GOT A GOOD REASON OR NOT? Do not overlook the Indemnity Principle

Solicitors are required to advise clients about the costs in a case on a continuing basis. In a budgeted case, not only is there is a practical requirement to certify the budget, a solicitor must be satisfied that the client is aware of the costs estimate and has agreed to be responsible for the costs up until the conclusion of the case up to the amount of the budget. This is to ensure that any budget or bill presented does not breach the indemnity principle. The budget and the bill will contain a certificate to this effect. This is particularly important when considering whether a paying party may be able to demonstrate good reason for the court to depart from a budget.

Where a cost management order has been made the court can depart from the budget if it is satisfied that good reasons exist to do so under the provisions of CPR 3. 18. The Court of Appeal case of Harrison –v- University Hospitals Coventry and Warwickshire NHS Trust [2017] EWCA Civ 792 held that the existence of the “good reason” provisions gives a valuable and important safeguard in order to prevent a real risk of injustice. Unfortunately, Davis LJ was reluctant to proffer any further, necessarily generalised guidance or examples. However, the one example he did endorse was the application of the indemnity principle.

When the budget is agreed the Costs Judge will set a figure for each phase. That figure will fall within the range of reasonable and proportionate costs for that phase. There will be no requirement for a breakdown of how the judge has arrived at the figure but once set the party in question can spend up to that amount however they want. The apportionment between profit costs and disbursements, including counsel fees in the budget may differ from the apportionment set out in the bill for each phase. The incurred costs will in any event be subject to a line by line assessment.

Consequently, following the decision by Davis LJ in Harrison the court will not be expected to carry out a micro assessment of the work claimed for each phase and reliance will be placed upon the certificate of compliance with the indemnity principle. It is a very high hurdle to overcome if a Costs Judge wants to depart from the budget upon assessment and there needs to be clear evidence of obvious overspending. Where there has been an underspend there needs to be evidence of an intention to spend up to the budgeted amount even if the work which was anticipated for that particular phase has not been completed.

The difficulty for practitioners however is although there was general guidance issued by the Court of Appeal in Harrison there have been subsequent decisions in the lower courts which demonstrate alternative approaches to the issue.

On the appeal before HHJ Dight in the case of Barts Health NHS Trust –v- Salmon [2019] (Unreported) his conclusions were that if the party has not spent the totality of the budgeted figure for a phase, that amounts to a good reason and the door is therefore open for the paying party to make further submissions on an appropriate figure for the phase.

District Judge Lamb when considering issues arising in the case of Chapman –v- Norfolk and Norwich University Hospitals NHS Foundation Trust [2020] (04.03.2020) disagreed. He found no good reason to depart from the budget. A simple failure to spend the entirety of the budgeted sum was not sufficient. He considered that there would need to be something amounting to a specific and substantial point arising in the case, as opposed to merely a general point, for it to amount to a good reason to depart from the budget. As such, breach of the Indemnity Principle would qualify.

Master Brown in Sophie Utting –v- City College Norwich [2020] (22.05.2020) had to consider the issue of whether an underspend on the budgeted sums amounted to good reason to depart from the budget pursuant to CPR 3. 18. He confirmed that when sitting as the Assessor with HHJ Dight he did agree with his findings but not the route he took. He agreed with the observations of District Judge Lumb in Chapman and did not consider that there was anything unjust if a receiving party were to receive a sum by way of costs which is less than the budgeted sum. He expressed the view that this could be contrasted with the situation where a phase is not substantially completed, where it would be unjust for a receiving party to receive the full amount of a budgeted sum in circumstances where only a modest amount of the expected work had been done.

It is also important to note that Master Brown decided that he would take a broad-brush approach as he was not satisfied that the relevant costs were unreasonably incurred having regard to all the circumstances including in particular the agreed/approved phases of the cost budget. This underpins therefore the extent of discretion that rests with the Costs Judge carrying out detailed assessment. The Court of Appeal made it clear that this could safely be left to the individual appraisal and evaluation of Costs Judges by references to the circumstances of each individual case.

Whilst the decisions are non-binding they are nevertheless well thought out and help to illustrate the need for solicitors to ensure that during the continuation of the case that every effort is made to ensure that the retainer and any adjustment is fully and properly documented and that budgets are regularly reviewed.

This article first appeared in the New Law Journal on 9 October 2020.  Written by David Cooper, Costs Lawyer and Chartered Legal Executive, Council Member of the Association of Costs Lawyers.

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16 Oct 2020

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