A case on security for costs but of interest on costs budgeting.

After dealing with matters relating to security for costs, Sales L.J. said,

The relevance of the costs budgets
33. …it is necessary to say something about the way in which the costs budgeting regime operates. This is the regime introduced as part of the reforms introduced following recommendations made by Lord Justice Jackson. The regime is contained in the costs management provisions at CPR Part 3.12 to Part 3.18.
36. Parties to litigation which is covered by the costs management regime, such as the present case, are required to provide each other and the court with costs budgets in good time before the first case management conference (CMC): CPR Part 3.13..

40. Paragraphs 7.3 and 7.4 of Practice Direction 3E state:

“7.3 If the budgets or parts of the budgets are agreed between all parties, the court will record the extent of such agreement. In so far as the budgets are not agreed, the court will review them and, after making any appropriate revisions, record its approval of those budgets. The court’s approval will relate only to the total figures for each phase of the proceedings, although in the course of its review the court may have regard to the constituent elements of each total figure. 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.
7.4 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.”

41. It may thus be seen that although a costs budget sets out the incurred costs element and the estimated costs element, as a result of para. 7.4 of PD3E the court does not formally approve the incurred costs element but only the estimated costs element; and it is only in relation to that approved estimated costs element that the specific rule of assessment in Part 3.18(b) applies, namely that the court will not depart from the approved budget “unless satisfied that there is good reason to do so”. It should be noted that there is no restriction in the Practice Direction regarding parties agreeing costs budgets as set out in the form of Precedent H, so in a case where the parties agree a costs budget in whole or in part and that is recorded in the relevant costs management order (as contemplated by Part 3.15(2)(a)), the rule in Part 3.18(b) applies both to the agreed incurred costs element and to the agreed estimated costs element.
42. However, even though in a case where court approval of a budget is in issue the approval does not apply to the incurred costs element…the court may still record its comments on those costs (in particular, regarding the court’s view whether they are reasonable and proportionate) as well as take them into account when considering the reasonableness and proportionality of items in the estimated costs element in the budget: see the second sentence of para. 7.4. If the court does record comments about the incurred costs, they will carry significant weight when the court comes to exercise its general discretion as to costs under CPR Part 44 at the end of trial.
43. For example, if a court has commented that incurred costs in a costs budget appear to be reasonable and proportionate, it would usually require good reason to be shown why such costs should not be included in an award of costs on the standard basis at the end of the trial. In such a case, the party who had put forward the costs budget would have been encouraged by the court to litigate on the understanding and with the legitimate expectation that such costs would be likely to be recovered if he were successful, and good reason would need to exist to justify defeating that expectation. Therefore, depending on what is said by the court by way of comment, the practical effect of a comment on already incurred costs made by a court pursuant to para. 7.4 of PD3E may be similar to the effect under Part 3.18(b) of formal approval of the estimated costs element in a cost budget.
44. 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”.
45. It appears that this was indeed the understanding of [the parties] in the lead up to the CMC in this case, as shown by the facts that each of them provided a costs budget which was signed and certified with this statement covering both the incurred costs element and the estimated costs element; they debated the entirety of their costs budgets with each other in advance of the CMC in the usual way; and they then agreed the terms of an order which they sent to Blair J to approve which included in respect of each costs budget a statement that the costs budget was approved in the full relevant total sum covering both the incurred costs element and the estimated costs element.
46. … The relevant order which all the parties together invited [the judge] to make, and which he made without the need for a hearing, was this:
“The Defendant’s costs budget is approved in the sum of [£ ]in the form attached to this order”
and [the party’s] costs budget was attached to the order…
47. Strictly, by reason of para. 7.4 of PD3E the court could not approve the incurred costs element of these costs budgets in a way which would engage the effect of CPR Part 3.18(b). The proper interpretation of the order made in relation to each costs budget, therefore, is that the estimated costs element in each case was approved by the order (so that Part 3.18(b) was engaged in relation to that element) and the court commented on the incurred costs element in each case (and on the total figure which included that element), as it was entitled to do under the second sentence of para. 7.4, 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.
48. There was also little if any difference in practical effect between what happened here and the position which would have arisen if, instead of recording its own approval, the court had recorded that the respective costs budgets had been agreed in full by the parties; which in substance, of course, they had been, since the parties invited Blair J to make his order in terms which they had all agreed.

50. …all the parties appreciated, or should have appreciated, that the first CMC was the appropriate occasion on which issues between them regarding the quantum of costs shown in their respective costs budgets should be debated. That was so both in relation to the estimated costs elements in the budgets, in respect of which a costs management order might be made under CPR Part 3.15(2)(b) and pursuant to para. 7.4 of PD3E to record the court’s approval of those elements, and in relation to the incurred costs elements in the budgets, in respect of which it would be open to the court to make comments under para. 7.4 of PD3E. Moreover, CPR Part 3.17 makes it clear that costs budgets are to be important instruments for all case management decisions, so parties must appreciate that if they wish to take issue with another’s costs budget they should do so at the first CMC, when there is to be debate about the costs budgets. In this case the first CMC, and the process leading up to it, afforded each party a fair opportunity to make any submissions they might wish on each other’s costs budgets.
51. [The Claimant] chose not to dispute the reasonableness and proportionality of the sums set out in [parties’] costs budgets when it had the opportunity to do so…
52. Secondly, for reasons explained above, [the] costs budget…as “approved” in and appended to [the judge’s], will be a strong guide as to the likely costs order to be made after trial, if [the party] is successful, both in relation to the incurred costs elements and in relation to the estimated costs elements. It is therefore appropriate that the costs budgets as so “approved” should be used as the relevant reference points for considering the amount which should be ordered for security for costs.
53. On the footing that the costs budgets (including both the incurred costs and the estimated costs elements) are to be used as the relevant reference points then, after making certain allowances accepted by [counsel], as mentioned above we understand it is agreed that the total amount to be ordered to be provided by way of security for costs is [£ ].

Edited for ease of reading. You can find the transcript of this judgement on bailli.