Falling short when advising client of ‘shortfall’

The importance of clear client communication on costs budgets has again come to the fore, this time in the context of solicitor-own client costs.

When a case is subject to a costs management order, if budgeted costs are to be exceeded it follows that the implications of that overspend are properly explained to the client. Even if the client has been notified that the excess may not be recoverable from the opponent, further steps need to be taken before deductions can instead be made from damages.

The SCCO case of ST v ZY [2022] EWHC B5 (Costs) (21 February 2022) highlighted exactly that. The costs exceeded the budget by £31,304.68 in the following phases:

-Issue/statements of case: the figure approved was £4,792.46, but £10,771.50 was claimed, an excess of £5,979.04.

-Witness statements: the figure approved was £1,391.51, but £7,643.50 was claimed, an excess of £6,251.99.

-ADR/Settlement: the figure approved was £12,452.85, but £31,526.50 was claimed, an excess of £19,073.65.

In points of dispute, the Defendant relied on the ‘good reason’ requirement of CPR 3.18 (b) not being met to challenge the Claimant’s departure from their budgeted costs.

No attempts were made by the Claimant to advance a reply on the grounds of ‘good reason’ in relation to the excess in the issue/statements of case or the ADR/settlement phases. Recovery from the Client’s damages was instead the default position.

In relation to the overspend in the witness phase, the Claimant did however seek to justify extra costs on the basis that some unexpected work was required in relation to additional witness statements. The time included in the bill of costs for this amounted to 1.9 hours. Unsurprisingly no good reason was found for the £6,251.99 overspend.  

The Defendant also took issue with £11,038 being claimed over and above the 1% and 2% caps allowed for costs management. The Claimant conceded that recovery of this additional excess from the Defendant was not possible and again turned to the Client’s damages.

Senior Costs Judge Gordon-Saker commented in his judgement that he had seen nothing to suggest that the excess had been explained to the Client.

Counsel for the Claimant set out in his skeleton argument that costs information had been provided to the extent that she had been advised there would be a shortfall and the advice letters estimated that shortfall to be £43,500 plus VAT the month before settlement. This figure was very close to the budget overspend of both the budget phases and the costs management cap combined, which altogether totalled £42,342.68 plus VAT.

Claimant’s Counsel submitted that the excess costs were not unusual in nature or in amount and were therefore reasonably incurred so the presumption as per CPR 46.9(3)(c) was not applicable. SCJ Gordon-Saker agreed that they were not of an unusual nature but did consider them to be unusual in amount, distinguishing both elements with a simple analogy:

Paying a brief fee of £50,000 when the usual fee would be £5,000 would be unusual and one can easily see that the solicitor should be at risk if the client is not informed that the fee might not be recovered because of that. The amount can be unusual without the nature being unusual.”

On the facts of this case SCJ Gordon-Saker then pointed out that the issue/statement of case budgeted costs were exceeded by 100%, witness statement budgeted costs by over 400% and ADR/settlement budgeted costs by over 150%.

He did however accept that the Client was advised throughout that there would be costs deducted from damages because they were not recoverable from the Defendant, but that there was nothing to suggest she was told about the set budget or the effect of the budget. He further went on to say:

To avoid the presumption applied by CPR 46.9(3)(c), the solicitor must tell the client that as a result the costs might not be recovered from the other party. That must mean as a result of their unusual nature or amount. Telling the client that some costs might not be recovered from the other side is not sufficient. ST should have been told that the budget was being exceeded by a wide margin and that, as a result, those costs might not (and, indeed, almost certainly would not) be recovered from the other side.”

Consequently, costs in excess of both the budget and the 1% and 2% caps were presumed to have been unreasonably incurred. On a practical note SCJ Gordon-Saker concluded his judgment by stating:

I should add that I think it very surprising that a solicitor would not tell their client that the budget had been exceeded and that the costs in excess of the budget would not be recoverable. At that point the client is moving from pursuing a claim in which reasonable and proportionate costs will be recoverable to a claim where no further costs will be recoverable in respect of some or all of the phases.

This case exemplifies the interplay between budgeted cases and solicitor-own client costs and the consequences of ambiguity.

When a budget is to be exceeded and it is apparent that those costs would neither satisfy the ‘significant development’ requirement for upward budget revision nor the ‘good reason’ test at assessment, the client needs to be advised of ‘unusual’ costs from all angles to minimise any potential write-off.  If and when a budget has actually been set, be clear about the consequences of exceeding that budget, especially if the client is to foot the shortfall bill. 

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