This is the first in a series of practice notes regarding the law around costs management. These will be treated as live documents and updated when developments arise.
There have been a few cases recently dealing with the issue of what constitutes good reason to depart. This practice note aims to set out the current rules and case law regarding this issue.
Civil Procedure Rules
"3.18 In any case where a costs management order has been made, when assessing costs on the standard basis, the court will –
- have regard to the receiving party’s last approved or agreed budgeted costs for each phase of the proceedings;
- not depart from such approved or agreed budgeted costs unless satisfied that there is good reason to do so; and
- take into account any comments made pursuant to rule 3.15(4) or paragraph 7.4 of Practice Direction 3E and recorded on the face of the order.”
The intentions of the rules are obvious, where a CMO has been made the Court will not depart from the amount budgeted in each phase unless it is satisfied there is good reason to do so.
Court’s Powers on Assessment
Merrix v Heart of England NHS Foundation Trust [2017] EWHC 346 (QB), [2017] 1 Costs LR 91 (Appeal in the High Court)
The reason for the appeal was to ascertain "To what extent, if at all, does the costs budgeting regime under CPR Part 3 fetter the powers and discretion of the costs judge at a detailed assessment of costs under CPR Part 47?". The Court found:
“where a costs management order has been made, when assessing costs on the standard basis, 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. This applies as much where the receiving party claims a sum equal to or less than the sums budgeted as where the receiving party seeks to recover more than the sums budgeted.”
CPR 3 does not fetter the costs Judge as it provides them with the ability to increase or decrease what is allowed in a phase if good reason can be established. This approach provides certainty to the parties and will reduce the need for detailed assessments.
Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] EWCA Civ 792
The decision in Merrix was tested in Harrison and the Court of Appeal agreed with the same. It was confirmed that the test of good reason was a fetter on the Court having an unrestricted discretion and that the Court should not adopt a lax or overindulgent approach to the need to find good reason.
The decision also confirmed that CPR 3.18 only applied to budgeted costs and incurred costs would be subject to a detailed assessment.
What Constitutes Good Reason
CPR 3.18 and the case law support that a Receiving Party will recover the budgeted costs claimed, limited to what was allowed within the budget, subject to a finding of good reason to depart. Each phase will be considered separately. Furthermore, good reason should be a high standard and not easily come to.
Indemnity Principle
Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] EWCA Civ 792
The one bit of guidance as to what constitutes good reason from the judgement was if the budgeted costs incurred are below the figure budgeted for that phase, the costs allowed will be reduced in line with the indemnity principle.
Hourly Rates
RNB v London Borough of Newham [2017] EWHC B15 (Costs) (High Court)
The Court held that the reduction of hourly rates on assessment would be considered good reason to depart from the budget. As hourly rates are not assessed at a costs management hearing it would offend the guidance in Harrison if they are left untouched at a detailed assessment as that is the only point the Paying Party would have opportunity to challenge them.
Nash v Ministry of Defence [2018] EWHC B4 (Costs) (High Court)
The Court held that hourly rates are one of many constituent elements when making a decision on what would be deemed reasonable and proportionate costs. The hourly rates therefore hold no special status and are no more than an underlying detail. The approach to reduce the budgeted costs based on hourly rates risked double jeopardy. Therefore, a reduction in hourly rates is not considered a good reason to depart.
Jallow v Ministry of Defence [2018] EWHC B7 (Costs) (High Court)
The Judge agreed with the decision in Nash as well as confirming that if the budgeted costs incurred are within the budgeted figure, they will be considered reasonable.
The consensus of the Courts as it stands in practice is that hourly rates are not considered good reason to depart.
Incomplete Phases
Barts Health NHS Trust v Hilrie Rose Salmon [2019] (Appeal in the High Court)
This decision confirmed the indemnity principle, as per Harrison, is good reason to depart. Further it was held that if the work in the phase is substantially incomplete in relation to the work anticipated for that phase, it would constitute good reason to depart.
Controversially however it was decided that if good reason was established, no further good reason needs to be established in that phase to make any further adjustment and the phase will then be open to assessment.
In practical terms therefore if a Receiving Party came in under budget or if the phase was not substantially complete it would open the entire phase up to detailed assessment.
Chapman v Norfolk and Norwich University Hospitals NHS Foundation Trust [2020] (County Court)
The Judge disagreed with the decision in Barts as the approach would increase the number of detailed assessments, undermining the principles of the costs budgeting process and would provide a perverse incentive for Receiving Parties to overspend and exceed the budgeted amount allowed in each phase.
Additionally, Harrison was considered to set a high hurdle when considering what would constitute good reason. It was held if a party does not incur all the budgeted costs allowed for that phase it would not open that phase up for assessment, a reduction will be applied in line with the indemnity principle. If the work in the phase is not complete this does not necessarily constitute good reason, even if the costs incurred are higher than would be anticipated for that work. There would have to be a deliberate overspend or costs building exercise to use up the allowance in the budget for there to be a consideration of good reason.
Practical Advice
There is little guidance on what constitutes good reason, this is mainly because as suggested in Harrison it is case specific and will be at the discretion of the costs Judge and the parties when negotiating. The test for good reason will likely be wider than the test for a significant development, however the hurdle is still likely to be high.
The indemnity principle for now is the only set in stone good reason to depart. I would imagine though on broad terms that the following would be considered good reason:
- Costs on the indemnity basis
- Misconduct
- Partial success
- Proportionality / Exaggeration of value of claim
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