The second issue that was debated in the case of Harrison v University Hospitals and Coventry and Warwickshire NHS Trust  EWCA Civ 792 was described in these terms:
3. The second issue is whether, with regard to costs incurred prior to the budget (“incurred costs”), there is or is not a like requirement of good reason if a costs judge on a subsequent detailed assessment is to depart from the amount put forward at the relevant costs management hearing.
The origins of this issue can be found in what might now be termed “the Sarpd Oil” heresy: this was a belief that gained some traction after obiter remarks by Sales LJ in the case of that of that name, that unless incurred costs were challenged at the costs and case management hearing, they were to be taken as drawn. This in turn led to lengthy recitals in costs management orders that the issue of incurred costs had specifically not been considered at the costs and case management hearing, and in effect, the issue was shunted off to detailed assessment.
The Court of Appeal in Harrison was at pains to state that the issue was to be resolved again, according to the wording of the rules and Practice Direction, applying the conventional canons of construction.
45. Although the second issue to an extent is connected with the first issue it seems to me that the same process of interpretation – that is, giving the wording of the Rules their natural and ordinary meaning – again indicates a clear outcome: this time, in favour of the appellant.
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.
It should logically be conceptually clear then, that it follows that incurred costs are simply not up for consideration at a costs budgeting hearing, but rather to be dealt with at a detailed assessment.
However this is not the case. Instead incurred costs can be considered at the costs budgeting hearing in two potentially important regards. The first, is that the amount of incurred costs could logically form an important consideration in setting budgeted costs: if, for example disclosure has already been undertaken to all intents and purposes, by the time a costs budgeting hearing takes place, then a very limited amount of budgeted costs might be allowed for disclosure in the disclosure phase. Similar arguments might be raised in relation to other phases.
Secondly, the court can record comments on incurred costs. How useful this would be, is moot. If a district judge, simply records on the order that the incurred costs are “too high”, how does this translate into specific findings or rulings on a detailed assessment? Any comments which can reasonably be recorded on the face of an Order, are likely to be so vague or non-specific as to be meaningless, and not least because in the context of a costs budgeting hearing the court would have only limited material before it, to give any context to highly impressionistic comments.
The issue of proportionality also has to be considered, and the conceptual confusion this might create will be explored below.
The Court of Appeal did firmly put to rest the spectre of Sarpd Oil, in so far as it lingered after the 1st April 2017 amendments to the costs budgeting rules:
50. In reaching his conclusion, the costs judge was clearly influenced by certain obiter remarks of Sales LJ delivering the judgment of the court in the case of Sarpd Oil (cited above) at paragraphs 41-44 of the judgment. That case did not in fact involve a detailed assessment as such but related to an issue on security of costs. I should also note that the budgeted costs in that case had been approved by the judge as part of an agreed CMO. At paragraph 43 Sales LJ indicated in general terms that, where positive comments were made in the CMO as to incurred costs, the receiving party would have the legitimate expectation of being likely to recover such costs if successful in the litigation. That having been said, at paragraph 44 of the court’s judgment it was then said: “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.” Similar points were made at paragraphs 47 and 50 of the judgment.
51. One can see that the wording used in Precedent H might tend to support such a view. But it does not accord with the language of paragraph 7.4 of PD 3E or CPR 3.15 or CPR 3.18: nor does it sit comfortably with the expressed entitlement (but not obligation) of the judge conducting the costs management hearing to record comments on incurred costs which, if made, will then be “taken into account” when considering reasonableness and proportionality.
The Court of Appeal then went onto consider proportionality and indicated that the incurred costs will be considered as part of the round of an overall view on proportionality, to be formed at the end of a detailed assessment. However, if budgeted costs have been set on the basis of what is reasonable and proportionate, in the light of the incurred costs which have already been accrued, one can legitimately ask oneself, what scope might there be in the ordinary case, for a global proportionality deduction?
The answer will depend on the figures in an individual case: where incurred costs are very modest, there might be very little scope: for the budgeted costs forming the majority of the costs will have been expressly set on the basis they are reasonable and proportionate.
Conversely, where the incurred costs are very great, not only might this result in modest budgeted costs being allowed, the scope for a proportionality argument to succeed must be greater: as the reasonableness and proportionality of those costs would be very much up for argument. One can see in this case “good reason” and proportionality arguments being run together.
52. I add that where, as here, a costs judge on detailed assessment will be assessing incurred costs in the usual way and also will be considering budgeted costs (and not departing from such budgeted costs in the absence of “good reason”) the costs judge ordinarily will still, as I see it, ultimately have to look at matters in the round and consider whether the resulting aggregate figure is proportionate, having regard to CPR 44.3 (2)(a) and (5): a further potential safeguard, therefore, for the paying party.
The Court of Appeal concluded that incurred costs and budgeted costs are to be sharply distinguished for the purpose of a costs budgeting hearing, as provided for by the amended rules, and in relation to the former rules, when properly construed.
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.
The third and final issue hinged on when a case was commenced for the purpose of rule 44.3(7)(a): the court had little difficulty in deciding that meant when proceedings were issued by the court.
Although the rules are clear, and indeed have been clear in my view since 2013, in their intended effect, the Harrison judgement clarifies the position and confirms the interpretation. To that extent the judgment is a valuable jurisprudential contribution.
What the judgment does not do, and does not purport to do, is address the philosophical contradictions at the heart of the current costs budgeting regime.
In particular, in a world where there is an ever greater impetus to fixed costs, with their settled, if not arbitrary amounts, it could be thought to be puzzling that the rules remain so tender of the notion of incurred costs and their inviolability to control or assessment at an early stage in a case.
Moreover, the provision in the rules for variation of a budget, cuts against the provision of certainty that a costs management order is meant to achieve: if a party’s potential liability for costs can be increased through the raising of a party’ budgeted costs, then a decision made to contest a case, will have been made on the basis of an invalidated premise.