Clare Dixon of 4 New Square looks at the impact which costs budgeting has had on interim payments on account of costs and explains why, when an indemnity costs order is made, the budget won't necessarily be a ceiling to recovery.
Victory having been secured in litigation, attention often then turns to costs. First on the agenda is securing a favourable costs order but, having achieved that, the receiving party wants to know how much they are going to recover, and when.
CPR 44.2(8) states: "Where the court orders a party to pay costs subject to detailed assessment, it will order that party to pay a reasonable sum on account of costs, unless there is a good reason not to do so". Obtaining such an order has several benefits:
- Unless the Court orders otherwise, payment should be made within 14 days and, in default of payment, enforcement action can be taken;
- If payment is not forthcoming and/or enforcement proceedings reveal there to be little or nothing to enforce against, then the successful party can take an informed decision about whether pursuing a detailed assessment is worthwhile; and
- If a high enough percentage is secured then, even if the paying party has the means to pay, the successful litigant may take the view that the prospects of recovering the remaining sum do not justify the expense of such action.
Before costs budgeting, and perhaps because of a previously more restrictive wording of the relevant rule, the percentages ordered by way of interim payments were (according to Birss J. in Thomas Pink Ltd v Victoria's Secret UK Limited  3 Costs LR 463) generally a little over 50% of the incurred costs. However, following the introduction of costs budgeting, CPR 3.18 was introduced which provides: "In any case where a costs management order has been made, when assessing costs on the standard basis, the court will... (b) not depart from such approved or agreed budgeted costs unless satisfied that there is a good reason to do so". Two consequences of this are the focus of this note. First, the impact which costs budgeting has had on the proportion of costs which Judges are prepared to award when making interim costs orders and, second, the relevance of costs budgets to interim costs orders where the paying party is ordered to pay costs on an indemnity basis.
In Elvanite Full Circle Ltd v AMEC Earth & Environment (UK) Ltd  EWHC 1643 the successful defendant's approved costs were about half their actual costs. Coulson J. (as he then was) considered the ambit of CPR 3.18 and made, amongst others, the following findings.
- First, he found (albeit obiter) that where an indemnity costs order was made the starting point for determining the level of an interim payment on account of those costs should be the budgeted costs. He found this, notwithstanding CPR 3.18's reference to assessment on a standard basis, but acknowledged that in such circumstances there may be "good reasons" to depart from the budgeted costs.
- Second, having found that the defendant could neither amend its budget nor evince a good reason to depart from it, the Judge ordered an interim payment of £250,000. This was about 94% of the defendant's budgeted costs (but only about 50% of their actual costs) and consequently a lesson both in the need to accurately budget and in the benefits to be gained where there is accurate budgeting.
In Kellie v Wheatley & Lloyd Architects  5 Costs LR 854 His Honour Judge Keyser QC ordered an interim payment of £90,000 against a costs budget of £91,700 (ie 98%). He also (again obiter) disagreed with Coulson J. on whether the starting point for assessing the level of an interim payment, where there was an order for indemnity costs, should be the budgeted figure for two reasons. First, because CPR 3.18 makes express reference to assessing costs on the standard basis. Second, because the budgeting process involves (amongst other things) assessing the proportionality of costs whereas indemnity costs are not subject to a test of proportionality, but merely of reasonableness.
The existence of the conflicting decisions in Elvanite and Kellie was acknowledged by HHJ Simon Brown QC in Excelerate Technology v Cumberbatch  2 Costs LO 223 who appears to have tried to reconcile the decisions saying: "Where, as here, the claimant's costs will be assessed on an indemnity basis, the claimant will not be so limited by the rules to the agreed costs budget but it may, in practical terms, be a starting point or guide for the costs judge on any detailed assessment". However, whilst the point was raised in Excelerate, it did not arise in practice since the actual costs did not exceed the budgeted figure. It therefore remains a point for future argument.
In terms of what constitutes a "reasonable sum" 90% was ordered in both Thomas Pink and MacInnes v Gross  4 WLR 49 with Coulson J. saying in the latter that he considered this to be "the maximum deduction that it is appropriate to make in a case where there is an approved costs budget".
Finally, in Cleveland Bridge v Sarens (UK) Ltd  2 Costs LR 333, the paying party opposed a payment on account of 90% on the basis that (i) part of the budgeted costs were incurred costs and (ii) there was likely to be a reduction in hourly rate on assessment. Both points had force given that CPR 3EPD provides that approval of hourly rates and incurred costs is not part of the budgeting process. In respect of issue (i) the Judge made an interim order of 70% in relation to incurred costs (finding that MacInnes was not intended to apply to such costs) and 90% in relation to budgeted costs and on issue (ii) she found that any issue as to hourly rates could be accounted for in the 10% differential between the budgeted costs and the interim order awarded.
From a practical point of view the importance of budgeting accurately and making timely revisions cannot be overestimated. Further, as Coulson J. pointed out in MacInnes, one of the main benefits to be gained from the additional work necessitated by costs budgeting is the additional certainty provided about what the likely costs recovery will be. When coupled with an interim order on account of costs it means that a successful party can have greater certainty not only about how much it is likely to recover but that it is likely to be able to enforce an order for a high proportion of that sum soon after receiving judgment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.