The debate on incurred costs continues

Just when you all thought you were getting to grips with the budgeting regime and things were settling down, along come amendments to part 3 of the Civil Procedure Rules (CPR).

The changes, which take effect on 6 April 2016, include:

• Budgets for claims below £50,000 have to be filed and served with the directions questionnaires; for larger claims, they are to be filed and served 21 days prior to the case and costs management conference (CCMC);

• Parties need to provide a mandatory budget discussion report seven days before the CCMC;

• No budgeting is required where the claimant is a child or has impaired life expectancy; and

• Clarification that court does not set hourly rates at CCMCs.

Incurred costs

Though the rules are clear that the court will only seek to manage the costs to be incurred, it is invariably the case that the costs management order either records an agreement or approves the total costs for each phase (both incurred and to be incurred) and of the total budget. This is on the basis that there has been no analysis or determination of the incurred costs.

At least, that was what we understood until the Court of Appeal ruling in SARPD Oil International Ltd v Addax Energy SA and another [2016] EWCA Civ 120. Though principally about whether to make an order for security for costs, it was also necessary for the court to consider what amount should be allowed for security. The application itself contended that the sum to be allowed should cover incurred costs. At first instance, Mr Justice Andrew Smith decided that if he had allowed security for costs, he would have assessed the amount by reference to a budget that had been agreed between the parties and approved by Mr Justice Blair.

On appeal, the respondent contended that the judge should have gone behind the costs budget and examined for himself whether certain sums recorded in the budget as having already been incurred were reasonable and proportionate costs.

The bench, notably, did not include any of the Court of Appeal judges who regularly deal with costs-related issues. Giving the judgment, Lord Justice Sales acknowledged that under paragraph 7.4 of practice direction 3E, the court does not formally approve the incurred costs element included within the budget. Consequently, the specific rule of assessment in part 3.18(b) CPR only applies to the approved estimated costs element. Thus the court will not depart from the approved budget 'unless satisfied that there is good reason to do so'.

But Sales LJ noted that where the parties agree a budget in whole or in part and that is recorded in the relevant costs management order, this applies both to the agreed incurred costs and the agreed estimated costs. Of course, the court can make comments in respect of incurred costs, which carry significant weight on assessment at the end of the case.

Mini assessment

Until now, where there is no comment, it has been thought this effectively leaves incurred costs for debate at the assessment stage. But Sales LJ said: 'Parties coming to the first CCMC to debate their respective costs budgets therefore know that that is the appropriate occasion on which to contest the costs of items in those budgets, both in relation to the incurred costs elements in their respective budgets and in relation to the estimated costs elements.'

The problem with this is that if the court 'will not undertake a detailed assessment in advance' and, in particular, will not approve hourly rates at CCMCs, how are the parties and the court to address this at CCMC stage, when time and resources are limited?

The question is whether there is now a requirement for what may be effectively a mini assessment of costs at the CCMC stage. If so, how can it be conducted if hourly rates will not be set at the CCMC?

Perhaps the answer is to record that incurred costs have not been assessed, are not approved or commented on by the court, are not agreed by the parties, and are to be subject to assessment, in default of agreement, at the conclusion of the case. If, however, it is necessary to draw attention to issues relating to the incurred costs in order to demonstrate the unreasonable or disproportionate level of estimated costs for a particular phase, it may be necessary to canvass these points in detail.

When negotiating a budget, it is now advisable for the parties to make sure that their understanding of what is being agreed, and the basis upon which the agreement is reached, is properly recorded.

This is a very recent decision and much more will be said about it. Those with budgets in the pipeline would be well advised to keep a close eye on the continuing debate.

David Cooper is a council member of the Association of Costs Lawyers @CostsLawyers www.associationofcostslawyers.co.uk