What is a ‘good reason’ to depart from an approved costs budget?
In their previous blog post, Anil Virji and Robert Patterson discussed the recent case of Merrix v Heart of England NHS Trust and the implications it would have for budgets and detailed assessment.
As previously stated, Mrs Justice Carr confirmed that her decision in Merrix would not end the debate and a judgment from a higher court would be required. That decision has now arrived in the form of Harrison v University Hospitals Coventry & Warwickshire NHS Trust  EWCA Civ 792.
It was possibly no surprise that the Master of the Rolls, Sir Terence Etherton, upheld the first instance decision of Master Whalan in Harrison. In doing so, he confirmed that the decision of Carr J was correct, for the reasons she had given.
In short, the Court of Appeal confirmed that the wording of CPR 3.18 was clear and mandatory and there should be no departure from budgeted costs unless there was “good reason for doing so”.
The Court of Appeal confirmed that incurred costs did not form part of the agreed or approved costs and therefore were not within the ambit of CPR 3.18 and would be subject to detailed assessment in the usual way.
Jigsaw falling into place
The decision finally gives clarity on how Jackson LJ’s vision of budgeting will work in practice.
The starting point is that, in cases where a Costs Management Order (CMO) has been made and costs cannot be agreed, detailed assessment hearings still have a significant part to play. In particular, where there is a proposed
departure from the budget – be it upwards or downwards – the court on detailed assessment is entitled to sanction such a departure if there is a good reason to do so.
In relation to incurred costs, given they will rarely form part of any CMO, CPR 3.18 does not apply to them. They are therefore still subject to both the test of reasonableness and then (when aggregated with the budgeted costs) to the test of proportionality.
What the judgment fails to define is what constitutes a ‘good reason’ to depart from the budget. Whilst it makes it clear that such a decision is within the discretion of the Costs Judge, it also makes it clear that they should not adopt a lax or over-indulgent approach to find good reason.
No doubt paying parties will seek to argue that hourly rates claimed above the guidelines are a good reason to depart from a budget. However, given the wording of paragraph 7.10 of PD 3E, it remains to be seen how much sway this argument will have.
Reasons which might resonate more strongly with Costs Judges could be where the bill has clearly been manipulated to make costs ‘fit the phase’; where the costs claimed clearly depart from the assumptions within the approved budget; or the party has claimed the full amount of the phase, but has not completed the work.
Within paragraph 10 of the judgment the Court asks the question, “[why] a claim which was always limited to £50,000 and in due course assessed as sufficiently meritorious to justify payment of £20,000 was not capable of settlement at a much, much earlier date?” The implication of this is that the defendant’s conduct had been brought into question. Given conduct (CPR 44.3(5)(d)) is a factor to be taken into account at both the costs management stage and the detailed assessment hearing, whether the request is to depart upwards or downwards, conduct must play a significant factor in deciding what constitutes a good reason.
One thing is for sure - until we get some judicial guidance, this will be a significant area of litigation for the future.
Anil Virji - Head of Costs at Civil and Commercial Costs Lawyers
Robert Patterson - Technical Advisor & Senior Costs Draftsman at Civil and Commercial Costs Lawyers
If you would like to speak to Anil, Robert or the rest of our experienced team about this or any other Costs issue, give us a call on 020 7842 5950 or send us your enquiry online.