The decision by Regional Costs Judge Lumb in Merrix v Heart of England NHS Foundation Trust  EWHC B28 (QB) caused many to question the point of costs budgeting.
The issue the court faced was:
“to what extent, if at all, does the costs budgeting regime under CPR Part 3 fetter the powers and discretion of the costs judge at a detailed assessment of costs under CPR part 47.”
At the risk of oversimplifying a very carefully reasoned decision, he concluded that a costs budget acted simply as a cap (in the absence of a “good reason” to allow more) on the recoverable costs but that any costs up to the level of that cap could be challenged on detailed assessment in the normal manner.
Unsurprisingly, perhaps, that decision has now been overturned on appeal: Merrix v Heart of England NHS Foundation Trust  EWHC 346 (QB).
The wording of the relevant rule, CPR 3.18, reads:
“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.”
On appeal, Mrs Justice Carr concluded:
“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 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.”
(The indemnity principle would stop greater costs being recovered than had actually been incurred.)
The Court of Appeal is due to consider this very issue in another case going to appeal in May of this year but it is unlikely they will reach a materially different conclusion.
This is not to suggest that detailed assessment is now a thing of the past where there is a costs management order. As the judgment recognised, there will be some areas which will be subject to detailed assessment in the normal way including:
- 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.
The most important of these, and the most problematic, is “good reason”. Matters would have been rather easier if this was a “save in exceptional circumstances” test. It is not and a costs budget therefore should not be equated to a straitjacket. The difficulty, and therefore the potential scope for endless satellite litigation, is where the boundaries of “good reason” lie.
One crucial practical issue to note, as highlighted by specialist costs counsel Andrew Hogan, is:
“the requirement now for a paying party to be quite specific whether in the Points of Dispute or a witness statement as to why there should be a departure downwards from budgeted figure for costs on a detailed assessment, addressing with particularity the reason which is said to be a ‘good reason’.”
The other important issue this case highlights is the importance of properly challenging costs budgets at the costs management stage. At detailed assessment it will often be too late.