The “Petrofac Costs Principle” – Rigorous Scrutiny and Detailed Justification for Interim Payments on Account in Restructuring-Plan Litigation

1. Introduction

In Petrofac Ltd (Costs), Re ([2025] EWCA Civ 1106) the Court of Appeal (Civil Division) – Lord Justice Snowden, Lord Justice Zacaroli, and Sir Christopher Floyd – delivered a pivotal ruling on the mechanics of interim payments on account of costs following a successful appeal against the sanction of restructuring plans under Part 26A of the Companies Act 2006. The dispute arose between the Plan Companies of the Petrofac Group (the unsuccessful proposers of the plans) and two dissenting creditors, Saipem and Samsung, who had resisted the plans at first instance and on appeal.

Having already determined the substantive appeal ([2025] EWCA Civ 821), the Court was asked to fix a suitable sum to be paid immediately by the Plan Companies as an interim payment towards the dissenters’ costs – a figure the creditors pitched at £3.75 million (about 60 % of their total £6.4 million claim), while the Plan Companies argued for only £0.5 million. The ruling not only fixed the figure at £2 million, but, more importantly, laid down stringent guidance on:

• What information a receiving party must supply to justify a payment on account;
• How the court will estimate the likely level of recoverable costs pending detailed assessment;
• The relevance of guideline hourly rates, counsel’s fees, and third-party experts in the restructuring-plan context;
• The broader policy objective of preventing cost inflation in Part 26A proceedings.

2. Summary of the Judgment

The Court exercised its power under CPR 44.2(8) to order a “reasonable sum” on account of costs, but found the evidence produced by Saipem and Samsung to be “manifestly deficient.” Key holdings include:

• Inadequate Particularisation: Merely supplying total invoices or heavily redacted narratives falls short; the receiving party must furnish “sufficient detail” to allow the court to gauge reasonableness and proportionality.
• Guideline Hourly Rates as a Starting Point:Where claimed rates greatly exceed the January 2025 Guideline Hourly Rates, a “clear and compelling justification” is required.
• Objective Lowest Reasonable Cost Test: The benchmark is the minimum expenditure necessary to present the case proficiently, not what the client was subjectively willing to pay.
• Third-Party Professional Fees: While specialist financial and expert input can be recoverable in restructuring litigation, bare description such as “Financial Advisory” without explanation or demonstrable relevance will attract judicial scepticism.
• Outcome: Balancing the likelihood of ultimate recovery against evidential uncertainty, the Court fixed an interim payment of £2 million – significantly above the Plan Companies’ offer but far below the 60 % sought.

3. Analysis

3.1 Precedents Cited and Their Influence

• Excalibur Ventures LLC v Texas Keystone Inc. [2015] EWHC 566 (Comm) – Clarified that the test is a “reasonable sum” rather than the “irreducible minimum.” Provided the conceptual framework for estimating a likely recovery range.
• Kazakhstan Kagazy plc v Zhunus [2015] EWHC 404 (Comm) – Leggatt J’s articulation of the objective, lowest-reasonable-cost standard was adopted and reiterated.
• Samsung Electronics v LG Display [2022] EWCA Civ 466 – Emphasised that exceeding Guideline Hourly Rates demands “clear and compelling” justification.
• Athena Capital Fund v Secretariat of State for the Holy See [2022] EWCA Civ 1061 – Applied proportionality scrutiny to counsel fees and warned against complacency where both sides incur high costs.
• Kington SARL v Thames Water Utilities Holdings Ltd [2025] EWCA Civ 1003 – Recently endorsed Kazakhstan Kagazy; cited for proportionality principles.
• Older authorities (Harold v Smith; Smith v Buller) were referenced to trace the evolution from “necessity” to CPR 44.3’s “reasonableness and proportionality.”

By weaving these authorities together the Court underscored continuity: modern CPR language has replaced archaic formulations, but the indemnity rationale and policy against cost excess remain constant.

3.2 Legal Reasoning in Depth

1. Statutory Gateway – CPR 44.2(8): The rule makes an order for a payment on account the default position unless good reason exists not to. The Court accepted there was an entitlement, so the dispute focused on quantum.
2. Evidential Deficits: The Court’s earlier order (8 July 2025) required a “schedule of costs… sufficient detail.” Invoices with high-level labels and masked narratives did not comply, depriving the Court of confidence that 60 % of £6.4 million would survive detailed assessment.
3. Guideline Hourly Rates Baseline: • Mayer Brown’s rates (up to £1,096 / hour) nearly doubled the £566 guideline for Grade A. • No structured justification (complexity, urgency, novelty, international issues) was offered.
4. Application of the “Lowest Reasonable Cost” Test: Citing Leggatt J, the Court rejected the creditors’ reliance on (i) the large quantum of their own claims and (ii) the Plan Companies’ even larger fees. Neither factor converts subjective expenditure into objectively recoverable costs.
5. Financial Advisers and Experts: The Court distinguished between (a) permissible financial advice or expert evidence necessary for the issues, and (b) unparticularised advisory work. Because invoices simply said “Financial Advisory” and engagement letters were missing, the Court could not assume recoverability.
6. Bracketed Estimation: Weighing the prospects that some, but not all, of the claimed costs would survive assessment, the Court selected £2 million as a cautious, yet meaningful, interim figure.

3.3 Anticipated Impact

The ruling institutes what practitioners are already calling the “Petrofac Costs Principle.” Its repercussions include:

• Elevated Disclosure Standards: Parties in Part 26A (and by extension scheme of arrangement) litigation must collate and present cost schedules approaching the detail of Form N260 even when a summary assessment is not sought.
• Constraint on Professional Fee Inflation: Insolvencies and restructurings are fertile ground for large advisory teams. Petrofac signals the Court’s willingness to interrogate hourly rates, delegation practices, and expert utilisation.
• Encouragement of Early Cost Management: Payors and recipients alike now have a clear precedent that “comparison with the other side’s spend” is not persuasive; instead, contemporaneous cost control and clear workstreams will be vital.
• Guideline Rates Anchor for Detailed Assessments: Although already “helpful,” guideline rates now enjoy reinforced authority in restructuring contexts traditionally dominated by premium City firms.
• Policy Alignment with Insolvency Objectives: Restructuring regimes are meant to salvage value for creditors, not dissipate it through unchecked professional fees. Petrofac arms judges with doctrinal tools to police that boundary.

4. Complex Concepts Simplified

5. Conclusion

Petrofac (Costs) revives an old theme—cost containment—but situates it in the fast-growing, high-stakes arena of restructuring plans. By demanding granular disclosure, reaffirming the objective “lowest reasonable cost” yardstick, and signalling intolerance of gratuitous premium rates, the Court of Appeal has charted a new, pragmatic course.

Going forward, parties seeking interim payments must be prepared to open their books in meaningful detail or risk a substantial downward adjustment. Conversely, paying parties now have doctrinal ammunition to challenge bloated or opaque cost claims. The judgment thus serves both as a cautionary tale for advisers and as a guardian of proportionality, aligning cost recovery with the underlying rescue aims of the UK’s restructuring framework.