What value budgets? Merrix v Heart of England NHS Foundation Trust considered

The issues

It is somewhat surprising that the introduction of costs budgets was accompanied by little advice on their impact on detailed assessment proceedings. CPR 44.3 (3) (h) does import the receiving party’s last approved or agreed budget into the ‘7 pillars of wisdom’ which the court needs to consider on detailed assessment, but no mention is made of its importance relative to the remainder.

The main guidance is therefore provided by CPR 3.18, which states:

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.

There is no doubt that where the receiving party is over-budget, then CPR 3.18 (b) operates to act as a fetter on the recoverable costs unless the receiving party is able to persuade the court that there is a ‘good reason’ to depart from the budget. However, the position is less clear where the receiving party is under-budget.

The case

The consequences of this scenario were considered in Merrix v Heart of England NHS Foundation Trust [2016] EWHC B28 (QB), before District Judge Lumb sitting as Regional Costs Judge.

The receiving party Claimant submitted that if costs are claimed at or less than the budget then they should be assessed as claimed unless the paying party Defendant satisfied an evidential burden that there was a good reason to depart. The Defendant’s position is the budget is only one factor to be considered in determining reasonable and proportionate costs on assessment, and does not fetter the costs judge.

SARPD Oil

The Claimant relied on a Court of Appeal decision in respect of the impact of a costs budget on an application for security for costs, Sarpd Oil International Ltd v Addax [2016] EWCA Civ 120. One of the paragraphs referred to in that judgment was quoted as:

For example, if a Court has commented that incurred costs in a costs budget appeared to be reasonable and proportionate, it would usually require good reason to be shown why such costs should not be included in an award of costs on the standard basis at the end of the trial…. Therefore, depending on what is said by the Court by way of comment, the practical effect of a comment on already incurred costs made by a Court pursuant to paragraph 7.4 of PD3E may be similar to the effect under part 3.18 (B) of formal approval of the estimated costs element in a costs budget.

Note the ellipsis at the end of the first sentence – more on that later! Of immediate relevance is that the Court of Appeal’s comments were arguably obiter and related to the impact on comments on incurred costs rather than approval of forecast costs; nevertheless, SARPD Oil appeared to be a strong indication that paying parties would struggle to reduce costs below budgeted levels.

The decision in Merrix

DJ Lumb disagreed with the Claimant’s interpretation of CPR 3.18. It was considered that a budget was not a ‘fixed sum’, but an ‘available fund’. In that context, talking of ‘departure’ upwards or downwards was nonsensical. If costs claimed exceeded the budget, then that was a departure from the available fund. But if costs claimed were within the budget then, even if reduced further, they were within the available fund and so there was no departure.

DJ Lumb resolved the case by indicating that:

the powers and discretion of a costs judge on detailed assessment are not fettered by the costs budgeting regime save that the budgeted figures should not be exceeded unless good reason can be shown.

Costs capping?

It is hard to argue with the characterisation of a budget as an ‘available fund’. Certainly that seems to accord with the plain meaning of the word.

However, with the greatest of respect to DJ Lumb, it is hard to follow how the conclusion applies from the premise. If the costs judge is indeed unfettered by the budget on assessment and can reduce costs incurred within budget then the ‘fund’ cannot in any meaningful sense be ‘available’.

In practice, it is hard to see how the conclusion in this case renders the ‘budget’ as anything other than a ‘cap’.

A curious ellipsis

I have already mentioned the ellipsis in the quotation from SARPD. The missing words were:

In such a case, the party who had put forward the costs budget would have been encouraged by the court to litigate on the understanding and with the legitimate expectation that such costs would be likely to be recovered if he were successful, and good reason would need to exist to justify defeating that expectation.

It is an odd omission from the quote, because the reasoning in this sentence would seem to be of direct application, indeed of central importance, to the question posed in Merrix. Whilst it strictly refers to comments on incurred costs (the reference point for the phrase “in such a case”), there is no logical justification for treating an approved budget any differently.

An unfortunate decision

Ultimately Merrix appears to be an unfortunate decision which robs costs budgeting of much of its merit. If this decision is followed (and it is understood to be subject to an appeal) then the predictability and reduction in the scope of disagreement on assessment that budgets should have brought will be rendered illusory.