The judgment in Harrison v University Hospitals Coventry & Warwickshire NHS Trust  EWCA Civ 792 (21 June 2017) is now with us. The implications are likely to be wide and they raise as many questions as answers. Sean Linley, Costs Consultant, reports.
The Court of Appeal considered two main areas pertaining to the interplay between an approved or agreed Costs Budget and the effect that this has at Detailed Assessment. An additional issue concerning when proceedings are commenced for the purpose of determining which proportionality test applies was also considered.
In short, the Court found as follows:
- Budgeted (estimated) costs will be allowed as drawn (so long as the budgeted costs do not exceed the approved costs budget) unless a “good reason” can be given to depart from the same (either upwards or downwards);
- Incurred costs are to be assessed in the usual way;
- For the purposes of CPR 44.3(7), when considering which proportionality test applies proceedings are commenced when the Court issues the claim form and not when a Claimant took steps to have the claim form issued.
- Where there is an approved Costs Budget the Court may still apply the proportionality test;
PIC takes a look at the impact of this important case in more detail below.
Issue 1. Where a Costs Management Order is made what is the impact of this upon the assessment of budgeted (estimated) costs at Detailed Assessment?
This issue arose from the wording within CPR 3.18 (unamended) and how it would practically be implemented at assessment. The relevant section states as follows;
“In any case where a costs management order has been made, when assessing costs on the standard basis, the court will:
- Have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings;
- Not depart from such approved or agreed budget unless satisfied there is good reason to do so”.
It was the Claimant’s case that as their Costs Budget had been approved then in the absence of ‘good reason’ the Costs Judge should allow those future costs that are within budget as drawn. This was the view taken by Master Whalan at the initial assessment stating that “so far as budgeted costs were incurred CPR 3.18 precluded him from subjecting them to a ‘conventional’ detailed assessment at the behest of the appellant [defendant] unless good reason for doing so was shown”
Crucially, Master Whalan indicated in addition that: “He was receptive to arguments on individual items to the effect that good reason did exist”.
Lord Justice Davis in the Appeal Judgment noted the case of Merrix whereupon Carr J found that:
“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.”
The appeal in respect of the first issue was dismissed with the Court holding that the view established in Merrix was correct. In other words, without a good reason the Court will not depart from an approved or agreed Costs Budget.
This is good news for receiving parties who will have a forceful argument to seek to narrow the issues prior to any assessment. It also underpins the importance of monitoring estimated costs and of costs management generally. Where budgeted costs are exceeded it is likely to lead to a struggle whereupon “good reason” must be argued retrospectively. If costs are monitored then it has two benefits;
- If there is going to be an over-spend pre-emptive action can be taken;
- If the spend is within budget it gives receiving parties the best possible chance of recovering the time spent.
There will likely still be challenges from paying parties as to reasons to depart from the Costs Budget. Unfortunately, the Court of Appeal declined to give any examples of good reasons leaving this to the “individual appraisal and evaluation of costs judges by reference to the circumstances of each individual case”. This will be another aspect which will likely become clearer as more costs managed cases proceed to assessment.
Issue 2: What is the effect of a Costs Management Order on the assessment of incurred costs?
In the original assessment, Master Whalan stated:
“Although incurred costs could not themselves have been approved as such at the case management conference nevertheless they would have featured in the overall budget put forward at the conference and thus had a ‘certain status’ ”.
It followed that a departure from the incurred costs required ‘good reason’ to be shown.
The Court of Appeal disagreed and stated:
“Costs incurred before the date of the budget were never agreed in this case. Nor were they ever ‘approved’ by the CMO. On the contrary the focus of a judge making a CMO is on estimating the costs reasonably and proportionately to be incurred in the future […] as part of the costs management process the court may not approve costs incurred before the date of the budget costs management conference”
“It follows in my view, that incurred costs are not as such within the ambit of CPR 3.18 (in its unamended form) at all. Accordingly, such incurred costs are to be the subject of detailed assessment in the usual way, without any added requirement of ‘good reason’ for departure from the approved budget”
Lord Justice Davis’ comments are clear: the application of CPR 3.18 will only relate to budgeted costs and for any assessment moving forwards the incurred costs are an open for challenge.
This is consistent with the amendments to the CPR that came into effect on 6 April 2017 with CPR 3.18 now explicitly defining ‘budgeted costs’.
Practically speaking this means when approaching any assessment of costs the receiving party must be careful to consider the risk of reductions to any incurred element of costs.
Issue 3: For the purposes of CPR 44.3(7) when are proceedings commenced in order to determine which proportionality test applies.
This was a case specific issue but may have some wider implications given the rush to issue cases prior to April 2013. The reason this point holds such importance is that for cases commenced before 1 April 2013 the old proportionality test applies to all of the work undertaken.
The Court of Appeal held:
“It is plain that a case is ‘commenced’ for the purposes of CPR 44.3(7) when the relevant proceedings are issued by the court.”
In Harrison, the claim form was issued by the Court on 9 April 2013 meaning that the new proportionality test will be applied to costs incurred post 1 April 2013.
The impact of this will turn on the case specific facts of the claim but it is notable that the claim had a limited value (up to £50,000.00) and settled for £20,000.00 (albeit shortly before Trial) with costs totalling over £467,000.00 submitted. Whilst this figure is inclusive of additional liabilities (and there are arguments proportionality wouldn’t apply to that aspect with final guidance hoped to be given in the appeal in BNM v MGN Limited in October) it would not be surprising to see some adjustment made by the Court despite the Costs Management Order having been made. The case will almost certainly hinge on case specific facts which fall outside the Court of Appeal judgment. This leads to another issue which was addressed by the Court of Appeal (see Other issues below).
Any practitioners and costs professionals must now ensure that they are fully aware of the date the claim form is issued by the Court as depending upon which proportionality test applies it will impact upon both the form of any Bill of Costs drawn and as to the assessment of costs likely to be recovered.
Other issues: Proportionality should still be applied at detailed assessment even where a Costs Management Order is made.
One of the notable comments from the Court of Appeal concerned the application of the test of proportionality where a Costs Management Order has already been made. This has been an issue of intense debate on the basis that proportionality and reasonableness has to be considered when setting an allowance for the Costs Budget.
The Court of Appeal at paragraph 52 stated:
“A costs judge on detailed assessment will be assessing incurred costs in the usual way and also will be considering budgeted costs (and not departing from such budgeted costs in the absence of “good reason”) the costs judge ordinarily will still, as I see it, ultimately have to look at matters in the round and consider whether the resulting aggregate figure is proportionate, having regard to CPR 44.3 (2)(a) and (5): a further potential safeguard, therefore, for the paying party.”
This is obviously a concern for receiving parties who could potentially face reductions at the CCMC, further reductions in an initial assessment followed by reductions again when the proportionality test is applied once more. It also firmly places a large amount of weight on hindsight increasing pressure on practitioners to plead cases correctly in the first instance.
Moreover, it raises the question as to the importance of Costs Budgeting. The clear implication is that a receiving party could successfully costs manage a case and despite the Court finding that there is no good reason to depart from such costs have a broad “in the round” reduction on the basis of proportionality.
It’s not clear what effect the Court of Appeal’s comments will have but the likelihood is that arguments will be advanced by paying parties as to good reasons to depart from an approved Costs Budget and additionally in respect of proportionality. Far from saving time and narrowing issues this is likely to cause fierce arguments.
Far from giving the complete certainty that is needed, the case of Harrison paints an unsettling picture of the state of costs proceedings at present. That a case which settled in 2015 remains in dispute and is to be referred back for a further costs assessment highlights the time and effort taken by all the parties. Will the guidance in Harrison ensure other matters proceed more smoothly?
The ramifications are as uncertain as they are clear. We know that the Court will not interfere with budgeted costs (where a CMO is made) absent “good reason” and that incurred costs will be assessed in the usual way. This good work could be undone by the uncertainty arising from the fact Costs Judges are expected to consider costs in the round even where there is an approved Costs Budget to ensure they are proportionate. Does this dilute Costs Budgeting? There’s certainly a persuasive argument to say it does.
For receiving parties an approved Costs Budget is not an automatic entitlement but it does add ammo to their arsenal. For paying parties the ability to challenge costs at multiple stages will be welcomed.
Whilst Harrison is exactly as expected, it is impossible to shake the feeling that when the dust settles there will be no true winner.
To contact him regarding this newsflash or any other costs matter,