Firm that failed to tell client about budget overspend barred from recovering it from their damages

5 July 2023

A costs judge has rejected a law firm’s bid to recover their budget overspend from a protected party because it failed to keep the litigation friend updated on the costs management process.

Costs Judge Leonard concluded: “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 [Irwin Mitchell] 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).

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

Applying the same approach as the Senior Costs Judge in ST v ZY, Judge Leonard also held the budget overspend, applying CPR 46.9(3)(c)(i), whilst not unusual in nature, was 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.”

He concluded: “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.

JXC v NIS [2023] EWHC 1000 (SCCO) concerned the claim of a 19-year-old Marine commando who sustained catastrophic head injuries when he fell about 20 feet during a training exercise.

In 2021, the court approved a negotiated settlement with a total capitalised value of over £14m.

Irwin Mitchell was instructed under a conditional fee agreement (CFA) in August 2013 and liability was admitted by the Ministry of Defence in February 2014, meaning the subsequent dispute was solely about quantum.

IM issued a bill for £1.3m and Judge Leonard approved an agreement that the defendant pay £1.05m to settle it.

The claimant’s budget was first set in January 2015. It was updated in July 2018 and again in June 2020, but the court did not approve the proposed budget figures in full. The base costs claimed by IM from the claimant “significantly exceed the budgeted figures for several phases of the litigation”.

The total difference between the base costs recovered and included in IM’s bill of costs, net of preparing and checking the bill, was calculated at £221,461 inclusive of VAT. IM sought to recover from the claimant £212,974, in part due to agreed reductions to counsel’s fees.

From the outset, IM advised CXJ that any shortfall between its costs billed and recovered would be deducted from any damages. Judge Leonard said the costs information provided at various points focused on a standard percentage (20-30%) of costs that would not be recovered, rather than any budget overspend.

“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.”

He rejected the proposition that a solicitor was 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.

“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.

“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.”

Given that IM was not in a position to rely upon the presumptions of informed consent at CPR 46.9(3)(a) and (b), the budget overspend was “unreasonably incurred and unreasonable in amount”.

He added: “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).”

Judge Leonard went on: “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.”

He also reduced the claimed first-stage success fee from 67% (reflecting a risk of 40%) to 33% (reflecting a risk of 25%). Whilst liability had not been admitted at the time the CFA was signed, the liability prospects were “very strong”.

“There was some additional risk posed by the possibility of a part 36 offer, possibly based on an allegation of contributory negligence, but nothing which would be beyond the capacity of an experienced solicitor like [the partner in charge] to judge. Those additional risks were in any case effectively offset by the high second-stage success fee.”

Erica Bedford instructed by Irwin Mitchell for the claimant’s solicitors.

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05 Jul 2023

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