National Museums and Galleries on Merseyside Board of Trustees v AEW Architects and Designers Ltd

High Court endorses substantial upward departure from approved cost budget

In the case of National Museums and Galleries on Merseyside Board of Trustees v AEW Architects and Designers Ltd [2013] EWHC 3025 (TCC), the High Court had to consider whether an interim payment on account of costs should reflect a cost management order made in April 2012 or the later costs management budget schedules submitted for the Pre-Trial Review, which through an oversight at the hearing had not been approved.

The case was governed by the Costs Management in Mercantile Courts and Technology and Construction Courts – Pilot Scheme (“PD 51G”), which permitted the judge to make costs management audits so as to control the cost of litigation in accordance with the overriding objective. Similar procedures are of course now in place as a result of the Jackson Reformsrules in CPR r.3.15 – r.3.18.

At a CMC on 24 February 2012, NML had its costs budget approved by the Court in the sum of £492,727.57. This estimate had increased to £1,129,880.01 by 3 January 2013, which was contained in a budget lodged with the Court for consideration at the Pre-Trial Review on 22 March 2013. Under Paragraph 6 of Practice Direction 51G, NML was so obliged to file and serve a revised costs budget because their approved budget was no longer accurate, giving reasons for such a departure.The Court should then have determined whether to approve or disapprove the amended budget, applying the test set out in paragraph 8 of PD 51G (now contained in CPR r.3.18), which provided: “When assessing costs on the standard basis, the court – (1) will have regard to the receiving party’s last approved budget; and (2) will not depart from such approved budget unless satisfied that there is good reason to do so.”  Due to an oversight at the hearing, the revised costs budget was not considered at the Pre-Trial Review.

At the costs hearing of 1 October 2013, following judgments on liability ([2013] EWHC 2403 (TCC)) and quantum ([2013] EWHC 2576 (TCC)), the Court had to determine issues of interest and costs, including the effect of the failure to approve the revised budget in March. Paul Reed QC, for and on behalf of AEW, argued that the costs judge was not able to depart from the last formally approved costs budget and therefore any interim payment on account should only relate to the sum approved in February 2012.

Mr Reed QC relied upon the case of Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd [2013] EWHC 1643 (TCC), in which Coulson J construed and applied the new costs management rules relating to PD 51G. In particular, Coulson J considered: (a) what a party needs to do to seek approval of a revised costs budget; (b) when a party should make an application for such approval; and (c) what test the court applies on such an application.

It was submitted for and on behalf of AEW that the analysis and discussion undertaken by Coulson J in Elvanite confirmed that the Court’s approval is a condition precedent to any changes to the original Court approved costs budget and for the recoverability of any sum which exceeds the approved budget. That was not to say that NML was not permitted to spend more on costs, it was simply that they could not recover any sum which exceeded the approved costs budget.

An application to revise a costs management order could have been and ought to have been made immediately it became apparent to NML that the original costs budget had or was going to be exceeded by more than a minimal amount. At the very latest the application pursuant to paragraph 6 of PD 51G ought to have been made before trial, in accordance with the specific wording of paragraph 6 (see paragraph 37 of the judgment in Elvanite). Indeed, in Elvanite, Coulson J explicitly held a party could not make an application for approval of a revised budget under paragraph 6 of PD 51G after trial as he considered that an application to amend an approved costs budget after judgment is a contradiction in terms, as:

“[f]irst it would mean that the exercise would no longer be a budgeting exercise, and would instead be based on the actual costs that have been incurred. Secondly it would encourage parties to ‘wait and see’; only applying to increase the budget if it was in their interests. Thirdly it would make a nonsense of the costs management regime if, at the end of the trial, a party could apply to double the amount of its costs budget. The certainty provided by the new rules would be lost entirely if the parties thought that, after the trial, the successful party could seek retrospective approval for costs incurred far beyond the level approved in the costs management order.… If I am wrong to conclude that an application to amend the costs management order should not be entertained after judgment, then I consider that, at the very least, the Defendant would need to demonstrate good reason why the application was made so late.”

Accordingly, on a proper analysis of the rules and the application of the principles explained in Elvanite, it was too late for NML even to submit an application to revise a costs management order in respect of the costs budget, let alone for the Court to approve the budget.

Mr Reed QC further submitted that NML had not demonstrated, or even sought to suggest, that there was any good reason why the Court should depart from the approved budget of February 2012.

Whilst paragraph 6 of PD 51G does not specifically require a party to demonstrate a “good reason” for the increase in its costs budget, Coulson J held at [42] of Elvanite that that the test under paragraph 6 of PD 51G is the same as that in paragraph 8: i.e. the court should not approve a revised budget unless satisfied in all the circumstances that there is good reason for the revision. Furthermore, in Elvanite, Coulson J made the following points, which are of general application (see [47-64]):

(a) The claim progressed as it was expected to (the issues raised in the initial pleadings were pursued to trial). As such, the general scope for alleging that there was good reason to depart for the costs management order was relatively limited.

(b) He reiterated his analysis in Murray v Neil Dowlman Associates [2013] EWHC 872 (TCC) that it was doubtful whether the mere making of a mistake in an approved costs budget could, of itself, amount to a good reason for a later departure.

(c) Costs budgets have to be prepared on the basis that all the pleaded issues are in dispute (rather than making any assumptions that the issues will be narrowed). In the absence of any qualification in the costs budget, the court is entitled to assume the comprehensive nature of the figures included.

(d) He commented that there was a good reason for one element of the increased costs. The parties reasonably had not assumed that one of the issues would be the subject of expert evidence, which had become necessary.

As a matter of principle, that would be a good reason to depart from the costs budget.

Mr Reed QC argued that none of these factors applied to NML’s costs budget, and that the comments made by Coulson J in Elvanite as directly relevant to the case between NML and AEW:

“This was not a case which some how lurched off track after its commencement, or where the issues ended up being very different to those which had originally been canvassed in the pleadings. Everything went pretty much as it might have been expected to go. In those circumstances, it seems to me that the general scope for alleging in this case that there is good reason now to depart from the costs management order is relatively limited.”

However, Akenhead J determined that there was a significant difference between the Elvanite case and the present case, the most prominent being that there was in the present case an oversight by both parties and the Court at the Pre-Trial Review to get around to addressing the substantially increased costs budgets of both parties and that it was more probable than not that both parties would have agreed each others budget. He also stated that there were a number of reasons why the costs budget had been substantially increased since February 2012 (see [39]), in particular:

(a)  an additional party had been added to the proceedings;

(b) there had been substantial amendments to the Claimant’s case in the autumn of 2012, particularly in relation to quantum;

(c) it was clear by the autumn of 2012 that the case was becoming much more complex than what could reasonably have been envisaged at the earlier stage;

(d) the tone, content and quantity of the correspondence between the parties had increased beyond what could reasonably have been envisaged at the earlier stage; and

(e) there was a much more concertinaed programme up to trial from the autumn on 2012, which inevitably increased costs beyond what was envisaged at the February 2012 CMC.

Whilst Akenhead J stated that it was not appropriate for him to revise NML’s formally approved budget (it being a matter for the costs judge), in ordering AEW to make an interim payment on account of NML’s costs, he awarded a sum considerably higher than NML’s approved costs budget, commenting that this was an obvious case for a substantial upward departure from the approved budget (see [40]).

The decision illustrates that the court may be prepared to allow a departure from the approved budget where there have been significant changes to the course of the litigation since the budget was prepared. Such a determination is clearly fact specific, with cases such as NML v AEW and Elvanite giving guidance on the circumstances in which the Court will approve or disapprove a revised costs budget.

Paul Reed QC and Brenna Conroy were instructed in the case.