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Posted June 18, 2018 | Published in Dispute resolution

Payment of costs on account – the 90% “rule”

The impact of costs budget continues to generate satellite litigation in the TCC, recently in relation to the payment of costs on account, i.e. in advance of a final assessment. I have had the task of writing blogs on the somewhat arid subject of costs budgets and previous cases clarifying their scope. Despite being a bit dry, it is an important topic that warrants consideration.  

In this blog, I review the issues that arose in Cleveland Bridge UK Limited v Sarens (UK) Limited.This judgment provides a further useful clarification on the impact of costs budgets. 

A number of disputes had arisen between CBUK and its subcontractor, Sarens, in connection with the construction of six bridges as part of the Heysham M6 link road project in Lancashire. 

As we reported in Dispatch in May 2018, CBUK obtained judgment in its favour in proceedings concerning the interpretation of the subcontract and was accordingly entitled to recover its costs. Sarens accepted this was the case. However, in the absence of agreement as to the amount, those costs were to be determined by detailed assessment. In the meantime, CBUK was entitled to be paid “a reasonable sum on account of costs, unless there was a good reason not to do so” in accordance with CPR 44.2(8). 

" Harrison clarified that in issuing a costs management order a judge does not approve incurred costs, and that incurred costs are subject to detailed assessment without the added requirement of a “good reason” to depart from the approved costs budget. "

CBUK sought the sum of just under £112,000, being 90% of its approved costs budget, adjusted to take account of deductions for costs not in fact incurred and additions in respect of the costs of CBUK’s two successful interim applications. Sarens said it should pay no more than approximately £75,000, being approximately 60% of the adjusted approved costs budget, or 80% of the realistic highest starting point for CBUK’s costs.

Some guidance was available to the parties from the judgment in MacInnes v Gross, where Coulson J had explained that the approved costs budget was “the appropriate place to start for the calculation of any interim payment on account of costs”.  In MacInnes Coulson J then applied a reduction of 10%, as “it was the maximum deduction that is appropriate in a case where there is an approved costs budget”.   However, as CBUK and Sarens could not agree what the sum should be, the matter came back before Miss Joanna Smith QC (“the Judge”) in April 2018.

The Judge recognised that certain aspects of Coulson J’s observations had been expressly approved in Harrison (a case I blogged about last year: Costs Budgets Rule – Part II, including that the starting point for assessing costs was an approved costs budget and, as held by Davis LJ, the “good reason” test referred to by Coulson J should be robustly enforced. 

However, the Judge also accepted that in approving paragraph 25 of Coulson J’s judgment in MacInnes the Court of Appeal was concerned only with his approach insofar as it related to budgeted/estimated costs. This was because Harrison clarified that in issuing a costs management order a judge does not approve incurred costs, and that incurred costs are subject to detailed assessment without the added requirement of a “good reason” to depart from the approved costs budget.

On this basis the Judge accepted that Coulson J cannot have intended to put in place a general rule of 90% payment on account in respect of sums that are not to be treated as approved.  

The Judge accepted that the approved figure – the estimated/budgeted costs figure – was the starting point for determining the amount to be paid on account of costs and that CBUK was entitled to 90% of that sum following MacInnes.

However, this was not necessarily the approach the court should adopt in relation to incurred costs, given they were not approved. Instead, the court must determine in every case, a reasonable sum. The Judge said that: 

“in my judgment, a reasonable sum in respect of incurred costs will often be one that is an estimate of the likely recovery subject to an appropriate margin to allow for error”.

The On Account Payment order  

Applying her decision on the overarching points, the Judge held that CBUK was entitled to 90% of its estimated costs, after the deduction of costs not actually incurred, and 70% of its incurred costs, including the costs associated with the two applications. As neither party had been wholly successful, each party had to bear its own costs associated with the hearing.

This judgment has provided a useful clarification on the extent of the impact of costs budgets on payments on account of costs. However, I still believe it is wise to raise any concerns in respect of the incurred costs section of a costs budget before the first costs and case management conference and before the costs budget is approved by the costs management order.

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