1. In claims where a Costs Management Order ("CMO") has been made, a costs judge on detailed assessment can only depart from the budgeted amount if there is good reason to do so; this is irrespective of whether the paying party wishes to pay less or the receiving party wishes to recover more than the budgeted amount.
2. With regards to costs incurred before the budget, these were never approved by a CMO and should be subject to detailed assessment in the usual way.

The Court of Appeal also considered proportionality in relation to the global sum and when a case is to be treated as “commenced” for the purposes of the transitional provisions relating to proportionality contained in CPR 44.3 (7).

The decision

On the first issue, the Court of Appeal rejected the paying party's contention that the purpose of CPR 3.18 (b) was to set a "cap" on the amount that the paying party could expect to pay so that the costs judge on a detailed assessment could not award more than the budgeted costs without good reason but could depart from the budget without good reason to award lower costs. The Court of Appeal was in no doubt that the decisions of Master Whalan in this case and Carr J in Merrix v Heart of England NHS Foundation Trust (2017) were correct. Good reason was required to depart upwards or downwards from an approved costs budget. The Court held that effect should be given to the ordinary and natural meaning of the words in CPR 3.18, which was consistent with the purpose behind costs budgeting and CMOs. The existence of the "good reason" provision provided a safeguard against the risk of injustice and would ensure that a detailed assessment was not merely a rubber stamp of the figure in the CMOs. As to what would constitute good reason could be left to an evaluation by the costs judges on individual cases.

The second issue had to follow the same approach towards interpretation by giving the wording in the Civil Procedure Rules their ordinary and natural meaning – but this gave a clear outcome in favour of the paying party.

The costs incurred before the date of the budget were never approved by the CMO. The focus of a judge in making a CMO was on estimating the costs to be reasonably and proportionately incurred in the future. It was clear from Paragraph 7.4 of PD 3E that a court may not approve incurred costs. It can only record its comments (if any), which can then be taken into account when considering reasonableness and proportionality at the detailed assessment. Incurred costs were not within the ambit of CPR 3.18 and should be subject to detailed assessment in the usual way, without any added requirement of "good reason" to depart from the budget.

Master Whalan had been influenced by the obiter comments in Sarpd Oil International Ltd v Addax Energy SA (2016) which suggested that the first case management conference was the appropriate occasion on which to contest the costs budget including the incurred costs elements. However, the Rules and Practice Directions clearly distinguish between incurred costs and estimated budgeted costs. The obiter comments in Sarpd went too far in suggesting how costs management hearings should be approached. Further, the Rules were changed with effect from 6 April 2017 to remove any ambiguity created by Sarpd Oil.

The Court of Appeal also clarified that, when assessing the incurred costs and considering the budgeted costs, the costs judge would still "ultimately have to look at matters in the round and consider whether the resulting aggregate figure is proportionate". This was described as "a further potential safeguard" for the paying party.

Finally, the Court of Appeal considered whether or not the case "commenced", for the purposes of CPR 44.3 (7) (a), before or after 1 April 2013. If the case was "commenced" before 1 April 2013 then the proportionality exercise was likely to be more favourable in outcome to the receiving party. Unsurprisingly the Court of Appeal found that a case was "commenced" for the purposes of costs rules when the relevant proceedings were issued by the court.

Comment

The decision has provided welcome guidance by confirming that the approach in Merrix was correct for budgeted costs and also avoids the lengthy arguments on incurred costs that would have ensued at case management conferences had it followed Sarpd Oil.

The decision on budgeted costs will tie paying parties' hands to a large extent and emphasises the need for parties to closely scrutinise their opponents' estimated costs at the case management stage. However, the proportionality test may assist paying parties in relation to those costs. In addition, incurred costs will remain subject to detailed assessment which could prove important where the work on claims has been front loaded before the first case management conference.

The debate will continue in other areas where the process remains unclear, for example, the issue of hourly rates.

Paying parties will be very concerned if the court fixes a total for budgeted costs on the basis of excessive underlying hourly rates, when they have not had the opportunity to challenge the rates in submissions at the case management conference or at detailed assessment. How will this affect the assessment of the hourly rates for incurred costs? On the other hand, if hourly rates are reduced in respect of incurred costs, will this be a good reason to reduce the rates in the budgeted sections of the bill?

There will also be further dispute over what constitutes a good reason, particularly with the often fluctuating developments in litigation after the budgeting process is complete. For both parties, it will be critical to retain detailed notes recording the basis of the CMO and to word the Order in a manner that achieves as much clarity as possible at the assessment hearing.