UK: The Big Short(fall): The Assessment Of Deductions From Protected Parties' Damages

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 needs the approval of the Court. In this article Martyn Griffiths and Charlotte Wilk 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 [2021] EWHC B27 (Costs)

MNO v HKC [2022] EWHC 2919 (SCCO)

JXC v NIS [2023] EWHC 1000 (SCCO)

Background

All personal injury practitioners are well aware of the approval process under Part 21 of the Civil Procedure Rules 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 r.46.4, PD46 as well as rr.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.¹ If the costs claimed only comprise a success fee claimed under a CFA or the balance of any payment due under a DBA the court can assess the sums by way of a summary assessment.² 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 r.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.
• 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.³ 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:

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".⁵ 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.⁶

Assessment of a Shortfall in Practice

Ordinarily in an assessment the Court is assisted by Points of Dispute which set out the items in the bill that are being challenged. 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.⁷

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 IM'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, the shortfall was put at 30%. The Judge considered that this was standard advice for non-budgeted cases.⁸

The Judge stated that:

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 (iv) the fact that the overspend was likely to add to the anticipated shortfall of between 20-30%.¹⁰

Applying r.46.9, crucially, the solicitors could not rely on the presumptions of r.46.9(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.¹¹

Hourly Rates

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.¹² The Judge accepted that the litigation friend was on notice that not all the costs may be recovered from the defendant. However, he 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.¹³ 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.¹⁴

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.¹⁵ The success fee had two stages: 20 per cent if the case settled prior to three months from the date of trial, 100 per cent thereafter.¹⁶ That success fee was based on the case falling into the 'Low Risk' category.¹⁷ The CFA provided both a generic description of the risk as well as more specific case information.¹⁸ 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.¹⁹ 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 per cent 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.²⁰ In order for there to be informed consent of the percentage amount of the success fee, the Judge held that 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 per cent.

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.²¹ He also considered that the liability prospects, even pre-admission, were very strong,²² and that early Part 36 offers were unlikely in a case of this complexity. Moreover, he stated that it is not appropriate to make any allowance within a success fee for the fact that a claim is likely to be substantial in amount. Judge Leonard adopted a similar approach to that taken by Judge Brown in BCX andMNO in relation to the assessment of success fees with reference to part 36 risks.²³ 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 per cent, to reflect a risk in the region of 25 per cent.²⁴

Discussion

The cases referred to above 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 to be 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 this is being done. 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.
• 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:

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.

Footnotes

1 CPR r.46.4(2)

2 CPR r.46.4(5)

3 PD46, para.2.1(b)

4 BCX, paragraph 16.

5 Per paragraph 18 of BCX citing Dunhill v Burgin [2014] UKSC 18.

6 BCX, paragraph 13.

7 BCX, paragraphs 28-9.

8 JXC, paragraph 86.

9 JXC, paragraph 91

10 JXC, paragraphs 92-4.

11 JXC, paragraph 111.

12 BCX, paragraphs 45-6.

13 BCX, paragraph 49.

14 BCX, paragraph 15.

15 The solicitors had originally sought to recover the shortfall of base costs but abandoned this claim before the Judge completed the assessment.

16 On the facts it was only the first stage of the premium that applied.

17 As opposed to 'Medium' or 'High' risk, MNO, paragraph 11.

18 MNO, paragraphs 12-13.

19 MNO, paragraph 21.

20 MNO, paragraphs 50-1.

21 JXC, paragraph 167.

22 JXC, paragraph 177.

23 Both following the approach set out in NJL v PTE [2018] EWHC 3570 (QB); see JXC, paragraph 153 and BCX, paragraphs 73-6.

24 JXC, paragraph 180.

25 JXC, paragraphs 64-5.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.