Omnes vulnerant, ultima necat

For many years I have thought that Liverpool could aptly be described as the engine room of the common law. Now it would appear that Sheffield is earning its own reputation as the crucible in which the law of solicitor-own client costs disputes is being cast.

On Friday judgment was handed down in the case of Karatysz v SGI Legal LLP 2021 EWHC 1608 (QB)_

Sharp eyed readers will note that although the argument in the case was concluded in November 2020, there was a substantial 7 month delay before the judgment was handed down. One does not criticise the judge for that: he alludes in his own judgment to the pressures of being presiding judge with many calls upon his time in the course of the pandemic.

Still possibly by reason of the delay, the judgment has something of the appearance of the “notebook judgment” fondly deployed in the county court since time immemorial, and appearing in older Court of Appeal authorities, when it was still possible to get an ex tempore judgment on the day. But I digress. However, picking through the judgment its significance can be reduced to a fairly pithy summary.

As is well known, solicitor-own client assessments have boomed in recent years, not just in the low value personal injury claim market, but generally, although the Karatysz decision was made in the context of the costs of a low value personal injury claim. In the case, the claimant had had the misfortune to be involved in a road traffic accident in May 2016. She instructed the defendant to pursue her claim for compensation in October 2016 under a conditional fee agreement. The terms and conditions of the conditional fee agreement included the following clauses:

3.2       You agree to these hourly rates, expressly understanding the following; it may be that your case is one to which the court fixed fees apply.  This means that the amount of costs which your opponent will have to pay if your (sic) win is limited to a fixed sum.  The costs which are chargeable under this agreement will almost certainly exceed those fixed costs and so you will be required to pay the shortfall from your damages.  This is because the Solicitors’ basic charges are comprised of hourly rates which when multiplied by the likely number of hours worked will exceed the fixed fees payable by the opponent.  Even if your case is not a fixed fee case, the hourly rates are higher than the rates which the court is likely to order your opponent to pay to (sic).  We believe these rates are justified to reflect the skill and specialised knowledge in the handling of your claim.  However, we are required to provide a warning to you that the hourly rates might not be recovered from your opponent and that you nevertheless approve the rates which we are charging.  This warning having been given, you permit payment to us of an amount of costs greater than that which you can recover from another party to the proceedings.

3.3       Further to the above warning as to recoverable costs, s 74(3) of the Solicitors Act 1974 shall not apply and having been warned that hourly rates may not be recovered in full you accept that the rates are chargeable in full.

The claim was successful: intimated via the MOJ Portal the claimant’s damages were agreed at £1250. Aviva the compensating body, made a mistake and paid somewhat more by way costs than were prescribed: a total of £1116 costs and disbursements with VAT. The claimant suffered a deduction of £312.50 in respect of the success fee, and the ATE insurance premium of £143. No bill of costs was provided at that time. Thereafter the claimant instructed lawyers to dispute the charges, and a bill of costs was delivered in January 2018. Proceedings for a solicitor-own client detailed assessment under section 70 of the Solicitors Act 1974 were pursued. The basic charges recorded in the breakdown to the bill were £1819.30, slightly higher than the sum recorded in the bill of £1717 plus VAT.

The parties disagreed over the retention of £177.50 as described in these terms:

42. In financial terms, what was in dispute before the district judge was a modest amount:

(1) The Defendant had received £1,116 from Aviva and had deducted £455.50 from the Claimant’s damages. The Defendant was not seeking to be paid anything more in respect of its costs.

(2) The Claimant accepted that the Defendant could retain the £1,116 received from Aviva, which included:

(a)£216 (i.e. £180 plus VAT of £36) in respect of the medical report fee; and

(b) £900 (i.e. £750 plus VAT of £150) in respect of the Defendant’s base costs.

(3) The Claimant also accepted that the Defendant had been entitled to deduct a total of £278 from the Claimant’s damages, made up of:

(a) £143 in respect of the ATE insurance premium; and

(b) £135 (i.e. £112.50 plus VAT of £22.50) in respect of the success fee, calculated as 15% of £900.

(4) So the dispute was over £177.50 (i.e. £455.50 less £278). As to this:

(a) The Claimant said that this amount was not payable because the Defendant’s base costs were limited to the £900 received from Aviva.

(b) The Defendant contended that it was entitled to more than £900 in respect of its base costs and/or to a success fee of more than 15% of its base costs.

(5) Although the following figures were not cited before the district judge, it can be seen that the £177.50 difference between the parties was equivalent to:

(a) a further £154.35 (i.e. £128.63 plus VAT of £25.72) in respect of the Defendant’s base costs, making its base costs £1,054.34 (i.e. £878.62 plus VAT of £175.72) rather than £900; and

(b) the consequential increase in the 15% success fee by £23.15, to £158.15, rather than £135.

After a paper hearing and an oral review the bill was assessed as follows:

54. The bill was therefore assessed in the amount of £1,394, made up of:

    • £750 base costs, plus VAT of £150;
    • £112.50 success fee (i.e. 15% of £750), plus VAT of £22.50;
    • £180 medical report fee, plus VAT of £36; and
    • £143 ATE insurance premium.

55. The net effect of the assessment was that the Defendant, instead of retaining £455.50 from the Claimant’s damages, was only entitled to retain £278 (i.e. the total of the success fee and the ATE insurance premium) and was obliged to pay the difference of £177.50 to the Claimant.

56. The district judge gave the Defendant permission to appeal against his decision that the Defendant’s base costs were limited to the base costs recovered inter partes by the Claimant. I will call this “the limitation decision.

The district judge found that in terms of the basic charges, that 9 hours of work at an hourly rate of £120 per hour would have been a reasonable charge in the context of an assessment on the indemnity basis. But this was not the amount of basic charges that he allowed, when considering the other points of dispute. He reduced them to the amount of the fixed charges, recovered from the insurers.

Now the reason why the district judge limited the solicitors profit costs to the amount of the fixed costs recovered from the insurers, was because he found that notwithstanding clause 3.2 noted above, there had been no informed consent given by the claimant to the charging of fees in excess of those recoverable from the insurers, and applied the presumption under rule 46.9(3)(c) which says:

(3) Subject to paragraph (2), costs are to be assessed on the indemnity basis but are to be presumed –

(a) to have been reasonably incurred if they were incurred with the express or implied approval of the client;

(b) to be reasonable in amount if their amount was expressly or impliedly approved by the client;

(c) to have been unreasonably incurred if –

(i) they are of an unusual nature or amount; and

(ii) the solicitor did not tell the client that as a result the costs might not be recovered from the other party.

(emphasis added)

Whereas he found for the defendant on rule 46.9(2) which it should be recalled says this:

(2) Section 74(3) of the Solicitors Act 1974applies unless the solicitor and client have entered into a written agreement which expressly permits payment to the solicitor of an amount of costs greater than that which the client could have recovered from another party to the proceedings.

So the issue before the appeal court was whether rule 46.9(3)(c) applied and/or had been breached by the solicitors failing to obtain their clients informed consent and what the consequence of that would be: which in turn raised the question as to whether informed consent was required at all. 

The rule 46.9(2) point faded away, as no respondent’s notice was lodged in time, so that the claimant could rely upon arguments to support the decision on an alternative basis. In considering this point, the judge dealt separately with limbs (i) and (ii) of 46.9(3)(c). In relation to limb (i) he said this:

101. The district judge found, in effect, in paragraph 7 of his judgment that the Defendant’s costs were “of an unusual … amount”, since £161 per hour was an unusual hourly rate for a Grade D fee earner conducting a low value road traffic accident claim. Mr Marven challenged this finding, but in my judgment it is an assessment which the district judge was entitled to make.  He explained that the usual rates in such cases were between £111 and £125 per hour and there was no evidence before me that £161 per hour was a usual rate in such cases.  It follows that the requirement of CPR 46.9(3)(c)(i) was satisfied. 

102. Although it is not necessary for the determination of this appeal, I should state that I do not accept the Claimant’s submission that any costs in excess of the fixed costs allowed inter partes were unusual for the purposes of CPR 46.9(3)(c)(i) on an assessment of costs between solicitor and client on the indemnity basis. It is not necessary for me to decide this point, because the district judge did not base his decision on it, but it may be worth stating that in my judgment the question of what is usual or unusual as between solicitor and client is a very different question from the question of what is recoverable inter partes.

103. The question whether a solicitor’s costs should be limited to those recoverable inter partes is dealt with by subsection 74(3) of the Solicitors Act 1974 and CPR 46.9(2). Assuming that a solicitor’s costs are not so limited by virtue of those provisions, it is not the purpose of CPR 46.9(3)(c) to reintroduce the same limit by a different route. 

Paragraph 102 is key: it is obiter dicta, and expressly so, but it is a very important point. The claimant’s case necessarily involved elliding the two limbs of the test, but they are set out in different limbs of the rule. The presumption at 46.3(c) applies to “unusual” costs but there is surprisingly little authority on what constitutes “unusual” costs for these purposes.

But in relation to limb (ii) the judge stated:

104. As for CPR 46.9(3)(c)(ii), the Defendant told the Claimant, by paragraphs 3.2, 8.2 and 8.4 of the document headed, “CFA: What You Need To Know” that the Defendant’s costs might not be recovered from Aviva. Moreover, paragraph 3.2 stated that this was because the hourly rates when multiplied by the number of hours charged would exceed the fixed fees payable by Aviva.  Mr Marven submitted that this was sufficient to mean that CPR 46.9(3)(c)(ii) was not satisfied.

105. The district judge took the view that informed consent was relevant for the purposes of CPR 46.9(3)(c)(ii), in the sense that a solicitor who argued that he had told his client that, as a result of their unusual nature or amount, the relevant costs might not be recovered from the other party had to show not merely that he had told his client that, but that he had obtained his client’s informed consent to it.

106. I note, however, that there is no authority to this effect:

(1) MacDougall v Boote Edgar Esterkin [2001] 1 Costs LR 118 concerned the need for informed consent when a solicitor sought to rely on the predecessor of CPR 46.9(3)(b).

(2) Herbert v HH Law Ltd [2019] 1 WLR 4253 concerned the need for informed consent when a solicitor sought to rely on CPR 46.9(3)(a) & (b).

(3) My decision in Belsner v Cam Legal Services Ltd concerned the need for informed consent when a solicitor sought to rely on CPR 46.9(2)

107. Indeed, the parties to Herbert v HH Law Ltd appear to have proceeded on the basis that informed consent was not relevant to CPR 46.9(3)(c). In paragraph 35 of his judgment, Sir Terence Etherton MR said as follows:

“There is no longer any dispute between the parties in relation to CPR r 46.9(3)(c). The judge recorded (at para 27) that Mr Andrew Hogan, counsel for HH before him and junior counsel for HH before us, accepted that an irrecoverable success fee could be regarded as a cost of an “unusual nature or amount” but had submitted that, as the retainer made it clear that the success fee could not be recovered from the other party, the condition in CPR r 46.9(3)(c)(ii) was not satisfied, and so there was no presumption under CPR r 46.9(3)(c) that it was unreasonably incurred. The judge agreed with that submission: para 47. There is no respondent’s notice challenging that decision.”

108. Mr Marven submitted that informed consent is irrelevant to CPR 46.9(c)(ii). In my judgment, that is right.  The issue under CPR 46.9(c)(ii) is whether or not the solicitor told his client what is there set out.  That issue concerns what the solicitor said, not whether the client agreed with or approved what the solicitor told him.  That issue is materially different from the issue under CPR 46.9(2) or 46.9(3)(a) & (b), which is whether the client agreed or approved something proposed by the solicitor.  The focus there is on what the client did, which is why it is relevant to consider whether the client gave informed consent to what was proposed.

109. Accordingly, I conclude that the district judge was wrong to decide that the presumption under CPR 46.9(3)(c) arose in the present case.

As the presumption fell away, the court was left with the district judge’s findings that 9 hours at £120 was a reasonable sum.

110. In any event, even if the district judge was right in his construction of CPR 46.9(3)(c)(ii), and supposing that it was to be presumed under CPR 46.9(3)(c) that the Defendant’s rate of £161 per hour was unreasonable, it does not follow that it was appropriate to limit the Defendant’s base costs to the amount recovered from Aviva in respect of fixed costs.   The effect of CPR 46.9(3)(c), where it applies, is to create, for the purposes of an assessment of costs on the indemnity basis, a presumption that certain costs were unreasonably incurred.  Where a solicitor claims costs at an unreasonable rate, the appropriate course on assessment on the indemnity basis is usually to allow costs at a reasonable rate.  Assuming that it was reasonable for the work to be done (and there was no challenge to the district judge’s decision that it was reasonable for 9 hours’ work to be done), it is not unreasonable for the solicitor to be paid for that work at a reasonable rate.

111. Moreover, in this case, the district judge had already, in deciding Point 3, decided that £161 per hour was an unreasonable rate and had instead identified £120 per hour as a reasonable rate. In the light of that decision:

(1) There was no need for the presumption in CPR 46.9(3)(c), since the district judge had already decided that £161 per hour was in fact an unreasonable rate.

(2) Moreover, the district judge had already decided the extent to which that rate was unreasonable: it was unreasonable insofar as it exceeded £120 per hour, but no further.

112. These considerations suggest that the district judge, if he had found that the presumption applied, should have reduced the Defendant’s base costs to £1,296 (i.e. 9 hours at £120 plus VAT per hour).

However the judge then stated in a muddying of the waters:

119. While I accept that the district judge could, for good reason, have departed from the “hours times hourly rate” method of assessing the Defendant’s base costs and could, for good reason, have alighted on £900 as the reasonable amount for the Defendant’s base costs (in the sense that any greater amount would have been unreasonable), I am not persuaded that that is what the district judge did.

Before coming back to:

120. In those circumstances, I consider that the limitation decision was wrong and that the district judge should have assessed the Claimant’s base costs (before the limitation of the Claimant’s costs at £1,571.50) at £1,296 (including VAT). On that basis, the district judge should have found that nothing was owing from the Defendant to the Claimant, since the Defendant was entitled to charge the Claimant the £455.50 which it had retained from the Claimant’s damages.

The secondary point in the appeal concerned the drawing of the finishing line for the purposes of the disposition of costs of the assessment under section 70(9) of the Solicitors Act 1974: in particular the difference between the parties was whether the bill was in the sum actually paid to or retained by the solicitor of £1571 or the total of the work recorded on the bill of £2731.90. Deciding it was the former and discounting the latter had a profound effect on the costs of the assessment due to the 1/5 rule contained in section 70(9) which provides:

“Unless—

(a)   the order for assessment was made on the application of the solicitor and the party chargeable does not attend the assessment, or

(b)   the order for assessment or an order under subsection (10) otherwise provides,

the costs of an assessment shall be paid according to the event of the assessment, that is to say, if the amount of the bill is reduced by one fifth, the solicitor shall pay the costs, but otherwise the party chargeable shall pay the costs.”

The judge decided the relevant sum for the purposes of section 70(9) was £1571.50.

He noted:

141. In my judgment, the key to the issue which arises under subsection 70(9) is the construction of subsection 70(9) and, in particular, the phrase, “the amount of the bill”. Since a bill of costs is a demand for payment, it is in my judgment plain that the amount of a bill is the amount demanded by the bill. 

142. That conclusion is not inconsistent with any of the authorities. In particular, Breyer Group Plc v Prospect Law Limited was an example of a case in which a bill contained a demand for one amount, but also identified a larger amount which the solicitor contended that he could have charged.  The decision of Master Rowley in Breyer Group Plc v Prospect Law Limited was that the amount of the bill in that case was the lesser amount demanded, rather than the greater amount which might have been demanded.  It is, moreover, a decision on subsection 70(9) of the 1974 Act. 

This is an interesting decision of the High Court. The key point relates to the issue of informed consent or approval: it is a requirement which is necessarily implicit in (a) and (b) of the presumptions, but as I surmised a number of years ago, has no place in (c). Moreover, there are powerful dicta here, that charging hourly rate costs when fixed costs are recoverable, are not per se unusual costs. But there is no exposition of what are unusual costs. A working definition of unusual costs, remains as elusive as a unicorn.

It should be noted that leaving aside limb (i) and the elusive concept of unusual costs, clause 3.2 was of considerable significance in determining that limb (ii) would not apply. However few solicitors retainers, based upon the Law Society Model will automatically include such a term.

That may not matter if any assessing costs judge takes the view that the real focus of the court should be, not on an argument that fixed costs are the de facto measure of reasonable costs, but rather what is the reasonable figure, taking into account the usual method of calculation by reference to an hourly rate and time spent on the case. Thus even if a costs judge finds that unusual costs were incurred and the client was not warned about their irrecoverability, it does not follows that the measure of what would be reasonable for the client to pay, is what is recovered by way of costs from the other side.

The point about section 70(9) is really just common sense. It is difficult to see how, given the state of the authorities recited in more detail in the judgment, that a court could come to any other conclusion. It will however materially alter the finishing line, for those contemplating making or resisting an application for a section 70 assessment. It remains to be seen to what extent part 36 might impact on the usual order under section 70(9): including whether part 36 has any application at all, to what might be thought to be a self contained code under the Solicitors Act 1974.

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