Costs budgets in litigation are becoming, in the light of recent judgments, increasingly important documents as they establish at a very early stage in a case what costs will be recoverable. There are, however, some exceptions to the rule that the level of costs stated in parties’ cost budgets are set in stone.

In my recent blog Costs Budgets Rule I commented on the judgment of Carr J in Merrix v Heart of England NHS Foundation Trust, and mentioned that related issues would be considered by the Court of Appeal in Harrison v University Hospitals Coventry and Warwickshire NHS Trust. The Harrison judgment has recently been handed down.

The Harrison judgment

Harrison provides a number of important clarifications in relation to the rules governing cost budgets and costs assessment where the Court has made a costs management order.  Therefore, Harrison is essential reading to anyone involved in submitting or discussing costs budgets in litigation proceedings.

" Harrison is essential reading to anyone involved in submitting or discussing costs budgets in litigation proceedings. "

Mrs Harrison brought a claim for medical negligence that was compromised on the basis that Mrs Harrison was entitled to her costs on the standard basis. By reference to the updated costs budgets, Mrs Harrison’s total costs including incurred costs but excluding success fees and ATE premium were £197,000. Incurred costs accounted for £108,000 of this sum. The Bill of Costs submitted was for £467,000 including the success fees and ATE premium. Although the judgment is based upon the pre-amended wording of CPR 3.18 (the provisions were amended with effect from 6 April 2017 to, among other things, replace “budgets” with “budgeted costs” which changes the focus to estimated costs) the judgment is still relevant to the approach that must be adopted when dealing with these issues going forward.

Estimated future costs                               

The judgment of Carr J in Merrix, including her reasoning, was confirmed by the Court of Appeal in Harrison as being correct; when a costs management order is made, the estimated future costs elements of the costs budget is binding on subsequent detailed assessment unless there is a good reason to depart from it. Further, Davis LJ indicted that the “good reason” test should be robustly applied. In practical terms this is a significant fetter on the court’s discretion. The judgment makes plain that the “good reason” test provides a valuable safeguard to prevent the real risk of injustice to either party.

However, Davis LJ declined to provide any generalised examples or guidance as to what will constitute a “good reason” in any given case. Davis LJ thought that would best be left to “individual appraisal and evaluation” by the Judge by reference to the circumstances of the case.  We shall have to wait for judicial guidance on these issues.

Incurred costs

Whilst supporting the costs management regime, the Harrison judgment also clarified the treatment of incurred costs, which will be a comfort to many practitioners who may want to raise issues about incurred costs. It was decided that incurred costs (i.e. costs incurred before the costs budget is prepared for the first case management conference) are subject to detailed assessment without the added requirement of a “good reason” to depart from the approved costs budget.

Davis LJ also indicated that there was a further safeguard for the paying party, by virtue of paragraph 7.4 of Practice Direction 3E. As the court is able to take into account any comments recorded by the Judge in respect of the incurred costs when considering proportionality and reasonableness of the incurred costs. This review, it would seem, will give the court a further opportunity to consider the proportionality and reasonableness of the costs as a whole and consider if any further overall reduction is required.

This seems to me to be the best position and one that I suspect will have surprised very few practitioners because costs budgeting, as enshrined in the Civil Procedure Rules, was designed to be consistent with the idea of reducing and controlling ligation costs. It also preserves the safeguards provided by the ability to refer the matter of incurred costs to detailed assessment and ensures that there is a test of proportionality applied to the sums and issues in dispute. However, depending on whether you are the successful or unsuccessful litigant, I also appreciate that elements of this judgment may seem harsh.

The Outcome of the Appeal

In terms of the appeal, the Trust was unsuccessful in relation to the estimated costs issue; their Lordships agreed with the costs judge. The Trust was successful in relation to the incurred costs issue. The matter was accordingly remitted to the costs judge for further assessment.