CPR 46.9(3) | Costs Budget Overspend And Informed Consent

Full Summary

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JXC v NIS [2023] EWHC 1000 (SCCO) concerned an assessment of the amount, if any, of costs payable by the claimant, a Protected Party, to his solicitors, Irwin Mitchell (“IM”) following a shortfall in inter partes recovery of just over £200,000 + VAT.

Relevant Background

• The Claimant, a 19 year old Marine Commando, sustained catastrophic head injuries when he fell a distance of approximately 20 feet during a training exercise.
• IM were instructed under a CFA dated 30 August 2013.
• Liability for the accident was admitted by the Ministry of Defence on 12 February 2014 in response to a formal Letter of Claim, so the subsequent litigation was concerned only with the quantification of damages.
• Quantum investigations were complex, given the multifaceted disabilities and needs stemming from the Claimant’s injuries.
• A substantial body of expert and witness evidence was obtained.
• Following provisional settlement of the damages claim at a total capitalised value of over £14,000,000, an order was made approving the same and providing for the costs payable by the Defendant to the Claimant to be assessed, and (at paragraph 13):

“Unless the Claimant’s solicitors waive their entitlement to be paid by the Claimant such shortfall in the costs recovered inter parties as they may be otherwise be entitled to under the terms of their retainer, there be a detailed assessment of the Solicitor/Client costs incurred on behalf of the Claimant and of the amount which it is reasonable for the Claimant’s Solicitors to recover from the Claimant in all the circumstances such costs to be assessed on the basis provided for in CPR 46.4 and 46.9.”

• The Claimant prepared and in April 2021 sent to the Defendant a bill of costs which included the costs of the Claimant’s previous solicitors, Woolsey, Morris and Kennedy. The bill totalled £1,300,448.44.
• Following service of that bill and subject to court approval, the parties agreed that the Defendant would pay £1,050,000 in settlement of costs. Once interest and detailed assessment costs are accounted for this, says IM, represents recovery of approximately 80% of total costs and disbursements.

CPR 46.4(2)(a)

CPR 46.4(2)(a) provides that as a general rule, where money is ordered to be paid to a protected party, the court must also order a detailed assessment of the costs “payable by, or out of money belonging to, any party who is a… protected party…“: in other words, the costs payable to the protected party’s legal representatives by the protected party. The amount payable to those legal representatives by the protected party will, under CPR 46.4(4), be limited to the assessed sum.

CPR 46.4(2)(b)

CPR 46.4(2)(b) provides that on assessing those costs the court must also assess the costs payable to the protected party by the “paying party”, usually the defendant to the claim.

CPR 46.9

CPR 46.9 makes provision for the assessment of costs as between solicitor and client. It provides, at CPR 46.9(3) and (4), that:

“(3)… costs are to be assessed on the indemnity basis but are to be presumed–

(a) to have been reasonably incurred if they were incurred with the express or implied approval of the client;

(b) to be reasonable in amount if their amount was expressly or impliedly approved by the client;

(c) to have been unreasonably incurred if –

(i) they are of an unusual nature or amount; and

(ii) the solicitor did not tell the client that as a result the costs might not be recovered from the other party…

(4) Where the court is considering a percentage increase on the application of the client, the court will have regard to all the relevant factors as they reasonably appeared to the solicitor or counsel when the conditional fee agreement was entered into or varied.”

The Budget

• The Claimant’s budget was first set on 27 January 2015. It was updated in July 2018 and again on 22 June 2020, but the court did not approve the Claimant’s proposed budget figures in full. Total reductions made by the court to the budgets presented by the Claimant totalled £261,860.03 excluding the success fee and VAT.
• The base costs claimed by IM from the Claimant significantly exceeded the budgeted figures for several phases of the litigation. IM’s bill, which was in electronic spreadsheet form, calculated the total overspend at £226,947.17 but IM argued that of this figure, £22,188 represented costs that could not have been anticipated and so included as contingencies within the budget.

The Base Costs Shortfall

The total difference between the base costs recovered from the Defendant and included in IM’s bill of costs, net of preparing and checking the bill, was calculated by IM at £221,461.69 inclusive of VAT. IM sought however to recover from the Claimant £212,974.69. The lower figure followed agreed reductions to counsel’s fees. WMK did not seek any payment from the Claimant beyond what had been recovered from the Defendant.

The Base Costs Information provided to CXJ

With reference to CPR 46.9(3) IM argued that they had complied with their obligations to provide costs information to CXJ and that she had given her informed consent to the deduction of costs from her damages.

Their approach had been to advise CXJ from the outset that the shortfall between the full legal charges agreed under the Conditional Fee Agreement (CFA) and the recovered costs would be deducted from any damages received by the Claimant. The CFA explained that the courts would usually only order the opponent to pay costs for the majority of the work needed, but not all of those costs. The courts would expect the client to meet those parts of the total costs which the courts consider to be ‘solicitor and own client costs’. As a broad guide, in most cases, she was advised, IM were usually able to recover approximately 80% of all their basic charges (plus VAT) from opponents, which leaves a shortfall of around 20%.

Sarah Griggs, a partner at IM, provided a full and detailed account of the costs information given to CXJ, backed by documents from IM’s file. Throughout the case, Griggs advised CXJ in relation to estimated costs, success fees, and the anticipated deduction from damages given the difference between the full costs payable to IM under the CFA and the amount likely to be recoverable from the Defendant.

The information provided to CXJ was detailed and included estimates of costs to be incurred for pursuing the claim over specific periods, the amount expected to be recovered from the Defendant, and the estimated contribution from CXJ.

In addition to the estimates, IM provided an information guide attached to the estimates that gave further information about base costs and cost budgets. The guide explained the court’s duty to consider setting limits on the legal costs payable by one party to another by approving a “costs budget” for each party after proceedings have started. It also explained that a party cannot expect to recover more legal costs from their opponent than the amount allowed for each phase unless there is good reason to depart from the cost budget.

IM’s Submissions on CPR 46.9(3)(a) and (b)

On behalf of IM, it had been submitted that:

• The final shortfall between costs incurred and costs recovered, and the components of that shortfall, had only crystallised following cost negotiations or an assessment. In this case, as the costs had settled following negotiations, there was no court determination of the exact costs which comprised the shortfall. Therefore, there was no way to establish the constituent elements of the shortfall, and their amounts, with any reasonable degree of accuracy.
• The shortfall was less than the budget overspend, and it was entirely possible (and IM argued probable) that the shortfall comprised elements of both costs which would fall to be disallowed under the Court’s general discretion on a standard basis assessment as well as potential overspend disallowances under CPR 3.18. An element of overspend was likely to have been recovered in the settlement sum. However, there was no way to identify it. One was simply left with an unascertained, mixed basket of unrecovered costs which in totality made up the Shortfall.
• To enable the Court to apply CPR 46.9(3) the court needed to know the amount in respect of which the Court was invited to make a determination. The exercise of that function was incompatible with unascertained amounts. The shortfall was, in contrast, ascertained, defined and demonstrable. It was a sum, Ms Bedford had submitted, in respect of which there was informed consent so as to support the presumption of reasonableness in CPR 46.9(3)(a) and (b).
• CXJ had been commended by Leading Counsel in his settlement advice for her determination to understand the evidence and the litigation process and for fighting tirelessly on the Claimant’s behalf to seek the best possible financial outcome for him. The excellent outcome, he observed, was in no small part due to her efforts and also to those of her lawyers at IM. Those comments, Ms Bedford had submitted, reflected CXJ’s level of sophistication and understanding, albeit without legal qualification.
• A key ingredient of informed consent in the case of this kind was that the litigation friend was informed of the likely amount of deductions from damages. That amount could properly be understood by reference to a percentage, and that information ought to have been set out within the initial client care documents.
• At the outset it was simply not possible, particularly in personal injury claims with a value exceeding £10,000,000 which in consequence fell outside the compulsory costs budgeting regime, to know whether a cost management order would be made; what level the budget would be set at; whether there would be any overspend; what amount such an overspend would extend to; or whether there would be any element of recovery of that overspend from the opponent.
• The concept of informed consent engaged with overarching categories of costs such as hourly rates, success fees and shortfall amounts. The information that was adequate, for the purposes of informed approval, did not need to descend into granular detail as to the intricacies of the CPR. It was sufficient to identify the potential shortfall by reference to a percentage limit, as was done here, not only initially but in all subsequent estimates provided to the client.
• Solicitors were not under a burden to set out every possible outcome of any potential cost recovery or disallowance, as the case may be. To require the solicitors to descend to explain the intricacies of budgeting as a facet of cost recovery in amongst general disallowances on assessment, all against an uncertain factual background, would not assist a client or meet any proper test of informed consent.
• ~ That would place too high a burden on the solicitor, would go beyond that which was required by the relevant authorities, and would not meet the requirement of being able to inform the client of the likely amount of a shortfall. Absent that key ingredient, informed consent would not be possible in respect of budget overspend until the conclusion of the cost claim, which was entirely unsatisfactory, not least from a client perspective.
• In contrast, explaining to the client that cost recovery was expected at 70-80% leaving the Shortall element limited to 20-30%, was to give information of which the solicitor could be sure and to provide the litigation friend with the critical information needed to make an informed decision at the relevant time.

IM’s Submissions on CPR 46.9(3)(c)

On behalf of IM, it was submitted that:

• The Senior Costs Judge’s conclusions in ST v ZY were inconsistent with the authority of Lavender J in SGI Legal v LLP v Karatysz [2021] EWHC 1608 (QB), which was not drawn to his attention. In this case, Lavender J suggested that the question of what is usual or unusual as between solicitor and client is a very different question from the question of what is recoverable inter partes [102-103].
• The budget overspend, on a solicitor/client basis, is neither unusual in nature nor unusual in amount so as to trigger the presumption in CPR 46.9(3)(c). The budget is concerned with standard basis costs subject to an overriding requirement of proportionality, which is entirely different from the indemnity basis assessment to be undertaken as between solicitor and client under CPR 46.9.
• The existence of an overspend alone is an overly restrictive measure of whether the overspend costs are unusual in amount. It necessarily imports proportionality into an assessment on the indemnity basis, and is accordingly impermissible.
• If “unusual” were to be measured by reference to an assessment between opposing parties, then a client would not enjoy the protection of CPR 46.9(3)(c) in relation to costs which are wholly in the realm of solicitor client work. For example, where a solicitor wishes to charge for an extraordinary amount of time discussing funding, which established authority is not recoverable against an opposing party.
• A shortfall of 20% of the overall costs claimed, in fact, falls towards the lower end of client contributions toward costs, which are usually between 20-30%. A shortfall at that level cannot properly be said to be “unusual in amount”.
• To avoid the presumption of unreasonableness imposed by CPR 46.9(3)(c) a client simply needs to be told that as a result of being unusual in nature or amount the costs might not be recoverable from the other side. That information needs to be delivered in a practical and pragmatic way which does not require the intricacies of the CPR to be set out to the client.
• IM have satisfied the test at CPR 46.9(3)(c). The advice given to the Litigation Friend from 10 June 2020 onwards clearly sets out that any overspend in budget will prove difficult to recover from the Defendant and that any non-recovered overspend will be incorporated into the Shortfall.

COSTS JUDGE LEONARD:

Conclusions on the Adequacy of the Costs Information Provided by IM

1. 1. I would start with the observation that IM’s characterisation of their shortfall estimates as incorporating or providing for an element of costs incurred in excess of budget, seems to me to be a construction imposed upon those estimates after the event.

1. 1. It is evident from the wording of the costs and shortfall advice provided to CXJ from time to time that it was provided according to a set formula. In the first estimate the shortfall was put at 20% of reported accrued costs. In every subsequent assessment it was put at 30%. That is standard advice for non-budgeted cases, in which a shortfall of between 20% and 30% may be expected on a standard basis assessment.

1. 1. The final estimate given before settlement (10 June 2020) did not, as Ms Griggs says, anticipate an ultimate shortfall of 20%: it anticipated a shortfall of 30% of an understated figure for accrued costs. This estimate seems to me in itself to demonstrate that IM gave no thought to budget overspend when estimating costs and shortfalls. It projects a shortfall, net of VAT, of £202,500 notwithstanding a budget overspend, net of VAT of £204,759.17, most of which must have been incurred by that point.

1. 1. It follows that the estimate could only be said to incorporate an allowance for budget overspend if it is assumed that costs would otherwise be recovered at 100%, which is (a) unsustainable and (b) clearly not intended.

1. 1. I do not mean to suggest that Ms Griggs’ statement is in any way intended to misrepresent the position. I am sure that it is not, but the similarity between the shortfall projected by IM on 10 June 2020 and the shortfall which IM now wants the Claimant to pay seems in reality largely to be coincidental. It cannot retrospectively justify the provision to CXJ of inadequate information on costs and I am quite satisfied that the cost information provided to CXJ from time to time was inadequate, for these reasons.

1. 1. 
      

      The authorities referred to by Ms Bedford do not, in my view, support the proposition that a solicitor is obliged only to provide a client with general information about a likely shortfall in costs which might fail the standard basis tests of reasonableness and proportionality, without explaining anything about, for example, a substantial budget overspend and its likely consequences.

1. 1. I am also quite unable to accept the proposition (if that is intended) that costs in excess of budget cannot be addressed until the litigation has concluded. A costs budget sets a figure for recoverable costs. Costs incurred in excess of budget are likely to come straight out of the client’s pocket, with no prospect of recovery.

It follows of necessity that it is incumbent upon a solicitor to monitor accruing budgeted costs (as IM said they would) and before budgeted figures are exceeded, to advise the client of the implications of doing so and of such options as applying for budget revision or avoiding the overspend.

1. 1. None of that happened here. No attempt seems to have been made at any point to obtain CXJ’s authority for, or even keep her advised of, anything to do with the budget set for this case. She was given no opportunity to authorise the three budgets IM submitted to the court for approval, or to authorise (or decline to authorise) any element of spending outside the limits set by those budgets.

1. 1. Such information as was provided on budgets and their effect was standard information, provided years after the event and never applied to the facts of the case. Notably CXJ was told on 10 June 2020 that the court had “now” set a budget, whereas in fact a budget had been set almost 5 ½ years earlier and was shortly to be revised for the second time. This appears to have been simply an update to the standard wording in IM’s costs estimates, but in the circumstances the very limited information on budgeting which CXJ was given on 10 June 2020 was misleading.

1. 1. In summary,

CXJ was never advised of the limits imposed by the court in its costs management orders upon recoverable expenditure in this case; or of the fact that the budget approved by the court was significantly lower than that proposed by IM; or of the likelihood that the budget overspend of £245,711 inclusive of VAT, would be irrecoverable from the Defendant in any event; or of fact that the overspend was likely to add substantially to (as Ms Bedford correctly describes it) the standard anticipated shortfall of between 20% and 30%.

Conclusions on the Appropriate Application of CPR 46.9

1. 1. Turning the appropriate application of CPR 46.9, my first observation would be that I have to decide, by reference to the criteria in that rule, whether the costs charged by IM to the Claimant were reasonably incurred and are reasonable in amount.

1. 1. As I have said, where costs have been settled between parties at a satisfactory level the court’s focus on a solicitor/client assessment under CPR 46.4(2) is upon any excess claimed by the solicitor over the costs recovered from the opponent. In fact, because the general requirement for a solicitor/client assessment at CPR 46.4(2) is displaced where the solicitor waives any claim to costs beyond those recovered from the opponent, I take the view that the court’s duty extends only to ensuring that anything claimed in excess of what is recovered from the opponent has been reasonably incurred and is reasonable in amount. Costs recovered from an opponent under such a settlement should, accordingly, be taken to have been reasonably incurred and to be reasonable in amount.

1. 1. It is important however to bear in mind that the solicitor/client assessment under CPR 46.4(2) is not an assessment only of the shortfall between the total costs sought by the solicitor from the client and the sum recovered from the opponent. The costs recovered from the opponent belong to the protected party, so all of the costs claimed from the paying party by their legal representatives will be “costs payable by, or out of money belonging to” the protected party and will fall to be assessed under CPR46.4(2)(a). All such costs are subject to the tests of having been reasonably incurred and reasonable in amount, and any component of those costs, whether it be success fees, hourly rates or budget overspend, may be disallowed if it fails those tests.

1. 1. For that reason, whether IM ultimately achieved a cost recovery that broadly equated with its projected shortfalls does not seem to me to have any real bearing upon the question of whether any particular part of their costs was unreasonably incurred or unreasonable in amount. That applies to the budget overspend as it does to any other part of their costs.

1. 1. Ms Bedford’s ingenious submissions concerning the impossibility of identifying the component elements of the cost recovered, and proposing that unidentifiable elements of budget overspend must be taken to be included within the costs figure ultimately recovered, seem to me to be too abstract and hypothetical to be of any real assistance.

1. 1. The appropriate approach to the overspend seems to me to be rather simpler than Ms Bedford’s submissions suggest.

1. 1. For the reasons I have given,

I have concluded that whilst the court’s duty is limited to ascertaining that the costs shortfall claimed by IM from the Claimant has been reasonably incurred and is reasonable in amount, in doing so the court must consider the totality of the costs claimed by IM from the Claimant. To the extent that the budget overspend was neither reasonably incurred nor reasonable in amount, it must be deducted from the base costs shortfall recoverable by IM from the Claimant. The budget overspend (£245,711 including VAT) exceeds the base costs shortfall which IM seeks to deduct from the Claimant’s damages (£212,974.69 including VAT). It follows that if the entire overspend was either unreasonably incurred or unreasonable in amount, IM cannot recover from the Claimant any part of the base costs shortfall.

1. 1. This takes me to the presumptions at CPR 46.9(3)(a) and (b). It seems to me that the authorities referred to by Ms Bedford are of no assistance to IM: quite the contrary. I cannot see how a client who was told nothing whatsoever about the limits on recoverable costs imposed by two costs management orders could properly be said, either expressly or impliedly, to have given informed consent to expenditure in excess of the budgeted figures.

1. 1. Given that IM is not in a position to rely upon the presumptions at CPR 46.9(3)(a) and (b) my conclusion is that the budget overspend was unreasonably incurred and unreasonable in amount, precisely because IM, having themselves given no thought to the effect of the costs management orders, gave CXJ no opportunity to consider whether it was appropriate to incur expenditure in excess of budget that was in consequence likely to be irrecoverable.

1. 1. As for CPR 46.9(3)(c), for the reasons I have given, my view is that the budget overspend should be regarded as unreasonably incurred before one considers the presumption created by CPR 46.9(3)(c).

1. 1. I would however respectfully agree with the conclusions of the Senior Costs Judge in ST v ZY as to the nature of the CPR 46.9(3)(c) criteria and the way in which they are to be applied when it comes to expenditure over budget.

1. 1. The observations of Lavender J at paragraphs 102 and 103 of his judgment in SGI Legal v LLP v Karatysz were, expressly, obiter. In any event, they are not in my view in any way inconsistent with the conclusions reached by the Senior Costs Judge. Lavender J was I believe making the point that it could not be right to characterise a solicitor’s costs as “unusual” to the extent that they exceed the recoverable costs under the fixed costs regime applicable to claims under the Pre-Action Protocol for Low Value Personal Injury Claims in Road Traffic Accidents. That is a view with which I would respectfully agree.

1. 1. Lavender J’s underlying point was, I believe, that

costs are not unusual in themselves simply because they are irrecoverable from an opponent. It remains the case that whether costs are “unusual” in nature or amount for the purposes of CPR 46.9(3)(c) has to be judged by reference to whether they may, in consequence, be irrecoverable from an opponent. So much seems to me to be evident from the combined wording of the rule itself and paragraph 6.1 of the accompanying Practice Direction.

1. 1. Ms Bedford is entirely correct to point out that on this interpretation of CPR 46.9(3)(c), the presumption that costs of an unusual nature or amount have been unreasonably incurred cannot arise if those costs are already, by their nature, irrecoverable against an opponent. Such costs cannot be said to be irrecoverable “as a result” of their unusual character, because they are already irrecoverable. That follows, unavoidably, from the way in which CPR 46.9(3)(c) and the Practice Direction are worded, but it does not in itself have any bearing on the correct interpretation of the rule.

In ST v ZY the Senior Costs Judge found that the costs incurred by IM in excess of budget were unusual in amount, in particular because of the remarkable extent by which costs for three specific budget phases had been exceeded. Although the excess costs, on a phase by phase basis, are not in this case so wildly in excess of budget as in ST v ZY, at almost a quarter of a million pounds inclusive of VAT the total figure speaks for itself. As in ST v ZY, the correct conclusion is that whilst the overall budget overspend was not unusual in nature, it was unusual in amount. The presumption of unreasonableness does apply, and I have seen nothing to rebut it.

1. 1. For all those reasons, I conclude that the budget overspend was in its entirety, as between IM and the Claimant, unreasonably incurred and unreasonable in amount.

1. 1. I appreciate that IM has, notwithstanding the budget overspend, achieved on the Claimant’s behalf a satisfactory recovery of costs from the Defendant, but that cannot offer a pretext for recovering from the Claimant additional costs that have been unreasonably incurred or are unreasonable in amount. The budget overspend must be deducted from the base costs shortfall which IM seeks to recover from the Claimant. It exceeds the shortfall, and in consequence IM may not recover the entire base costs shortfall from the Claimant.

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Summary of Conclusions

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1. 1. Having told CXJ nothing about the three costs management orders made in this case or (except at a late stage and in entirely hypothetical, generalised terms) of their effect on recoverable costs, and having denied her any opportunity to make an informed decision about incurring a budget overspend of £204,759.17 (£245,711 inclusive of VAT), IM is not in a position to rely, in relation to the budget overspend, upon the presumptions created by CPR 46.9 (3)(a) and (b).

1. 1. It seems to me that for the same reasons, it is right to conclude that the budget overspend was unreasonably incurred.

1. 1. As a separate point, applying the same approach as the Senior Costs Judge in ST v ZY, it is also I believe right to conclude that the budget overspend, applying CPR 46.9(3)(c)(i), whilst not unusual in nature, is unusual in amount. As IM did not warn CXJ that the overspend would, in consequence, be irrecoverable, the presumption at CPR 46.9(3)(c) applies and the overspend must be presumed to be unreasonably incurred.
2. 1. The court’s duty is to ensure that any costs payable by the Claimant to his legal representatives in excess of the amount recovered from the Defendant have been reasonably incurred and are reasonable in amount. Because the budget overspend exceeds the amount of the base costs shortfall which IM seeks to deduct from the Claimant’s damages, it follows that no part of the shortfall may be deducted by IM from the Claimant’s damages.

The judgment went on to deal with the success fee, which we will cover in another post.