Consistency and clarity in the approach of judges to costs budgeting have suffered due to the absence of guidance from the Court of Appeal. However, now that there has been consideration of the correct approach by that court in Sarpd Oil International Limited v Addax Energy SA & another, some may find the guidance surprising.
The background and the decision at first instance
The Court of Appeal in Sarpd considered an appeal against a decision in respect of an application for security for costs.
The underlying claim concerned the purchase of gas oil. The claimant (Sarpd) purchased gas oil from the defendant (Addax). Addax had purchased the gas oil from the Part 20 defendant (Glencore). Sarpd claimed that the gas oil failed to meet the contractual specifications and sought damages or an indemnity from Addax. Addax in turn sought the same relief from Glencore.
Addax made an application for security for costs from Sarpd, relying on the gateway at CPR 25.13(2)(c) that there was “reason to believe that it will be unable to pay the defendant’s costs if ordered to do so”. There were no publicly available records of Sarpd’s financial position and it had not provided evidence of good financial standing despite requests from Addax’s solicitors.
At first instance, Andrew Smith J held that, despite the lack of public information and Saprd’s reticence to provide such information when requested, there was no reason to believe that Sarpd would be unable to pay Addax’s costs if so ordered. Accordingly, he dismissed the application.
The decision of the Court of Appeal
The Court of Appeal considered three broad issues:
- Whether the judge was right to dismiss the security for costs application.
- Whether the security should have included the costs of the Part 20 claim.
- The relevance to the amount of security of incurred costs in approved costs budgets.
On the first issue, the court held that the judge was wrong to dismiss the application, on the basis that if:
“…a company is given every opportunity to show that it can pay the defendant’s costs but deliberately refuses to do so there is, in our review, every reason to believe that, if and when it is required to pay a defendant’s costs, it will be unable to do so.”
On the second issue, the court held that the security should have included both Addax’s costs and Glencore’s costs of the Part 20 claim. This was on the basis that if Sarpd lost the main claim, then Addax would have lost the Part 20 claim and be liable to pay Glencore its costs. In those circumstances, the costs which Addax could likely recover from Sarpd would include both its own costs of the Part 20 claim and those of Glencore.
As regards the relevance of costs budgets, the question for the court was whether, when setting the amount of security, the court should go behind the figures in the costs budget which had been approved by the costs management order, and in particular assess whether incurred costs were reasonable and proportionate.
In considering this argument, the court had regard to the costs management provisions at CPR 3.12 to 3.18, paragraphs 7.3 and 7.4 of Practice Direction (PD) 3E and the overriding objective at CPR 1.1. It does not appear from the judgment that any relevant authorities, such as Redfern v Corby Borough Council, CIP Properties (AIPT) Ltd v Galliford Try Infrastructure Ltd and others or GSK v QPR, were cited.
Ultimately, the court determined that both the incurred costs and the estimated costs within an approved costs budget should be used as the relevant reference points when determining the appropriate amount of security.
Analysis and comment
The court recognised that the effect of paragraph 7.4 of PD 3E was that the court did not approve the incurred costs in the costs budgets in a way which would engage CPR 3.18(b) (which provides that the court will not depart from an “approved or agreed budget unless satisfied that there is good reason to do so”).
However, the court’s reasoning would appear to suggest that, firstly, CPR 3.18(b) applies to incurred costs within an agreed budget, and secondly, the practical effect of approval of a costs budget was to import the same test in respect of the incurred costs within that budget.
The court seemingly took the view that, in agreeing a budget, the parties agreed both the incurred and estimated costs. This may come as a surprise to many practitioners. Given the court’s approval was only in respect of the estimated costs, such that CPR 3.18(b) only applied to those costs, it would appear to follow that, likewise, the parties’ agreement was only in respect of the estimated costs. Indeed, reference to the “budget” within CPR 3.18(b) could naturally be read as referring only to prospective, estimated costs, whether agreed or approved. Therefore, in future, parties will need to be careful and clear as to the extent of any agreement, and whether it includes the incurred costs.
The court’s conclusion in respect of approved budgets was also surprising. It was said at paragraph 47 that, in approving a costs budget, the court:
“…commented on the incurred costs element in each case (and on the total figure which included that element)… to the effect that it agreed the claim made on the face of the costs budget that those costs were reasonable and proportionate costs in the litigation. The effect of this comment was that it was likely that the incurred costs element would be included in any standard assessment of costs at the end of the day, unless good reason was shown why it should not be. There was little if any difference between the practical effect of the court’s order in relation to incurred costs and its order in relation to estimated costs.”
Both substantive parts of the above reasoning are somewhat difficult to understand. Firstly, the order did not make any express comments (positive or negative) regarding the incurred costs. Therefore, the Court of Appeal effectively held that, absent express comment, there will be an implicit comment in an approval of estimated costs that the incurred costs were reasonable and proportionate. Secondly, there is no hint within the rules of an intention by the draftsmen that the strict test imposed by CPR 3.18(b) (as confirmed by Moore-Bick LJ in Henry v News Group Newspapers) would be applied whether by analogy or at all to the comments (made expressly or implicitly) by a judge at a case and costs management conference (CCMC).
The effect of this is that, at a CCMC, parties must be ready not only to take issue with estimated costs within their opponents’ budgets, but also to debate the incurred costs. Indeed, the Court of Appeal took the view that encouraging the parties to debate about both incurred and estimated costs at the CCMC was a reason in favour of the approach taken.
This is an unfortunate result, as it will lead inevitably to much more focus on incurred costs at the first CCMC than has previously been the case. This will inevitably increase the time and cost of such hearings. Moreover, inviting the court to make prima facie binding comments on incurred costs renders the process akin to an interim detailed assessment, which is expressly not what is intended (see CPR PD 3E paragraph 7.3).
In the circumstances, the question for practitioners and parties is to what extent Sarpd must or will be followed. The focus of the court’s attention was the impact of costs budgets on security for costs applications, rather than on the impact of approval or agreement at a subsequent assessment. Moreover, the comments in respect of the agreement to a budget are plainly obiter, since the case concerned an approved budget, rather than an agreed one.
However, the statements made by the court regarding the status of an approved budget are clearly part of the ratio of the court’s decision. In any event, as the only Court of Appeal decision on the approach to incurred costs in costs budgets, it will be a brave judge at a lower tier who will ignore the comments made.
Therefore, parties and practitioners will be well-advised to be:
- Clear as to the scope of any agreement as to a budget (and in particular as to whether the incurred costs are agreed).
- Fully prepared to engage at the CCMC in respect of incurred costs, as the express and implied comments of the judge at that stage may well be taken to bind the costs judge at assessment, absent good reason.
