REUTERS | David Gray

Hourly rates and costs budgeting: to fix or not to fix, that is the question!

But what is the answer?

In theory it is straightforward. When the court is fixing costs budgets at a case or costs management conference (CCMC), the 82nd update to the Practice Direction at PD 3E.7.10 tells us:

“It is not the role of the court in the cost management hearing to fix or approve the hourly rates claimed in the budget. The underlying detail in the budget for each phase used by the party to calculate the totals claimed is provided for reference purposes only to assist the court in fixing a budget.”

So if it is not for the court to fix the hourly rates at the CCMC and they are not agreed by the party who is ultimately ordered to pay costs, it must follow that the occasion for rates to be considered judicially will be at detailed assessment? After all, that will be time when the costs incurred before the date of any CCMC are scrutinised by the court, since the case managing court under PD 3E7.4 cannot approve them and can only:

“…record its comments on those costs and will take those costs into account when considering the reasonableness and proportionality of all subsequent budgeted costs”.

If that is right, it will follow that when the pre-budget costs are before the court for approval at any subsequent detailed assessment, if the successful party claims, say, £300 per hour for a fee earner and the paying party offers £250 per hour, either of those rates or something in between are up for grabs before the costs judge.

So much ought to be uncontroversial, but it is not. Schools of opinion are divided about whether the rate allowed for the pre-budget costs (for argument’s sake, let us say it is £275 per hour) is also to be applied to the budgeted costs.

School I

School I says that it is not the role of the court to fix hourly rates at the CCMC (see PD 3E.10 above) and that Carr J gave guidance on this very point in Merrix v Heart of England NHS Foundation Trust in paragraph 73:

“The fact that hourly rates at the detailed assessment stage may be different to those used for the budget may be a good reason for allowing less, or more, than some of the phase totals in the budget”.

It follows, so the argument goes, that if hourly rates are not fixed at the budgeting stage, the time for their reasonableness and proportionality to be considered is at the detailed assessment, in which case the rate allowed for the incurred costs must then be applied to the budgeted costs. Thus, in our example, where the receiving party’s Precedent H costs budget at the CCMC had advanced an hourly rate of £300, the figure allowed on assessment would be £275 per hour, the same as for the pre-budget costs (see RNB v London Borough of Newham).

School II

Not so, says School II. To reduce hourly rates for budgeted costs to the same levels as those allowed for the incurred costs, thereby causing a potential departure from the budgeted phase totals, is to second-guess the thought process of the costs managing judge and is to impute a risk of double jeopardy into the detailed assessment (see Bains v Wolverhampton NHS Trust (unreported)).

Permission to appeal was granted in RNB by the court at first instance, so it was expected that the difference in approach would be resolved by the appellate court one way of the other, that is until the arrival of:

School III!

In The Capital Markets Co (UK) Ltd v Traver, Mr Michael Furniss QC was asked to approve a costs budget for £8.9 million, with £6.3 million having already been incurred. The hourly expense rates advanced in Precedent H for partners were £705 and £540 against a guideline rate of £409. For Grade B fee earners, the respective rates were £475 and £296.

These rates caused judicial eyebrows to be raised. They were too high, but mindful of PD 3E.7.10, what was the court to do about them?

In order to address the difficulty, the judge said this at paragraph 15:

“My second general observation is that the hourly rates which the claimants’ solicitors propose to charge in their budget are well in excess of the current guidelines for London solicitors. They are proposing to charge £705 per hour for partners and an average of £540 per hour for other Band A earners… the guidelines are of course, just for guidance and in appropriate high-value or high difficulty cases, the court will allow a higher rate… While it is not for the court to set hourly rates when approving a costs budget [emphasis added], I can take account, when deciding whether to approve the budget, of the fact, as I consider to be the case, that the claimants are proposing to remunerate their solicitors at a rate which is higher than the lowest amount they might be expected to pay in order to conduct the case proficiently… It is hard to see why the claimants should be paying more for partners and other Grade A fee earners than the maximum amount proposed to be charged by Kingsley Napley [solicitors for the defendant], i.e. £500 per hour… [16], Following the approach of Warby J in Yeo [Yeo v Times Newspapers], I have formed a broad view of the overall level of excess charging (in the sense of the excess over what should be allowed in the budget) within the claimants’ budget. In my view, looked at in the round, all other things being equal, a reduction of 20% would be justified from the solicitors’ costs element of the claimants’ budget for that element alone”.

The Capital Markets thus reflects a third approach; recognising the strictures imposed by PD 3E.10, the judge avoided fixing, in terms, the rates that he considered to be reasonable and proportionate but in effect, went on to do just that, by refusing to approve the budget until he had applied a 20% reduction. In doing so, he brought down the hourly rates to a level similar to those being charged by the defendants’ solicitors, reducing the Band A by almost £170 an hour.

If that is not “fixing” the hourly rates, what is and how does the judgment square with RNB and Bains?

The School I approach is that where, as in The Capital Markets, the case managing judge has commented upon and effectively fixed the hourly rates (£705 minus 20% = £534 per hour for Band A), that is the rate that must also be applied to the incurred costs. It follows that if and when the costs in The Capital Markets fall to be assessed at the end of the case, £534 per hour for the Band A will be the rate to be applied both to the budgeted and to the pre-budget costs, and it will not be open to the assessing judge to allow a different rate. That is in line with other High Court judgments in which rates have been considered and judicially approved (see, for example, Group Seven Ltd v Nasir (Morgan J), Stocker v Stocker (Warby J) and GSK Project Management Ltd v QPR (Stuart-Smith J), Yeo v Times Newspapers (Warby J), JSC Mezhdunarodniy Promyshlenniy Bank and another v Pugachev and others (Birss J)). In other words, where the case managing judge has dealt with the hourly rates, it is not for the costs judge on a subsequent detailed assessment to alter them.

The School II approach is the opposite. It is predicated on the proposition that case managing judges do not fix hourly rates at the CCMC. On the contrary, they merely set a global budget and “If the budget is set globally, it is for a party to determine how to spend that money”(see DJ Middleton The White Book Costs and Funding Q&A 3rd Edition at paragraph 4-75). It follows that the powers of the costs judge at detailed assessment will not be limited by what has taken place at the CCMC. Although the budgeted costs cannot be touched (absent either party advancing a “good reason” under CPR 3.18(b) to depart from the budget), a different hourly rate for the pre-budget costs can be allowed to that used in the receiving party’s Precedent H. Thus, the fact that in The Capital Markets the court in effect reduced the hourly rates by 20% will not limit or restrict the court on detailed assessment from allowing higher (or lower) rates for the pre-budget costs. That is exactly the opposite of the School I approach.

Such a divergence does not sit comfortably with the expectations of those who have advocated costs budgeting and the certainty it is supposed to bring.

As long ago as 1999, Judge LJ (as Lord Judge then was) said in Ford v GKR Construction Ltd:

“Civil litigation is now developing into a system designed to enable the parties involved to know where they stand. In reality, at the earliest possible stage, and at the lowest practicable cost, so that they may make informed decisions about their prospects and the sensible conduct of their cases…”

Ten years on, in his Review of Civil Litigation Costs: Preliminary Report, at Chapter 48 “Costs Management”, Sir Rupert Jackson said at paragraph 1.6:

“Specific approval or sanction of the incidence of costs at stated or approved levels throughout the life of the case ought to have the effect of removing or reducing the need for an ex post facto examination whether the costs incurred should have been incurred or were reasonably incurred”.

The decisions in RNB, Bains and now The Capital Markets are illustrative of how far removed these expectations still are from the realities of day-to-day litigation, and what a distance there is to go before they are fulfilled. The appeal in RNB is to the High Court and if the judge does not follow the approach in The Capital Markets, it is possible that we shall have a School IV, leaving the profession with two decisions at High Court level in apparent conflict. That will remain the position unless or until there is a further appeal to the Court of Appeal when conclusive guidance can be given, a minimum of 18 months away, probably more.

It terms of what that guidance should be, a useful starting point would be to alter PD 3E.7.10. At detailed assessment (along with proportionality, the indemnity principle, after the event (ATE) insurance premiums and the success fee), the hourly rate is the “Big Ticket” item. Arguably, it is the biggest item of all. Resolve that and often everything else will be agreed, which begs the question, why is the most contentious issue on detailed assessment deliberately avoided when the court has an opportunity to grasp the nettle and resolve it early in the case at the CCMC?

If case managing judges at CCMCs were to deal with hourly rates as Morgan J did in Group Seven, the parties would have the benefit of knowing where they stood at the beginning, rather than at the end of the litigation. All sides would be aware that if there was a shortfall between the rate claimed in Precedent H and the amount allowed going forward, they and their clients thereafter would have to cut their coats according to their cloth. That would go a long way to fulfil the Jackson expectations. This is in contrast to the situation which now prevails, where different judges are doing different things, making it more difficult than it should be for lawyers to give their clients reasoned advice about what the case will cost, the amount they will recover if they win and what they will have to pay if they lose.

Back to “fix or not to fix”. Let us hope that the appeal in RNB will give the answer. Until then, it will remain a free-for-all.

Kain Knight Colin Campbell

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