The recent Court of Appeal decision in Sarpd Oil International Ltd v Addax Energy SA and another  EWCA Civ 120 introduced a new and rather unexpected application of an agreed costs budget in the process of assessing a party's costs.
The Court of Appeal decision
When deciding the appropriate level of security for the Defendant’s costs in pursuing a Part 20 claim against a Third Party, the Court of Appeal ruled that the costs budgets agreed between the parties without a Costs Management Hearing would be the "relevant reference points" for considering the amount which should be ordered. At the application hearing Saprd argued that only the estimated costs had been agreed in the budgets, and so the Court should consider and make a proportionate reduction to the incurred costs before deciding on an appropriate level of security for costs. This is the same approach that parties have expected the Courts to take when factoring an agreed or approved costs budget into a Detailed Assessment of costs.
In short, the Court of Appeal's position was that a party who agrees an opponent’s costs budget is agreeing that both the incurred and the estimated costs are proportionate. That party’s decision to agree the budgets rather than to attend a Costs Management Hearing amounted to a concession of their right to oppose the proportionality of their opponent’s incurred costs on assessment. If a party wants to raise issues with the costs incurred by their opponent before the date of the costs budget, they must use the Costs Management Hearing as their opportunity to put their objections on the record. In their words, it would be “contrary to the overriding objective to allow Sarpd to try to re-open costs issues which it had already had a fair opportunity to address."
The Court of Appeal referred to specifics of the CPR, and highlighted a difference of the application on Detailed Assessment between budgets that are agreed by the parties and those which are approved by the Court. Whilst their decision may fit this interpretation of the costs management and assessment rules; it is in stark contrast to the approach that many costs practitioners and Judges have taken previously on this issue.
Parties have been negotiating costs budgets on the basis that the incurred costs 'are what they are'; they cannot be changed or reduced during the costs management process but they also cannot be approved by the Court. This has caused parties to negotiate the estimated future costs on the basis that the incurred costs per phase will be subject to detailed assessment at the conclusion of the claim. The incurred costs in the budget are the very most that the party will be awarded for the work done up until the date of the budget, but these costs are likely to be reduced on assessment. Negotiations on future costs will be conducted on the assumption that some of their opponent’s incurred costs will not be recovered. In certain circumstances they could even be entered into on the expectation that all of their opponent's incurred costs in a particular phase would be disallowed on assessment.
As with any legal negotiations, agreeing an opposing party's costs budget can be a commercial or tactical decision. The party may have to balance the merits and risks of either accepting a certain figure for future costs in order to avoid the costs and delay of a Costs Management Hearing; or proceeding to the hearing on the expectation that the Judge will award a lesser sum.
For example, an opponent may have already spent £25,000 on witness statements before the date of the costs budget and is seeking an additional £15,000 for estimated costs. In your view the £25,000 is a proportionate sum for the entire phase, but not the work done to date. However you acknowledge that they still have work to do under this phase when exchanging and considering your witness evidence. In negotiations you agree to £5,000 for their estimated costs under this phase on the assumption that they will only recover £20,000 of the incurred costs in this phase on assessment. You and your client are happy with the potential exposure to £25,000 of witness statement costs.
If this process happens with every phase, the parties will be able to reach an agreement on the estimated costs of the budget and therefore inform the Court of their agreement. They have engaged in reasonable and proportionate negotiations that have avoided the additional costs and delay of attending a Costs Management Hearing.
Yet under this new guidance the parties will have conceded their opportunity to request that the Court record comments on, for example the proportionality or level of, the incurred costs. They haven’t lost out on the Court's ability to review, reduce or approve those incurred costs - as the Court cannot do this. But it seems that they will no longer be able to argue on assessment that the opposing party's costs incurred before the date of the costs budget were disproportionate regardless of the sums incurred.
So what should they have done to protect their client’s best interests?
Should they have rejected the £5,000 agreement of the estimated costs and demanded a Costs Management Hearing so that their disapproval of the incurred costs could be recorded? If so, there is every chance that the Court would order £5,000 or a higher sum as reasonable and their client would be in a worse position. Furthermore, the Court could take their refusal to agree the reasonable amount offered as a reason to make an order against them for the costs of that hearing.
Instead, should they have agreed the estimated costs but refrained from informing the Court of the agreement until the Costs Management Hearing on the basis that the agreement only stands if the Court records their disapproval of certain incurred costs? I would question whether this is in keeping with the overriding objective as an efficient use of the Court’s time, and a proportionate expense of all of the parties concerned.
So, should we now be seeking to agree budgets but with explicit comments relating to the parties' disapproval or disagreement of their opponents' incurred costs? What form will this take; should a Consent Order be filed recording the agreed amounts followed by each parties' objections? What weight would such an order have on assessment if the Court hasn’t contributed to those comments?
All of these questions will impact on costs practitioners' approach to agreeing costs budgets so that their clients' best interests are protected at the Detailed Assessment stage as well as the Costs Management Hearing. I can only see this leading to fewer agreements of phases and longer arguments at CMCs; all at a time when the Courts are introducing changes designed to streamline the Costs Management process and the practitioners are being told to reduce their assumptions and caveats in any budget that is drawn, filed or agreed.