How important is an approved costs budget in determining the sum to be ordered by way of security for costs? This was an issue considered by Mr Justice Andrew Smith in Sarpd Oil International Ltd -v- Addax Energy  EWHC 2426 (Comm).
The defendant was defending a claim in excess of $2 million and brought a Part 20 claim against Glencore.
THE DECISION ON SECURITY FOR COSTS
The judge declined to make an order for security for costs. The claimant company was incorporated in the British Virgin Islands and there was no reason to believe it was not able to pay the defendant’s costs.
COULD THE DEFENDANT OBTAIN SECURITY FOR COSTS OF THE THIRD PARTY PROCEEDINGS?
The judge held that, if he had ordered security for costs, I would have assessed the amount having regard to the costs of bringing the Part 20 proceedings against Glencore but disregarded its potential liability for Glencore’s costs if the claims fail.
THE SIGNIFICANCE OF THE COSTS BUDGET
The judge went on to consider the relevance of the approved costs budget to the quantification of an order for costs. He found that the budget was important. He would have ordered security for £380,000 (in relation to costs budget of £407,906.85).
The main issue between the parties about how the quantum of any security should be assessed concerns Addax’s costs budget and an order made about it by Blair J dated 22 May 2015. The case management conference was listed for hearing before him, but I understand that the parties agreed case management directions and Blair J made his order without a hearing. (In so dealing with costs management, he was following the course advocated in the Supplement to the White Book published as “Costs & Funding following the Civil Justice Reforms: Questions & Answers” at para 4-42, citing Jackson LJ’s Final Report.) The parties had filed and exchanged costs budgets in the form of precedent H annexed to CPR Practice Direction 3E. They were verified by the parties’ solicitors in the prescribed form: “This budget is a fair and accurate statement of incurred and estimated costs which it would be reasonable for my client to incur in this litigation”. Blair J’s order included this: “The Defendant’s costs budget is approved in the sum of GBP 407,906.85 in the form attached to this order”. He made similar orders in respect of the costs budgets of Sarpd, whose budgeted costs were £592,369.64 and Glencore, whose budgeted costs were £488,254.42.
“The court may at any time make a ‘costs management order’. Where costs budgets have been filed and exchanged the court will make a costs management order unless it is satisfied that the litigation can be conducted justly and at proportionate cost in accordance with the overriding objective without such an order being made. By a costs management order the court will—
(a) record the extent to which the budgets are agreed between the parties;
(b) in respect of budgets or parts of budgets which are not agreed, record the court’s approval after making appropriate revisions”.
Despite Blair J’s costs management order, Mr Nolan submitted that the amount of security should not reflect Addax’s budget because it is excessive. Rule 44.3(2)(a) provides that, where the amount of costs is to be assessed on the standard basis, the court will only allow costs which are proportionate to the matters in issue, and that costs which are disproportionate in amount may be disallowed or reduced even if they were reasonably or necessarily incurred; I am bound to say that, were this virgin territory, my impression would be that the amounts in the budgets of all the parties are higher than are proportionate. CPR44.3.5 provides that:
“Costs incurred are proportionate if they bear a reasonable relationship to –
(a) the sums in issue in the proceedings;
(b) the value of any non-monetary relief in issue in the proceedings;
(c) the complexity of the litigation;
(d) any additional work generated by the conduct of the paying party; and
(e) any wider factors involved in the proceedings, such as reputation or public importance”.
Here only monetary relief is claimed, the litigation does not appear particularly complex for claims of this kind, there do not appear to be considerations of reputation for any party, the issues do not appear to raise any points of public importance and there has been no suggestion that Sarpd’s conduct has or is likely to generate additional work. The trial is expected to last 7 days, and leading counsel have been instructed by all the parties. The budgeted costs include provision for a procedure for alternative dispute resolution. I express no concluded view: I did not hear any submissions of any detail about the amounts of the budgeted costs, and Glencore was not represented at the hearing before me. Nevertheless, had the question been for me to determine and important to my decision on the application, I would have needed some persuasion that the budgeted costs are proportionate to the sums in issue and so proportionate for the purposes of assessing what costs assessed on a standard basis would be. For example, I would need persuading that Addax’s budgeted costs of £64,443.50 for “Issue/Statements of Case” would, absent the costs management order, be recoverable upon an assessment on the standard basis given that, as Mr Lewis told me, it is largely deploying Glencore’s pleadings, and that £24,700 would be recoverable in respect of witness statements given Mr Lewis’ submission about them.
“In any case where a costs management order has been made, when assessing costs on the standard basis, the court will –
(a) have regard to the receiving party’s last approved or agreed budget for each phase of the proceedings; and
(b) not depart from such approved or agreed budget unless satisfied that there is good reason to do so.
(Attention is drawn to rule 44.3(2)(a) and rule 44.3(5), which concern proportionality of costs.)”.
I was told that in fact the parties all agreed the budgets in their entirety, and the whole of Blair J’s case management order was made by consent. Although the order does not record that it was made by consent, I think that this must be correct, because otherwise the case management order would not have been made without a hearing. CPR3.15 contemplates that in these circumstances the court will not approve the budget(s), but will simply record the agreement. Blair J, however, went further and expressed his approval of the budgets. Thus, he did not make an entirely conventional costs management order, but it was, and was intended to be, a species of case management order and that CPR3.18 apply to it. Accordingly, it is not to be departed from unless there is good reason to do so. Any doubts that I have about whether the budgeted costs are reasonable or proportionate would not be a good reason to depart from what Blair J approved: that would destroy the scheme of the new costs regime. Of course, it might turn out that the costs that the parties anticipated when they exchanged and agreed the costs budgets will turn out to be more than is reasonable and proportionate in light of unexpected developments, and if so this might result in a further costs management order in relation to an amended (increased or reduced) budget: CPR3.18 applies to the last approved or agreed budget. But this is not relevant to my decision on this application. There is no evidence that there has been any significant change since Blair J made his order, and “Once a costs management order has been made by the court, it may only be varied where there are significant developments”: see the “Costs & Funding” guidance (cit sup) at para 4-34. I accept Mr Lewis’s argument that therefore the appropriate amount of security should be assessed on the basis that Addax’s budgeted costs are likely to be recoverable on a standard assessment.
This conclusion, I think, applies to both costs that had already been incurred when the costs had been incurred and future costs that were estimated in the budget. During the hearing I questioned this: the notes in the White Book at CPR3.18.1 state, “While those costs that were incurred cannot form part of the budget and so fall for assessment unfettered by the restraints of the budget, once assessed, on the basis that they were reasonably incurred and reasonable in amount, and added to the budgeted costs, the total figure is still subject to an overall assessment of proportionality”. In the “Costs & Funding” guidance it is said at 3-13:
“At the costs management stage the rationale is that the past conduct of the parties … is not relevant. This is because the court can only budget the costs ‘to be incurred’. As such, the court can control conduct going forward by proportionate costs and case management. …”.
However, a costs budget in the form of precedent H includes both past and anticipated costs and the legal representatives who verifies it is required to certify 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”. When a costs management order is made, CPR3.15 contemplates that it will refer to the whole budget, and CPR3.18 does not distinguish between costs that were already incurred and those which were anticipated. As I see it, this means that Mr Lewis’ argument applies with equal force to costs that had already been incurred by the time of Blair J’s order and the costs budget of Addax that he approved, and the costs that it anticipated.
If I were awarding security for Addax’s costs, therefore, I would assess the level of security by reference to the approved costs budget, and would assess them at £380,000. Mr Nolan submitted that any order should provide for security to be provided in tranches, and I see force in that. Had I ordered security, I would have invited counsel’s further submissions about that. However, I have concluded that condition c is not met, and the application is refused.