If a CMO is appointed, could the budgeted costs be reduced during a detailed assessment?
Where a CMO has been made, are the budgeted costs potentially at risk of a reduction for proportionality reasons on detailed assessment if there is not a good reason to depart from the budget?
What is the dispute?
Before we come on to looking at the decision in Hope Capital Limited & Anor v Alexander Reece Thomson [2023] EWHC 3157 (KB) let’s start with a reminder as to the rules applying where there is a costs management order (CMO) in place, and what the Court of Appeal has said previously.
CPR 3.18 applies when assessing costs on the standard basis where a costs management order has been made, and it says;
In any case where a costs management order has been made, when assessing costs on the standard basis, the court will –
(a) have regard to the receiving party’s last approved or agreed budgeted costs for each phase of the proceedings;
(b) not depart from such approved or agreed budgeted costs unless satisfied that there is good reason to do so; and
(c) take into account any comments made pursuant to rule 3.17(3) and recorded on the face of the order.
Travelling back to 2017, the Court of Appeal looked at how costs budgeting works in Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] EWCA Civ 792, and it is fair to say that the judgment can be interpreted in different ways as to how proportionality should be applied on assessment.
If you are acting for the paying party, then you are likely to seek to rely upon paragraph 52 of the judgment to argue that proportionality can be considered again for the budgeted costs on detailed assessment, even where there is no good reason to depart from the budget, where Davis LJ says:
“I add that where, as here, 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.”
That sounds like there can be two bites of the cherry in relation to a proportionality reduction, being at both the costs budgeting stage and then on detailed assessment. In Reynolds v One Stop Stores Limited (21.09.18) HHJ Auerbach, on appeal at the County Court at Norwich and at Cambridge [2018] Lexis Citation 93 that is what is thought to be the case, such that you can apply proportionality again to all costs on assessment.
However, this is not all the Court of Appeal says in Harrison. There are sensible comments at paragraphs 31 to 33, and when the judgment is read as a whole then a different interpretation should properly be drawn from paragraph 52 of the judgment. In favour of the receiving party, the following reasons are noted as to why it would not be appropriate to apply proportionality again on assessment to costs which have already been subject to costs management (assuming there is no good reason to depart):
- It would overlook that the budgeted costs were already set with regard to reasonableness and proportionality,
- The aim of costs budgeting is to reduce the number of detailed assessments,
- Certainty for clients,
- Collins v Devonport Royal Dockyard Limited (8 February 2017: AGS/1602954) is referenced, where Master Gordon-Saker asked “what would be the point of costs budgeting (and the considerable resources it has required) if the resulting figures amount to nothing more than a factor, guidance or cap at detailed assessment?“,
- The provisions for budget certification, and
- The provisions for budget amendments.
Davis LJ then says, at paragraph 33:
“… it is also in my view particularly important overall to bear in mind that a judge who is being asked to approve a budget at a costs management hearing must take into account, in assessing each budgeted phase, considerations both of reasonableness and of proportionality. Proportionality may be, to give but one example, of particular potential relevance where the costs prospectively claimed are very large and the amount at stake in the claim relatively small.”
The authors of Cook on Costs 2024 (at 14.8) and of the Costs & Funding following the Civil Justice Reforms: Questions & Answers, 8th Edition (at question 16 regarding proportionality) both opine that the court should not assess the budgeted costs for proportionality on a second occasion (assuming there are no factors constituting a good reason to depart or comments per CPR 3.17(3)).
The argument is that it is necessary to qualify paragraph 52 of Harrison by reference to the earlier paragraphs, and the costs were subject to a determination of proportionality at the time the budget was set and the wording of CPR 3.18 precludes departure from this sum, unless one of the provisions at (b) or (c) applies. Accordingly, on assessment if the total of the assessed costs is not proportionate, then the court must reduce the costs to a level that is proportionate, but that cannot be less than the budgeted costs.
Now, we come to our case in question; Hope Capital Limited & Anor v Alexander Reece Thomson.
What is the background?
The court considered a series of offers, where the Claimants had failed to better an offer from the Defendants. The Claimants accepted they had to pay costs from expiry of the Defendant’s first offer, but there were arguments as to the basis of payment (be it standard or indemnity basis – where standard basis was held), whether there should be a proportionate deduction from the recoverable costs incurred by the Defendant up to the expiry of the first offer (none was held), and issues relating to the costs of two specific applications.
The Claimants suggested that the assessment of the Defendant’s costs should be without reference to its costs budget, however this was rejected by Mr Justice Constable. At paragraph 32 he stated:
“… In circumstances where the Court has determined that an award of indemnity costs is not justified, the Court should not go on (in light of the very same reasons unsuccessfully advanced in the context of indemnity costs) to remove the important requirement for proportionality by the backdoor by ordering that costs should be assessed free from the constraints of the costs budget, even if the Court had power to make such an order, which I doubt. In this context, the only specific power to depart from an approved or agreed budgeted costs resides in CPR 3.18 and this power is to be exercised ‘when assessing costs’ i.e. by the costs judge. It is for the costs judge to determine whether there is a good reason to depart from the budgeted costs. It may be that some of the matters raised as ‘conduct’ issues in the context of an indemnity costs application are matters which, in due course, amount to good reasons for such a departure but that is not a matter for determination by me at this stage.”
Summary
I agree with the decision in Hope Capital Limited that that costs should not be ordered to be assessed without regard to the budget constraints, and that to do so would be to circumvent proportionality by the backdoor. I also agree with the view that the court should not generally assess the costs for proportionality reasons again on assessment, if we are not getting into arguments as to any good reason to depart. If it was known when the budget was set that a claim had a modest value but where the costs were increased due to specific issues (say, a claim with multiple Defendants/liability was strongly contested/it settled at a JSM after the exchange of evidence/there were vulnerability issues etc.) then the fact it is a low value claim and where there has been no significant change in the valuation of the claim should not be a reason to depart from the budget on assessment and to apply proportionality considerations again – and the costs should not be reduced below the budgeted allowances. However, this is a nuanced area when it comes to arguments as to interpretation of the judgment in Harrison, and considerations as to ‘good reason to depart’.
If you have any questions about the issues here, if you think that there is potentially a good reason to depart from the budget, or any questions about these issues then please get in touch.
Caroline Engledow, Costs Lawyer
22.02.2024