Escaping the shackles of the budgeted sum

Some recent decisions from specialist costs judges bring back into focus the question of how the indemnity principle interacts with approved budgeted costs and good reason to depart under CPR 3.18.

The indemnity principle means a receiving party cannot claim more than they are in fact liable to be charged by their own solicitor. No automatic entitlement exists to the “budgeted” sum for any particular phase. If the receiving party has incurred less than the budgeted sum at the conclusion of the action, the indemnity principle means that only the sum incurred can be claimed between the parties.

There is judicial variance as to whether this constitutes “good reason” and therefore entitles the paying party to contest all the costs in a particular phase, or whether the court should instead just allow the costs in that phase in full as they are below the budgeted figure.

• HHJ Dight CBE in Barts Health NHS Trust v Salmon (CC London) 17/01/2019 found that once a “good reason” has been established (i.e. the receiving party has spent less than the budgeted sum) the court is given the right to depart from the budgeted sum by operation of the indemnity principle. Consequently, no further good reason needed establishing under CPR 3.18 and the court would assess the costs of that phase in the normal way.
• DJ Lumb disagreed in Chapman v Norfolk and Norwich University Hospitals NHS Foundation Trust (CC Birmingham) 4/3/20. He found that very clear evidence of obvious overspending in a particular phase would be required before the Court could even begin to entertain arguments that there was a good reason to depart from the budgeted figure if the amount spent came within budget. The experienced district judge opined it was not the role of the costs judge at Detailed Assessment to carry out a calculation of what level of the proportion of a budgeted phase a prudent receiving party would have incurred where the phase has not been completed.
• In Utting v City College Norwich (SCCO Ref: SC-2019-BTP-000657) 22/05/2020, Master Brown agreed with DJ Lumb that if underspend were to be a good reason for departing from a budget, it would be liable to substantially undermine the effectiveness of costs budgeting. However, on the issue of whether any kind of assessment of a phase should take place where the receiving party is under budget, Master Brown suggested the court remained open to receiving submissions on whether to depart further downwards from the sum claimed if the assumed work in a particular phase was only partially completed.

Keoghs Comment:

Until there is binding authority from the higher courts, this thorny issue remains uncertain. Perhaps a sensible and realistic stance most costs judge will adopt is that something more than simple underspend must be established before the court will find good reason exists and start assessing the costs in a budgeted phase.

An example of “good reason” in this context could be that the work assumed in a phase is not substantially completed yet the costs claimed are approaching the approved budgeted sum.

In all circumstances however, the starting point for good reason under CPR 3.18 should be an analysis of the assumptions and reasons underpinning the approved budgeted sums and how and why the costs being claimed differ.