It has been confirmed. On assessment you need a good reason to depart from a Budget in either direction – but what is a good reason? The answer may well be the legal equivalent of 42. Here, Lee Dixon, Senior Costs Draftsman, will attempt to collect the guidance to date to provide some kind of answer to the meaning of ‘good reason’.
A ‘good reason’ appears to be a less extreme test. I often have a good reason for being late home but I’d rarely have an exceptional one. The ‘good reason’ test suggests strongly persuasive but not exceptional; not out of the ordinary.
The test to revise a Budget is also different as you need to demonstrate a ‘significant development in the litigation’ has or will occur. Whilst we are concerned here with good reasons, there is likely to be some overlap as a significant development is, presumably, the best good reason there is.
In the context of Budgets, the good reason issue has been flirted with by several experienced Judges/Masters. However, before we touch on the guidance, we need some context.
What is an approved / agreed Budget?
It is a range of the reasonable and proportionate costs required to conduct that piece of litigation.
Mrs Justice Carr said in Merrix v Heart of England NHS foundation Trust  EWHC 346 (QB) (24 Feb 2017) that a Judge is, “Identifying what future costs are reasonable and proportionate”. Cleary this is within the framework provided to the court within your Budget (your ‘assumptions’ and your incurred costs).
It follows, then, that any figure less than the approved Budget must be ‘more reasonable and proportionate’ (Jones v Harding) and, equally, any costs over the Budget must (apparently) start from the presumption that they are unreasonable and disproportionate.
Budgets should also be regarded by phase, not globally. So, if you intend to depart then, it follows, you need to be focused on the relevant phase or phases.
Finally, everything herein can only relate to estimated costs. Incurred costs remain ringfenced and an issue for detailed assessment.
As a Budget is inevitably woven from each individual case’s fabric, it appears common sense that a good reason is likely to be case specific. However, are there any overarching generic reasons, good or otherwise?
Arguably, one may be the only obvious good reason; our old friend, the indemnity principle. Clearly, if you Budget for £50,000 and spend £30,000 you cannot then recover £50,000. Your Budget includes, after all, a statement of truth vouching for the integrity of the indemnity principle. If there was any doubt, this example was supported in Collins and in Merrix that: ‘If the reviewing party has spent less than was agreed or approved in the Budget, then the need to comply with the indemnity principle would require departure from the Budget.”
Another overarching good reason could be something flowing from a change in the law. The impending discount rate change, for example, may be a good reason (and a significant development). Whilst a change was hoped for, it would surely be unreasonable to suggest that it was more likely than not going to end up how it has? If the work involved was not reasonably catered for, and any additional work has exceeded the existing Budget, then that would appear to be a good reason.
Hourly rates are a third general reason. Merrix states:
“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.”
This is another interesting one. PD 7.10 now specifically prevents a Judge from deciding rates at a CCMC, presumably as you require hindsight to properly assess a reasonable rate. This will probably be the primary reason for departing on assessment; although I’m not sure whether claiming low rates in the Budget and high rates at the end will get you over the Murray test (see below)? Similarly, is it tactically astute (or litigation suicide) to start with the highest rates and come down in the Bill, which means your Bill should always be under Budget and the paying party faces an even greater uphill struggle to secure any kind of reduction (Jones – see below).
The proportionality test may also itself be a good ‘general’ reason. It is not an issue for this article, but it is arguable that the bulk of the test laid out at CPR 1.1(2) and CPR 44.3(5) requires hindsight to properly apply as evidenced by the current guidance that suggests, on assessment, a Judge steps back and takes in the landscape. You cannot properly do this at the CMC stage. So, if you can argue any of those factors were not applied when the Budget was approved, and as arguably therefore no approved Budget can be definitely proportionate, and as the court cannot give its approval to disproportionate costs the whole system unravels; is that a good reason.
Turning to more specific examples, we start with Henry v News Group Newspapers Ltd  2 All ER 840 which confirmed that when answering the good reason question, a Judge is open to taking into account all of the circumstances of the case.
A guiding principle was set out in Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd  EWHC 1643 (TCC) which suggests that any case specific reasons had better have had a fundamental effect on the litigation. As Coulson J said:
“This was not a case which somehow lurched off track after its commencement, or where the issues ended up being very different to those which had originally been canvassed in the pleadings. Everything went pretty much as it might have been expected to go. In those circumstances, it seems to me that the general scope for alleging in this case that there is good reason now to depart from the costs management order is relatively limited.”
The fact that experts’ and counsel’s fee were higher than expected was not a good reason. The inference here is that absent tectonic changes to the anticipated litigation you will struggle. As we all recall, the court is not concerned with little things.
This gained support in the Budget revision case Warner v The Pennine Acute Hospital NHS Trust (Manchester County Court 23rd September 2016) when DJ Hovington said:
“Significant developments in the litigation’ seems to me to require that the case has gone off in a different direction in some manner or other, that it has taken a turn that was not reasonably foreseeable or envisaged at the time of the original exercise. The fact that the expert evidence tells us something that we had not totally anticipated is not in itself I think sufficient to pass that ‘significant development’ test.”
So Elvanite and Warner suggest that something unexpected that fundamentally effects the litigation and leads to unexpected costs may be a good reason. I’d suggest it needs to have been reasonably unexpected in order to satisfy Coulson J in Murray & Anor v Neil Dowlman Architecture Ltd  EWHC 872 (TCC) when he said that there was ‘considerable force’ in the argument that:
“If approved costs Budgets can be revised at a later date because of mistakes or self-induced inadequacies in the original, the whole purpose and effect of the new costs management regime may be thwarted.”
In Simpson v MGN Ltd  EWHC 126, Warby J said:
“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.”
Without getting into a debate over approving incurred costs, I’d suggest Simpson requires you to be proactive and also prove that the approved Phase has been, or will be, inadequate. I’d also suggest that Warby J reaffirms the principle that any unexpected event needs to lead to significant further costs. Remember a Budget is range of costs, not a fixed amount. If you think one unexpected statement is going to guarantee you an increase in the witness phase, then take care. The court may well feel ample scope was already allowed on the basis one statement may not impact enough on the overall case (See also Churchill v Boot [22/04/16], below).
So, your original Budget must reasonably reflect the reasonably likely course of anticipated litigation. As long as it does this, then anything ‘reasonably unexpected’ (i.e. a significant development) that leads to costs significantly in excess of those Budgeted can, arguably, be a good reason.
The concept of reasonably unexpected finds further support at PD 7.9 where the usual rule that interim applications are treated as additional to the Budget only applies if the need for the application was reasonably omitted (i.e. less likely than not to occur).
Do we have any examples of something that is reasonably unexpected?
I would start with a significant development in the litigation. This is aimed at, I think, a fundamental shift in the case as per Elvanite. You’re claiming for A and unexpected evidence suggests you must also investigate B and C; or your client dies and the bottom falls out of the future loss claim; or they lose capacity and trigger Part 21. Such an event would probably impact across several Phases.
At the coal face, this could also catch more routine factors such as an unexpected change in directions; the addition or removal of trial days; a second CMC; substantial additional witness or expert evidence; the court of its own volition deciding that a hitherto unneeded PTRH is now needed.
In National Museums and Galleries On Merseyside (Trustees of) v AEW Architects and Designers Ltd  EWHC 3025 (TCC) (11 October 2013), good reasons for a proposed increase included the addition of a party, substantial amendments and the increased complexity of the case. However, in Churchill v Boot (22/04/16) Mr Justice Picken did not feel that a doubling in claim size was a significant development; the actual work required had not fundamentally changed. Also, Collins could be suggesting that these good reasons may be one-way only if a Phase is started but not completed.
Unexpected work is the epitome of case specific but as stated above; be prepared to argue that it was reasonably unexpected and led to, or will lead to, significant costs.
Be wary of failing to properly anticipate work. The role of the contingency sections are, according to Warby J, Yeo v Times Newspapers Ltd  EWHC 209 (QB) to include work that: ‘…is foreseen as more likely than not to be required’. Now it may seem that if it is more likely than not, then it would be in the body of Budget itself. However, following the general principle of the balance of probabilities, if something has a 51% chance or more of occurring, you need to be Budgeting for it especially as an omission due to a failure on your part to anticipate something is not a good reason (Murray).
This would suggest that to cover yourself you must specifically exclude something with explanation (and justification that there is less than a 50% chance of it occurring) if you later want to add it in. That would be absurd as the list of excluded work would be enormous. So, what to do? Well, include everything you believe is more likely than not to occur and make sure the time allotted to this work is reasonable. I cannot see that you have any other choice and if the court removes it, at least it was not as a result of your error or omission.
What about costs orders?
Adverse costs orders; specific issue costs orders; failed counterclaim costs will all skew a Budget that is prepared on the assumption costs will follow the event. Adverse costs orders will more likely than not be caught by PD 7.9. However, if the court awards at Trial 50% of the costs then that must be a good reason. Similarly, if a Defendant Budgets for a full defence and counterclaim and loses the latter, the Budget must be too high and this would surely be a good reason to depart.
This is the ‘get out of jail free’ card for proportionality so is likely to be the same for Budgets. Clearly a Budget must be prepared with the overriding objective in mind, and according to that parties must cooperate. If your opponent takes an unreasonably obstructive approach to the litigation, advances unreasonable arguments and/or generally forces one party or another to incur costs they might have reasonably assumed were not needed (and thus outside the Budget) then that, surely would be a good reason. Warby J (again) certainly thought so in Barkhuysen v Hamilton  EWHC 3371 (QB) as he said:
“[The claimant] has sought an order to reflect various ways in which the defendant’s conduct of the action has increased the claimant’s costs beyond the Budgeted amount, by generating work which (reasonably) had not been anticipated or Budgeted for.
I have accepted her argument so far as the following points are concerned: (1) a 2-hour PTR hearing, when the Budget assumed a telephone hearing; (2) causing the 5-day trial estimate to overrun, such that closing submissions had to be put in writing, and additional work had to be done dealing with post-hearing evidence submitted by the defendant; (3) the preparation and lodging of a fifth witness statement of Mr Dolan, the claimant’s solicitor. I have also formed the view that the recoverable costs should not be limited to the Budgeted figures in two further ways: (4) the trial was held in Exeter not Truro; (5) the adjourned hearing. These points may not result from unreasonable conduct on the part of the defendant, but they were reasonably not Budgeted for.”
So to summarise some platforms on which to construct good reason arguments; indemnity principle, hourly rates; proportionality test; changes in the law; significant and reasonably unexpected developments that lead to significant unexpected costs; costs orders and conduct.
Merrix has confirmed unequivocally that the good reason test applies both ways; but is the test equal? I suspect not.
A Budget is at best a rough approximation of how any litigation is anticipated to progress so it should, in theory, be easier to argue that work was reasonably and necessarily done above the Budget than to argue that where a case was concluded under Budget, further reductions should be applied.
Certainly, there was a terse warning from DJ Baldwin in Jones v Harding, quoted favourably in Merrix, who states:
“…A high burden would remain upon the paying party to show a good reason to award less than the lower figure [underspend]. The raising of such an argument would only exceptionally, in my view, be a proportionate or appropriate use of scarce court resources”
Note the double hurdle there – it must be a good reason but you can only raise it in exceptional circumstances. In other words, dispute an under Budget costs claim at the risk of facing judicial wrath. I cannot help but feel a good reason had better be an exceptional one.
Note also Collins v Devonport Royal Dockyard Limited [AGS/16029/54] (February 17) where Master Gordon-Saker said:
“However that a phase was not completed at the point of settlement, would not it seems to me necessarily amount to a good reason.”
So, the ADR Phase allows £10k for an RTM; you settle this by way of Part 36 and the ADR costs are £9k. The fact there was no RTM may not be a good reason as you’re still under Budget. Interesting.
Somewhat outside of the scope of this article is the question; when is the best time to depart from your Budget; during the case or at the end? Which test is the harsher; the good reason test or the significant development test?
It will inevitably depend on your reasoning but in a climate where the courts are keen to control costs I cannot help but feel that an application during the case will be judged less harshly than an argument at the end.
Viewed through the prism of MacInnes v Gross  EWHC 127 (QB) and Coulson J’s comments (that):
“One of the main benefits to be gained from the increase work for parties (and the court) in undertaking the detailed costs management exercise at the outset of the case is that fact that, at its conclusion, there will be a large amount of certainty as what the likely costs recovery will be…”
…if you keep your Budget up to date then your opponent’s prospects of departing from it diminish accordingly.
If you get it wrong this may be a double edged sword; Henry v News Group Newspapers Ltd  2 All ER 840  stated that:
“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.”
This guidance strikes me as encouraging applications as soon as possible (and rumoured recent judicial training appears to be suggesting that the Judges are being urged to deal with updating applications during the course of a claim with more sympathy following Merrix).
It will also be interesting to see if a failed application to increase a Budget during the course of a case can be overturned at the end when you seek to depart when the Court has the benefit of a full view of the landscape. It certainly seems from Warner v The Pennine Acute Hospital NHS Trust that this is an option:
“For those reasons the application to amend the Budget [seeking a QC] is refused. That does not of course preclude the claimant from engaging such representation as the claimant considers fit. What it does mean of course is that in the event that the claimant succeeds and the matter proceeds to detailed assessment the onus will be upon the claimant to demonstrate that if that involved exceeding the Budget that I set last year that is reasonable and proportionate in all the circumstances.”
What should you do?
Contrary to the rules, that eschew detailed supporting assumptions, you need to know EXACTLY what is in your Budget. You need to know precisely what steps you have Budgeted for. You also need to keep a clear record of any CCMC to record any steps that are removed by the Judge. In fact, you must encourage the Judge to set out the assumptions he/she makes when approving any Budget for later reference, without which any application to amend or argument to depart is going to struggle.
If you’re a Claimant, you need to make sure your Budget is watertight and reasonably reflects the true cost of the litigation you are bringing. You need to give thought to your contingencies, as these were once regarded with judicial disdain, but may well become a battle ground as parties’ wrestle with what can be reasonably anticipated that is not more likely than not to occur. You need to do all of this for 3% of the Budget.
If you are intending to update your Budget you must act quickly and you should avoid doing the ‘reasonably unexpected’ work until the Budget is in place. If you do, then you may struggle at the hearing on the basis of the technical argument that the court cannot approve incurred costs. If the work must be done before any application can be heard, the good reason argument at the end is probably a safer option.
Finally, a tip. It may be worth digging out that old guide to horse trading. Whilst it is beyond the scope of this article to look at the methodology of updating a Budget; the parties are encouraged to cooperate and one way to avoid a lot of the risk if you anticipate a phase amendment, is to look at those Phases which remain comfortably intact and try to do a deal.
As long as the global Budget amount remains the same, dropping one phase to let you increase another, is merely the sharpening of a Budget and may save a lot of time and money.