The ruling in Merrix has made it all the more important to get budgets right, writes Francis Kendall
What, exactly, is the point of costs budgeting? This is a question that goes to the heart of one of the most contentious issues in the world of costs right now: to what extent does budgeting constrain the costs judge on detailed assessment?
Even the Civil Procedure Rule Committee has found it difficult to resolve. Late last year, a subcommittee flagged up ‘this important issue’ but did not seek to resolve it. Firstly, it was not within the committee’s remit – it was set up to update the CPR following last year’s Court of Appeal ruling in Sarpd Oil International Ltd v Addax Energy SA & Anor  EWCA Civ 120. ‘Secondly, there is a strong argument that an issue of such fundamental importance should be the subject of public consultation. Thirdly, we could not reach a unanimous decision.’
The main vehicle for this debate has been the case of Merrix v Heart of England NHS Foundation Trust, which burst back into the headlines in late February. Overturning District Judge Lumb’s much-discussed ruling last autumn, Mrs Justice Carr decided that the costs judge ‘will not depart from the receiving party’s last approved or agreed budget unless satisfied that there is good
reason to do so’.
Carr J said the starting point had to be CPR 3.18: ‘The words are clear. The court will not – the words are mandatory – depart from the budget, absent good reason. On a detailed assessment on a standard basis, the costs judge is bound by the agreed or approved costs budget, unless there is good reason to depart from it.
‘No distinction is made between the situation where it is claimed that budgeted figures are or are not to be exceeded. It is not possible to square the words of CPR 3.18 with the suggestion that the assessing costs judge may nevertheless depart from the budget without good reason and carry out a line-by-line assessment, merely using the budget as a guide or factor to be taken into account in the subsequent detailed assessment exercise.
‘The obvious intention of CPR 3.18 was to reduce the scope of and need for detailed assessment. The respondent’s approach would defeat that object. This straightforward conclusion reflects the fact that costs budgeting involves the determination of reasonableness and proportionality.’
The judge said this interpretation was in line with the obiter comments in Sarpd, Mr Justice Coulson’s thinking in the very recent case of MacInnes v Gross  EWHC 127 (QB), and the views of Senior Costs Judge Master Gordon-Saker in Collins v Devonport Royal Dockyard Limited last month, and Master Whalan in Harrison v Coventry NHS Trust last year.
In what was a thorough judgment, Carr J went through the possible objections to her conclusion and found that they did not bear scrutiny. For example, nothing in paragraph 7.3 of Practice Direction 3E, where it is stated that when reviewing budgets the court will not carry out a detailed assessment ‘in advance’, impinged on this approach.
‘The practice direction is there setting out the nature of the assessment exercise at the costs budgeting stage. The court will not carry out a detailed assessment at that stage; rather it will consider whether the budgeted costs fall within the range of reasonable and proportionate costs. It is not stating that, whatever costs budget is approved or agreed, there will be an unfettered detailed assessment in due course.
‘The fact that hourly rates are not fixed at the costs budgeting stage is no obstacle to such a conclusion. 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.’
The judge emphasised that costs budgeting does not replace detailed assessment: ‘But the appellant is not contending that there should be no detailed assessment. On the contrary, the question is how that assessment should be conducted. Further and on any analysis, there remains room for detailed assessment outside the budget – for example in relation to pre-incurred costs not the subject of the costs budget; costs of interim applications which were reasonably not included in a budget; where costs are being assessed on an indemnity basis; where the costs judge finds there to be a good reason for departing from the costs budget.
‘Equally the addition of the receiving party’s last approved or agreed budget as being a factor to which the court will also have regard (in CPR 44.4 (3)(h)) does not demote the budget to the status of a guide alone.’ DJ Lumb had expressed concern that this approach would lead to longer and more expensive cost management hearings instead.
Carr J said: ‘With proper and realistic co-operation and engagement between the parties, that should not be the case. The costs budgeting exercise already takes up significant amounts of court time and the parties’ time in preparation. There is already a very substantial investment.
‘Further, the costs budgeting exercise is not intended to be a detailed assessment, and the parties and the court should not approach it as such. It is a broad, phase-based assessment which will, albeit performed on a principled and carefully timetabled basis, inevitably be rough and ready in places.
‘The clear intention behind and effect of the cost budgeting regime is that it is nevertheless to result in a budget from which the court will not depart on detailed assessment on a standard basis, unless there is good reason to do so.’
The ‘shortcomings and inevitable inaccuracies’ in the cost budgeting process also did not help the respondent, she continued.
‘Where costs claimed are less than the budgeted figure, then the inaccuracies will be irrelevant, since the receiving party will only recover the lower figure (because there would be good reason to depart by reason of the indemnity principle). Equally, where costs claimed were higher, the receiving party would have to show good reason for departure from the budget.’
The appeal court awaits
As the judge recognised, this first High Court ruling is not the end of the story. Carr J described the issue as one which ‘would appear to be ripe for early consideration by the Court of Appeal’. In May, the Court of Appeal is to hear an appeal against Master Whalan’s ruling in Harrison, and she suggested any appeal in Merrix could be listed alongside.
She continued: ‘Whatever the future holds, however, it is important that a growing body of judgments on the same issue does not emerge in piecemeal manner. It is essential that there is procedural co-ordination. ‘The same solicitors and/or counsel are involved in many of these matters in what is a relatively small world. I am told that many stays of detailed assessments are already in place, pending the outcome of this appeal. The parties may accept my judgment as binding for their purposes. ‘Alternatively, it may be that further stays need to be imposed, to prevent unnecessary court and judicial time and expense being devoted to a debate which the Court of Appeal is very shortly going to consider.’ There are reports of cases being adjourned on the application of defendants to await the appeal judges’ decision, but Merrix was followed in an assessment I attended recently. So in practice, and pending any higher authority, parties should be prepared for that. The ruling will also weigh heavily on the minds of any defendants who were thinking of agreeing claimants’ budgets ahead of case and costs management conferences (CCMCs).
The underlying intention
To return to where I started, Carr J said her conclusion reflected what was ‘the clear intention of costs management’ as set out in CPR 3.18(b) – to reduce the cost of the detailed assessment.
Lord Justice Jackson’s view was that the burden of costs management, if done properly, would save substantially more costs than it generates, she said, even if he reached no final conclusions and made no final recommendations in his 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). Such a solution might appear to be an obvious one, even if not one upon which Jackson LJ fixed conclusively in the Final Report.’
There is certainly logic to her argument and a senior judiciary seemingly keen to reduce the amount of time and resource devoted to costs issues is likely to be attracted to her thinking – but they will have to avoid turning CCMCs into quasi detailed assessments in advance. This all needs to be set against Jackson LJ’s current review of fixed recoverable costs. Speaking about it in early March, he observed that the written and oral submissions received to date delivered a ‘strong message’ that ‘despite all the criticisms in the past, costs management is now working much better’. He reported: ‘It applies the new proportionality rule to the circumstances of each individual case. Many people are arguing that this does away with the need for fixed costs in the multi-track. The counterargument is that for lower-value cases, a fixed-costs regime is simpler and cheaper. Defendants and liability insurers are inclined to accept that costs management controls future costs. But they maintain that fixed costs would be better.’ Lawyers may see budgeting as the lesser of two evils, but there is force in the argument that the judge needs to give his own reforms more time to bed down – it was always going to take three or four years for some of these thorny issues to come before the Court of Appeal. And a decision that costs management trumps detailed assessment when appropriate will bolster the argument that fixed fees are not needed. But an alternative decision may make them inevitable. For the time being, though, the message must be to focus on costs at the budgeting stage. As John Foy QC, who acted for the claimant in Merrix, puts it: ‘The case emphasises how important it is to get the costs budget right, and it is likely to reward the time spent on it.’
Francis Kendall is vice-chair of the Association of Costs Lawyers and a partner at Masters Legal Costs Services
This article was first published in PI Focus in March 2017.