply a blunt tool. There are so many potential variables and nuances that the answer on any particular given set of facts might require refinement. But the central message is that set out in CPR 3.18, namely that the approved or agreed budget will bind the parties at the detailed assessment stage (on a standard basis) whether the costs claimed are for less than, equal to or more than the sums approved or agreed by that budget, unless there is good reason otherwise.
- One can be confident that this decision on first appeal will not end the debate. I respectfully make the perhaps obvious point that the issue would appear to be ripe for early consideration by the Court of Appeal raising, as it does, an important point of principle or practice. Indeed, I learned only days before the appeal came before me that there is in fact an appeal already listed to be heard in the Court of Appeal this May against Master Whalan's decision in Harrison (by way of "leapfrog" direction and albeit on a "floating" basis only). It may be that any appeal from this decision could be listed alongside that matter, if that were thought appropriate.
- Whatever the future holds, however, it is important that a growing body of judgments on the same issue does not emerge in piecemeal manner. It is essential that there is procedural co-ordination. The same solicitors and/or counsel are involved in many of these matters in what is a relatively small world. I am told that many stays of detailed assessments are already in place, pending the outcome of this appeal. The parties may accept my judgment as binding for their purposes. Alternatively, it may be that further stays need to be imposed, to prevent unnecessary court and judicial time and expense being devoted to a debate which the Court of Appeal is very shortly going to consider.
