Gurion Taussig on The Fundamental Importance of the Costs Budget: Merrix v Heart of England NHS Foundation Trust
Articles | Mon 13th Mar, 2017
1. Since their introduction in 2013 as part of the Jackson reforms, costs budgets have introduced much earlier consideration of parties’ costs in civil proceedings than hitherto. The interplay between costs budgeting and subsequent detailed assessment of costs, however, has remained open to question. Of particular growing concern has been the extent to which the approved or agreed costs budget constitutes a benchmark of reasonable and proportionate costs so that further independent consideration at the detailed assessment becomes curtailed.
2. The importance of the costs and case management hearing was emphasized last year by the Court of Appeal in SARPD Oil International Ltd v Addax Energy SA  EWCA Civ 120. The Court stressed that parties coming to that hearing should know that the first CCMC would be the appropriate occasion to contest budgets – not only of estimated costs but incurred costs too.
3. Now, in Merrix v Heart of England NHS Foundation Trust  EWHC 346 (QB), the High Court has handed down a landmark judgment clarifying the relationship between costs budget and detailed assessment. The importance of this decision cannot be overstated, affecting as it does the way every detailed assessment is to be conducted where a costs budget has been agreed or approved.
4. Central to Merrix was the meaning of CPR Rule 3.18, which Rule sets out the procedural approach to assessing costs on the standard basis where a costs management order has been made. The Rule provides:
‘In any case where a costs management order has been made, when assessing costs on the standard basis, the court will:
(a) have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings; and
(b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so’.
5. At first instance and on appeal, the Claimant argued that the costs allowed in the detailed assessment should be the budgeted figure unless there was good reason to depart from that figure. The consequence, according to the Claimant, was that there was no need to go through a line by line detailed assessment whether or not the figure claimed was greater or less than the budgeted figure.
6. The Defendant contended that Rule 3.18 only applied if the receiving party sought to recover more than the sums budgeted. It argued that it was entitled to a full detailed assessment with the costs budget but one factor in determining reasonable and proportionate costs. So, it was argued, the paying party does not need to establish good reason to persuade a court to depart from an approved or agreed budget downwards.
7. At first instance, the Defendant’s arguments prevailed. District Judge Lumb accepted however that there was ‘significant debate in the legal profession‘ as to whether the costs budget did in fact fetter the discretion of the costs judge to a greater extent than he had allowed. The Claimant appealed.
Decision on Appeal
8. Mrs Justice Carr DBE’s construction of Rule 3.18 was at once literal and purposive. She found the language clear and unequivocal: ‘the Court will not – the words are mandatory – depart from the budget without good reason‘. The Court held that on detailed assessment on a standard basis, the costs judge is indeed bound by the agreed or approved costs budget, unless there is good reason to depart from it. This is the case whether or not the budgeted figures are or are not exceeded. At the same time, this literal approach was consistent with a purposive consideration of the Rule: the Court was clear its interpretation of Rule 3.18 was in line with the philosophy of costs budgeting: to reduce the scope of and need for detailed assessment.
9. It followed that the approved or agreed cost budget hearing is not merely a guide to the maximum level of reasonable costs. On the contrary, the costs judge’s decision on the parties’ budgets constitutes an identification of what future costs are reasonable and proportionate in a particular case. The setting of the costs budget was stated as being of, ‘fundamental importance‘. The Court emphasized the considerable time and money already invested into the budgeting phase, which fact she found supportive of her conclusion that the resulting cost budget would be definitive, unless there was good reason to depart from the same.
10. What then of the relationship between the CCMC and subsequent detailed assessment hearing. Clearly, the Judgment not only re-states the importance of the costs budget but emphasizes the primacy of the initial CCMC in the costs assessment process. At the same time, the Court did still see some continuing role for detailed assessment. First, the subsequent costs judge would be required to adjudicate on any ‘good reasons‘ to depart from the budget. As to what those ‘good reasons’ might be, the Court was not minded to state in detail. Spending less than the budget allowed for was one obvious example. Hourly rates are another: the Court cited with approval the White Book’s note that the fact hourly rates at detailed assessment may be different to those used for the budget may be good reason for allowing less, or more than some of the phase totals in the budget.
11. In addition, the Court identified various other elements of the proceedings which would still require detailed assessment: incurred costs; costs of interim applications which were not included in the budget; indemnity basis costs; and situations in which there is a good reason to depart from the budget. Listing those situations however is to acknowledge the large degree to which the cost judge at a detailed assessment hearing will now need to defer to the decision made by the cost judge at the CCMC in approving the budget at that earlier stage.
12. The High Court decision may not of course be the final chapter in the story. Mrs Justice Carr indicated that as early as May 2017, the Court of Appeal will hear the appeal in Harrison v Coventry NHS Trust, which will consider similar issues as in Merrix. The Court expressed the wish for decisions in this area not be delivered in a piecemeal fashion.
13. The importance of the cost budget hearing cannot now be overstated. Unless there is good reason to depart from the budget approved by the Court, that hearing will determine reasonable and proportionate future costs in the case. This may well lead to budget hearings becoming more contentious rather than less, with parties less willing to agree budgets prior to the CCMC. Certainly, there can be no excuse now for not justifying as fully as possible future costs in all phases. Parties would be well-advised to justify future costs more fully in the ‘Assumption’ sections of the budget, which could well become less ‘pro-forma’ than is commonly seen presently.
14. The corollary is that detailed assessments are now likely to be much less significant than hitherto in determining the amount of costs payable. Arguments regarding reasonableness and proportionality of costs will inevitably be curtailed: for instance, it will be very hard if not impossible to argue that an amount under the approved amount is not reasonable and proportionate. Similarly the scope of the detailed assessment is significantly constrained: although incurred costs remain subject to detailed assessment, as Lord Justice Jackson pointed out in his most recent roadshow, such costs generally make up no more than 31% of the costs of an action.  In addition, it may well be that in many cases the hourly rate is likely to comprise the only other major issue for determination at detailed assessment.
15. More generally, the decision in Merrix can be seen as part of the continuing process of fixing costs across civil law. In his latest roadshow, Lord Justice Jackson acknowledged the view of many practitioners that cost budgeting is indeed fixing costs in the multi-track to the extent that further fixing of costs is unnecessary. The decision in Merrix lends support to those arguing that the budgeting process already adequately controls costs by giving the Court power to control about 70% of the total costs of a particular claim.
16. The opposing view articulated in the present consultation is that although budgeting does go some way to controlling future costs, fixed costs are still preferable. It is an irony that the decision in Merrix, lauding at it does the centrality of costs budgeting, comes at a time when, depending on the outcome of the consultation, the longevity of costs budgeting is itself questionable. For now, however, Merrix remains the leading authority on the primacy of the costs budgeting process in controlling costs within multi-track civil litigation and will be followed by costs judges unless the Court of Appeal rules otherwise.
 ‘Costs Conference on 7th March 2017; Keynote Address by Lord Justice Jackson; The Review of Fixed Recoverable Costs’.