Do approved or agreed costs budgets apply to the assessment of costs on the indemnity basis?
When asked this question recently my immediate answer was no. A costs budget includes the costs that it would be reasonable and proportionate for a party to incur in the litigation; therefore surely any costs management ordered by the court is made on the standard basis?
If so, it would only be fair to apply the limitation of an approved costs budget to the assessment of costs which is also being conducted on the standard basis, and the logical extrapolation would be that an approved costs budget would no longer apply where an order has been made for the costs to be assessed on the indemnity basis. I set about to confirm my assessment of this scenario and, whilst the overall conclusion appears to be accurate, the research has shown that the matter is not as cut and dry as one may think.
Assessment of Costs in the CPR
There seems to have been an oversight in relation to costs management and indemnity costs when the rules concerning costs budgeting were introduced to the CPR in 2013. Costs management orders were introduced to enable the Court to proactively control the costs of engaging in litigation. The Precedent H costs budgets are supposed to detail the costs which the parties intend to incur in litigation. These costs are either agreed between the parties or assessed and approved by the Court at a costs management hearing. The total sum allowed in the costs management order will act as a ceiling for the maximum sum of costs that the successful party may recover at assessment, save for exceptional circumstances. This appears to be the logical application of the relevant CPR, culminating in the assessment of costs in accordance with CPR 3.18 which states:
In any case where a costs management order has been made, when assessing costs on the standard basis, the court will –
(a) have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings; and
(b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so.
It is clear that CPR 3.18 explicitly refers to the assessment of costs on the standard basis, and the majority of parties are now fully aware of the role that an agreed or approved costs budget will play at a provisional or detailed assessment of costs. Conversely, CPR 3.18 does not provide for the assessment of costs on the indemnity basis. Indeed there does not appear to be a corresponding rule in the CPR that details how costs budgets or costs management orders should apply to the assessment of costs on the indemnity basis.
The majority of onlookers would automatically assume that the explicit reference to the standard basis in r 3.18, and the apparently intentional omission of any reference to the indemnity basis, means that r 3.18 only applies to situations where the court is assessing costs on the standard basis. It follows, therefore, that the court does not have to have regard to the last approved or agreed budget where an order has been made for indemnity costs.
The case law
This question has been considered by the High Court on a number of occasions over recent years, and it has appeared to reach a consensus if not an explicitly binding authority for us to follow.
The Honourable Mr Justice Coulson tackled the issue in the matter of Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd  4 Costs LR 612 At paragraph 28 of his judgment Mr Coulson emphasised that whilst r 3.18 is expressed to be relevant to the standard basis:
“…as a matter of logical analysis, it seems to me that the costs management order should also be the starting point of an assessment of costs on an indemnity basis, even if the 'good reasons' to depart from it are likely to be more numerous and extensive if the indemnity basis is applied.”
He suggested that the costs budgets are not prepared with a basis of assessment in mind, but instead intend to be a genuinely comprehensive total of the costs that a party will need to incur. Therefore it should remain a reasonable starting point for assessment regardless of the basis on which that assessment is conducted. He also indicated that after the costs management order, the parties conduct their litigation on the assumption that the approved or agreed budget represents the total costs liability which they may face should they lose and face a costs order. Their tactical decisions and risks are assessed on the basis of this potential exposure to costs.
The following year His Honour Justice Simon Brown went a step further and explicitly stated that costs budgeting would not come into play where indemnity costs are awarded. In Slick Seating Systems GL Events SA v Lea Mark Adams(1) Leamark Ltd(2) LA Structures(3) John Jones(4)  EWHC B8 (TCC) he argued at paragraph 11 of his Judgment:
“…even if the claimants had exceeded it, their budget would not have come into play as far as this is concerned because it would be upon the defendant to show that the costs they had incurred, whether within or above the budget were unreasonable”
There was no suggestion that the approved or agreed budget should be a starting point for assessment, and the emphasis was put back onto the paying party to prove that the costs – whether totalling less or more than the approved budget – were unreasonable.
Hi Honour Justice Brown’s position was mirrored by His Honour Judge Keyser QC in the obiter of his Judgment in the matter of Kellie and another v Wheatley & Lloyd Architects Ltd  EWHC 2886 (TCC) Judge Keyser QC had to consider the implications of costs management on a request for indemnity costs and, whilst not needing to apply it to the order made in this particular matter, he stated his interpretation of the law.
He respectfully, but explicitly, disagreed with the approach of Mr Justice Coulson and argued that where proportionality is not an issue that the court will consider when assessing costs on the indemnity basis, it would be wrong to import the approach of CPR 3.18 into an assessment on the indemnity basis in any way. Judge Keyser QC submitted that the costs budgets are prepared and assessed in line with the reasonable and proportionate costs that could be incurred in each matter. This is a clear application of the standard basis description of recoverable costs. Therefore it would be incorrect to take an approved budget which has been assessed in line with these principles and use it as a marker for assessing the same costs on an indemnity basis.
Furthermore Judge Keyser QC also suggested that the parties should be afforded the protection of assuming that an opponent’s approved costs budget represents the maximum total costs exposure that they would face in the event of a loss, but only if they continue to conduct the litigation in a reasonable and proper manner. Where parties knowingly act outside of the realms of what is deemed reasonable conduct, they should face the possibility of having to pay costs in excess of what were previously deemed reasonable and proportionate.
He summarised his disagreement that CPR 3.18 had any application, whether directly or by reference, to the indemnity basis assessment of costs at paragraph 17:
“First, it is both unnecessary and contrary to the rationale of that rule. Second, it tends to obscure the fact that the nature of the justification required of a receiving party is quite different under the two bases of assessment. Third, and consequently, it risks the assimilation of the indemnity basis of assessment to the standard basis, which is not justified by the costs management regime in the CPR”
The chronology of these judgments appears to suggest that the High Court judiciary have gradually crystallised their opinion on costs management and indemnity basis costs. The comments in both “Slick Seating Systems" and “Kellie and another” imply that CPR 3.18 has no application to the assessment of costs on the indemnity basis, and any approved or agreed costs budget should not even be a starting point for any indemnity assessment. The decisions appear to separate the two bases of assessment with costs management applying explicitly to standard basis orders alone.
Yet more recently His Honour Justice Brown has reasserted his position on costs budgets and indemnity costs from Slick Seating Systems, but also acknowledged that the approach suggested by Mr Justice Coulson in 2012 may also be applicable to certain assessments. At Paragraph 31 in his Judgment in the matter of Excelerate Technology Ltd -v- Cumberbatch  EWHC B1he ruled:
“Where, as here, the Claimant's costs will be assessed on an indemnity basis, the Claimant will not be so limited by the rules to the agreed costs budget but it may, in practical terms be a starting point or guide for the costs judge on any detailed assessment.”
In light of these High Court decisions, the prevailing position on the relevance of costs management orders and costs budgets on indemnity basis assessments of costs seems to be this: An approved or agreed costs budget will not be used as a maximum level of recoverable costs for a receiving party that has been awarded indemnity costs, but a Judge would not be wrong in deciding that the total allowed in that budget shall be taken into consideration when assessing what a reasonable amount of costs would be.
What would happen at assessment?
One would hope that, on attending a Detailed Assessment, the receiving party could refer to the case law cited above and have their costs assessed without being limited to the maximum allowed under each phase of the costs budget. In short, the costs which have been reasonably incurred would be recovered. In practice, however, the current uncertainty of the Court’s approach to an assessment on the indemnity basis where a costs management order has been made could give the receiving party quite the tactical headache and it might be worth considering an alternative strategy.
At the end of a trial where a party is seeking an order for indemnity basis costs, there may be a temptation to ask for the costs to be summarily assessed in line with the total of the approved or agreed costs budget. If the Judge is likely to take the costs budget into consideration as a starting point for an assessment, the receiving party may ask the Court to award the full budgeted amount on the basis that if this sum was deemed reasonable and proportionate at the budgeting stage, surely it has been reasonable for the receiving party to have incurred this level of costs where the opponent's conduct has justified an indemnity basis award? The Judge may well agree with this logical approach and be happy to trust the costs management process and award the approved budget total in costs without detailed consideration of the costs claimed. This is by no means a guaranteed outcome, but was very much the approach taken by Justice Simon Brown in Slick Seating Systems when he certified costs of £351,267.35 following his earlier approval of a costs budget totalling £359,710.35.
The alternative approach would be for the receiving party to request a detailed assessment of their costs on the indemnity basis, which would allow for a potential recovery of an amount of costs which surpasses the total allowed in the costs budget. This would allow for the obvious benefit of a higher overall percentage recovery of the costs incurred in the litigation, but there may also be an increased risk. By entering the detailed assessment process the receiving party would be opening all of their costs up for scrutiny by the opponent and the court. Even with an indemnity order, the Court would have to agree that the costs claimed were reasonably incurred. Whilst it may be likely that the Court does agree that the majority of the costs claimed were reasonably incurred and makes an award which is higher in amount than the total figure allowed in the costs budget; the paying party now has the opportunity to demonstrate that a significant portion of the costs claimed were not reasonable. One can envisage a situation where a receiving party has an approved budget of £100,000 but has incurred £120,000 in bringing their claim. They are awarded costs on the indemnity basis and proceed to Detailed Assessment in the hope of recovering the additional £20,000 that has been incurred above the approved budget, but the receiving party is able to demonstrate that only £95,000 of the costs claimed were reasonable.
In this situation, not only has the receiving party incurred further costs and spent further time in recovering their costs of the main action, but they have recovered an amount which is less than the total approved budget. Whilst taking the first approach would have meant conceding the additional £20,000 of incurred costs without argument, it provides for a quick and definite recovery of a high percentage of the overall sum of costs incurred.