Good reason to depart from costs budget
In Harrison v University Hospitals Coventry & Warwickshire NHS Trust  EWCA Civ 792 the Court of Appeal confirmed that a court, on detailed assessment, would not depart upwards or downwards from the last agreed or approved budget unless there was a good reason to do so. The battle has now moved on to the issue of what constitutes a “good reason”.
An interesting decision on this issue comes in the case of RNB v London Borough of Newham  EWHC B15 (Costs).
Deputy Master Campbell decided that there was a “good reason” where the hourly rates claimed in the agreed/approved budget were in excess of the reasonable hourly rates as determined as part of the detailed assessment process.
This decision is contrary to my understanding as to the judicial training for costs budgeting. The rules expressly state (at PD3E para.7.3):
“The court’s approval will relate only to the total figures for budgeted costs of 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.”
and (at PD3E para.7.10):
“The making of a costs management order under rule 3.15 concerns the totals allowed for each phase of the budget. It is not the role of the court in the cost 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.”
It was generally understood that the purpose of these provisions was to set a globally reasonable and proportionate figure for each phase of a case. It was not to dictate how the work for that phase would then be undertaken.
For example, a budget might include 10 hours at £300 per hour by a Grade A fee earner for the witness statement phase, equating to a total of £3,000. If that figure is agreed/approved for the phase, it is then entirely a matter for that party as to whether the work is actually done by a Grade A fee earner in 10 hours, or by a Grade D fee earner charging £150 per hour who takes 20 hours on the task, or the matter is outsourced to Counsel who charges a fixed fee of £3,000 for completing the relevant work. So long as the work envisaged at the time the budget were agreed/approved is completed, and there is no breach of the indemnity principle, there should be no issue at the detailed assessment point as to recovery of costs. If the total claimed to undertake the budgeted work is within budget it should normally be allowed.
The cause of the problem in the RNB case is that if the defendant was unhappy with the totals claimed for any of the relevant phases in the claimant’s budget, they should not have agreed the same. This applies as much whether it is the time or the hourly rates claimed that is deemed excessive. Inevitably, this does create a problem. How does a party raise legitimate challenges to an opponents budget, in Precedent R or at a CCMC, where their concern is with the hourly rates being applied, rather than the time sought, if the court will not determine the appropriate hourly rate as part of the budgeting process? I have seen some parties attempting to agree the number of hours claimed within budgets but not the hourly rates. The difficulty with this is that PD 3E, para.7.10 states the making of a CMO “concerns the totals allowed for each phase of the budget”. Unless a total figure is agreed for the phase, there can be no CMO made on the back of that “agreement”.
The problem, so far as Deputy Master Campbell saw it, was:
“At the assessment hearing, I made reductions to the hourly rates claimed for the incurred costs to a level which has meant that the overall recovery by the Claimant for the period of work before the CMO has been reduced by significant amounts. Were that not to be reflected in the budgeted costs, that would mean that the Claimant will appear to recover an hourly rate as set out in Precedent H for the budgeted stage at a level that significantly exceeds the figure I consider to be reasonable and proportionate for the pre-budget stage. … If, (as it is the case), the hourly rate is a mandatory component in Precedent H which is not and cannot be subjected to the rigours of detailed assessment at the CCMC, it makes no sense if it is automatically left untouched when the rates for the incurred work are scrutinised at the ‘conventional’ assessment. …. Indeed, as Mr Clayton points out, it is only on that occasion that a paying party has an opportunity to challenge the rate and I agree with him for the reasons given above, that that is a ‘good reason’ to depart from the costs allowed in the Claimant’s last approved budget.”
This is a legitimate criticism of the whole costs budgeting process. One of the concerns when costs budgeting was first introduced was that judges would make rough-and-ready decisions in relation to setting costs budgets that resulted in figures that were higher than would be likely to be allowed under the scrutiny of a detailed assessment hearing. Parties would then be stuck with those excessive figures. However, although that may be a legitimate criticism of the costs budgeting process, it is difficult to see how that amounts to a “good reason” to override agreed/approved costs budgets.
Deputy Master Campbell took support for his approach from the comments made by the Court in Merrix v Heart of England NHS Foundation Trust  EWHC 346 (QB):
“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.”
The flaw with this approach, I would suggest, is to focus simply on the hourly rate element of budgets. Although it is clearly correct that when approving a budget a court does not “fix or approve the hourly rates claimed in the budget”, it is equally true that the court is not meant to fix or approve the number of hours claimed within the budget. It is meant to do no more than approve “total figures for budgeted costs of each phase of the proceedings”. Neither the hourly rates nor number of hours set out are approved. If it is legitimate to reduce an agreed/approved budget because the hourly rate is too high, why not equally challenge the budget because the time claimed is too high for that phase? Would it not be an equally “good reason” to depart from the budget if the judge on assessment considered the time claimed in the budget to be too high?
The practical problem from this approach can be seen from the way many budgets are agreed/approved. A budget may be advanced that claims, for example, £20,000 for the disclosure phase based on 100 hours at an hourly rate of £200. The global figure for that phase may be reduced by agreement or court decision to £15,000, with no breakdown as to how that figure is arrived at. Can a party on detailed assessment challenge a claim for costs that comes in at £15,000 for that phase on the basis that the £200 per hour claimed is too high, even if the time claimed is only 75 hours (even though the £15,000 agreed/approved contained no figure for hourly rates)? What if the bill limits the hourly rate to £125 but now claims 120 hours work? Can a challenge be raised that the time spent was too long and higher than the original budget?
The proper analysis, I would suggest, is that an agreed/approved budget acts as a form of fixed fee for the relevant phase. So long as all relevant work for the phase has been completed (eg if a witness statement budget phase was based on there being three witness statements from each party, it would be necessary for those statements to have been completed and exchanged) and there is no breach of the indemnity principle, a party should be able to expect to recover the amount as set out in the agreed/approved budget (in the absence of some other “good reason” as to why this would be inappropriate).
When analysed properly, the RNB decision appears to be no more than saying budgets can be reduced on assessment simply on the grounds that the judge considers the constituent figures in the budget to be too high.
Deputy Master Campbell was canny enough to ensure his decision was not open to appeal by finding, in the alternative, that the overall costs (after the line-by-line assessment) were disproportionate but that a proportionate figure could be arrived at by reducing the hourly rates further:
“It follows that if I am wrong about ‘good reason’, the amount to be allowed on assessment must be adjusted by the application of CPR 44.3(5) so that the sum payable is the same as if the rates allowed for the incurred had been used to work out the amount to be allowed for the budgeted work.”
It therefore seems unlikely that this decision will be taken further. However, I rather doubt that the RNB approach will gain approval from the higher courts in due course.