Dangers of agreeing budgets – Sarpd Oil International Ltd

One must employ extreme caution when agreeing any element of an opponent’s costs budget and indeed when making representations at a CMC. The Court of Appeal has handed down very clear guidance in the case of Sarpd Oil International Ltd and Addax Energy SA and ANR [2016] EWCA Civ 120.

The case must be put into context of “high-end” Judicial comment on the Budgeting regime.

In his Harbour lecture of 13th May 2015, Jackson LJ said:

“Costs Management works. When an expert judge or master costs manages litigation with competent practitioners on both sides, the costs of litigation are controlled from an early stage. Although some practitioners and judges regard the process as tiresome, it brings substantial benefits to court cases”.

This sentiment was echoed recently by QB Master Cook in a speech delivered at a seminar at 7 Bedford Row. Master Cook said:

“Experience of the clinical negligence matters is that there are now signs the parties are adapting to the costs management process. We are seeing a significant increase in the number of cases where budgets are agreed or where a number of the phases are agreed”.

The outcome in Sarpd forces one to consider whether the parties in all those cases where budgets were agreed, fully understood the potential ramifications of that agreement.

Although Sarpd v Addax dealt with issues appertaining to the quantum of security for costs where there had been an approved budget, the stark warning is to beware the implications of agreeing budgets without requisite caveats as to future challenges to the incurred costs elements. This is a very different approach to that employed by many up to now where the temptation was simply to ignore incurred costs as being untouchable at the budgeting stage.

The distinction between incurred and estimated costs is there for all to see in that as a result of 7.4 of PD3E, the Court does not formally approve the incurred costs element but only the estimated costs element; and it is only in relation to the approved estimated costs element that the specific rule of assessment in part 3.18 (b) applies, namely that the Court upon assessment will not depart from the approved budget “unless satisfied that there is a good reason to do so”. Under PD 3E 7.4,however, the Court does have the power to record comments upon incurred costs and to take those costs into account when considering the reasonableness and proportionality of all subsequent costs.

In Sarpd , the Claimant chose not to dispute the reasonableness and proportionality of the incurred costs set out in Addax’s costs budget when it had the opportunity to do so (at the first CMC). The parties reached agreement on budgets without the need for any judicial intervention. It was held that there had been no relevant change of circumstances between the date of the CMC and the Application for security for costs and therefore the decision on the budget still held good.

At paragraph 43 of the judgment it was held

“For example, if a Court has commented that incurred costs in a costs budget appear to be reasonable and proportionate, it would usually require good reason to be shown why such costs should not be included in an award of costs on the standard basis at the end of the trial. In such a case, the party who had put forward the costs budget would have been encouraged by the Court to litigate on the understanding and with the legitimate expectation that such costs would be likely to be recovered if he were successful, and good reason would need to exist to justify defeating that expectation. Therefore, depending on what is said by the Court by way of comment, the practical effect of a comment on already incurred costs made by a Court pursuant to para 7.4 of PD 3E may be similar to the effect under Part 3.18 (b) of formal approval of the estimated costs element in a costs budget” (emphasis added).

In paragraph 47 it was further held

“...strictly by reason of para.7.4 of PD 3E the Court could not approve the incurred costs element of these costs budgets in a way which would engage the effect of CPR part 3.18 (b). The proper interpretation of the Order made in relation to each costs budget, therefore, is that the estimated costs element in each phase was approved by the Order (so that Part 3.18 (b) was engaged in relation to that element) and the Court commented on the incurred costs element in each case) and on the total figure which included that element), as it was entitled to do under the 2nd sentence of para 7.4, to the effect that it agreed the claim made on the face of the costs budget and those costs were reasonable and proportionate costs in the litigation. The effect of this comment was that it was likely that the incurred costs element would be included in any standard assessment of costs at the end of the day, unless good reason was shown why it should not be[our emphasis added].There was little if any difference between the practical effect of the Court’s Order in relation to incurred costs and its Order in relation to estimated costs”.

It is essential therefore for a party who takes exception to the level of incurred costs in an opponent’s budget to raise those concerns. Failure to do so may lead to there being an implied approval from the Court that those incurred costs are reasonable and proportionate and cause considerable difficulty in challenging the level of those costs on any subsequent assessment. In such cases, the Court should be invited to make comment on those incurred costs (although bear in mind that the Court may not agree with the challenge made). If attempting to agree budgets without judicial intervention, any such concerns should be explicitly voiced and sought to be included within the costs management order subsequently made.