Updating Costs Budgets – amending incurred costs – what is the correct approach?
There has, since the inception of Costs Budgeting, been much, both written in the legal press and by way of case law, endeavouring to clarify the aims and intentions for Jackson LJ’s vision, and also to seek to smooth the process as a whole.
Most recent of these decisions have come in the form of the judgment in the matter of Harrison v University Hospitals Coventry and Warwickshire NHS Trust  EWCA Civ 792 in respect of which we wrote in this blog and further provided additional insight only a few days ago, following the judgment of Deputy Master Campbell in the matter of RNB v London Borough of Newham, SCCO ref CCD 1702513, judgment 4 August 2017.
Those further clarifications have provided valuable assistance to the profession with regard to the inter-relation between budgeting and detailed assessment. However, what about beforehand, whilst the budgeting process is still ongoing?There have been many instances where with a CMO having been made, parties have found themselves potentially coming unstuck by failing to ensure that they are within budget and equally apocryphal tales of attempts to vary or amend budgets, with varying degrees of success; but more often than not unfavourable results.
One area where it appeared a positive variation could happen was perceived to be the ability (for example at a subsequent CMC or at PTR stage) to prepare an updated budget and then to transfer work which had been estimated in the original budget, but since that time undertaken, into the “incurred costs”, such that they were no longer capable of being budgeted due to the operation of section 7.4 PD 3E. However, this is not so and an incorrect approach.
The appropriate approach to updating a Costs Budget is set out within the notes accompanying CPR 3.12, to be found within the current (2017) White Book on page 133, at 3.12.3, which reads
“Problems concerning retrospective amendments to budgets
Until February 2017 there was some controversy as to the power of the court to vary an existing budget so as to approve any extra costs which had been incurred before that approval had been sought and obtained (contrast the ruling as to this given by Warby J in Yeo v Times Newspapers Ltd  EWHC 2132 (QB);  4 Costs LR 687, and the remarks attributed to Flaux J in the Commercial Court Update, October 2015 [Accessed 13 February 2017]).
It is arguable that the amendments made by the Civil Procedure (Amendment) Rules 2017 (SI 2017/95), with effect from 6 April 2017, had laid this controversy to rest. In r3.15(1) as amended, the term “incurred costs” is used in contradistinction to the term “budgeted costs”. The former refers to the costs the parties place in the columns headed “incurred costs” in the first budget they submit in compliance with r 3.13(1). The term “budgeted costs” should now be understood to refer to the costs the parties place in the columns headed “estimated costs” in that budget.
If, after the approval of that budget, the party submits a revised budget seeking an increase in respect of any part of it, the costs previously shown in the incurred costs column should remain the same; unless and until the court approves any revision, the costs previously approved in the estimated columns (the budgeted costs) should remain in the estimated columns even if substantial amounts of them have now been incurred. Practice Direction 3E, para.7.4 (amended by CPR Update 88, again with effect from 6 April 2017), provides that the court may not approve costs incurred before the date of any case management hearing but may take those costs [i.e., the incurred costs] into account when considering the reasonableness and proportionality of all budgeted costs. This paragraph makes little sense unless the words “those costs” are construed as costs previously placed in the incurred costs columns.
For example, a party’s budget may have been reasonably drawn on the assumption that no formal mediation would take place. Consequently, none of the budgeted costs relate to mediation. If, later in the proceedings, a real possibility of mediation arises, the parties need not seek prior approval in respect of it before incurring any expense. Of course, the parties should not delay in seeking the agreement of the other parties or, failing that, the approval of the court. Also, any costs incurred on mediation before the agreement or approval is obtained are risk that such agreement or approval might never be obtained.”
So, what does this all mean?
Put simply, once a CMO has been made, the incurred costs remain the same and incapable of amendment in any subsequent budget, and will be subject to detailed assessment. The only aspect of any subsequent, post-CMO budget which can be amended are the “estimated costs”, and these will be assessed (assuming the amended budget is approved) as per the process in Harrison.
This is further confirmed by the provisions of section 7.6, PD 3E, which states inter alia
“Each party shall revise its budget in respect of future costs upwards or downwards"
Accordingly, it is clear that the only element of any budget capable of amendment is future, estimated costs, and thus any endeavours to transfer previously estimated costs into incurred costs, such costs by that stage having been incurred, are likely to fall on stony ground.
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