Court of Appeal provides guidance on cost management orders and approval of incurred and estimated costs

In considering an appeal relating to security for costs the Court of Appeal in SARPD Oil International Ltd v Addax Energy SA and another [2016] EWCA Civ 120, has made important observations regarding the treatment of both incurred and estimated costs as set out in parties’ cost budgets. This decision is likely to have significant consequences for practitioners dealing with costs issues in cases subject to costs management orders.

Pursuant to CPR Part 3.18:

‘In an 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; and
• not depart from such approved or agreed budget unless satisfied that there is good reason to do so.’

The scope of costs management is further clarified in CPR Practice Direction 3E paragraph 7.4, which 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 Court of Appeal has given clarification, in its first judgment on the issue, of how it will treat incurred costs recorded in a party’s budget. In this case, the parties had agreed costs budgets, and asked the Court to make an order recording the agreement of the parties’ budgets in their respective sums (with the budgets attached to the order).

The Court of Appeal commented that strictly speaking, by reason of CPR PD3E para 7.4, the Court could not approve the incurred costs element of a party’s budget, such as to engage CPR 3.18. However, where an order is made recording agreement or approval of the whole of a party’s budget, this is to be interpreted as the Court commenting on the incurred costs element in the budget (as it is entitled to do so), with the effect that it is agreed that the costs were reasonable and proportionate costs in the litigation.

The effect of such an interpretation resulted in the incurred costs element of the budget (along with the estimated costs element) being included in any standard assessment of costs at the conclusion of the claim pursuant to CPR 3.18, unless good reason could be shown why those costs should not be included.

There was, the Court held, no restriction on the parties agreeing costs budgets. Where parties agreed a costs budget and that was recorded in a costs management order, CPR 3.18(b) would apply both to the agreed incurred costs and to the agreed estimated costs.

The Court further noted that the paying party had chosen not to dispute the reasonableness and proportionality of the sums set out in the others party’s cost budget when it had the chance to do so at the CMC. It would be contrary to the overriding objective to allow a party to re-open costs issues which it had already had a fair opportunity to contest. The Court of Appeal commented that to allow such a course of action would add additional unnecessary costs to the case.

This decision will come as a surprise to many practitioners, who will have assumed that the incurred costs element of parties’ budgets remains outside of the scope of costs management.

In light of this judgment, insurers should note the importance of preparing thorough and robust responses to opponents’ costs budgets, addressing both the incurred and estimated elements of the budget.

If agreeing budgets and / or costs management orders, parties must be careful to ensure that agreement is reached in respect of both incurred and estimated costs. Where the matter proceed to a contested costs management hearing, parties will need to ensure that they are in a position to make appropriate representations in relation to both incurred and estimated costs, and to seek that the Court records, in any costs management order, its comments in relation to the incurred costs.

Going forward, parties who neglect to raise objections to incurred costs at the time of a costs management conference are likely to find themselves in difficulty if seeking to dispute these costs at a later date.

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