Costs budgeting after Sarpd
David Cooper discusses the confusion surrounding incurred costs that the Court of Appeal decision has created for practitioners
Following the decision in Sarpd Oil International Ltd v Addax Energy SA  EWCA Civ 120 earlier
this year, practitioners are
still grappling with how to
deal with incurred costs
and hourly rates at any case
and costs management
Contrary to practice direction 3E of the Civil Procedure Rules (paragraphs 7.3, 7.4, and 7.10), the Court of Appeal has said that such issues should be addressed at the CCMC. As a result, practitioners are seeking to ensure that it is not necessary
to argue issues of incurred costs and hourly rates before or during the CCMC; whether they should seek approval of budgets on the basis that the approval given is without prejudice to any points that may be made on assessment of costs; and further, where budgets are agreed, that specific terms are included which make it clear that the agreement does not extend to the incurred costs or hourly
rates in particular.
It does appear that some regard is being paid to the difficulties that have arisen as
a result of the Sarpd decision.
The decision not to dispute
the reasonableness and proportionality of incurred costs meant that a paying party was held to be bound by the incurred costs (at the time of budgeting) and had lost the opportunity to raise those issues at detailed assessment. Emphasis was placed upon the available opportunity to do so at the CCMC, both in relation to estimated and incurred costs.
Consequently, if representations are not made
at the budgeting stage, then,
in the absence of any material change, the party will be prevented from raising any
such issues at assessment.
Mr Justice Flaux in the case of Wright v Rowland  EWHC 2206 (Comm) appears to favour
a partial approach to budget approval on the basis that some elements are approved but the court declines to approve the figures relating to certain phases.
This approach allows for
a detailed assessment to
take place in respect of the unapproved costs. However, one particular difficulty that arises from this approach is that the approval should still only be in relation to the estimated costs, on the basis that incurred costs are taken into account (PD 3E 7.4) and the position in respect of incurred costs needs to be preserved.
This approach does not provide any level of restriction upon the costs that might
need to be incurred for those unapproved phases. If elements of costs set out in the budget are not the subject of an approved order, then they are open to full argument upon detailed assessment. This remains a worrying issue and one hopes it may be addressed by the Court of Appeal or the Civil Procedure Rule Committee in the future.
Practitioners need to be
vigilant to ensure that they continue to preserve the position contemporaneously relating to incurred costs and hourly rates if they are to be determined at detailed assessment.
There may be cases where leaving sections of the budget unapproved, perhaps by reason of the fact that there remain substantial issues with regard
to incurred costs, will be appropriate. However, it may
still be necessary to consider whether, following Sarpd, arrangements are made to ensure that challenges are made at the CCMC to the incurred costs, thereby enabling the court to record any relevant comments and for these to be taken into account when considering the estimated costs (PD 3E 7.4).
If negotiations take place
with a view to agreeing budgets, care needs to be taken to ensure that challenges in respect of incurred costs and hourly rates are detailed in the precedent R document. Any agreement needs to ensure that there is certainty
as to what has been agreed, what remains in dispute, and the basis of any such agreement.
A final word of warning:
there seems to be a growing enthusiasm for trying to avoid detailed assessment of costs
at the end of the trial where budgets have been agreed or approved and the costs claimed do not exceed the budget.
Flaux J warns of this possibility
in his judgment in Wright (at paragraph 8) and there have already been examples of cases where this has occurred.
The time to fully consider the issue is ideally at the budgeting stage, even if only to preserve later disputes on reasonableness in light of this judgment.