Court of Appeal confirms good reason required to depart (up or down) from costs budget

The Court of Appeal has recently delivered an important judgment on the relationship between the costs budgeting regime and the costs that are ultimately awarded to a successful party in litigation: Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] EWCA Civ 792.

A number of costs assessments had been put on hold pending the outcome of this appeal, which was referred directly to the Court of Appeal from the Senior Courts Costs Office on a "leapfrog" basis.

The Court of Appeal considered the meaning of CPR 3.18 which provides that, in assessing costs on the standard basis, the court will not depart from the receiving party's last approved or agreed budget for each phase of the proceedings unless satisfied that there is good reason to do so. The main issue in this appeal was whether good reason was required before a court could award a lower amount than budgeted. It concluded that good reason had to be shown for any departure, upwards or downwards, from an approved costs budget. However, the court held that this requirement did not extend to the court's assessment of costs incurred before the date of the budget, as these did not form part of the approved budget.

Two key impacts for litigants are: (i) it should be easier than it would otherwise have been for a successful party to obtain full recovery of legal costs falling within an approved or agreed budget; but (ii) the same does not apply to recovery of costs incurred pre-budget, where there is no requirement for good reason to depart from the figure put forward at the budget stage.

Francesca Ruddy, an associate in our dispute resolution team, considers the decision further below.

Background

The underlying claim was a clinical negligence case against an NHS trust. At a costs management hearing in August 2014, the parties' costs budgets were approved. The judge recorded no comment on the figure relating to the claimant's incurred costs, which amounted to some £108,000 of the total figure of £197,000. Shortly before trial, the claim was settled, with the defendant agreeing to pay the claimant's legal costs on the standard basis.

On detailed assessment of the claimant's costs, the defendant sought to argue that the approved budget operated as a cap, so that good reason to depart from the budget would be required only if the judge were to award an amount in excess of the budget. No good reason was needed for the judge to undertake its own detailed assessment of the claimant's costs and award a lower amount than the approved budget.

Master Whalan held that CPR 3.18 required good reason to be shown before he could depart either upwards or downwards from an approved costs budget. He considered that, "in practical terms", this requirement also extended to costs incurred before the date of the costs budget. Although these did not strictly fall within the budget, they featured in the overall budget put forward and thus had a "certain status".

The defendant appealed directly to the Court of Appeal.

Decision

The Court of Appeal dismissed the appeal as to whether the court could award below-budget costs without good reason, but allowed the appeal regarding the status of incurred costs. Lord Justice Davis delivered the leading judgment, with which Black LJ and Sir Terence Etherton MR agreed.

Finding that a court would need good reason to depart upwards or downwards from an agreed or approved costs budget, the Court of Appeal affirmed the recent High Court decision of Mrs Justice Carr in Merrix v Heart of England NHS Trust [2017] EWHC 346 (QB) (see our blog post here).

The Court of Appeal rejected the argument that the costs budget should operate as a cap, with good reason only required to exceed the budgeted amount. Davis LJ noted that, if this was the intention of the scheme, it could have been made explicit in the wording of the CPRs. The court underlined that its judgment gave effect to the "natural and ordinary meaning" of the words in CPR 3.18(b) and was wholly consistent with the purposes behind the costs management regime – which included reducing the need for, and scope of, detailed assessments.

However, the court rejected the defendant's suggestion that costs management orders approving a budget would replace the court's detailed assessment of costs at the end of case. Detailed assessments would continue to take place, with the only change being to the manner in which these were conducted. The existence of the "good reason" exception to following the costs budget was highlighted as a "valuable and important safeguard" against injustice.

The court also underlined the importance for both parties of having certainty at an early stage in litigation as to the likely costs burden, criticising the defendant's approach for being concerned solely with the paying party and paying "scant, if any, regard" to the interests of the party whose costs were to be paid.

The second, related issue concerned whether good reason would be required to depart from the amount put forward at the costs management hearing in respect of costs incurred before the date of the budget. Here, the Court of Appeal found in favour of the defendant. Incurred costs did not fall to be approved by the court within the budget and so the "good reason" requirement for departing from an approved budget did not apply. Davis LJ said the court's power to comment on incurred costs allowed it to provide a "steer" for the costs judge conducting  the detailed assessment, but was not sufficient to give those costs a "special status" that would require good reason to depart from the figure put forward at the costs management hearing.