Costs budgeting, or rather costs and case management to give it its formal title, has been one of the most contentious and hotly debated aspects of the Jackson reforms. That debate continues, most recently with Lord Justice Jackson’s lecture on the subject on 13 May 2015 and with the setting up of the sub-committee of the CPRC, led by Coulson J, to review the operation of the costs management rules.
Despite costs budgeting having been in place as a key part of the CPR for over two years now, and despite the operation of the pilot schemes before that, it is still very early days in terms of the practical application of the scheme and, in particular, there is very little experience as yet of how the courts will deal with detailed assessments in cases where approved budgets are in place.
One interesting aspect of this, where a difference of opinion has already been judicially aired, relates to the applicability of costs budgeting where a party is subsequently awarded indemnity basis costs in respect of some or all of the claim.
Does the approved or agreed budget operate as some form of limitation on the costs that can be allowed by the court in such circumstances? The topic is of particular interest, for obvious reasons, to claimants, given that an award of indemnity costs is one of the Part 36 “benefits” to which a claimant is automatically entitled (unless a court considers it unjust) in circumstances where a claimant has made a Part 36 offer which has not been accepted, and subsequently achieves an outcome that is at least as advantageous as that offer (CPR 36.17).Indemnity costs awards are, of course, possible in a range of other situations pursuant to CPR 44.2, and there is some anecdotal evidence that there is an increase in applications for such orders, possibly as a way of attempting to sidestep the restrictions imposed by the costs budgeting rules (Courtwell Properties v Greencore might be thought to be a candidate for such a case).
So, what is the position? Does costs budgeting bite on indemnity basis costs?
The starting point is the costs budgeting rules under CPR 3. The teeth in CPR 3, which give a costs budget its bite in the case, are to be found in CPR 3.18 (the sanction for late filing under CPR 3.14 aside).
This provides that “In any cases where a costs management order has been made [which is an order recording approval or agreement of a budget], when assessing costs on the standard basis, the court will (a) have regard to the receiving party’s last approved or agreed budget…and (b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so.”
This blog is not the place to anguish over what might or might not be good reason. The simple point is that the budget for each phase will stand (absent good reason) as the assessed costs, but only where that assessment is “on the standard basis”.
That, of course, does not mean that the budget (whether the approved one or the one originally submitted) is irrelevant, and it may be that a court demands an explanation on assessment for any departure as a method of testing the reasonableness of the costs claimed.
However, as to the direct application of CPR 3.18, the rule seems clear to me. It is reinforced by the idea that a key aspect of costs budgeting is to ensure proportionality, a concept that does not apply to an indemnity basis assessment. So why ask the question?
The answer lies, in part, in the dicta of Coulson J in Elvanite Full Circle v AMEC Earth & Environment. Coulson J’s experience in the field of costs budgeting should not be overlooked. Not only has he played a key role in its use in the TCC, where there was a pilot scheme prior to full introduction, but he now chairs the CPRC sub-committee that is reviewing the rules.
In Elvanite, Coulson J (obiter) accepted that CPR 3.18 indicated that a CMO was only relevant to a standard basis order, but, as a matter of “logical analysis”, stated that it was also the “starting point” for an indemnity basis assessment.
The key difference, in his mind, was simply that on an indemnity basis assessment the “good reasons” to depart from the approved budget were likely to be “more numerous and extensive”, or perhaps, to put it another way, more readily justifiable.
Further, he noted (in a piece of logical analysis I find a little hard to follow) that the award of indemnity basis costs might itself be a “good reason” to depart. Doing the best I can, I assume that this might mean that the factors which justified the award of indemnity costs in the first place might in turn justifying departing from the approved budget.
Coulson J’s approach differs from that taken by HHJ Simon Brown QC (himself a leading light and hugely experienced in the costs budgeting field) in Slick Seating v Adams, though he does not appear to have been taken to the Elvanite decision.
More pertinently, it has been expressly contradicted, in trenchant and cogent terms, by HHJ Keyser QC, also in the TCC, in Kellie v Wheatley & Lloyd Architects. At paragraph 17 of his judgment, he gives a series of reasons why he considers Coulson J to be wrong, the most cogent of which are (i) the wording of CPR 3.18 and (ii) the fact that proportionality does not apply to an indemnity basis assessment.
Who is right? I am on record as firmly supporting HHJ Keyser’s view and consider the contrary argument to be a very weak one.
However, a very recent change has served to reopen the debate.
With effect from 6 April 2015, CPR 36 was substantially amended. One of the amendments addressed a concern which lingered from the effect of Mr Mitchell MP’s case against Newsgroup Newspapers.
The concern was that parties would be far less worried about, and therefore far less likely to accept, an opponent’s Part 36 offer if they knew that that opponent had been sanctioned under CPR 3.14 and that the opponent’s future costs were therefore, effectively, nil.
Accordingly, a new rule was introduced (CPR 36.23), the simple effect of which is that where an offeror is awarded costs under Part 36, but is subject to a CPR 3.14 sanction, then for the period after the end of the relevant period following the making of the relevant offer (usually 21 days), they shall be entitled to 50% of the costs they would have received but for the CPR 3.14 sanction.
In other words, for the post-offer period the sanction is lifted by 50%.
This is all very sensible, even if the need for it can be debated. Its present relevance, though, is that it expressly applies to an award of costs to a claimant on the indemnity basis pursuant to CPR 36.17(4)(b).
In other words, if a claimant is subject to a CPR 3.14 sanction, but is then awarded indemnity costs following a Part 36 offer, their costs at the end of the relevant period will be limited to 50% of the costs that would have been awarded but for the sanction.
This presupposes that where a deemed budget under CPR 3.14 is approved, the court on assessment cannot depart from that deemed budget under CPR 3.18, even if the claimant is awarded indemnity costs.
It further appears to assume that, as Coulson J considered, CPR 3.18 applies on an indemnity basis assessment as well as on a standard basis assessment.
It would appear that the drafters of this rule were themselves in some doubt and considered that a claimant in that situation could argue that the sanction did not bite because of the indemnity costs award, but proceeded with the amendment on the basis that the rules were “silent” as to the application of CPR 3.18 on the indemnity basis.
I have my own doubts as to the wisdom of introducing an amendment in one rule to deal (in part) with a situation which is said to be unclear under another rule. Perhaps more importantly, whilst it does not appear to have been the intention to add weight to the idea that CPR 3.18 does bite on indemnity basis costs, this may be the practical effect.
I remain of the view that CPR 3.18 does not bite on an indemnity basis costs award. However, given the continued lack of clarity, this may be something that should be addressed by the forthcoming review chaired, of course, by Coulson J.