An Unknown Quantity: How should the level of incurred costs included within a budget impact on the amount of estimated costs being sought?
Since the beginning of the costs management regime imposed by the Jackson reforms in 2013, there have been many areas of uncertainty which practitioners have been forced to tackle with only limited guidance from the Courts. Some of the issues which have arisen have subsequently been addressed by case law, or have resolved as the experience of the Courts and practitioners has increased. However, the question of the interaction between incurred costs and future costs during the assessment of a budget remains a lacuna in the application of the rules, which presents a particular challenge to all involved with costs management.
The Differing Approaches
The basis of the Court’s approach to incurred and future costs can be found in Practice Direction 3E. Of particular relevance are the following provisions from PD3E 7.3 and 7.4;
When reviewing budgets, the court will not undertake a detailed assessment in advance, but rather will consider whether the budgeted costs fall within the range of reasonable and proportionate costs.
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.
At first glance the Court’s powers are clear, however considerable ambiguity has arisen as to the approach that the Court should take when presented with a budget where the incurred costs, to include those of a given phase, appear to be disproportionate. PD3E 7.3 provides that the Court’s approval will relate only to the total figures for each phase of the budget, but how the Court should reach that figure is a subject to debate.
There are broadly two schools of thought on the subject. The first is that, where the Court considers the incurred costs to be disproportionate to the matter in issue, it should pass comment on those costs (usually upon invitation of the opposing party) and only allow a proportionate sum for future costs to enable the case to be progressed in accordance with the directions. Proportionality and/or reasonableness of the incurred costs will then be examined upon detailed assessment, whereat the costs Judge’s view is likely to be heavily influenced by the comments made at the earlier costs management hearing. Naturally, this is the approach that is generally advanced by those primarily concerned with defending their cost budgets.
The alternative approach puts a greater emphasis on the provision in PD3E 7.4 which states that the Court will take the incurred costs into account when considering the total amount to be allowed for each phase. This approach is a strong weapon in the arsenal of those opposing cost budgets where substantial costs have already been incurred. Whilst the Court is unable to alter the incurred costs, by taking them into account it can reduce the future costs on the basis that the overall phase total would be disproportionate. In the most extreme examples the Court could elect (and in various cases has) to allow no future costs for a given phase on the basis that the incurred costs are already disproportionate.
The Story So Far
Whilst definitive clarification is awaited as to which approach is correct, several cases have attempted to provide guidance.
One of the earliest of these was the case of Redfern v Corby Borough Counsel  EWHC 4526 (QB), the subject of which was a Claimant cost budget totalling £744,000, including £130,000 of incurred costs. At first instance the Court was advised that the value of the underlying claim was, at best, £700,000 and formed the view that the costs incurred to bring the claim as far as the first CMC were disproportionate. As a result of the level of the incurred costs various reductions were made to the phases of the cost budget bringing it down to a total of £266,796. The Claimant appealed, arguing that the focus of the costs management regime was on the future costs to be incurred and that the Court had therefore erred by taking the incurred costs into account when setting the phase totals. HHJ Seymour considered the requirement in PD3E 7.4, that the Court take the incurred costs into account when setting the budget, and concluded that:
“The only way in which one can take into account excessive costs already incurred in determining the reasonableness and proportionality of subsequent costs is to limit the approved subsequent costs at figures below what they might otherwise have been approved at but for the excessive sums which have already been expended.”
The appeal was therefore dismissed and the Claimant was left in the uncomfortable position of having extremely limited future costs to make use of to progress the matter to trial. The particular sting in the tail of the approach taken by the Court in Redfern was the fact that the level of the incurred costs would also almost certainly be open to attack on any subsequent detailed assessment. As a result any party presenting incurred costs which appear disproportionate on initial inspection would be at risk of being effectively penalised twice; firstly if their budget was restricted and secondly if the costs were latterly subject to detailed assessment.
The question was addressed again by Mr Justice Warby as part of his overview of the costs management procedure in Yeo v Times Newspapers Ltd  EWHC 209 (QB). In the case Mr Justice Warby reached a similar conclusion to that in Redfern, namely that PD3E 7.4 required the Court to take the incurred costs into account when determining the total to be allowed for any given phase. As a result, it was open to the Court to reduce a budget phase where the incurred costs were seen to be excessive by disallowing some or all of the future costs sought.
The approach taken in Redfern and the guidance in Yeo came under the microscope of Mr Justice Coulson in CIP Properties (AIPT) Ltd v Galliford Try Infrastructure Ltd and Others  EWHC 481 (TCC). In that case, the Court was faced with a Claimant’s costs budget totalling over £9.2 million, which had already been declared to be “entirely unreliable” during a previous hearing. Incurred costs totalled approximately £4.3 million and, prior to this hearing, Mr Justice Coulson had given an indication that a figure of £4.5 million was likely to be the upper limit of what he would be willing to allow. Mr Justice Coulson conducted a phase by phase analysis of the budget and identified the totals for each phase which he considered to be reasonable (this resulted in a total budget of £4.28 million). In view of the substantial difference between the figure claimed and that considered reasonable by the Court, Mr Justice Coulson sought submissions from the parties as to the options available to him. These were identified as follows:
- Order the Claimant to submit a new budget.
- Decline to approve the Claimant’s budget.
- To set a budget for each phase
- Refuse to allow any further costs.
The Court was unwilling to order the Claimant to submit a new budget on the basis that this would make no difference to the level of incurred costs which were already determined to be excessive. It also considered that it would not be appropriate to decline to approve the budget as it would simply leave the issues to be addressed at a later stage whilst potentially encouraging the Claimant’s solicitors to continue with incurring a high level of costs.
In considering whether to refuse to allow any further costs, Mr Justice Coulson reviewed the approach taken in Redfern and identified the risk that there was the potential for the Claimant to be doubly penalised should the Defendant seek substantial reductions to the incurred time on assessment. Mr Justice Coulson therefore determined to allow a figure for incurred and future costs for each phase but modified his approach to reflect the concerns regarding the incurred time. A total figure was allowed for each phase, in some cases having the de facto result of allowing zero for the future costs. In order to address the potential injustice of the incurred costs being reduced on assessment, Mr Justice Coulson clarified that where an assessing officer allowed less for the incurred costs on assessment than was included in the amount he had allowed, then the difference could effectively be applied to the future costs (which otherwise would have been set at zero).
Lessons to be learnt
The above examples demonstrate what an important issue the interaction between incurred and future costs can become at the CCMC.
For any party in the position of defending a budget containing a high level of incurred costs it is crucial that the advocate is fully prepared to justify why the work already done is proportionate to the matter in issue to avoid potentially disastrous reductions to the future costs. This task will be particularly difficult in cases of high complexity but low value, where the court may accept that the work needed to be done but nonetheless require considerable persuasion to find it proportionate.
In these scenarios, the first step should be to draw the Court’s attention to the risk of injustice highlighted in CIP Properties by Mr Justice Coulson (i.e. that a party will be doubly penalised at later detailed assessment) and ask that the Court, if so minded, records comments on the incurred time but makes a reasonable provision for the future work. Where the Court is not persuaded to restrict itself to a comment on the incurred costs, practitioners would be well advised to draw the Court’s attention to any applicable strands of the test for proportionality, to be found in CPR 44.3(5), which requires the costs to bear a reasonable relationship to:
- the sums in issue in the proceedings;
- the value of any non-monetary relief in issue in the proceedings;
- the complexity of the litigation;
- any additional work generated by the conduct of the paying party; and
- any wider factors involved in the proceedings, such as reputation or public importance.
Naturally the argument will be easier where the incurred costs are below the estimated value of the case, but where they are not it may assist to turn to the overriding objective at CPR 1.1(c), which requires the Court to deal with a case in ways which are proportionate to the importance of the matter and its complexity, as well as its value.
Conversely, when opposing a costs budget the cases of Redfern, Yeo and CIP Properties are valuable tools for placing limitations on any budget phases where the work which has already been carried out is high, particularly in the post LASPO world where proportionality is king. Practitioners would be well advised to bring any phases with significant incurred costs to the Court’s attention at the outset of the consideration of any budget, both to restrict the future costs (or phase total) allowed for that particular phase and to cast doubt over the proportionality of the budget in general.
With almost three years’ experience of the costs management regime there remains little indication that the judiciary are looking to issue definitive guidance as to how the level of incurred costs should impact the future costs. Lord Justice Jackson highlighted the issue in his 2015 lecture Confronting Cost Management and made several suggestions, including amending the Form H to show separate totals for incurred and future costs, requiring the Court to only assess the future costs in the majority of cases and providing the Court with the power to summarily assess the incurred costs as part of the costs management process.
Thus far no steps have been taken to implement the above. Whilst attempts were made in Redfern and CIP Properties to find a workable solution, there remains a risk of injustice upon the subsequent assessment, as well as concerns regarding access to justice if future costs are restricted to the extent that work vital to the successful progression of the case cannot be recovered from the opponent. It is conceivable that, absent an alternative approach, a situation may arise in a complex but low value claim where a party is faced with the Hobson’s choice of taking a “bare bones” approach to the litigation or financing necessary work themselves.
A potential solution does however present itself with the forthcoming amendment to the Practice Direction to Part 47. This will require all bills of costs, where a costs management order has been made, to distinguish between those costs which had been incurred when the budget was prepared and those which were estimated. This change has the potential to add teeth to the Court’s power to comment on the incurred costs at the CCMC. Whereas in the past the Court, on assessment, would be unable to determine exactly which items in the bill were subject to comments made during costs management, they will now be easily identified, making it possible for the assessing officer to apply additional scrutiny and reduce these costs if necessary.
Added to this is the recent guidance of the Court of Appeal in the case of Sarpd Oil International Ltd v Addax Energy SA and Another  EWCA Civ 120, a security for costs application in which the Court took the view that where the Judge at the first CCMC had commented on the incurred costs in a positive light, the assessing Court should give considerable weight to those comments. The Court of Appeal went so far as to suggest that the practical effect of a positive comment on the incurred costs should be that the Court on assessment should not depart from them without good reason.
It is to be hoped that greater clarity as to the incurred costs on assessment and the potentially increased force of the Court’s comments will reduce the need for the Court to restrict future costs at the CCMC in order to tackle them, thus removing the risk of double sanction.
David Wright is a costs lawyer and council member of the Association of Costs Lawyers