06 Mar 2017

The recent decision of the High Court in Merrix v Heart of England NHS Foundation Trust[1] has cast considerable doubt on the approach to be taken by the courts on a detailed assessment of costs that have already been the subject of a costs management order. This decision may well be overturned on appeal, but as it stands would require insurers and their solicitors to substantially change their approach to the costs budgeting system.

Background

The decision arises from a clinical negligence claim brought by Mrs Merrix (the Claimant) against an NHS trust (the Defendant). The claim settled before trial, but following exchange of witness statements and expert evidence, and around 6 months after the Court had made a costs management order under CPR r.3.15(2). Under that order the Claimant's budget had been approved in the sum of £128,256. As the clinical negligence claim was settled before the costs of trial had been incurred, the Claimant sought to recover costs of only £74,780 on assessment.

Following initial consideration by District Judge Lumb sitting as a Regional Costs Judge (but before consideration of either the Claimant's budget or bill) the matter was referred to the High Court for the appeal of a preliminary issue as to the extent to which "the costs budgeting regime under CPR Part 3 fetter[s] the powers and discretion of the costs judge at a detailed assessment of costs under CPR Part 47". On that preliminary issue DJ Lumb concluded that "the budget, although not binding, will be a strong guide to what will be allowed on a detailed assessment". However, the Claimant contended that where a receiving party claims costs at or less than the budgeted figure, it should - unless the paying party can establish a good reason to depart from this general principle - be entitled to recover all of those costs.

The appeal did not therefore consider what would constitute a good reason for departing from a budgeted figure, but rather whether the existence of a good reason should be the only basis upon which a costs judge may deviate from an approved budget.

The judgment

In allowing the Claimant's appeal, Mrs Justice Carr carried out a detailed analysis of both the recent case law on costs management orders and the effect of the relevant provisions of the CPR. In her view CPR r.3.18(b) was of critical importance as it confirms that:

"In any case where a costs management order has been made, when assessing costs on the standard basis, the court will…not depart from such approved or agreed budget unless satisfied that there is good reason to do so".

As the judgment notes, the words are clear and it is not possible to reconcile them with the notion that the assessing costs judge may nevertheless depart from the budget without good reason, and carry out a line by line assessment which merely uses the budget as a factor to be taken into account.

As mentioned above, the judgment does not address in any detail what might constitute a "good reason" to depart from an agreed or approved budget on assessment, although Carr J did note that one obvious example would be where a bill was lower than a budget (as in the present case) as to do so would be a breach of the indemnity principle. The Court of Appeal's decision in Henry v News Group Newspapers[2] (a defamation case) provided a further example of such a reason, where the Claimant successfully contended that the way in which the defendant had chosen to conduct the proceedings had caused her to incur a substantial amount of costs that could not reasonably have been predicted at the time when the budget was prepared Accordingly she was able to recover an amount in excess of her most recent approved budget.

Analysis

The decision of Carr J is both logical and problematic. While the conclusion accords with the wording of CPR r.3.18(b), in practice the decision would necessitate a wholesale shift in the way that parties approach costs budgeting and costs management hearings. Simon Noakes of Profin Cost Solutions comments that “Whilst some might say that the author of CPR 3.18 meant to use the words 'not exceed' instead of 'not depart', on the face it, Mrs Justice Carr’s decision appears to make sense, albeit I would have more confidence in the decision if there was consistency of judicial approach where the consideration of Precedent H Costs Budgets is concerned".

Many practitioners to date have taken the broad approach that an approved budget operates as a cap on the costs recoverable by the receiving party, rather than effectively operating as a form of advanced assessment. This is endorsed by the comments of Jackson LJ in his Review of Civil Litigation Costs: Final Report (December 2010). That said, until now the position had not been tested.

The decision in Merrix means that, unless a "good reason" is identified, costs management will in effect operate as assessment in advance. This would lead to significant problems: to take but one example, in making costs management orders the courts are entitled to comment on, but not change, the hourly rates claimed. Instead, the budgeting process looks at the hours (rather than sums) claimed for a particular phase. Presumably a challenge to an unreasonable or disproportionate hourly rate claimed might constitute a "good reason" to deviate from a budget, but this would have to be tested by the courts.

While the decision in Merrix stands, solicitors who have previously reserved their efforts to challenge their opponents' costs until assessment would be well advised to scrutinise the costs claimed by their adversaries more closely at the budgeting stage. This is particularly likely to be the case for insured defendants (for example in casualty or professional negligence claims) where there is an early recognition of an exposure to the claim and therefore its costs, and the main issues in dispute relate to quantum. The net result is that early involvement of costs draftsmen in the budgeting process is likely to become more common, leading to greater front-loading of costs. This is problematic, as Simon Noakes points out: "How can the brief consideration of a Costs Budget at a CCMC trump the forensic approach adopted at a Detailed Assessment Hearing? I suspect that the new battleground will now be 'what constitutes a good reason?' I also fear for paying parties that have paid mere lip service to costs budgeting in the last couple of years who will now face the harsh reality of detailed assessment proceedings post Merrix”.

These are considerations that the Court of Appeal will need to grapple with in the near future.


[1] [2017] EWHC 346 (QB)

[2] [2013] EWCA Civ 19