In this article, we report on the case of Nash v Ministry of Defence  EWHC B4 (Costs) on costs at detailed assessment. Previously, in edition 197 (here) of BC Disease News, we reported on the decision in RNB v London Borough of Newham  EWHC B15 (Costs), which also ruled on ‘good reason’ to depart from a costs management order (CMO). The appeal decision of RNB had been expected, but the case since settled and has not been heard.
In summary, this line of case law questions ‘... whether a costs judge, who reduces the hourly rates for incurred costs, should then do the same to budgeted costs’?[i] In recent case law, there has been uncertainty over the extent to which costs judges may fetter the orders of judges at costs and case management. Are incurred costs to be treated in the same way as costs to be incurred?
In RNB, Deputy Master Campbell ruled that, ‘reducing the hourly rates for incurred costs meant there was a “good reason” to reduce the budgeted costs too.’
However, in Bains v Royal Wolverhampton NHS Trust (unreported), which we later discussed in edition 201 (here), District Judge Lumb ‘expressly disagreed’ with the judgement of Master Campbell.
The most recent case of Nash was heard by Master Nagalingam in the Senior Courts Costs Office a fortnight ago, at detailed assessment. A costs management order had been made, reflecting the parties’ position of agreement, with respect to budgets. The claimant had spent less than the CMO had allowed for in certain phases and spent more in others. However, it was acknowledged by the claimant that an agreed budget could only be departed downwards, absent of good reason.
Since April of 2017, the latest iteration of CPR 3.18 has provided judges at detailed assessment with the following powers:
Defendant counsel argued that, where Master Nagalingam had earlier reduced the hourly rates for incurred costs, there was ‘good reason to apply the same reduced rates to the ‘budgeted’, i.e. future costs’. Thus, it was submitted that the newly assessed hourly rate could be retrospectively applied to reduce the future costs, which were ‘merely recorded’ by the case managing judge unscrutinised.
The result of this, if the defendant was successful, was that the claimant would be restricted to a recalculated total of budgeted costs, where the claimant had spent more than the agreed budget, and receive the lower figure, at a recalculated rate, where they had spent less than the agreed budget.
Counsel for the defendant also submitted that the parties agreed that the hourly rates, applied to the budgeted costs, were at the discretion of the costs judge at detailed assessment. Whereas, counsel for the claimant argued that its client, in agreeing aspects of future costs, did not seek to exclude hourly rates from that agreement.
Under the iteration of CPR 3.15, which was in force when the CMO was made, judges at case management were required to ‘record the extent to which the budgets are agreed between the parties’.
This was consistent with Practice Direction 3E, paragraph 7.4:
‘If the budgets or part of the budgets are agreed between all parties, the court will record the extent of such agreement’.
Correspondence with the CMC, prior to the conference before the case management judge, specified:
‘… the parties have been able to agree budgets’.
The simplicity of this direction, it was observed, signified a basic agreement, namely that there had been an agreement ‘in full’.
The judge found in favour of the claimant, in respect of the terms of agreement, but this did not prevent the costs judge from considering ‘good reason’ to depart from the budgeted costs, at detailed assessment, pursuant to discretionary powers conferred by CPR 3.18(b).
Firstly, when tackling the existence of ‘good reason’, the judge sought to clarify that‘… when the parties agreed budgets, they were agreeing to fix a budget for future costs whilst accepting that incurred costs could be the subject of detailed assessment’. In addition, ‘… a costs management order may only arise in circumstances where the approved budgeted (future) costs are deemed to be proportionate by the case managing judge’.
Under PD 3E paragraph 7.4 (2016):
As part of the costs management process the court may not approve costs incurred before the date of any budget. The court may, however, record its comments on those costs and will take those costs into account when considering the reasonableness and proportionality of all subsequent costs (2016).
As such, Master Nagalingam explained, at paragraphs 56 and 57:
‘The effect of the practice direction ... is to provide the case managing judge with a discretion to record comments on the costs management order relating to incurred costs, but provides a mandatory requirement for the case managing judge to take into account the incurred costs before making a costs management order of what amounts are reasonable and proportionate in terms of the subsequent costs.
The case managing judge is aware that the incurred costs are subject to detailed assessment and therefore approves a budget for subsequent costs in the full knowledge that the incurred costs may be reduced on detailed assessment. However, notwithstanding that jeopardy to the eventual receiving party, the amount allowed for subsequent costs follows a mandatory requirement for the case managing judge to take into account incurred costs – a practice which often leads to the budget for subsequent costs being reduced’.
The judge perceived that ‘good reason’ to depart requires a high threshold to be met, else it creates a double jeopardy situation, which can only be escaped by staging a detailed assessment of incurred costs at the budgeting stage – a ‘wholly unsatisfactory’ prospect which would contravene both the overriding objective and the purpose of costs budgeting.
Pursuant to the former Practice Direction 3E, paragraph 7.10 provided that:
‘The making of a costs management order under rule 3.15 concerns the totals allowed for each phase of the budget. It is not the role of the court in the costs management hearing to fix or approve the hourly rates claimed in the budget. The underlying detail in the budget for each phase used by the party to calculate the totals claimed is provided for reference purposes only to assist the court in fixing a budget’.
The Costs Master was not in favour of assigning an ‘elevated status’ to hourly rates over and above all other constituent elements and details in the budget:
‘Rates hold no special status in the composition of a budget’.
The judge went on to emphasise that the purpose of costs budgeting is to increase certainty and reduce the costs of dealing with future assessment of costs. Thus, certainty is eroded if hourly rates are given a form of ‘special status’ and they should remain an ‘underlying detail’.
Master Nagalingam ruled, at paragraphs 70 to 79:
‘A costs management order is only made in circumstances where the court finds that such an order is required to ensure the litigation can be conducted justly and at proportionate expense in accordance with the overriding objective. A costs management order has been made in this case, and no revisions were ever sought in respect of the same. No significant developments took place which would have warranted a revision to the budgets. The costs management order was made to allow a budget for future costs in each phase, taking into account various underlying details and the constituent elements of the claimed budget. The costs management order reflects the allowance of budgeted phase totals, with rates being nothing more than an underlying detail.
Thus 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.
I find that hourly rates hold no special status in the making of a costs management order.
A proportionate total for each phase of budgeted (future) costs is set based on taking into account a variety of factors, including the incurred costs. A party therefore proceeds with certainty as to what is a proportionate future sum to spend per phase. That certainty is entirely eroded if hourly rates are then given a form of special status which requires rates to be assessed in the estimated phases of a bill of costs.
CPR 3.15(3) provides that:
If a costs management order has been made, the court will thereafter control the parties' budgets.
That control is on the amount of money the parties spend, not how they spend it.
By way of example, if a party budgets for 10 hours at £500/hr plus £2,000 on Counsel for future costs in the disclosure phase, the total of £7,000 is exactly the same as if the same party had budgeted for 100 hours at £50/hr plus £2,000 on Counsel. If £7,000 is approved for the budgeted (future) costs total then the court will not interfere with how that money is spent without good reason.
A budget approved in these terms does not, for example, compel that party to spend £2,000 on Counsel for future costs relating to disclosure or use the fee earners anticipated when the budget was drawn. Similarly, it does not limit that party to spend £2,000 on Counsel for future costs relating to disclosure.
The budget is set following the making of a costs management order, and Solicitors must thereafter cut their cloth accordingly.
Taking the example above, where a rate of £500/hr is reduced to £100/hr in the incurred costs, it cannot be logical for a budget claiming 10 hours at £500/hr plus £2,000 for Counsel (total £7,000) to be reduced to £3,000 on assessment but where a budget claiming 100 hours at £50/hour plus £2,000 for Counsel (total £7,000) would suffer no reduction at all (where say £7,000 is claimed in that phase in the bill of costs)’.
This decision follows Bains, but has the same High Court status as RNB. A Court of Appeal decision is needed to clarify the position on whether the changing of hourly rates for incurred costs supplied ‘good reason’ to depart from the budgeted costs.
Despite this finding, the judge highlighted that the defendant could still argue ‘that the overall sum of assessed incurred costs plus budgeted costs is disproportionate such that the overall sum should be reduced’, pursuant to CPR 44.3(2)(a):
The full text judgment can be found here.
[i] Neil Rose ‘Debate over hourly rates in budgeted cases to rage on after RNB appeal is dropped’ (14 March 2018 Litigation Futures)