INCURRED COSTS AND COSTS BUDGETING: TWO RECENT CASES

July 4, 2017 · by · in Costs, Costs budgeting

Two recent cases have considered the significance of incurred costs in costs budgeting.  These two cases indicate:

1.  Incurred costs do not form part of the budgeting process (but can be scrutinised at assessment, including on the issue of whether the overall costs are proportionate).

2. The court should be wary of making any comment in relation to incurred costs at the budgeting stage.

  1. “I add that where, as here, a costs judge on detailed assessment will be assessing incurred costs in the usual way and also will be considering budgeted costs (and not departing from such budgeted costs in the absence of “good reason”) the costs judge ordinarily will still, as I see it, ultimately have to look at matters in the round and consider whether the resulting aggregate figure is proportionate, having regard to CPR 44.3 (2)(a) and (5): a further potential safeguard, therefore, for the paying party. “

“There is no significant benefit to be gained in the court making the sort of anodyne comment that the BBC proposes. A comment is not a finding of fact, but merely a matter to be taken into account. Making a comment does bear the risk, however, that on a detailed assessment disproportionate weight might be given to it, although the comment is based on limited information.” 

HARRISON

In Harrison -v- University Hospitals Coventry & Warwickshire Hospital NHS Trust [2017]  EWCA Civ 792 the Court of Appeal confirmed the traditional view that incurred costs were not part of the costs budgeting process. The incurred costs had to be dealt with at the assessment stage. However incurred costs could be considered in relation to the overall question of proportionality.

“Decision below
  1. Master Whalan took the view that so far as budgeted costs were incurred CPR 3.18 precluded him from subjecting them to a “conventional” detailed assessment at the behest of the appellant as paying party unless good reason for doing so was shown. (At the same time, however, he indicated that he was receptive to arguments on individual items to the effect that good reason did exist.) As to incurred costs, Master Whalan – to an extent founding himself on some observations of Sales LJ giving the judgment of the court in Sarpd Oil International Limited v Addax Energy SA [2016] EWCA Civ 120, [2016] 2 Costs LR 227 – said that although incurred costs could not themselves have been approved as such at the case management conference nevertheless they would have featured in the overall budget put forward at the conference and thus had a “certain status”. Master Whalan indicated that, with regard to the incurred costs, it was “in practical terms” required that good reason likewise should be shown if there was to be a departure from what was set out in Precedent H. As to the date when the case commenced, Master Whalan held that in the present case that was when the letter was sent (on 27 March 2013) by a prescribed method which would lead to next-day delivery and so was prior to 1 April 2013. In the result, Master Whalan assessed the recoverable costs at £420,168 (including success fee and ATE premium). He ordered the appellant to pay the costs of the assessment.
  1. I am in no real doubt that Master Whalan reached the right conclusion on this issue and that the conclusion of Carr J in Merrix was also correct, for the reasons which she gave.
    1. It follows, in my view, that incurred costs are not as such within the ambit of CPR 3.18 (in its unamended form) at all.  Accordingly such incurred costs are to be the subject of detailed assessment in the usual way, without any added requirement of “good reason” for departure from the approved budget.
    2. Mr Latham frankly acknowledged the force of the appellant’s arguments in this regard.  However he advanced an ingenious argument – although “nuanced” was his preferred epithet – seeking to uphold the approach of the costs judge on this point.  In essence the argument was founded on paragraph 7.3 of PD 3E.  That required the court’s approval to relate (only) to the total figures for each phase of the proceedings.  In doing that the court necessarily will take into account the constituent elements of each phase: which, he said, would include taking into account the incurred costs for the purposes of appraising reasonableness and proportionality. He also said that was not inconsistent with the use of words “budget” or “parts of budgets” used in the (then) version of  CPR 3.15 and 3.18 respectively.  By these means, he said, in the absence of recorded judicial comment in the CMO to the contrary the incurred costs will have acquired a special status: in that, while not “approved” as such, they will have been taken into account by the court at the costs management hearing in managing the future estimated costs.
    3. With respect, this will not do.  Either incurred costs are within the ambit of CPR 3.18 (b) or they are not.  Since they are not approved budgeted costs, by the terms of paragraph 7.4 of PD 3E and of the Rules, they are not within that sub-rule.
    4. In reaching his conclusion, the costs judge was clearly influenced by certain obiter remarks of Sales LJ delivering the judgment of the court in the case of Sarpd Oil (cited above) at paragraphs 41-44 of the judgment. That case did not in fact involve a detailed assessment as such but related to an issue on security of costs. I should also note that the budgeted costs in that case had been approved by the judge as part of an agreed CMO. At paragraph 43 Sales LJ indicated in general terms that, where positive comments were made in the CMO as to incurred costs, the receiving party would have the legitimate expectation of being likely to recover such costs if successful in the litigation. That having been said, at paragraph 44 of the court’s judgment it was then said:
“Parties coming to the first CMC to debate their respective costs budgets therefore know that that is the appropriate occasion on which to contest the costs 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 rubric at the foot of Precedent H also makes that clear, since it requires signed certification of the positive assertion that “This budget is a fair and accurate statement of incurred and estimated costs which it would be reasonable and proportionate for my client to incur in this litigation.”
Similar points were made at paragraphs 47 and 50 of the judgment.
  1. One can see that the wording used in Precedent H might tend to support such a view.  But it does not accord with the language of paragraph 7.4 of PD 3E or CPR 3.15 or CPR 3.18: nor does it sit comfortably with the expressed entitlement (but not obligation) of the judge conducting the costs management hearing to record comments on incurred costs which, if made, will then be “taken into account” when considering reasonableness and proportionality.
  2. I add that where, as here, a costs judge on detailed assessment will be assessing incurred costs in the usual way and also will be considering budgeted costs (and not departing from such budgeted costs in the absence of “good reason”) the costs judge ordinarily will still, as I see it, ultimately have to look at matters in the round and consider whether the resulting aggregate figure is proportionate, having regard to CPR 44.3 (2)(a) and (5): a further potential safeguard, therefore, for the paying party.
  1. Costs budgeting, to be performed properly, undoubtedly places a real burden on the parties and court.  It would potentially greatly extend that burden if incurred costs were to be subjected to the same degree of preparation and appraisal as budgeted costs.  One  can understand that there are principled arguments which nevertheless could favour such an approach: but there are also competing arguments.  At all events, the then and current versions of the Rules and Practice Direction clearly sharply distinguish, for these purposes, incurred costs from estimated budgeted costs.  I therefore think, with all respect, that those particular obiter comments of Sales LJ in Sarpd Oil may have gone too far in so far as they suggest otherwise in terms of how costs management hearings are to be approached in this respect.
  2. I should add that it seems that those remarks of Sales LJ in Sarpd Oil with regard to incurred costs gave rise to a degree of disquiet.  The matter came to the attention of the Civil Procedure Rule Committee.  It considered that the consequences of those observations in Sarpd Oil were “unexpected”.  It also considered that the effect of those observations would be to complicate, not simplify, costs management and might undermine desirable attempts to agree costs budgets.  The outcome of the Report of the relevant sub-committee of 9 December 2016 was to recommend that incurred costs indeed should be “decoupled” from budgeted costs so that the court’s budgeting would only relate to the costs to be incurred (but retaining the court’s power to comment on previously incurred costs, which could provide a “steer” thereafter): thus restoring the position to the perceived status quo ante.  This is designed to be made clear beyond argument for the future by the subsequent amendments to CPR 3.15 and CPR 3.18 with effect from 6 April 2017.  As will be gathered, I in fact consider, and disagreeing with the obiter remarks of the court in Sarpd Oil, that the status quo ante was in any event to the same effect.

THE CLIFF RICHARD CASE

In Sir Cliff Richard OBE -v- The BBC & Chief Constable of South Yorkshire Police [2017] EWHC 1666(Ch) Chief Master Marsh urged caution when a judge is asked to make a “comment” under CPR 3.15.(4)

(4) Whether or not the court makes a costs management order, it may record on the face of any case management order any comments it has about the incurred costs which are to be taken into account in any subsequent assessment proceedings.

CHIEF MASTER MARSH:

  1. I am hearing this morning a costs management conference that was directed by Mann J in his order dated 5th May 2017. I invited counsel for the claimant and the BBC at the outset to deal first with the question of whether I should make any comment about the Claimant’s incurred costs and also to address me, generally, on the question of proportionality. This judgment concerns only incurred costs, it having been agreed between the court and the parties that the court will take into account the submissions made about proportionality but there is no requirement for a reasoned judgment at this stage.
  1. The court’s power to make a comment about a party’s incurred costs is contained in CPR 3.15 and the power is repeated in a similar form in Practice Direction 3E. There is no doubt that it is a discretionary power and the discretion is a very broad one. Neither the rule nor the practice direction gives any guidance about the circumstances in which a comment may be, or should be, made.
  1. A comment about incurred costs is to be taken into account in any subsequent assessment proceedings (rule 3.15(4)). Although a comment must be taken into account, that falls some way short of it being binding on the Costs Judge. On a detailed assessment, the Costs Judge will have far more information than the judge at the Costs Management Conference. It seems to me that a Costs Judge is entitled, having take a comment into account, to disagree with it or to put it to one side, if on the detailed assessment a fuller picture emerges.
  1. When dealing with costs management, the court is required to approve only the totals for future costs for each budget phase although it will have regard to the constituent elements in the budget. The court is expressly required not to undertake a detailed assessment in advance but rather to “… consider whether the budgeted costs fall within the range of reasonable and proportionate costs.” (PD3E 7.3) [my emphasis]
  • Although not all of the 11 standard phases will need to be approved in every case, and often the first two phases will only comprise incurred costs, the court has a substantial task to undertake where there are disputed elements in both budgets. The exercise is necessarily a summary one that often has to be undertaken briskly. This is consistent with setting budget figures for prospective costs that are within an acceptable range. Both the notion of a ‘budget’ which looks into the future, which is unknowable, and a ‘range’, indicate that the approval can only be undertaken at an impressionistic level, unless the litigation is of a standard type where the scope for non-standard budget phase levels is more limited. In a claim like this one, the variables that may affect the level of future costs are considerable.
  1. This leads me to conclude that a degree of caution is appropriate when the court considers whether to make a comment about incurred costs. It is asked to do so in the context of the overall costs management exercise and the restraints that are clearly stated in PD3E para.7.3. The exercise of producing budgets and their review is, necessarily, an exercise based on limited information, even in relation to incurred costs; the amount of information that is to be included in the budget is very limited indeed…
  1. I have indicated that the court should exercise a degree of caution. Here the figures that have been incurred are substantial. In aggregate they amount to £1,167,144.83.  The pre-action costs total £526,437.97 and the issue and pleadings costs are £324,611. The difficulty for the court, however, is that, although those figures appear to be substantial in absolute terms, it is quite impossible for the court today to form any meaningful view about whether those costs can properly be characterised as being unreasonable and/or disproportionate, let alone to be significantly or substantially unreasonable and/or disproportionate.
  1. To my mind there is little or no value in the court recording a general comment about incurred costs along the lines that the incurred costs are “substantial” or they are “too high”. If the court wishes to record a comment that the incurred costs are “excessive” or they are “unreasonable and disproportionate” it will wish to be sure that the comment is made on a sound footing, rather than impression, because commenting is quite unlike the exercise of approving a figure per phase for future costs. The court will also wish to consider the utility of making a comment unless it is specific and well-founded.
  1. There is no significant benefit to be gained in the court making the sort of anodyne comment that the BBC proposes. A comment is not a finding of fact, but merely a matter to be taken into account. Making a comment does bear the risk, however, that on a detailed assessment disproportionate weight might be given to it, although the comment is based on limited information.
  1. The costs judge, on a detailed assessment, will have the benefit of a full review of all the work that has been carried out. That is a far safer basis for a review to be taken. I am not persuaded that a comment should be made for the reasons I have given. I am also concerned that a comment could unfairly skew a detailed assessment at a later stage. That consideration, set against there being no real benefit to the BBC in making such a comment, other than a short term tactical advantage, leads me to conclude that in the exercise of my discretion I should reject the BBC’s request.
    1. I do not accept Mr Eardley’s submission that there is a danger that, if a comment is not made, a Costs Judge will proceed on the basis that the costs are both reasonable and proportionate. That is a fanciful suggestion, given that Costs Judges are experienced in dealing with costs in many different types of claim and drawing conclusions about reasonableness and proportionality in a wide range of different circumstances.
    1. I decline to make any comment on the Claimant’s budget.
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