Costs practitioners and litigators were surprised by Master Gordon Saker's comments in August 2015 in the case of BP v Cardiff & Vale University Local Health Board  EWHC B13, in which it was considered whether the costs cap for preparing costs budgets (which should not exceed the higher of £1,000.00 or 1% of the approved budget) in the Practice Direction included VAT and additional liabilities. In this case, it was suggested that additional liabilities were included but not VAT.
We, at Paragon Costs, found this comment surprising, particularly given that the CPR clearly states that additional liabilities and VAT are excluded and indeed the Precedent H explicitly states that the estimate excludes additional liabilities. We therefore welcome the latest judgment to come from the phone-hacking litigation against MGN (Various Claimants v MGN Limited  EWHC 1894 (Ch)) which has confirmed that additional liabilities should not be included within costs budgets.
Various Claimants v MGN Limited  EWHC 1894 (Ch)
This case was subject to costs management. Earlier costs budgets had been agreed, however, further budgets were exchanged to take the managed cases up to the trial stage. The Claimants agreed the Defendants' budgets. However, the Defendants disputed practically every item contained within the Claimants' budgets.
Additional liabilities were recoverable in this case as it related to privacy and defamation (a type of claim which avoided the abolishment of success fees following LASPO). This judgment dealt with one of the issues being the extent to which costs budgeting should encompass additional liabilities (success fee and ATE premium).
The Claimants' argument
The Claimant argued that the proper approach, which excludes a consideration of additional liabilities for costs management proceedings, is clear from the provisions of the CPR and the relevant Practice Direction. This can be seen by the fact that the Precedent H summary page (annexed to Practice Direction 3E) states that the costs budget excludes VAT (if applicable), court fees, success fees and ATE insurance premiums (if applicable), costs of detailed assessment, costs of any appeals and costs of enforcing any judgment.
The Defendants’ arguments
The Defendants approached the matter stating that the court should adopt a procedure described as being "akin to the approach on detailed assessment". The Defendants' proposed procedure relied heavily on the post-April 2013 rules on proportionality.
The Defendant argued that proportionality led to the approach of the costs judge (Master Gordon-Saker) in the post-action assessment in BNM v MGN Ltd (3rd June 2016). It was said that in this case the additional liabilities payable under the CFA and the base profit costs were considered together when carrying out an overall assessment on proportionality.
The Defendant also submitted that Counsel, acting for the Claimant, had argued in a previous judgment (Various Claimants v MGN Limited EWHC 855 (Ch)) that:
‘The costs judge can, on the facts of every case, decide whether the total sums payable, including the additional liabilities, are proportionate’.
The Defendant submitted that the Claimants should be stuck with this analysis because they should not be allowed to blow hot and cold and, having relied on that submission when it suited them to do so on the previous hearing, they should not be allowed to resile from it now. However, the Court held that statements of case by Counsel in previous litigation cannot rise to some form of estoppel.
The Court considered the points raised by the Defendant and held:-
‘Those additional liabilities will not be taken into account in the budgeting process. They cannot be. The CFA party does not have to disclose sums likely to be payable, and the form expressly provides that they do not have to be included. Accordingly, if the counterparty agrees the budget it is agreeing a budget which does not provide for the additional liabilities’.
The Court considered the practicalities of including additional liabilities within the budget and held that:
'Unless the incurred costs come in at less than the agreed budgeted sum in relation to any phase there will be no room in the budgeted sum for the recovery of additional liabilities. That is capable of rendering the right of recovery of additional liabilities nugatory in many cases, or at best haphazardly dependant on over-statements of budgets in relation to base costs’.
The possibility of establishing good reason for an increase under CPR3.18 was suggested as being a way of dealing with the problem. However, the Court held that it would be likely to have to be invoked in large numbers of cases in order to justify any substantial recovery of additional liabilities, which would not be a satisfactory answer and would also lead to uncertainty.
In light of the above, the Court ruled that the determination of figures in the costs budgeting exercise shall not include any sum for additional liabilities.
Paragon Costs considers this to be a sensible decision and one that reflects the intentions of the rules committee when drafting the CPR.