RNB v London Borough of Newham [2017] EWHC B15 (Costs)

The relationship between an approved or agreed costs budget and a detailed assessment is one which has caused great difficulty in the near four and a half years since costs budgeting was introduced.

Certainty regarding this ‘difficult’ relationship, appeared to come from the Court of Appeal in the decision of Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] EWCA Civ 792, where it was decided that a court, on detailed assessment, would not depart upwards or downwards from the last agreed or approved budget unless there was a good reason to do so.

Since the judgement was handed down in June, it has taken only a matter of months for the first significant decision regarding what exactly warrants ‘good reason’ to come to fruition, in the case of RNB v London Borough of Newham [2017].

The decision in Harrison of course related only to budgeted costs, and not those costs which are already incurred at budgeting stage, with it long established that those are to be dealt with by way of the detailed assessment process, however it is the assessment of these costs from which the decision in RNB stems.

By way of a brief background to the case, at the costs and case management conference (CCMC), on 12 August, a costs management order for £143,692.36 was made, agreeing the claimant’s budget under CPR 3.17. On 4 January 2017, a consent order settled the claim for ‘£250,000, plus costs to be assessed if not agreed’. A detailed assessment hearing was consequently listed, in respect of the claimant’s bill of costs, totalling £121,051.40.

On assessment, on 21 June 2017, the rates used by the Claimant during costs budgeting were reduced for incurred costs before the CCMC, on the basis that ‘the uplift on outer London guideline rates was excessive on the standard basis, having regard to the CPR 44.4(3) factors, and the increases year on year were too high given the level of inflation, were unexplained and could not be justified by reference to, for example exceptional overhead expenses’.

Following the Judge’s reduction to the hourly rates in the incurred section of the budget, the Defendant asked the Court to consider whether this reduced hourly rate meant that it was also ‘good reason’ to depart from those costs which were within the ‘budgeted’ costs. The Defendant’s submissions were predicated on the fact that given the provisions of CPR PD 3E para 7.10, the assessment provided the only opportunity for the paying party to challenge the hourly rates, and the costs budget was not a costs cap, meaning that the determination of the reasonableness of hourly rates needed to be applied equally to the incurred and budgeted costs, with adjustment to the incurred costs, providing the ‘good reason’ needed to depart from the budget.

Whilst hourly rates are not decided at CMC pursuant to CPR PD 3E para 7.10,  most lawyers are now fully aware of the fact that judges now approach costs budgeting by allowing what they believe to be a proportionate figure per phase. Whilst the reasoning may be based on a vague idea of what the Judge believes a reasonable hourly rate may be, even if not expressly stated, it is commonplace for a Judge to state that parties may spend a figure awarded ‘how they wish.’ Whether this in effect means a lower grade fee earner spends more hours than were originally budgeted, or a higher grade fee earner spends less time, should be irrelevant. This point formed the basis of the Claimant’s submissions, who submitted further that a departure based on a reduction of hourly rates would not warrant ‘good reason’, and be contrary to the decisions of the Court in Harrison.

Nonetheless, Deputy Master Campbell sided with the Defendant, reasoning at paragraphs 22 to 25:

At the assessment hearing, I made reductions to the hourly rates claimed for the incurred costs to a level which has meant that the overall recovery by the Claimant for the period of work before the CMO has been reduced by significant amounts. Were that not to be reflected in the budgeted costs, that would mean that the Claimant will appear to recover an hourly rate as set out in Precedent H for the budgeted stage at a level that significantly exceeds the figure I consider to be reasonable and proportionate for the pre-budget stage.

If, (as it is the case), the hourly rate is a mandatory component in Precedent H which is not and cannot be subjected to the rigours of detailed assessment at the CCMC, it makes no sense if it is automatically left untouched when the rates for the incurred work are scrutinised at the “conventional” assessment. Such an approach would offend against the guidance given in Harrison at paragraph 44. Indeed…, it is only on that occasion that a paying party has an opportunity to challenge the rate and I agree with him for the reasons given above, that that is a “good reason” to depart from the costs allowed in the Claimant’s last approved budget’.

Further binding authority to support this proposition is to be found in Merrix at paragraph 73 which I repeat for convenience (the whole paragraph should be read); “… As the notes to CPR 3.18 in the White Book reflect, the fact that hourly rates at the detailed assessment stage may be different to those of the budget may be a good reason for allowing less or more, than the phase totals in the budget”. It follows that the rates allowed for the incurred costs in Part 1 will need to be applied to the budgeted costs in Part 2.

If I am wrong, the same conclusion can be reached by a different route, as I have said in paragraph 5 above, proportionality was raised by the paying party in the points of dispute. With regard to costs incurred on the standard basis, CPR 44.3(2) provides that :- “…the court will – (a) only allow costs which are proportionate to the matters in issue. Costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred; ..”

Whilst undoubtedly, Claimants can expect the case to appear in a flurry of sets of points of disputes in the coming weeks and months, it must be remembered that this decision is not binding and merely persuasive. The usefulness of this decision to Defendants is one which at this stage is unknown, and it remains to be seen as to whether other assessing judges will seek to follow. It is also highlighted at this stage that permission has been granted to appeal the decision. The benefits of this may be fruitless, however, given the assessing Judge’s ‘in the alternative’ approach in stating costs would still be reduced to the same figure based on proportionality.

The use of the stand back test to consider budgeted costs on assessment was acknowledged in the decision of Harrison (para 52). Since this decision was handed down, there is no doubt Claimants are well aware that their costs may be reduced on this basis. However, the Court of Appeal were already aware that incurred costs in a budget are liable to reduction on the basis of hourly rates when handing down the decision in Harrison, and it was surely their intention to add clarity to the relationship between budgeting and detailed assessment. Should phases of the budget not be fully completed then it is perfectly reasonable to expect reductions to the budgeted amounts, however allowing the reduction of those costs which were already incurred prior to budgeting to amount to ‘good reason’ for departure is  surely adverse to the Court’s intentions in Harrison, and unlikely to be followed in future.

In fact, the day of writing this article, it has come to light that on Friday 18th August, at a detailed assessment which again used the case of Harrison as guidance, District Judge Lumb, sitting as regional costs Judge held that “to reduce hourly charging rates for budgeted costs to the same levels as those allowed for the incurred costs, thereby causing a potential departure from the budgeted phase totals, would be to second guess the thought process of Costs Managing Judge and would impute a risk of double jeopardy into the detailed assessment”.

The decision is supportive of the fact that a judge at CCMC may not fix hourly rates but is almost certainly likely to have regard to them, and also that the guidance from the senior Courts in Harrison was to simplify the assessment process, and ‘good reason’ for departure is a significantly threshold to breach.