The Hourly Rate Debate: the effect of costs management on hourly rates

There has recently been a flurry of case law in respect of the effect of costs management on hourly rates at detailed assessment.

With regard to costs management, there are two rules of central importance, both contained within Practice Direction 3E:-

Para 7.3 provides that “The court’s approval will relate only to the total figures for budgeted costs of each phase of the proceedings, although in the course of its review the court may have regard to the constituent elements of each total figure. When reviewing budgeted costs, the court will not undertake a detailed assessment in advance, but rather will consider whether the budgeted costs fall within the range of reasonable and proportionate costs.”

CPR PD 3E (7.10), which states that It is not the role of the Court in the costs management hearing to fix or approve the hourly rates claimed… the underlying detail… is provided for reference purposes only”.

As to Detailed assessment, the relevant rule is Part 44.3(1), which provides that:-

Regardless of the basis upon which costs are assessed “…the court will not in either case allow costs which have been unreasonably incurred or are unreasonable in amount”.

The starting point is the judgment in Harrison -v- University Hospitals Coventry & Warwickshire NHS Trust [2017] EWCA Civ 792, which held that where there is an approved budget, the court is empowered to sanction a departure from the budget if it considers that there is good reason to do so. What the judgment did not say is that the figure allowed for a particular phase in a costs management order will be allowed unless there is good reason to depart from it. The distinction is subtle, but important.

Following a month later, the judgment in RNB -v- London Borough of Newham [2017] EWHC B15 (Costs) gave guidance on how the Court would approach hourly rates in the context of a costs management order. In RNB it was held that if hourly rates were reduced on assessment, that reduction would apply to all of the costs claimed, whether they were incurred pre- or post- the costs management order.

In Bains -v- Royal Wolverhampton NHS Trust, 18th August 2017, The County Court at Birmingham (Unreported), District Judge Lumb expressly disagreed with the position in Nash and found that “to reduce hourly rates for budgeted costs to the same levels as those allowed for the incurred costs… would be to second guess the thought process of Costs Managing Judge and would impute a risk of double jeopardy...”

In the absence of a report or transcript, we do not know what reasoning underpinned the judge’s finding in Bains. What is clear is that a central assumption to the finding in Bains was that the judge at costs management may have accounted for a reduction to hourly rates when making the costs management order. It could be said that such an assumption would be tantamount to a finding that the judge at costs management had breached CPR PD 3E (7.10), by in effect setting the hourly rates when making the costs management order. It might well be argued that such an assumption was unreasonable.

Furthermore, the judgment in Bains explicitly states that there is a risk of double jeopardy; in other words, that the judge on assessment may have considered a reduction to hourly rates when making the costs management order. At least on a standard basis assessment, CPR 44.3(2)(b), any doubt as to whether the court on costs management had done so should be resolved in favour of the paying party. Thus in the absence of an explicit finding that the judge on costs management had factored in a reduction to the hourly rates, the court on assessment should assume that they did not.

A little later, in Nash -v- Ministry of Defence [2018] EW Misc B4 (CC), Master Nagalingam of the Senior Courts Costs Office held that a reduction to hourly rates in respect of the incurred costs would not be a ‘good reason’ to depart from the budget for future costs. This has led to some litigants arguing that where there is a Costs Management Order, so long as the party is within budget for the given phase, a reduction to hourly rates will not ‘carry through’ to the future costs in the budget. It is important to recognise that, in Nash, the receiving party’s budget had been agreed.

The central question here is whether or not a reduction to hourly rates is a ‘departure’ from the costs management order. As stated above, hourly rates are not to be fixed or set by the court on costs management. Therefore, if the hourly rates do not form a part of the costs management order, a reduction to hourly rates for ‘future’ costs cannot be said to be a departure from it. By analogy, an additional liability (such as an ATE premium, which is recoverable in Clinical Negligence matters) does not form a part of the budget, and therefore a reduction to such a premium does not constitute a departure.

It is also important to note that CPR PD 3E 7.3 provides that the purpose of costs management is for the court to identify a range of costs which it considers to be reasonable and proportionate for the conduct of the claim. However, the fact that a costs management order has been made does not justify a party incurring costs which are individually unreasonable so long as they fall within budget. In the context of hourly rates, therefore, if it is found that an hourly rate of say £450 per hour is unreasonable, then that hourly rate is unreasonable regardless of whether the work was done before or after the costs management order was made.

Some commentators have argued that the judgments in Bains and Nash are an attempt by the Courts to implement the intention of Jackson LJ to remove the need for detailed assessment. Returning to Harrison, Davis LJ commented that the case had “descended into a kind of arms race in collecting views or comments… with an aim of… extracting some kind of clue as to what [had been] intended…” when the rules were drafted. Importantly he went on to comment “this is beside the point… what we have to do is construe the wording of [the CPR]”. It is quite clear that, in the judgment of the Court of Appeal, it is not the function of the Court to decide what the intention behind the rules was, but only to interpret what the Rules mean and how they apply to the facts.

The difficulty faced by litigators and judges at present is that the rules are unclear, and there is little guidance as to how they should be implemented. This results in a lack of clarity and certainty when proceeding to assessment of costs. In my opinion, there are two potential routes by which the rules might be improved:-

  1. The detailed approach

The Precedent H is amended to remove reference to hourly rates and time. There could then be no question of the assessing judge taking hourly rates into account. As the court cannot set the hourly rates in any event, this should have no practical impact upon the making of costs management orders; the judge on costs management will have a feel for the case and will be fully qualified to consider the work which needs to be done in each phase and make a judgment as to the amount of costs which it would be reasonable and proportionate to incur in doing it.

  1. The summary approach

The court is empowered to set rates at costs management, and also to make a judgment in relation to incurred costs. Under this system, the judge would summarily consider the costs already incurred in the litigation and include within the costs management order what each party will be allowed at the conclusion in respect of the costs already incurred. The court will set a limit for future costs, and the successful party is entitled at the conclusion of the litigation to the amount allowed by the court in respect of incurred costs, plus all amounts incurred after the costs management order so long as they are less than the budget.

The first approach would continue to provide for a detailed assessment at the conclusion of the proceedings, the second approach would not. Of course, the problem with the second approach is that it could give rise to unfairness as parties would not be able to deal with their opponents’ costs in detail.

What is clear is that under the current rules, there is significant doubt over how they should be interpreted, and we will have to wait and see whether this doubt will be rectified by the rules or by binding judgments in the courts.

Matthew Rose is a Solicitor in the Costs and Litigation Funding department at Clarion Solicitors. You can contact him at matthew.rose@clarionsolicitors.com, or the Clarion Costs Team on 0113 2460622.

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Getting your orders right – Fixed Costs

The introduction of fixed costs was expected to create certainty in the amount which parties would recover at the conclusion of a claim. However the rules as drafted leave numerous lacunas and gaps which parties can exploit, which in turn has lead to satellite litigation. This is not what the drafters of the rules intended and is often not in the interest of the parties, as it leads to additional further cost which, in many cases and given the already low amount of costs recoverable, can be disproportionate.

In order to avoid this risk it is important that practitioners ensure that terms of settlement make proper provision for costs to avoid the risk of further litigation. This is a complex topic, and this is intended as a quick reference guide to help you to avoid the pitfalls so that you do not fall into the ‘fixed costs trap’.

  1. Claims which leave the portal

Pursuant to the Protocols, a claim will leave the portal if it is revalued in an amount higher than the protocol limit (currently £25,000). However, CPR 45.29A states that fixed costs apply where the claim was started in the protocol. Of critical importance is to note that the mere fact that the claim was revalued at more than the protocol limit does not mean that standard basis costs apply. Practitioners should be wary of this when settling such claims and should either:

  1. Settle only on terms that standard basis (not fixed) costs apply. Therefore CPR 36 should be avoided; or
  2. Refuse to settle until after allocation of the claim to the multi-track, as allocation to the multi-track causes fixed costs to cease to apply (see Qadar v Esure)

Whilst it may seem extreme to refuse settlement until allocation, this is at present the only way to ensure (so much as it is ever possible to ensure) that fixed costs will not apply. It should be borne in mind that such an approach is a calculated risk, as it is possible that a court would find that such conduct is ‘unreasonable’ should the matter proceed. That said, it should be possible to argue that without agreement fixed costs would apply and that the claimant is therefore better off and as such the conduct was not unreasonable.

  1. Settlement by CPR 36.20

Where fixed costs do apply and the claim is settled by part 36, there is no right to detailed assessment. If a dispute arises over fixed costs then one of the parties must apply.

  1. Non-Part 36 settlement

It is generally preferable to seek to agree the amount of fixed costs which apply. Failure to do so can lead to disputes (and costly applications) over the correct level of fixed costs and ‘reasonable’ disbursements. It is currently unclear whether the costs of such applications are recoverable. Including a provision in a settlement agreement should be straightforward, as the costs are fixed. If an opponent refuses to do so it may be that they intend to raise technical arguments about the costs which are recoverable.

Claimants should note that defendants are aware of these argument and therefore may try to catch out the unwary.

This is a very quick summary of the issues surrounding settlement in cases to which fixed costs apply, however with the imminent introduction of fixed costs in cases of noise induced hearing loss slated for 2019 at the latest and he likely introduction of fixed costs in all cases in around 2020, these issues will only become more relevant. On current information, the proposed rules for NIHL claims do not fix any of the existing issues with fixed costs and therefore we can expect these problems to persist for some time.

Matthew Rose is a Solicitor in the Costs and Litigation Funding department at Clarion Solicitors. You can contact him at matthew.rose@clarionsolicitors.com, or the Clarion Costs Team on 0113 2460622.

Looking Back: are costs incurred prior to the date of a CFA recoverable?

For retainers entered into on and after 1 April 2013, success fees have been, in the vast majority of cases, unrecoverable inter partes. For this reason, it is easy to think that there is less need to be rigorous in compliance with the letter of the rules relating to CFAs as, the thinking goes, they will never be tested. Unfortunately such an attitude can have dire consequences, and could even lead to all of the costs claimed being disallowed.Read More »