22 November 2023
Post-LASPO, there has been an increase in solicitors seeking a deduction from their client’s damages in respect of the shortfall between their fees and the amount recovered from a defendant in inter partes costs proceedings. The expansion of the fixed costs regime means that there is likely to be a further increase in this practise.
Where the client is a protected party, such recovery of course needs the approval of the court. In this article, we address the process that the court follows and the issues that arise where a solicitor seeks the approval of the payment of a shortfall by a deduction from their client’s damages by reference to three recent authorities: BCX v DTA  EWHC B27 (Costs), MNO v HKC  EWHC 2919 (SCCO), and JXC v NIS  EWHC 1000 (SCCO).
All personal injury practitioners are well aware of the approval process under part 21 of the CPR for the approval of settlements concerning protected parties. However, the procedure by which the court approves deductions from a claimant’s damages for solicitors’ fees or disbursements may be much less familiar. This is provided for by a combination of CPR 46.4, PD 46 as well as rules 21.10-12.
The general rule is that the court must order a detailed assessment of costs payable by or out of money belonging to a child or protected party (CPR 46.4(2)). If the costs claimed only comprise a success fee claimed under a conditional fee agreement (CFA) or the balance of any payment due under a damages-based agreement, the court can assess the sums by way of a summary assessment (CPR 46.4(5)).
When carrying out the assessment, the court does so on the same basis as any other solicitor and own-client assessment. That is to say that it is an assessment on the indemnity basis and the presumptions in CPR 46.9 apply. Those presumptions are that costs:
- Will have been reasonably incurred if they were incurred with the express or implied approval of the client;
- Will be reasonable in amount if the amount was expressly or impliedly approved by the client; and
- Will have been unreasonably incurred if they are of an unusual nature or amount and the solicitor did not tell the client that as a result the costs might not be recovered from the other party.
The fact that the assessment is carried out on the indemnity basis means that the solicitor is entitled to the benefit of the doubt.
Historically, there has been a limited requirement for the court to undertake assessments, because pre-LASPO solicitors tended to waive any entitlement to costs beyond those recovered from the other side. Where legal representatives do waive their entitlement to further costs there is no requirement for a detailed assessment (PD 46, paragraph 2.1(b)).
The economic consequences of the LASPO reforms mean that this is no longer the case and costs judges are increasingly being called upon to assess deductions from protected parties’ damages. Costs Judge Brown recorded his own experience in BCX that, whilst claims are sometimes made for a modest shortfall to be paid by a protected party, with a recognition that not all the time recorded on the case will be recoverable, “more recently the costs claimed have been based substantially on all the time which has been recorded by the solicitors without any significant further deduction”.
The fundamental role of the court is the same as it is in approving the settlement of a claim for damages: “to impose an external check on the propriety of settlement”. The court will be alert to the fact that the deduction for which approval is sought could have a substantial impact upon the protected party; they might reduce the sums available for the claimant’s own care or the sums available for the dependents or children of the protected party.
As Costs Judge Brown noted, the issue may be particularly acute where the underlying proceedings have been settled with deductions to the full claim value to account for allegations of contributory negligence or because the prospects of success were uncertain.
Assessment of a shortfall in practice
Ordinarily in an assessment, the court is assisted by points of dispute. Necessarily, where the court is carrying out an assessment of a shortfall, there will be no pleading to identify the issues for the judge. Indeed, it may well be that the litigation friend is content to agree the deductions. However, such agreement will be of limited, if any, weight. The litigation friend will not be in a position to know whether the fees are reasonable and the solicitors’ interests are not aligned with those of the client, meaning that they cannot give advice on the reasonableness of their own charges.
In BCX, the court adopted the approach of carrying out a provisional assessment where the costs judge could give a view on the papers with the solicitors able to raise that matter at a hearing if so advised. It is apparent from the judgment that this procedure was adopted at the suggestion of counsel because the judge had highlighted a number of issues and it would be impracticable to address them at the hearing. In matters where the court has more limited queries about the costs sought, it will very likely be capable of being addressed at a hearing.
The adequacy of the costs information provided
During the course of the claim in JXC, the solicitor advised the litigation friend in relation to estimated costs, success fees and the anticipated deduction from damages in view of the difference between the full costs payable under the CFA and the amount likely to be recoverable from the defendant.
On six occasions, the solicitor had warned that there would be a shortfall but had not advised in relation to the approved costs budget. The judge considered that the firm’s advice on the costs and shortfall provided to the litigation friend was provided on a set formula. In the first estimate, the shortfall was put at 20% of reported accrued costs. In the subsequent assessments, it was put at 30%. The judge considered that this was standard advice for non-budgeted cases.
The judge stated 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”.
The litigation friend had not been given an opportunity to authorise any of the three budgets submitted to court for approval, or to authorise (or decline) any aspect of spending outside the ambit of those budgets. Consequently, the client could not be said to have expressly or impliedly given their informed consent to expenditure in excess of the budgeted figured when they had never been provided with relevant and up-to-date information about the relevant costs management orders.
The litigation friend was never advised on: (i) the limits imposed by the costs management orders, (ii) the fact that the budget approved by the court was lower than the solicitors’ proposed budget, (iii) the likelihood that the budget overspend of £245,711 inclusive of VAT would be irrecoverable from the defendant in any event, and (iv) the fact that the overspend was likely to add to the anticipated shortfall of between 20-30%.
Applying rule 46.9, crucially, the solicitors could not rely on the presumptions of rule 6.9(3)(a) and (b), that the costs had been reasonably incurred. The presumption of unreasonableness was applied, and there was nothing to rebut it; therefore it was held that the overspend was unreasonably incurred and unreasonable in amount.
That conclusion was summarised succinctly by Costs Judge Leonard: “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.”
The importance of the information provided to the litigation friend can also be seen from the way that Costs Judge Brown dealt with hourly rates in BCX. The grade A fee earner rates were held to be reasonable but the grade B to D fee-earner rates were all unreasonable.
The judge accepted that the litigation friend was on notice that not all the costs may be recovered from the defendant but was not satisfied that there was evidence that the litigation friend had been provided with an explanation that the hourly rates themselves may not be recoverable inter partes.
However, it is also worth noting that the judge doubted whether approval would have provided informed consent in any event, given that the litigation friend would not be in a position to know whether the rates were reasonable.
Approval of a success fee
In BCX, Costs Judge Brown noted that, where the court is approving a success fee, the approach may differ depending on whether the success fee is being applied only to the costs recovered from the defendant or it is also being applied to sums not recovered inter partes. If the former approach is being taken, the court may well take as the starting point that the defendant will not have paid more than a reasonable sum of costs. On which basis, the court will wish to consider the percentage of the success fee but that may be a relatively straightforward process.
Whilst it may be a straightforward process, it remains one that the court approaches carefully. In MNO, Costs Judge Brown was tasked with considering the percentage of the success fee to the costs recovered from the defendant. The success fee had two stages: 20% if the case settled prior to three months from the date of trial, 100% thereafter (on the facts it was only the first stage of the premium that applied).
That success fee was based on the case falling into the ‘low risk’ category, rather than medium or high risk. The CFA provided both a generic description of the risk as well as more specific case information. The judge considered the risks carefully and considered that the real risk in the case lay in the claimant failing to beat a part 36 offer that the solicitors had advised the claimant to reject. In that instance, there would be no payment for the solicitors after the expiry of the relevant period.
The judge rejected the argument that the litigation friend had approved the 20% success fee. Although the litigation friend had given informed consent to the payment of a success fee out of the claimant’s damages, there had been no informed consent of the amount of the success fee. In order for there to be informed consent, the judge held, there would have to be an explanation of how the risks translated into the success fee.
Costs Judge Brown adopted a similar process when addressing the success fee in BCX, where in relation to a similar staged CFA he also held that the reasonable success fee was 15%.
In JXC, Costs Judge Leonard held that in calculating the base costs upon which the success fee would be based, the correct approach was to deduct the budget overspend. He also considered that the liability prospects, even pre-admission, were very strong, and that early part 36 offers were unlikely in a case of this complexity. Moreover, he stated that it was not appropriate to make any allowance within a success fee for the fact that a claim was likely to be substantial in amount.
Judge Leonard adopted a similar approach to that taken by Judge Brown in BCX and MNO in relation to the assessment of success fees with reference to part 36 risks (both following the approach set out in NJL v PTE  EWHC 3570 (QB)). He concluded that a reasonable first-stage success fee in this case, factoring in the risks perceived at the date of the CFA, would have been 33%, to reflect a risk in the region of 25%.
These cases demonstrate that the court will take the same careful and considered approach to claims by solicitors for deductions from the damages of a protected party as it takes to the settlement of the underlying claim itself. It is therefore recommended that detailed evidence is put in to support the application that is made.
In our experience, even where solicitors are making concessions against their strict contractual entitlement, the court will still look closely at what is claimed. It is important not to presume that a solicitor stating that they are taking less than they might otherwise will be sufficient for the court to permit the deduction from the claimant’s damages. Where the solicitor is making a concession against their full entitlement, this should be set out in detail, along with an explanation as to why. Further, an explanation of why the fees claimed are reasonable is of central importance.
In terms of practical learning points during the life of litigation, solicitors should provide clients with an informed opportunity to approve the costs being incurred; that is particularly so where the costs are unusual or in excess of a budget. The same practice should be adopted where the costs incurred are likely to be in excess of any fixed costs permitted for a particular stage of litigation. Given the ambulatory nature of costs, it is important to keep the client abreast of any costs-related developments throughout the proceedings.
It is also important that the information provided to the client in the course of the retainer addresses:
- The fact that not all costs will be recovered from the other side;
- Where there is a success fee, the level and staging of this with full explanations of the risk and how the fee is calculated; and
- The amount of fees for any work that may not be recoverable against the other side with a warning that the fee may not be recoverable.
Having provided this information, it is critical that this is recorded in contemporaneous attendance notes and emails that are then available to the court at any hearing. As is so often the case in solicitor and own-client costs matters, the provision of clear and thorough information to the client, along with detailed record keeping are of central importance.
As Costs Judge Leonard commented in JXC: “The concept of informed consent engages with overarching categories of costs such as hourly rates, success fees and shortfall amounts. The information that is adequate, for the purposes of informed approval, does not need to descend into granular detail as to the intricacies of the CPR. It is 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 are 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.”
Whilst the information that is provided needs to strike a balance, it is fundamental that the client or litigation friend understands that particular elements of costs may not be recoverable. BCX and JXC demonstrate that it is not sufficient to tell a client about the possibility of a shortfall in the abstract.