A case making clear the distinction between budgeted costs (where the budget bites) and incurred costs (where the budget does not bite and costs are assessed in the usual way. The decision in SARPD had tended to blur the distinction between the two categories.

Davis LJ said,

’46. The starting point is this. CPR 3.18 (b), in its then form, relates to a departure from “the approved or agreed budget”. But the costs incurred before the date of the budget were never agreed in this case. Nor were they ever “approved” by the CMO.

On the contrary the focus of a judge making a CMO is on estimating the costs reasonably and proportionately to be incurred in the future: as the opening words of CPR 3.15 (1) make clear. In undertaking this exercise the court may have regard to costs stated already to have been incurred: and that may in turn impact on its assessment of what may be reasonable or proportionate for the future.

But paragraph 7.4 of PD 3E is quite specific: as part of the costs management process the court may not approve costs incurred before the date of the budget costs management conference. What it can do is record in the CMO its comments (if any) on such costs: which are then be taken into account when considering reasonableness and proportionality: a direction now enshrined in the amended CPR 3.15 (4) and CPR 3.18 (c) with effect from 1 April 2017.

47. 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.

49. … 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.

53. 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.

54. 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.’

Editorial Note:  the changes to the rules were made by The Civil Procedure (Amendment) Rules 2017 [ SI 2017 no 95] and take effect from 6th April 2017.

The effect of the new rules is to unwind the problems caused by the decision in SARPD Oil International Ltd v Addax Energy SA [2016] EWCA Civ 120.

The effect of this decision falls upon cases in the system prior to 6th April 2017, confirming that the statements in SARPD were obiter and overruling them. Therefore for cases prior to 6th April 2017 the rule is, now, the same: incurred costs are not covered by CPR 3.15. That applies only to budgeted cases. Incurred costs fall to be treated under CPR 44 in the normal way save that any comments made about them may be considered by the costs judge (PD 3E para 7.4.

[Edited and formatted for ease of reading.]