'Good Reason’ to Depart from the Budget: Jallow v Ministry of Defence [2018] EWHC B7 (Costs)'

In this article, we report on another High Court authority, which has ruled on whether there was ‘good reason’ to depart from an agreed budget. As recently as edition 225 (here), we reported on the judgment of Nash v Ministry of Defence [2018] EWHC B4 (Costs), which dealt with the same issue. Jallow v Ministry of Defence (Jallow) [2018] EWHC B7 (Costs) is the latest case to examine the impact of a costs management order (CMO) and the powers of costs judges at detailed assessment.

The claimant had suffered ‘Non-Cold Freezing Injuries’ to his hands and feet during a tactical exercise with the British Army. Liability was agreed between the parties, but quantum was disputed. Subsequently, a CCMC was listed on 12 October 2015 and heard by Master Leslie.

The claimant’s budget was reduced to a single figure of £120,000 from around £148,000, of which £78,500 were budgeted costs and the remainder were incurred. It was the view of the defendant that the budget had been set by Master Leslie on the basis that the claim had been valued at £300,000. Claimant counsel, however, argued that quantum had been calculated twice in the schedule of loss: £185,000 and £312,000.

After numerous Part 36 Offers, the claimant accepted an offer for £90,000, four weeks before the hearing on quantum.

At detailed assessment, the claimant served its bill of costs, seeking in the region of £188,000. Master Rowley, who handed down his reserved judgment, reduced the hourly rates in respect of incurred costs. The question was whether the reduction, in principle, provided ‘good reason’ to depart from the claimant’s approved budget. The defendant also argued that the reduction in damages, by 70%, constituted ‘good reason’ to depart. Had the ‘true value’ of the claim been known at the time of the CMO, the defendant submitted that the approved figures would have been much lower. Counsel for the claimant attributed the reduction in valuation to the risks of litigation.

Master Rowley dealt, firstly, with the ‘valuation issue’.

The claimant’s position was that the defendant should have appealed the order of Master Leslie at the CCMC, as opposed to arguing that the CMO was inappropriate at detailed assessment.

The judge, sitting in the Senior Courts Costs Office, applied the ‘previous regime regarding proportionality’, in the Court of Appeal case of Lownds v Home Office [2002] EWCA Civ 365, to the new regime. He further stated that what was relevant to his decision was:

‘… 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’.

As such, Master Rowley reasoned that the claimant had not exaggerated his claim and rejected the defendant’s argument on the valuation tranche. There was no ‘good reason’ to depart from the budget on this basis.

Master Rowley went on to consider the defendant’s second submission on the ‘hourly rates issue’. He acknowledged that judges at costs and case management are ‘exhorted’ by Costs Practice Direction 3E paragraph 7 to approve total figures of budgeted costs:

‘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’.

In doing so, the judge reasoned that hourly rates are not fixed or approved. They are ‘for reference purposes only’.

Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] EWCA Civ 792 established the concept of ‘good reason’, but did not define what might amount to it. Davis LJ did, however, suggest that it is a sensitive matter to be judged on a case by case basis, taking into account the individual facts. The judge also cautioned against costs judges adopting a lax or overindulgent approach to the need to find ‘good reason’. We examined this decision in edition 182 (here), much of which was echoed by Mrs Justice Carr in Merrix v Heart of England Foundation NHS Trust [2017] 1 Costs LR 91.

Claimant counsel argued that the ‘good reason’ test is essentially the same as the ‘significant development’ test. Master Rowley did not favour this interpretation, however, reasoning that the ‘good reason’ test has a wider scope. Instead, he opined:

‘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’.

Tension, in this area of costs law, exists on one side, with the certainty of recovery afforded by the CMO, and on the other side, with the need for reasonable and proportionate costs, afforded by detailed assessment proceedings.

In the case of RNB v London Borough of Newham [2017] EWHC B15 (Costs), reported in edition 197 (here), Master Campbell made reductions to the hourly rates claimed for incurred costs and considered that this constituted a ‘good reason’ to depart from the budget. Master Rowley shared Master Campbell’s concern over a lack of court scrutiny on 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’.

Master Rowley rejected the defendant’s remaining argument. There was no 'good reason' to depart from the budget, even though the hourly rates had been reduced, in respect of incurred costs:

‘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’.

On reflection of the somewhat contradictory judgement, the judge professed that ‘two odd numbers added together will still make an even number’.

On the contextual landscape of cost budgeting and detailed assessments, the judge concluded:

'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’.

Full text judgment can be found here.