The question of whether a reduction in hourly rates for incurred costs is a good reason to do the same to budgeted costs is a big one at the moment, absent higher court authority. Recently, Master Rowley in the Senior Courts Costs Office (SCCO) had his say, and joined what seems to be the majority view among judges to date that it is not.
Jallow v Ministry of Defence was a claim by a soldier over non-cold freezing injuries he suffered to his hands and feet that led him to leave the army. Liability was agreed on a 75/25 basis before proceedings began, but it continued over the issue of quantum.
Master Leslie reduced the claimant’s budget from £148,262 to £120,000 plus VAT and additional liabilities, and including the incurred costs. As a result, the estimated future costs were £107,777, reduced to £78,505.
There was some disagreement about the value of the claim. While the defendant said that the budget was set on the basis of the claim being worth £300,000, the claimant said that it was put on two bases depending on what findings of fact the judge made in the final hearing, in relation to the employment of the claimant. There were therefore two alternative sums claimed, £185,000 or £312,000. This is relevant, as will be seen later.
Four weeks before the assessment of damages hearing, the claimant accepted a Part 36 offer of £90,000.
On detailed assessment, the claimant sought £188,085 inclusive of additional liabilities. Master Rowley reduced some of the hourly rates (which ranged from £140 per hour for grade D fee-earners up to £330 for grade A) in respect of the incurred costs.
So was this a good reason to depart from the budget? Master Rowley gave the issue a lot of thought. He said the “good reason” test came with a high threshold to pass. He rejected the claimant’s analogy with the “significant development” test to amend a costs budget, saying instead that there were similarities with the “genuine issue” test when trying to challenge a retainer:
“In place of the solicitor’s certificate is the approval of the budget by the court. In either situation, the judge at the detailed assessment is not going to entertain a challenge unless something is raised which is specific to the case before the court.
“There is nothing specific to this case regarding the hourly rates challenge. If they are reduced here, exactly the same point would apply in any other case. That in itself, in my view, points to the conclusion that a reduction in the hourly rates ought not to be a good reason to depart from the budget.”
He said that the fact that the hourly rates allowed at detailed assessment were different from those originally used in the budget did not constitute a good reason, finding that the case was a good example of why the make-up of the estimate on which the budgeted costs were subsequently agreed or approved was not relevant to the subsequent detailed assessment.
The master noted that, in this case, the solicitor who had conduct for the first two years (which was, more or less, up to the case management order (CMO)) left the firm and the case had to be reallocated. The claimant and his solicitors thought that a more experienced solicitor was required to deal with the quantum difficulties. As a result, the work was done at a higher hourly rate than had been envisaged in the budget:
“It has always been my understanding that the approved phased total can be used by senior or junior fee-earners at differing hourly rates as the party considers to be appropriate. If it were otherwise and, as in this case, the fee-earner who had originally been acting was no longer able to do so, a slavish adherence to the rates set out in the calculations for the original budget would mean that an application to amend the underlying details to the budget would be required even though there may be no wish to amend the budget totals themselves.
“That seems to me to be an unlikely proposition and this illustration explains why I have said above that, once the phase total has been approved, the underlying figures are no longer relevant.”
Given that we have been repeatedly told that hourly rates are not considered during the budgeting process, this has to be right.
Master Rowley acknowledged the tension between the need to allow reasonable and proportionate costs on an item-by-item basis in detailed assessments and the need for certainty of recovery as expected by the use of budgets. However, he said that the reality was that, if the party came within its approved or agreed budget, individually “unreasonable” items turned into a reasonable and proportionate sum overall.
His concern, which he suspected was shared by Master Campbell in the first case to raise this issue, RNB v London Borough of Newham, was that the lack of scrutiny at a detailed assessment of the hourly rates claimed would encourage parties to incur costs up to the budget set for each phase, on the basis that they were unlikely to have to withstand scrutiny at a detailed assessment.
As a result, he considered that there would be an inflationary element, which is only kept in check by conventional detailed assessments. However, this concern was something that had to yield to the aims of costs management in making detailed assessments shorter.
“For a long time, the work of the costs judge has been described as the compounding of “much sensible approximation” to achieve justice. Ultimately the use of CMOs is simply a further example of that pragmatism.”
Accordingly, the master found for the claimant that there was no good reason to depart from the budget by virtue of the reduction to the hourly rates in the case.
The defendant also argued that the valuation of the case was a good reason to depart from the budget. Master Rowley suggested that, in relation to the sums claimed being “rather higher” than the sums achieved, the Court of Appeal’s dicta in Lownds held good.
“The essence of the point is whether it was reasonable for the claimant to believe that his case was worth the sum that he claimed,” the master said:
“It is only if he could not reasonably have had that belief, because his claim was exaggerated in some way, that the budget might be considered to have been set on a false premise and as such should be departed from on assessment.”
That was not the case here, he continued. In his judgment, the claimant did not exaggerate his claim. The claimant had put forward alternative cases as to quantum which had demonstrated that he was alive to the issues surrounding the potential level of damages to be recovered.
The master rejected the defendant’s argument that the valuation of the case was a good reason to depart from the budget because “the ultimate settlement of this claim did not falsify in any way the premise of Master Leslie’s setting of a budget in a case where the sums in issue were £300,000.”
It is a shame that RNB settled shortly before the High Court was to hear an appeal because authoritative guidance on this issue would help.
Another issue likely to arise and require judicial guidance was discussed in the panel session at the recent Association of Costs Lawyers (ACL) conference in Manchester: in a case where the hourly rates have been amended on detailed assessment, when considering the incurred costs, and in a phase where either party has persuaded the court that there is good reason to depart, will the original or assessed hourly rates apply?
Obviously the “good reason” to depart will need to be considered, was the view of the panel of judges, with those that were in line with the budget attracting the original rate and any further costs now claimed under good reason arguably attracting the reduced rates allowed on assessment.
Further problems will arise in attempting to delineate that distinction on assessment as necessary, particularly if the good reason is in issue, as is likely to be the case.