horwich farrelly

Budgeting post-Merrix

March, 16, 2017

Merrix v Heart of England NHS Foundation Trust [2017] EWHC 346 (QB)

The Decision

“In my judgment…where a costs management order has been made, when assessing costs on the standard basis, the costs judge will not depart from the receiving party’s last approved or agreed budget unless satisfied that there is good reason to do so. This applies as much where the receiving party claims a sum equal to or less than the sums budgeted as where the receiving party seeks to recover more than the sums budgeted.

The impact of this decision reverses the commonly held belief that the ‘good reason’ test under CPR 3.18 only applied to a receiving party who had exceeded their approved cost budget allowance; now, a paying party at assessment has to show a ‘good reason’ as to why a judge should reduce costs that fall within the receiving party’s approved costs budget.

Practical Impact – Proportionality

“The proportionality test can be applied at the time of fixing the budget. If there is good reason to depart from that decision, the judge on detailed assessment can do so.”

The costs budgeting element of the costs and case management hearing now becomes even more crucial to the paying party’s ability to control and reduce the receiving party’s costs entitlement. The new test of proportionality – previously seen as such a weapon at detailed assessment for paying parties – now seemingly has the most impact at the CCMC stage, where the court is said to fix a ‘proportionate and reasonable’ costs total for the claim at hand. This finding of what is a ‘proportionate and reasonable’ costs total remains at detailed assessment unless a paying party can persuade the court otherwise.

Practical Impact – Budget Negotiation

“The Costs Judge expressed concern that such an approach would, on the other hand, lead to longer and more expensive costs management hearings. With proper and realistic co-operation and engagement between the parties that should not be the case.”

Whilst the judgment emphasises that parties should be realistic and co-operate prior to a CCMC, the stakes have now become so high that a tough negotiation strategy has to be taken as to the costs allowed under each phase, so as to maximise the opportunity to restrict the claimant’s costs budget prior to the detailed assessment process. There is therefore a delicate balance to be set – negotiate enough so as to not draw the ire of the court, but not give too much away in terms of offers that the risk of a claimant’s budget being higher than is reasonable is increased.

Practical Impact – Incurred Costs

“Further and on any analysis, there remains room for detailed assessment outside the budget – for example in relation to pre-incurred costs not the subject of the costs budget…”

The rules are clear – ‘the court may not approve costs incurred before the date of any costs management hearing’ (CPR 3 PD 3E 7.4). This judgment does nothing to change that, so the ‘incurred’ costs included within a costs budget are still subject to the usual, ‘line-by-line’ detailed assessment, without being subject to any test of ‘good reason’.

Practical Impact – ‘Good Reason’

Whilst further guidance is awaited as to the definition of ‘good reason’ within CPR 3.18, it appears from the case law received to date that such a test carries a lesser threshold than ‘exceptional circumstances’ and therefore should not be viewed as an insurmountable hurdle for paying parties to overcome.

Recommended Behaviours

  • Utilise Proportionality – Judges must be asked and pushed even harder to utilise the new proportionality test to its full extent at the costs management stage of proceedings, as there may not be opportunity to revisit this during the detailed assessment process.
  • Detailed Assumptions – make sure that the court takes a note of the basis upon which they are allowing costs for each phase – any departure from this basis could be a ‘good reason’ at assessment for the court to reduce costs that fall within budget.
  • Harsh Negotiation – push the argument that an over-spend on incurred costs means that the receiving party cannot have any further costs, on grounds of proportionality.
  • Active Case Management – if a case significantly changes to the point where the basis upon which a costs budget was approved is entirely different, that the paying party invites the receiving party to amend their budget accordingly, or alternatively put the receiving party on notice that the change of circumstance will be raised at detailed assessment as a ‘good reason’.
  • Specialist Costs Advocacy – with costs and case management conferences carrying even greater importance in terms of costs implications than previously, specialist costs advocacy must be utilised at costs and case management hearings so as to ensure that the paying party’s position as to costs budgets is fully protected.
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