The recent decision of Nash v Ministry of Defence  EWHC B4 (Costs) addresses the question of whether a reduction to hourly rates for incurred costs at detailed assessment constitutes good reason for budgeted costs to be reduced.
This is the second reported decision in this matter. The first being Master Campbell's decision, in RNB –v- London Borough of Newham  EWHC B15 (Costs), that a reduction in rates is a good reason to depart from the budgeted costs on assessment. Marc Harris considers this decision in more detail here. The RNB decision was being appealed but the parties have since agreed settlement.
Background - Nash v Ministry of Defence
The bill of costs was drafted pursuant to an order from March 2017 in a fatal accident claim. The matter was the subject of a costs management order in June 2016.
In the detailed assessment proceedings, the Claimant had initially attempted to argue that there was good reason to depart upwards from the budget in a number of phases. They ultimately withdrew these arguments during the course of the hearing; conceding that they could not establish good reason. In relation to the other phases, the Claimant sought less than the budgeted amounts approved in the CMO. This in itself was sufficient reason to depart downwards to the actual level of costs claimed for these phases; there would otherwise have been a breach of the indemnity principle and the Claimant would have something of a windfall.
The Defendant's Arguments
The Defendant argued that there should be a reduction to the future costs to reflect Master Nagalingam's earlier decision to reduce the hourly rates insofar as they related to incurred costs. No further argument was made to reduce the budgeted costs. The Defendant's proposal was that the Master apply the hourly rates to the estimated hours to effectively arrive at an amended budget figure which the costs claimed would then be considered against.
The Defendant noted that the budget had been agreed and thus not subject to the scrutiny that it would have been had the judge considered the budget at the CMC stage. It was therefore contended that the CMO held less weight than it would have, had the managing judge made a decision following budgets not being agreed.
The Defendant relied on CPR 3.18 as a reason for reducing the budgeted costs. CPR 3.18 states in the body of the rule that “Attention is drawn to rules 44.3(2)(a) and 44.3(5), which concern proportionality of costs.” Notably, the rule to which this note relates referred to the ‘budget’ at the time when the CMO was made, but has since been changed to refer to 'budgeted' - this change coming as a result of the decision in ‘SARPD oil’ which led to the change to the rules to clarify that only budgeted future costs could be the subject of a CMO.
The Defendant was effectively seeking to bind the parties to the number of hours and disbursements as agreed in the budget but alter just one element; the hourly rates. The Defendant’s final argument was that the agreement of the budgets was subject to an agreement that the budgeted costs were agreed but for the hourly rates, which would be subject to assessment.
The Claimant's Arguments
The Claimant’s primary argument was that there was no such agreement that the budgeted costs were agreed but for the hourly rates. This led to a further question of whether there was in fact any agreement in relation to the budgeted costs. In this regard, it was clear that there was a CMO and thus it had been made clear to the Court at case management that there was an agreement.
The Claimant’s second argument was simply that a reduction in hourly rates to the incurred costs did not constitute a good reason to depart from the future costs.
Was there an agreement? - The Master had seen the correspondence and notes from the time that the CMO was made and saw nothing to suggest that the parties had agreed to be bound by everything other than the rates. Further no such agreement was recorded in the CMO and the Master therefore concluded that no such agreement had been entered.
Was this uncertainty as to any agreement, sufficient to justify good reason to depart down? – Irrespective of any uncertainty, CPR 3.18(b) permitted the Master to reduce budgeted costs if there was good reason to do so.
What status does the agreed budget have – The Defendant's contention that a CMO based on the Court’s approval of an agreed budget held less weight than one which followed an assessment by the managing judge, was incorrect. In any event, the court still has responsibility to consider whether budgeted costs fall within the range of what is reasonable and proportionate. A court is not prevented from withholding its approval of agreed budgeted costs.
The CMO was therefore to be treated in no different way than one which came about as the result of the managing judge considering budgets which had not been agreed.
Was the reduction of hourly rates in the incurred costs good reason to depart from the budgeted costs? - Master Nagalingam found that the Defendant’s proposed approach gave rise to a risk of double jeopardy and takes away from the certainty which costs budgeting is intended to provide.
When a costs management order is made, it is mandatory that the case managing judge takes the incurred costs into account when considering what costs are reasonable and proportionate. The judge approved budgeted costs in the knowledge that the incurred costs will be subject to detailed assessment and likely reduction. Accordingly, if those budgeted costs are then open to reduction at detailed assessment there is a double jeopardy. This could only be avoided by undertaking a detailed assessment of incurred costs at the costs management stage, which is not practical. According to the Master, this is a factor in setting such a high bar when considering what constitutes good reason to depart from the budgeted costs.
Hourly rates were found to hold no special status when it comes to the making of a costs management order and thus there was found to be no reason to depart from the budgeted costs. The Master summarised this point at paragraph 73.
“A proportionate total for each phase of budgeted (future) costs is set based on taking into account a variety of factors, including the incurred costs. A party therefore proceeds with certainty as to what is a proportionate future sum to spend per phase. That certainty is entirely eroded if hourly rates are then given a form of special status which requires rates to be assessed in the estimated phases of a bill of costs.”
The Master's Further Comments
Where the budget does not exceed £25,000 or the value of the claim does not exceed £50,000, only the front page of the Precedent H is to be used. There are no details of hourly rates on the front page and the Master noted that adopting the Defendant’s approach in this case would have created a distinction between what can be challenged at detailed assessment in a matter valued at less than £50,000 (or where the budget is less than £25,000) than in one valued at more than this amount. This, in the Master’s opinion, supported his decision.
Irrespective of the amounts allowed at detailed assessment, it is still open to the Court to reduce costs on the basis of proportionality. Accordingly, even if the budgeted costs cannot be reduced on the basis of the hourly rates, it is still open to the paying party to seek a reduction on the basis that the overall sum of assessed and budgeted costs is disproportionate.
Finally, to expose the receiving party to double jeopardy in this way would be at odds with overriding objective to deal with the case justly.
We at Paragon Costs were surprised by the decision in the RNB case and the general consensus was that we were not alone. Master Campbell's decision appeared to go against the intention of costs budgeting, which was to allow a reasonable and proportionate amount for future costs which the receiving party could use as they saw fit. What has not surprised us, is the fact that paying parties have taken the opportunity to seek to reduce recoverable costs even further by using the RNB decision.
Master Nagalingam’s reasoned approach in this matter appears to be a far more accurate interpretation of the rules and is in line with Jackson LJ’s vision for costs budgeting. The decision may not be binding, but one would hope that it is heeded by both paying parties, and those hearing such arguments.