Whilst a difference of opinion remains between costs judges as to whether or not a reduction in hourly rates in respect of incurred costs amounts to a good reason to depart from a costs budget, the current emerging case law tends to suggest a majority leaning towards the negative in the wider interests of reducing the time involved in detailed assessments.
This was the latest in a number of SCCO decisions looking at the issue of whether a reduction in hourly rates for incurred costs amounts to a ‘good reason’ to depart from the budgeted figures.
In RNB v London Borough of Newham (Aug 17), Deputy Master Campbell ruled that it did.
This decision was appealed, but settled.
The following month, in Bains v Royal Wolverhampton NHS Trust (Sep 17), District Judge Lumb, sitting as a regional costs judge, expressly disagreed with this position.
It didn’t end there.
In Nash v MoD (Feb 18), Master Nagalingham agreed with District Judge Lumb, finding that:
“…save for where hourly rates hold some special status in the setting of a budget and subsequent making of a costs management order, there is no good reason to depart from the budget for the budgeted (future) costs.”
This most recent case fell to Master Rowley to decide.
At that CCMC, Master Leslie had allowed a budget of £120,000 plus VAT and additional liabilities. That figure included the incurred costs.
The budget was set on the basis of the claim being worth in the region of £300,000.
The claimant ultimately accepted the defendant's Part 36 Offer of £90,000 on 23 December 2016, roughly four weeks before the assessment of damages hearing was due to take place.
The claimant commenced detailed assessment proceedings on 13 February 2017 and served a bill of costs seeking £188,085.02 inclusive of additional liabilities.
The hourly rates contained in the bill ranged from £140 per hour for grade D fee earners up to £330 per hour for grade A fee earners in the latter stages of the case.
At the detailed assessment hearing, Master Rowley reduced some of those hourly rates in respect of the incurred costs.
The defendant argued that the reduction of hourly rates in respect of incurred costs was a good reason to depart from the budgeted figures.
The defendant also pointed to the sums claimed in the particulars of claim of £300,000 compared with the settlement figure of £90,000 and argued that the reduction in the damages was also a good reason to depart from the budget, specifically because:
i. The figures as approved were only approved as they were deemed proportionate to the value given by the Claimant of £300,000;
ii. The Defendant did not accept this valuation at the time, and as the claim settled for £90,000 gross it was clear that the valuation was far too optimistic;
iii. If the true value of the Claim had been known at the time of Budgeting, the approved figures would be much lower;
iv. To allow the approved figures would result in the costs being disproportionate, therefore under CPR 1.1 and 44.3(2) must be reduced."
The valuation issue
14. … The essence of the point is whether it was reasonable for the claimant to believe that his case was worth the sum that he claimed. It is only if he could not reasonably have had that belief, because his claim was exaggerated in some way, that the budget might be considered to have been set on a false premise and as such should be departed from on assessment.
15. That is not the case here. The claimant was "employed" by the defendant for a period of 14 months before he left. That is a very limited period on which to base a substantial loss of earnings claim. The situation in respect of being in the Army is further complicated by the various points (in this case 4 years, 7 years and 12 years) at which the claimant might have left the Army. As I indicated in respect of other decisions that I gave in this case, the claimant's claim in quantum was inevitably going to be based on a certain amount of conjecture. It is in fact for that reason that both sides relied upon employment expert's evidence. It seems to me that this is just the sort of case where a wide variety of potential sums might be achieved at an assessment of damages hearing, depending upon how the evidence pans out. Consequently, it was likely to be settled somewhere in the middle given the risks involved to both sides of adverse findings by the judge. That is what happened in this case.
16. In my judgment, the claimant did not exaggerate his claim. He put forward alternative cases as to quantum which demonstrates that he was alive to the issues surrounding the potential level of damages to be recovered. Therefore, the ultimate settlement of this claim did not falsify in any way the premise of Master Leslie's setting of a budget in a case where the sums in issue were £300,000. Consequently, I reject the Defendant's argument that the valuation of the case is a good reason to depart from the budget.
The hourly rates issue
17. There have been several decisions by costs judges in relation to whether or not a reduction in the hourly rates allowed for the incurred parts of the bill ought to be carried over to the budgeted parts of the bill. Those judgments set out many of the rules governing costs management and the case law upon them in great detail. I do not propose to reiterate them here. There is, in my view, little that is controversial in how the budgeting judge is to go about setting the budget. He or she is exhorted by paragraph 7 of Practice Direction 3E to approve total figures of budgeted costs for each phase of the proceedings. That approval is not achieved by undertaking a detailed assessment of the costs in advance but by considering whether the budgets as claimed fall within a range of reasonable and proportionate costs. If they do not, he or she will revise the budgets until they do so.
18. The budgeting judge will not fix or approve the hourly rates claimed and the details set out in the pages behind the front page of the budget (which are used by the party to calculate the totals claimed) are provided for reference purposes only.
19. There is also nothing controversial in saying that the assessing court needs to find a good reason to depart from the budget, whether that is upwards because the receiving party seeks to claim costs above the budget, or downwards because the paying party wishes to challenge items claimed within the allowed budget.
20. The superior courts, such as the Court of Appeal in the leading case of Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017) EWCA Civ 792 have steered clear of seeking to define what a good reason may be. It is a fact sensitive matter to be dealt with on a case specific basis. The comments of various Court of Appeal and High Court judges suggest that the test is deliberately left rather wide so that the assessing judge's discretion is not fettered as to what can be considered to be a good reason.
21. Davis LJ in Harrison cautioned against costs judges adopting a lax or overindulgent approach to the need to find good reason. The need to do so was described by him as a "significant fetter on the court having an unrestricted discretion: it is deliberately designed to be so."
22. This last comment is echoed by Carr J in Merrix v Heart of England Foundation NHS Trust  1 Costs LR 91 at paragraph 83 where she states:
"Fundamentally, this conclusion reflects what is in my judgment the clear intention of costs management as set out in CPR 3.18(b), namely to reduce the cost of the detailed assessment process by the treatment of agreed or approved cost budgets as binding, absent good reason to proceed otherwise. If this approach be right, the scope and cost of detailed assessment of costs on a standard basis will indeed be reduced materially. Jackson LJ's view was that the burden of costs management, if done properly, would save substantially more costs than it generates, even if he reached no final conclusions and made no final recommendations in the Final Report as to how that would be achieved. It is achieved if there is a saving in the time and costs needed for detailed assessment, rather than duplication of time and expense in an unfettered landscape (even if the budget is seen as a strong guide)."
23. There are numerous other passages that could be quoted in terms of the aims of costs management. It is, on any account, a time intensive exercise being undertaken on the great majority of multitrack cases. If there is to be any saving in the costs incurred overall, then those costs must be saved at detailed assessments. The only way of doing so is to reduce the time involved in detailed assessments or indeed the need for them in the first place. Those aims will only be met if the good reason test comes with a high threshold to pass.
24. Davis LJ in Harrison at paragraph 44 considered that the ability of the assessing judge to depart from the budget, where there was a good reason to do so, went a considerable way to meeting the defendant counsel's prediction that detailed assessments would become a mere rubberstamping of CMO's. This is so, but it does not mean that good reasons will necessarily be easy to find.
25. Mr Hayman sought to argue that a good reason founds essentially the same test as a "significant development" in the litigation, which is required to persuade the court that a CMO should be amended. I do not accept that submission. In my view, the phrase "good reason" is wider than "significant development." Whilst it may well be that, for example where the trial went on for rather longer or rather less time than was anticipated, this would be a good reason to justify an increase or decrease from the budgeted figure. But it does not have to be an unexpected development after the last CMO for it to be a good reason, in my view.
26. There is, however, another test which has long been employed in detailed assessments which, in my view, does have some similarities to the good reason test. In detailed assessments, there are regularly challenges made to the retainer of the receiving party as to whether that party is liable to their solicitor for costs so as to raise an indemnity principle challenge. It has long been held (see for example Hazlett v Sefton Metropolitan Borough Council  1 Costs LR 89) that a party who instructs a solicitor is liable to pay the costs of that solicitor. If the paying party wishes to challenge that position it needs to demonstrate that a "genuine issue" exists. Consequently, the solicitor's certificate to the receiving party's bill of costs that the receiving party is obliged to pay the solicitor's costs is normally conclusive.
27. It seems to me that a similar test to the "genuine issue" test is intended by the "good reason to depart" terminology in CPR 3.18. In place of the solicitor's certificate is the approval of the budget by the court. In either situation, the judge at the detailed assessment is not going to entertain a challenge unless something is raised which is specific to the case before the court. There is nothing specific to this case regarding the hourly rates challenge. If they are reduced here, exactly the same point would apply in any other case. That, in itself in my view points to the conclusion that a reduction in the hourly rates ought not to be a good reason to depart from the budget.
28. The defendant's argument in relation to hourly rates starts from a quotation in the White Book in the notes to CPR 3.18 which also found favour with Carr J in the case of Merrix (paragraph 73):
"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."
29. In my view, the notes to the White Book do not take the defendant very far. The fact that the hourly rates allowed at the detailed assessment are different from those originally used in the budget does not, in my view, found a good reason. This case is a good example of why the make-up of the estimate on which the budgeted costs are subsequently agreed or approved is not relevant to the subsequent detailed assessment. In this case the solicitor who had conduct for the first two years (which was, more or less, up to the CMO) left the firm and the case had to be reallocated. The claimant and his solicitors took the view that a more experienced solicitor was required to deal with the difficulties in the quantum claim. Consequently, the work was done at a higher hourly rate than had been envisaged in the budget. It has always been my understanding that the approved phased total can be used by senior or junior fee earners at differing hourly rates as the party considers to be appropriate. If it were otherwise and, as in this case, the fee earner who had originally been acting was no longer able to do so, a slavish adherence to the rates set out in the calculations for the original budget would mean that an application to amend the underlying details to the budget would be required even though there may be no wish to amend the budget totals themselves. That seems to me to be an unlikely proposition and this illustration explains why I have said above that once the phase total has been approved the underlying figures are no longer relevant.
30. The real nub of the defendant's challenge can be found in the tension between the need to allow reasonable and proportionate costs on an item by item basis in detailed assessments and the need for certainty of recovery as expected by the use of CMOs. In RNB v London Borough of Newham  EWHC B15 (Costs) Master Campbell set out his concern about the absence of any court scrutiny of the hourly rates in the budgeted parts of the bill and the effect this would have on individual items. He put it this way at paragraph 22 of his judgment:
"the allowances in the costs budget were made by reference to phases without the court having commented upon the hourly rates, either in respect of the incurred or budgeted costs. At the assessment hearing, I made reductions to the hourly rates claimed for the incurred costs to a level which has meant that the overall recovery by the claimant the period of work before the CMO has been reduced by significant amounts. Were that not to be reflected in the budgeted costs, that would mean that the Claimant will appear to recover an hourly rate as set out in Precedent H for the budgeted stage at a level that significantly exceeds the figure I consider to be reasonable and proportionate for the pre-budget stage."
31. For the reasons I have given, I do not agree with Master Campbell in relation to the … reference to the hourly rates in the precedent H but otherwise I share his concern about the lack of court scrutiny. The budgeting judge has not approved or fixed the hourly rates and therefore the only person who could consider them is the judge on the detailed assessment. If it is the case that the receiving party can claim any hourly rate (as long as it does not offend the indemnity principle) in the budgeted costs without it being assessed by the court, that does not sit easily with the assessing judge's responsibility to allow only reasonable and proportionate costs on an item by item basis. This is all the more so where that judge has already found that the hourly rates claimed in the incurred costs parts of the bill were unreasonable. Assuming they are the same rates in the budgeted parts then then they are, by definition, unreasonable hourly rates. This is essentially the high watermark of the defendant's argument.
32. The assumption on the part of the defendant is that if each item is claimed at an unreasonable hourly rate in the budgeted part of the bill, then the totality of the items in each of those parts must equally be unreasonable. This would be so in a conventional detailed assessment. However, the budgeted part of the bill is not dealt with by a conventional detailed assessment. The court has to accept that the budgeted figures for taking the case to trial (as recorded in the CMO) are reasonable and proportionate. Therefore, if the sums subsequently claimed in the bill are within that budget they are, on the face of it, also reasonable and proportionate. Where, as here, the case got to within a short period before trial, and therefore it can be assumed that much, if not all, of the work had been done within the various phases and the costs were still within budget, the presumption is all the stronger in my view that the costs incurred are reasonable and proportionate.
33. As I have set out above, it is for the party and his or her solicitor to determine who exactly does the work that needs to be done. Where the costs overall are within the budget that has been set, there can be no legitimate criticism in using a senior or a junior solicitor, leading or junior counsel to carry out the work. This is true, even if the work is all carried out at ostensibly unreasonable hourly rates. If it comes within the budget that has been set, it will turn individually "unreasonable" items into a reasonable and proportionate sum overall. As I put it colloquially at the hearing, two odd numbers added together will still make an even number.
34. My concern, and I suspect Master Campbell's, is that the lack of scrutiny at a detailed assessment of the hourly rates claimed will encourage parties to incur costs up to the budget set for each phase on the basis that they are unlikely to have to withstand scrutiny at a detailed assessment. As such there will be an inflationary element which is only kept in check by conventional detailed assessments. But this concern is something which has to yield to the aims of costs management in making detailed assessments shorter. For a long time, the work of the costs judge has been described as the compounding of "much sensible approximation" to achieve justice. Ultimately the use of CMOs is simply a further example of that pragmatism.
35. Accordingly, I find for the claimant that there is no good reason to depart from the budget by virtue of the reduction to the hourly rates in this case.
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