Drafting a Precedent H costs budget is rarely a straight-forward exercise. There are a number of different issues to consider and assumptions to be made before arriving at a total costs figure. However, until recently it was generally accepted that ‘incurred costs,’ i.e. those costs incurred before the budget was prepared, were exempt from anything but the briefest judicial analysis.
While Practice Direction 3E paragraph 7.4 states that the court “will” take incurred costs into account when considering the reasonableness and proportionality of the costs yet to be incurred, no guidance is given as to how this is to be achieved. As a result, courts were initially reluctant to have anything other than a limited regard to the level of incurred costs when considering and approving costs budgets going forward. However, as judges become more familiar with, and gain knowledge from, the budgeting process they are increasingly willing to challenge both incurred and future costs.
In the judgment in CIP Properties Ltd (AIPT) v Galliford Try Infrastructure Ltd and others EWHC 481 (TCC) handed down yesterday, Coulson J analysed both the incurred and future costs set out in the claimant’s cost budget. The sum claimed was £8.9 million but the judge considered that budget to be entirely unreliable since it excluded certain costs (increasing the actual budget to £9.5 million) and made a number of wide ranging assumptions in relation to future costs. As a consequence, taking account of those matters, the type of action and the amount at stake (£18 million) he was inclined to award no more than £4.5 million. However, this sum was broadly equivalent to what had already been spent by the claimant. How then was the court to deal with future costs?
The parties put forward 4 options. They were:-
- To specifically disapprove the claimant’s costs budget (as in Willis v MRJ Rundell and Associates Ltd and Another  EWHC 2923 (TCC)).
- To set (reasonable) costs budget figures on a phase by phase basis, looking at the estimated rather than actual costs.
- To direct another budget was served by the claimant.
- To allow no costs going forward (an approach adopted in Redfern v Corby Borough Council EWHC 4526 (QB) HHJ)).
Whilst attracted to Option 4, the judge felt that it could potentially lead to the claimant being penalised twice since it would be open to the defendant on a detailed assessment to challenge the reasonableness of the costs already incurred. In other words the claimant could recover significantly less than the £4.5 million the judge thought was reasonable and proportionate. Similarly, Option 1 lacked certainty and had the potential for the claimant to recover significantly more than £4.5 million.
As Coulson J was not prepared to allow the claimant to serve another costs budget, which he thought would not be particularly helpful and would require yet another hearing, Option 3 was rejected. That left Option 2, but its implementation would result in a costs budget being approved which was significantly higher than the figure of £4.5 million the judge considered proportionate and reasonable.
Coulson J therefore elected to adopt what he described as a ‘modified approach’ to Option 2. First he recorded (on a phase by phase basis) what he considered to be reasonable and proportionate figures for both the incurred and projected costs. He then directed that if, on assessment, the claimant recovered more in incurred costs (which are not subject to budget approval) there was to be a pound for pound adjustment in future costs (which are subject to budget approval).
This case serves as a warning to those involved in the drafting of costs budgets to exercise diligence and care in the drafting process or else face serious costs consequences. In order for a budget to be considered reliable, any spikes in the costs as compared against previous projected figures, even in the early stages of a matter, must be justified. The parties must exercise control in the drafting of the assumptions which form the basis of the budget and recognise that assumptions should not be abused in a manner which creates uncertainty in the cost management process. It also serves to as a reminder of the importance of keeping costs under control with courts keen to ensure that the spirit of the costs reforms is respected.
Further reading: CIP Properties Ltd (AIPT) v Galliford Try Infrastructure Ltd and others  EWHC 481 (TCC). If you would like a copy of the judgment, or any of the other judgments referred to above, then please email one of the contacts below.