The importance of costs budgets confirmed by the Court of Appeal

22 Jun 2017

Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] EWCA Civ 792

On 21 June 2017 the Court of Appeal handed down a judgment clarifying the relationship between costs budgeting and detailed assessment. This should clear up a great deal of confusion and prevent conflicting approaches.

The principal issue concerned the practical application of the requirement to demonstrate ‘good reason’ when departing from an approved budget at detailed assessment. The argument that a departure downwards for future costs within a budget did not require good reason was rejected, with an approved budget not to be treated as an available fund.

However, costs which were incurred before the date of the budget, did not require a consideration of 'good reason' at detailed assessment. Furthermore, on detailed assessment a potential global proportionality reduction would apply to all the costs.

The facts
The claimant made a claim for clinical negligence and issued her claim on 9 April 2013. Damages were stated to be limited to £50,000.  At a costs management conference, budgets were approved in the sum of £197,000 of which £108,000 related to costs incurred and a Costs Management Order was made. The case settled shortly before trial at the amount of £20,000 and costs on the standard basis. The bill of costs was claimed at £467,000. 

Detailed assessment
At detailed assessment, the costs judge held that there should be 'good reason' shown in order to depart from both the estimated future costs and also the incurred costs. The old test on proportionality was applied as the case was determined to have commenced before 1 April 2013. Costs were assessed at £420,168 (including a success fee and ATE premium). The defendant was ordered to pay the costs of the assessment.

The Court of Appeal decision
The defendant appealed against the decision that was made at the detailed assessment which was then leapfrogged directly to the Court of Appeal due to the wider importance of the issues and conflicting authorities. 

The three main issues were decided as follows:

  1. Where a costs management order,  approving a costs budget is made, a costs judge on a subsequent detailed assessment is precluded from going below or above the budgeted amount, unless there is good reason. 
  2. In relation to costs that were incurred before the budget there is not a like requirement of good reason. On its facts the incurred costs were never agreed and could not therefore trigger the good reason test. Furthermore, it was not the function of the court to approve incurred costs and therefore the good reason test does not apply in principle. In deciding that the detailed assessment of the incurred costs remains unfettered, guidance was also provided that the global proportionality test would apply to all costs both incurred and future.
  3. Although proceedings were not issued until 9 April 2013, they were sent to the court before 1 April 2013. To trigger the latest proportionality test, the commencement date was the date of issue and therefore the more robust test applied.

What this means for you
The decision reinforces the importance of the budgeting process and makes it clear that unreasonable budgets must be robustly challenged at the earliest opportunity within the costs management process, focusing on the future budgeting costs.

Although it is helpful to obtain clarity that incurred costs will not be subject to a good reason test, excessive incurred costs should also be highlighted to emphasise that they are not agreed, as well as attempting to obtain helpful comments that can be taken into account at the detailed assessment.

It remains to be seen whether the decision will further protract and delay the litigation process. By reinforcing its importance, paying parties will rightly continue to take a pro-active and robust stance at case management conferences when faced with unreasonable budgets. Taking a broad-brush approach to budgets on the assumption that the court has an unfettered discretion at detailed assessment is no longer an option. 

Detailed assessments going forward
Although one of the purposes of costs management is to reduce detailed assessments, it’s clear that they will continue to play an important role in the fight against unreasonable and disproportionate costs. In the short-term, a number of detailed assessments have been stayed pending the decision which can now be progressed. A commonly adopted position that incurred costs are protected from detailed assessment is now untenable. 

A significant outcome for paying parties was the express confirmation that the global proportionality approach applies to all costs, regardless of whether good reason is established for future costs. This will act as a powerful weapon especially against low damages settlements.

The next battleground will be what might amount to good reason. No guidance was provided and costs judges were warned ‘not to adopt a lax or over-indulgent approach to the need to find "good reason."

Authored by Adam Burrell and Marie Ingoe (BLM costs)

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Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to customers of BLM. Specialist legal advice should always be sought in any particular case.

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