This month we look at how a party may (or may not) depart from an approved or agreed budget
Significant developments …
Once a costs management order (CMO) has been made the court will thereafter control the parties’ budgets in respect of recoverable costs (CPR 3.15). The court will, by the CMO, approve the total figure for budgeted costs of each phase of proceedings (CPR PD 3E para 7.3). Incurred costs are ‘off the menu’ (although the Court may record its comments on incurred costs which may be taken into account later).
The Rules provide that each party shall revise its budget in respect of future costs upwards or downwards, if warranted by significant developments (PD 7E para 7.6), although a downward revision is likely to be a rare thing indeed.
In Sharp v Blank & Others  (a group litigation against former directors of TSB and Lloyds) the Defendants raised the seven ‘significant developments’ which, they said, required budget revisions – the Judge’s findings follow each point:
- Extended trial (from 59 to 107 days) – was a significant development, a trial on this scale was “a vast enterprise”;
- Production of 984 additional documents – reviewing nearly 1,000 documents was a major task such that the budget should be increased;
- Service of an additional expert report without permission – was a significant development as it was a change from the agreed basis for provision of expert evidence;
- Permission to serve a supplemental report – flowed from the additional report and was a significant development;
- A third-party disclosure application – the likelihood of such application meant this was not a significant development;
- Additional questions to experts – did not require “more than merely a modest increase in the anticipated cost of the work” and was not a significant development;
- Responding to a new approach by an expert –was a modest adjustment which could not be characterised as significant.
In Al-Najar & Others v The Cumberland Hotel (London) Ltd  the Judge allowed an upward revision where the Defendants disclosed far more documents than expected (3,250 cf. 1,000 to 1,500) noting that the bar for what constitutes a significant development should not be set too high: “What is required is a standard of reasonableness. It is no answer … that disclosure on the scale that has occurred could have been foreseen or anticipated. That would be to impose an altogether unrealistic burden and encourage the sort of bloated, defensive budgets which are to be deprecated”.
The Judge derived five broad principles as to whether a development is significant:
A. It is a question of fact turning on the scale and complexity of what has occurred;
B. If it should reasonably have been anticipated it will probably not be significant or, for that matter, a development;
C. There is no requirement that it must have occurred other than in the normal course of the litigation;
D. As a matter of policy, the bar for what constitutes a significant development should not be set too high;
E. If there has been a significant development, then the question is whether the figures in the revised budget are reasonable and proportionate in the light of the development.
In Seekings v Moores  the Judge refused a proposed budget increase on the basis that it is inconsistent with the overriding objective to allow parties to amend budgets because they have overlooked something or erred in estimations, or where the case develops in a way that should have been foreseen.
… and good reasons
The Rules provide that in any case where a CMO has been made, when assessing costs on the standard basis, the court will not depart from approved or agreed budgets unless satisfied that there is good reason (CPR Part 3.18) (emphasis added)
How does a budget affect detailed assessment? In Merrix v Heart of England NHS Foundation Trust  where the costs claimed on assessment are, on a phase by phase basis, within the budgeted figure for the same phase, then the court, in applying CPR 3.18 cannot depart from that agreed figure either upwards or downwards without good reason. In other words, absent good reason, the approved or agreed figure for estimated costs is to be allowed.
Likewise, in Harrison v University Hospitals Coventry & Warwickshire NHS Trust  the Costs Judge would not depart, either up or down, from the budget for anticipated costs unless satisfied that there was good reason to do so.
Does a reduction in hourly rates for the incurred costs amount to a ‘good reason’ to depart from budgeted costs? In RNB v London Borough of Newham  the Judge found that it did: “reductions to the hourly rate claimed for the incurred costs … [should] be reflected in the budgeted costs… [otherwise] the Claimant will appear to recover an hourly rate … for the budgeted stage, at a level that significantly exceeds the figure I consider to be reasonable for the pre-budget stage”.
However, the opposite view was held in Bains v Royal Wolverhampton NHS Trust  and subsequently in Nash v MOD . In Nash the Judge found that a reduction in hourly rates of the incurred costs was not a good reason to depart from the budget in respect of future costs. One of the reasons underlying the decision was that, to reduce the hourly rates for budgeted costs to the same levels as those allowed for the incurred costs, would involve second-guessing the Judge who had approved the budgeted costs, thereby imputing a risk of ‘double jeopardy’ into the detailed assessment.
In Jallow v MOD  it was held that neither the reduction of the hourly rates for incurred costs, nor the fact that the matter settled for a significantly lower sum than claimed (and on which the budgets were based), were good reasons to depart from the budget. The Judge said that, to amount to a good reason, something specific needs to have happened. A change in hourly rates does not amount to something specific. If it could be said to do so, it would set a precedent for parties to argue good reason every time rates are reduced (which is in many cases).
It is for the Costs Judge to decide what amounts to “good reason” (both Merrix and Harrison refer to there being no fetter upon the assessing judge’s discretion). Therefore “good reason” is to be determined on a case-by-case basis. Some guidance may be drawn from the following:
• Something specific is required – see Jallow above;
• The indemnity principle – where a receiving party has incurred less than the amount in an approved budget, there is “good reason” for restricting the allowable costs accordingly;
• An award of indemnity costs – as this will not require any assessment of proportionality, this may be a good reason;
• Non-completion of a phase, underspend in a phase – say, where three witnesses are budgeted for but only two statements are served, this may be a good reason;
• Overspend in some phases and underspend in others – there may be good reason to depart from a budget in one phase (for example Sony v SSH Communications  where experts were given more to do because more documents then expected were produced by the other side);
• Early settlement – where a party has not utilised a specific part of their budget – this may be good reason to depart from a budget in one or more phase;
• Where assumptions underlying the budget are incorrect;
• In ‘tactical surprise’ budgets – it may be a good reason to award costs where those costs have been deliberately left out of a budget so as not to tip-off the other side (for example, surveillance in a PI claim – Purser v Higgs )
• Proportionality – if the Judge reduces the total costs to a proportionate level, and that total falls below the amount of the budgeted costs, the Judge must be satisfied that this is a good reason;
• Developments at trial – late, significant developments may lead to unbudgeted costs when it is too late to amend the budget – this may amount to a good reason;
• Very large cases – in very large cases the Court may be more indulgent with regards to the vagaries of estimating cost;, but
• Failure to revise the budget –could be a reason not to depart from a budget.