Underspend or Incomplete Costs Budget Phase: A Clear Distinction Should be Made
To depart from an approved or agreed costs budget, whether it be upwards or downwards, a party must demonstrate ‘good reason’ under CPR 3.18(b). Furthermore, it is a well-established principle that the ‘good reason’ bar has a high threshold. Two recent decisions have shed much needed light on the issue of whether incurring less costs than the approved budget constitutes good reason to depart downwards from the budget. The decisions have also highlighted the clear distinction that should be made between underspending in a budget phase and not substantially completing a budget phase.
The Initial Complication – Salmon v Bart Health NHS Trust (unreported) (17 January 2019)
In Salmon v Barts Health NHS Trust, HHJ Dight, sitting with Master Brown, held that there was a good reason to depart from the costs budget when the sum claimed on assessment was lower than the figure stated on the costs budget.
On appeal, HHJ Dight found that, under CPR 3.18(b), the fact that the anticipated work had not been completed was a good reason to depart from the costs budget. This was on the basis that the claimant had already departed from the costs budget to allow a lesser amount by virtue of the indemnity principle and thus no further good reason had to be provided to reduce the phase further.
HHJ Dight, at paragraph 36 of the transcript, stated the following:
“Awarding the lower figure would be, in my judgment, a departure from the budget, which requires a good reason to be established: in this case, once that had been done it was open to the paying party to challenge the figure which was then being claimed by the receiving party, and they did not have to assert a further good reason to enable the court to do so.”
The Competing Decision – Chapman v Norfolk and Norwich University Hospitals NHS Foundation Trust (Birmingham County Court, 4 March 2020)
In Chapman v Norfolk and Norwich University Hospitals NHS Foundation Trust, District Judge Lumb held that not spending the totality of the budgeted figure for a phase was not in itself a good reason to depart from the costs budget.
In disagreeing with HHJ Dight in Salmon, District Judge Lumb, at paragraph 16 of the judgement, stated:
“If that approach was correct, virtually every case would go to detailed assessment and there would be a perverse incentive to a prospective receiving party to overspend and marginally exceed every phase in order to avoid a detailed assessment.”
At paragraph 15 of the judgment, DJ Lumb said that it was not the role of the Costs Judge at detailed assessment to carry out a calculation of the proportion of a budgeted phase that a receiving party would have incurred where that phase had not been completed. This is because such an approach would completely undermine the whole purpose of costs budgeting.
In addressing the issue before him, DJ Lumb acknowledged that the ‘good reason’ bar was a high threshold to overcome.
The Distinction that Should be Made – Utting v City College Norwich  EWHC B20 (Costs)
In the most recent case of Utting v City College Norwich, Master Brown, who in fact sat with HHJ Dight in Salmon, rejected an argument that an “underspend” amounted to a good reason to depart from the costs budget.
Master Brown permitted the defendant to argue in the assessment that there was a “good reason” to depart from the budget in respect of two of the phases on the grounds that the phases had not been substantially completed. However, the defendant’s argument was that an “underspend” amounted to a good reason to depart from the budget.
Master Brown considered the two competing aforementioned cases on the topic. At paragraph 17 of the judgment and following his review of the decisions in Salmon and Chapman, Master Brown stated:
“I sat as assessor to Judge Dight in the Salmon case and, as he very courteously records, whilst I agreed with him on the outcome of the appeal I did not necessarily agree with the route by which he reached it. It seems to me that the conclusions reached by the learned Judge in respect of the budget were justified on the basis that the relevant phases were not completed or at least not substantially so; put another way, the assumptions upon which the budget had been prepared were not fulfilled. These were, to my mind, “good reasons” for departing from the budget.”
Master Brown, at paragraph 19 of the judgment, went on to say:
“As to whether an ‘underspend’ amounts to a “good reason” I respectfully agree with District Judge Lumb’s decision [in Chapman], essentially for the reasons given by him”.
Master Brown, therefore, concluded that an ‘underspend’ was not a good reason to depart downwards from the costs budget. However, he emphasised that there was a clear and obvious distinction between an ‘underspend’ and a situation where there was, at the very least, substantial non-completion of a budget phase. He found that, “at the risk of stating the obvious”, it would be unjust for a receiving party to receive the full amount of a budgeted sum in circumstances where only a modest amount of the expected work had been done.
The decisions in Chapman and Utting have resolved any complications that arose from Salmon. If an underspend were to be a good reason for departing from a costs budget, it would substantially undermine the effectiveness of cost budgeting. Moreover, solicitors who had acted efficiently and controlled their costs to within the budget would find their costs subject to detailed assessment, whereas less efficient solicitors who exceeded the budget would, absent any other good reason, receive the budgeted sum in full.