Costs Budgeting: When is a Good Reason Required?

As is often the case when a new procedure is introduced, the requirements and boundaries of that procedure are often tested in several different ways to enable practitioners to find its limits, to that extent costs budgeting has been no different.

Case Law

In Harrison v University Hospitals Coventry & Warwickshire NHS Trust [2017] EWCA 792 the court grappled with two issues relevant in the context of costs budgeting. The first was whether, where a Costs Management Order approving a costs budget is made, is a costs judge at detailed assessment unable to go below the budgeted amount unless satisfied that there is good reason to do so? Secondly, when considering costs incurred prior to the budget is there a similar requirement of good reason if a costs judge at detailed assessment wishes to depart from the sum put forward at the costs management hearing.

Rule 3.18 provides that:

“In any case where a costs management order has been made, when assessing costs on the standard basis, the court will –

  • have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings;
  • not depart from such approved or agreed budget unless satisfied that there is good reason to do so.”



Paragraph 7.4 of PD 3E states:

“As part of the costs management process the court may not approve costs incurred before the date of any budget. The court may, however, record its comments on those costs and will take those costs into account when considering the reasonableness and proportionality of all subsequent costs.”

The first issue had been considered in the case of Merrix v Heart of England NHS Foundation Trust [2017] EWHC 346 (QB), whereby it was held that a good reason was required before departing from the approved figure, although this was the first time the point had been considered by the Court of Appeal. The lower court Judge in Harrison had agreed with the decision in Merrix.

The Court of Appeal affirmed those decisions. The Court found that if approval of a costs budget by a Costs Management Order has the more limited status which the appellant would ascribe to it then that would have a potentially adverse impact on parties thereafter attempting to agree matters without requiring a detailed assessment. It appeared to Lord Justice Davis that “was indeed designed to be one of the prospective benefits of cost budgeting that the need for, and scope of, detailed assessments would potentially be reduced.”

The Court of Appeal pointed to the fact that if a good reason to reduce the sum were not required then it would involve “a most unappealing lack of reciprocity. It means that a receiving party may only seek to recover more than the approved or agreed budgeted amount if good reason is shown; whereas the paying party may seek to pay less than the approved or agreed budgeted amount without good reason required to be shown. It is difficult to see the sense or fairness in that.”

With regard to the second issue the Court of Appeal made a clear distinction between the similarly posed question when concerned with incurred costs. Lord Justice Davis asserted that “either incurred costs are within the ambit of CPR 3.18(b) or they are not. Since they are not approved budgeted costs, by the terms of paragraph 7.4 of PD 3E and of the Rules, they are not within that sub-rule.” Accordingly it was held that “It follows, in my view, that incurred costs are not as such within the ambit of CPR 3.18 (in its unamended form) at all. Accordingly such incurred costs are to be the subject of detailed assessment in the usual way, without any added requirement of “good reason” for departure from the approved budget.”


Accordingly the position in relation to when a ‘good reason’ is required to depart from a budgeted sum has been clarified. If the sum in question was approved by the Judge under a Costs Management Order then a good reason will be required to depart from it, whether that is an upward or downward variation. Conversely, where a sum relates to incurred costs at the time the budget is considered, no such good reason is required to depart from it as it has not been subject to the same scrutiny by the court at the costs budgeting phase.