The John M Hayes Partnership have proven to be professional, effective and knowledgeable Costs Draftsmen. The quality and speed of their drafting is excellent and the advice received has been detailed and pragmatic.
The recent case of Kellie v Wheatley & Lloyd Architects Ltd  EWHC 2886 (TCC) brings focus back to the following questions: how will the court’s assessment of costs in a budgeted case differ if costs are assessed on the indemnity basis rather than the standard basis? And what size payment on account is appropriate?
The underlying action related to a claim for professional negligence. At trial, the Claimant failed to establish breach of duty. At a hearing to resolve the order to be made as a consequence of the outcome of the trial, three matters were to be decided: whether a percentage based costs order was to be made, whether costs were to be assessed on an indemnity basis, and what level of interim payment was appropriate.
On the facts, the court declined to make a percentage based costs order or award costs on the indemnity basis. The relevant paragraphs (4-10 and 18-29) are worth consideration for a summary and application of the relevant principles when the court exercises its discretion in regard to making an order for costs.
For the purpose of this article, though, the most interesting part of the judgment is at paragraphs 14-17, where the practical differences in terms of an award of standard or indemnity basis costs are elucidated.
The Defendant had previously submitted a budget in excess of £140,000. That had been reduced to £91,700 at a costs management hearing on the grounds of proportionality. Reference was made to Elvanite Full Circle Ltd v AMEC Earth & Environment (UK) Ltd  EWHC 1643 (TCC) where it was stated, obiter, that “the costs management order should also be the starting point of an assessment of costs on an indemnity basis, even if the ‘good reasons’ to depart from it are likely to be more numerous and extensive if the indemnity basis is applied”.
The court found itself in respectful disagreement with Elvanite. A costs budget sets out the probable limit of the proportionate costs that can be incurred, and which will trump reasonableness. However proportionality is not a consideration on the indemnity basis. Therefore
When a costs management order is made, the parties know that costs within the approved budget are likely to be considered proportionate, and costs in excess of the approved budget are likely to be considered disproportionate; in either case, the burden of justification lies on the party seeking a departure from the approved budget. But the costs management regime is not intended to give litigants an expectation that they will not incur a liability for disproportionate costs pursuant to an order for costs on the indemnity basis.
So if costs are awarded on the indemnity basis, the budget will not be a limiting factor on the receiving party’s costs. Kellie is also obiter; but it is likely to be preferred to Elvanite as it fits more closely with the purpose and rationale underpinning costs management.
What is also interesting is the statement that “the burden of justification lies on the party seeking a departure from the approved budget”. Some paying parties might argue that the only relevance of budgeting is in providing an upper bound on the receiving party’s costs unless good reason can be shown. They might be in for a shock as it also provides a lower bound unless good reason is shown.
The final point to note is that an interim payment of £70,000 had already been made. However, the court had regard to the Defendant’s budget and, on the basis that there were no factors which indicated a downward departure from the budget was likely, increased the amount to be paid on account to £90,000. It would therefore seem justifiable for successful parties to seek a sum close to the approved budget by way of an interim payment as a matter of course.