Costs budgets and hourly expense rates: the rigmarole returns

Everything sorted: that is what appeared to be the case with solicitor’s hourly expense rates and costs budgets after Jacobs J gave his judgment in Yirenki v Ministry of Defence:

“It is clear from [paragraph 7.3 of Practice Direction 3E to CPR 3.15] that the ultimate goal of the costs budgeting exercise is for there to be a figure which is given for the costs of each phase of the proceedings. The constituent elements are part of the road to reaching that goal, but they are not an end in themselves and those constituent elements are not the subject of approval.”

By “constituent elements”, the judge meant hourly rates and the hours to be expended by fee earners on each phase of the case going forward. The idea of the budget is for figures for each phase to be given which fall within the range of reasonable and proper costs, subject to the possibility of review only if “good reason” can be shown under CPR 3.18 for a departure (see paragraphs 12 and 18 of the judgment). In fixing the budget for the phase, the court does not approve the hourly rates, nor the hours estimated to be spent which will have been set out in the parties’ Precedent H “Budget Report”. Put differently, what this means is that once the court approves a figure for a phase, the party entitled to be paid costs can expect the budgeted amounts to be ticked through by the court at any subsequent detailed assessment.

Clear enough: thus following Yirenki, the allowance for the phase is for the solicitors to spend as they think fit and if the approved sum is £10,000 for trial preparation, it will not matter whether the senior partner stands by the photocopier putting trial bundles together or that the task is undertaken by a squadron of trainee solicitors: provided the work is done and the job completed within budget, the phase total will be allowed by the costs judge. The fact that the senior partner did the work will not avail a paying party unwise enough to advance a “good reason” argument that the work should have been delegated down the pecking order of fee earners. It is the total for the phase that counts, not who did it.

None of what the judge undertaking the costs budgeting exercise can affect the “incurred “costs, that is to say, the costs which the parties incur before any budgeting is carried out. PD 3E.7.4 makes it clear that:

“As part of the costs management process the court may not approve costs incurred before the date of any costs management hearing”.

It follows that as incurred costs cannot be approved or assessed by the costs budgeting court, if they cannot be agreed, they must be assessed by the costs judge under CPR 47.14.

What of the hourly rates for the pre-budget work? It is well known that on detailed assessment, one of the principal battlegrounds is the hourly expense rate for solicitors. PD 3E.7.3 provides that it is not the role of the court in the costs management hearing to fix or approve the hourly rates claimed in the budget. Is it to be assumed, therefore, that where rates are in issue for the pre-budget work, that it is for the costs judge to deal with them at detailed assessment?

Whilst that may appear to be the theory, following Warby J’s decision in Arcadia Group Limited v Telegraph Media Group Limited, the reality may be very different. Notwithstanding paragraph 7.3, the judge expressed a view about hourly expense rates when carrying out costs budgeting. In doing so, he indicated that those in excess of £550 per hour for partners could not be justified and that proportionate reductions from £690 were required.

But that is to get ahead of ourselves. First, the background to the Arcadia litigation needs to be explained. In a nutshell, three anonymised claimants, ABC, DEF and GHI, took action against the Daily Telegraph to restrain the newspaper from publishing information about them. The particulars of that were that there had been “misconduct” by the claimants, and that there was a significant public interest in publicising details of it, a fortiori, because non-disclosure agreements had been used to prevent five alleged victims of “immoral and reprehensible behaviour” from making the details public. The Court of Appeal had granted an interim injunction to preserve the confidentiality of the claimants until trial, but on 25 October 2018 Lord Hain, under Parliamentary privilege (meaning that he was immune from suit in respect of what he said within the House of Lords), had named Sir Philip Green as being one of the claimants. Having been “outed” in this way, no purpose was left to be served in continuing the anonymity orders which were then discharged by consent.

The action, however, continued. On 23 January 2019, Warby J carried out costs budgeting for the pre-trial review, trial preparation and trial phases. In doing so, he commented that “some of the incurred costs on the claimants’ side are very high”, but time constraints had prevented him from engaging in any detailed examination of the reasons for disparities between the parties’ respective budgets. He then said this:

“Although budgeting is not the same as detailed assessment, it is almost inescapable for the court to give some thought to the hours and hourly rates that are justified for the work in question. The hourly rates claimed by the claimants range from £190 (for a Grade D lawyer, a trainee) to £690 (for a Grade A lawyer, a partner)… I do not consider that hourly rates in excess of £550 can be justified and proportionate reductions should be made in the lower partner’s rates.”

The action then took a different turn. As the judge put it in his next judgment on 7 February 2019, unusual if not exceptional circumstances had prevailed after Lord Hain had said what he did and for the claimants to take the decision to discontinue the case, for which the permission of the court was needed as the claim had included an interim injunction (see CPR 38.2(2)(a)(i)). The default position under the rule is that the discontinuing party pays the costs of the discontinued-against parties, but the judge was having little of that due to the “exceptional factor” being Lord Hain’s intervention. In respect of the application for the injunction, he made no order for costs and in relation to two substantial applications for disclosure, he ordered the Daily Telegraph to pay 100% of Sir Phillip Green’s in respect of the first and 75% of the second. Only in respect of the costs of the action itself did the default rule apply.

With costs orders going both ways, absent agreement, there will need to be a detailed assessment to decide how much each of the parties should pay to the other. Suppose that in respect of Sir Phillip’s costs, the hourly rate is claimed at £690 on the basis that under PD 3E.7.4, the court is not permitted to approve the incurred costs and that, accordingly, the rate is up for grabs. Doubtless the Daily Telegraph would counter that argument by contending that Warby J has already made a ruling about the rates by limiting those for the partners to no more than £550 per hour.

Which argument will prevail? It would be a brave costs judge not to give considerable weight to the comments of a judge at a higher level, but should that be to the extent that those rates considered proportionate for the budgeted costs must therefore apply to the incurred costs? After all, the budgeting judge is not permitted to approve (or by inference) disapprove the incurred costs, and it would follow that that would include the hourly expense rates. Yet it would be an odd state of affairs if one rate was applied to the costs which the court is not permitted to budget and a significantly lower rate for those that it is. Here, that discrepancy would be a minimum of £140 per hour.

Unfortunately, Yirenki does not provide the answer, albeit in fairness that that question was never posed in that case. The judgment is limited to saying that when costs are being budgeted, the court looks at the total figure for the phase, rather than using an hourly rate and multiplying that by the number of hours to do the work. No guidance is given about how those constituent parts should apply (if at all) to the incurred costs. If they cannot be agreed beforehand, it will be at the detailed assessment of Sir Phillip’s costs that a first instance answer will be provided.

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