By Virginia Rylatt

First published in New Law Journal, May 2010

In brief:

  • It is not the role of the Senior Courts Costs Office to punish solicitors for their failure to provide or update an estimate.
  • Determining costs covered by an estimate relied upon by a client needs to be distinguished from the costs incurred outside of the estimate of which the client is aware.

Costs Judges dealing with estimates should have one’s sympathy. Instead of the “15% rule” that was habitually applied pursuant to the apparently sacrosanct principles which did not in fact derive from Wong v. Vizards, we have 2 judgments of Morgan J dated 23rd November 2007 [2007] EWHC 2733 (Ch) [2008] 3 All ER 417 and 30th March 2009 [2009] EWHC 651 (Ch) [2009] CP Rep 33, [ 2009] 3 Costs LR 393, [2009] 1 WLR 881 and the Court of Appeal’s judgment of 7th December 2009 [2009] EWCA Civ1526 to consider.

In between the first and second judgments of Morgan J, Withers LLP’s (“Withers”) 11 bills were assessed by Costs Judge Simons at 78.4% of the costs as billed by Withers to its ex-client Mastercigars Direct Ltd (“Mastercigars”) – except that those costs covering the 6 week period of the estimate were calculated being “capped” at the value of the estimate plus 20% pursuant to the judgment of Costs Judge Simons dated 11th July 2008. Withers appealed that decision. Morgan J acceded to that appeal and then Mastercigars sought leave to appeal both judgments of Morgan J to the Court of Appeal, which decided that, if leave to appeal was given, it would proceed to hear the appeal immediately following the Leave to Appeal hearing on 7 December 2009.

An expensive decision

This was an expensive decision as it required the parties to be fully prepared to deal with a possible substantive hearing which, if Mastercigars application for leave to appeal was dismissed (which in the event it was) would be unnecessary. Costs summarily assessed in Withers favour of £25,000 were awarded. Whilst such decisions are common and convenient for the Court of Appeal, the costs of preparing for a substantive hearing of the appeal, before the Court of Appeal have given leave to appeal, places a burden on the parties which ought to be avoided.

The Court of Appeal (at paragraph 33) in its judgment of 7 December 2009 endorsed and agreed the explanation given in paragraph 54 of the judgment of Morgan J of 30 March 2009 as to the legal process involved in a case where a client contends that its reliance on an estimate should be taken into account in determining the figure which it is reasonable for the client to pay.

Paragraph 54

Paragraph 54 states:

“In my judgment, the legal process involved in a case where a client contends that its reliance on an estimate should be taken into account in determining the figure which it is reasonable for the client to pay is as follows. The court should determine whether the client did rely on the estimate. The court should determine how the client relied on the estimate. The court should try to determine the above without conducting an elaborate and detailed investigation. The court should decide whether the costs claimed should be reduced by reason of its findings as to reliance and, if so, in what way and by how much. Whether there should be a reduction, and if so to what extent, is a matter of judgment. Specific deductions can be made from the costs otherwise recoverable to reflect the impact which an erroneous and uncorrected estimate had on the conduct of the client. Such an approach requires the court to form an assessment of the impact of the estimate on the conduct of the client. The court should consider the deductions which are needed in order to do justice between the parties. It is not the proper function of the court to punish the solicitor for providing a wrong estimate or for failing to keep it up to date as events unfolded. In terms of the sequence of the decisions to be made by the court, it has been suggested that the court should determine whether, and if so how, it will reflect the estimate in the detailed assessment before carrying out the detailed assessment. The suggestion as to the sequence of decision making may not always be appropriate. The suggestion is put forward as a practical guidance rather than as a legal imperative. The ultimate question is as to the sum which it is reasonable for the client to pay, having regard to the estimate and any other relevant matter.”

Some clear principals have been laid down, which it is now incumbent for Cost Judges to apply.

Not a punishment

The Master of the Rolls endorsed Morgan J’s analysis at paragraphs 107 to 111 of his 23 November 2007 judgment that the Solicitors’ Costs Information and Client Care Code, (“The Code”) was not an implied term; that non-compliance carried with it the consequences set out in Section 37A and Schedule 1A of the Solicitors Act 1974; and that it was correct to reject the argument that solicitors are not entitled to be paid if they do not comply with the Code. As Morgan J found and the Court of Appeal approved it is not the role of the Senior Court Costs Office to punish solicitors for their failure to provide or update an estimate.


Extent of the work covered by the retainer

The estimate did not (per Morgan J at paragraph 112 of his 23rd November 2007 judgment) define the extent of work to be done. Withers standard terms of business was held not to place an upper limit on costs nor to be a definition of the work required of Withers. Morgan J found that “Withers were instructed to do what was reasonably necessary on behalf of the client in the litigation as it involved”.

Evidence

  • Costs Judge Simon’s judgment as to reliance summarised by Morgan J at paragraph 43 of his 30th March 2009 judgment found that:
  • Mastercigars has arranged funding by reference to the estimate of 6th May 2005; and Had the estimate been at a level approaching the figures in later bills for the relevant period Mastercigars would have instructed other solicitors in place of Withers.

Detriment

Withers argued that Mastercigars had not shown that it suffered any detriment. Costs Judge Simons found detriment was not relevant. Morgan J explained in paragraph 47 of his 30th March 2009 judgment that “It is not necessary for the client to prove detriment in the sense of showing on the balance of probabilities that it would have acted in a different way which would turn out to be more advantage to the client. In a case where the client satisfies the court that the inaccurate estimate deprived the client of an opportunity of acting differently, that is a relevant matter which can be assessed by the court when determining the regard which should be had to the estimate when assessing costs. Of course, if the client does prove the fact of detriment, and in particular substantial detriment, that will weigh more heavily with the court as compared with the case when the client contends that the inaccurate estimate deprived the client of an opportunity to act differently and where the matter is wholly speculative as to how the client might have acted”.

Guidance for future assessments

At points during the hearing before him but in particular in his Judgment of 30th March 2009, Morgan J gave some indications of the factors that would weigh with the court in determining whether the costs claimed should be reduced by reasons of its findings as to reliance and if so in what way and by how much:

  • The aim as expressed in paragraph 54 of the 30th March 2009 judgment is to do justice between the parties. As was pointed out by the Master of the Rolls Lord Neuberger in his judgment of 7th December 2009 (paragraph 34) agreeing with Stanley Burnton L.J. as to why the argument that the estimate was binding on Withers in the sense that it could not be exceeded was unsustainable: “... it produces a potential windfall result for a client who for instance, ... may not have relied on the estimate or would have proceeded with the action but with other solicitors. Why should they not pay at least a reasonable sum reflecting that?”
  • Morgan J (see paragraph 60 of his 30th March 2009 Judgment) favoured what he termed “the sixth option” – forming a preliminary view as to what sums were reasonable costs reasonably incurred and then making specific deductions where justice so required. He called this the “top down approach”.
  • Morgan J was keenly aware that Mastercigars success in reducing the costs of Withers would primarily benefit Hunters & Frankau Ltd & Corporacion Habanos SA against whom Mastercigars had been awarded costs, both in the Court of Appeal and at first instance (which insofar as it related to the counter-set issues was awarded on the indemnity basis). It is clear from the Judge’s observations that this was a factor which would be taken into account by the court in any final decision.
  • When the court examines the individual items in a bill to assess whether they are reasonable is the time for the solicitor to provide a satisfactory explanation for the difference between the estimate and the bill (see paragraph 63 of Morgan J’s judgment of 30th March 2009) as otherwise if the court were to decide “how to reflect its finding as to reliance on its estimate in the assessment before considering whether elements of the costs were unreasonably incurred or an unreasonable amount, the court had, for practical purposes, to take into account the possibility that on the subsequent detailed assessment of individual items the court might take the view that the items were reasonable in amount and were reasonably incurred.”
  • While the selection of a percentage margin has not been taken off the menu, it cannot be arbitrary, - nor have the appearance of being arbitrary. A Costs Judge has to at least “give brief reasons as to why a factor was taken into account, or left out as the case maybe” to account for his selection of a percentage margin (paragraph 80 of Morgan J Judgment of 30/3/2009).

Costs not covered by the estimate

Determining costs covered by an estimate relied upon by a client needs to be distinguished from costs incurred outside of the estimate of which the client is aware. In the substantive case all 6 of Mastercigars Cuban witnesses withdrew their witness statements under duress in the week before trial. The subsequent emergency hearing to get the “withdrawn” witness statements reinstated demonstrates exactly why estimates are just that.

Courts will still have to deal with this question as posed by Morgan J in paragraph 63 of his 30th March 2009 judgment: “If a client is given an estimate and then subsequently the client is aware that the solicitor is doing further work which has not been included in the estimate, can the client be said to be relying on the estimate in relation to that further work or should the client realise that an additional charge will be made?”

Claims for costs in excess of those set out in an estimate within proceedings for the assessment of costs will never be easy again, despite all the assistance and help given by Morgan J in his 2 judgments of 23rd November 2007 and 30th March 2009.

Viginia Rylatt, a partner of Rylatt Chubb, was a partner with Withers LLP and has been involved in Mastercigars Direct Ltd v Withers LLP throughout its long history which began in 2006.