The unsavoury practice of costs budget exaggeration

It is perhaps no secret that reducing the scope for significant and expensive costs disputes - ergo saving court time - is the real ethos behind introducing costs budgeting. It is designed to limit the scope for significant disagreement at the conclusion of the case by managing costs at an early stage and rewarding efficient conduct.

Costs budgeting attempts to achieve this through transparency whilst providing a good measure of certainty to litigants who are often ordinary people for whom involvement in court proceedings may be a very daunting event.

The rules require the parties and those representing them to act in a transparent and professional manner. In particular, legal representatives are expected not to mislead the court or provide erroneous information. It is for these reasons pleadings and other important documents in litigation carry a statement of truth or certificate of accuracy.

There is now a well-established body of case law which has developed at district judge/costs judge level - where these matters are enforced on the ground - where the courts have shown no reluctance to strike out the entirety of costs claimed or distinct parts of a bill where there has been deliberate and unintentional inaccuracy.

Whilst the reported cases are predominantly focused on bills of costs in detailed assessment proceedings, the unsavoury practice of deliberately providing misleading and inaccurate documents has now spilled over into the costs budgeting process.

Tucker v Hampshire Hospitals NHS Foundation Trust

The parties are required to certify that a budget is fair and accurate by signing a statement of truth. The signatory is certifying that he/she believed the amount of incurred costs stated in the budget is an accurate statement of the actual costs incurred up until the budget is drafted. That signature is no empty formality. Where it can be shown to be untrue it can result in the court exercising its jurisdiction under CPR 44.11 to disallow all or part of the costs being assessed.

In the landmark case of Tucker v Hampshire Hospitals NHS Foundation Trust, two costs budgets were served in the claimant’s name and certified by partners of Irwin Mitchell as being “accurate and fair.” Upon conclusion of the claim, the defendant noticed that the pre-action “incurred” costs claimed within the detailed bill were lower than those claimed within the budgets; and both budgets bizarrely stated different figures for the same pre-action phase.

Upon further scrutiny, the difference in amount was due to “composite” hourly rates being used in the budget whereas the actual hourly rates in line with the retainer were used in the bill as set out in the below table.

Grade of fee earner Hourly Rates in Bill (agreed in the retainer) Hourly Rates in 1st Costs Budget Hourly Rates in 2nd Costs Budget

The difference in hourly rates meant that the amount of incurred time costs in the bill was £38,871.50 less than the amount of incurred time costs in the claimant’s last budget.

This exaggeration of incurred costs in the budget is likely to have resulted in the court approving a budget at a higher sum than would otherwise be reasonable had it been presented with accurate information when carrying out its costs management function.

In the Tucker case, the defendant argued that claiming incurred costs/rates at a figure in excess of the known agreed rate/charged costs was neither a fair nor accurate statement of the incurred costs. To the contrary, it was misleading. By quantifying incurred costs at rates in excess of those contractually in place when the work was undertaken, the certification under the statement of truth was consequently inaccurate and misleading. An application was issued for costs to be disallowed or reduced on the grounds of improper conduct.

The claimant’s solicitors, Irwin Mitchell, argued that the costs budget was drafted using hourly rates by grade of fee earner that were “composite” or “blended” rates. It was contended that the so- called composite rate reflected a fee earner’s original, current and future hourly rates.

In evidence from Irwin Mitchell, it was argued that they had applied the “composite hourly rates” to drafting personal injury budgets since the costs management regime began. The composite hourly rates were used because the costs budget form did not allow different hourly rates to be used reflecting increases in hourly rates that may occur during the length of the case. It was further averred that the budget was not intended to be accurate to the last penny and there was no prejudice to the defendant in the approach adopted.

The Court’s Views

In a scathing judgment, Master Rowley expressed his disapproval of the “composite hourly rate” approach to costs budgeting that was used by Irwin Mitchell, stating:

“It is not at all clear to me why Irwin Mitchell would seek to recalculate the sums no doubt appearing on their electronic ledger by reference to a blended hourly rate.

…It is self-evident that a solicitor preparing a costs budget should not overstate a party’s liability to his solicitor for costs that have already been incurred. It is to all intents and purposes a breach of the indemnity principle.

It is bound to mislead both the opponent and the court in circumstances where neither has any opportunity to examine the costs claimed in any detail at a budgeting hearing. It is no answer to say that the opponent’s liability to pay such costs is ultimately protected by the option of going to a detailed assessment.

The whole purpose of costs management is meant to limit the need for detailed assessments and part of that must involve the parties and the court being able to rely upon the information provided by the other party.”

Master Rowley went on to say that in his judgment, the Irwin Mitchell approach to costs budgeting is not one which would be endorsed by solicitors in general; as such he was satisfied it amounted to improper conduct. In imposing sanction for this unacceptable conduct, the Master stated:

“It seems to me that the egregious aspect of the conduct here relates solely to the approach to the costs management of the underlying claim. Consequently, it is the costs claimed in the costs management activities that should be penalised. 

I have concluded that, in order sufficiently to mark the court’s disapprobation of Irwin Mitchell’s conduct in this case, I should disallow all of the costs management elements, or “non-phase” part, of the bill.”

The Impact

The benefit of this “composite hourly rate” approach to costs budgeting becomes clear upon settlement of a claim. The “pot” of costs increases the likelihood that the costs claimed in the bill will be less than the total of the approved budget. Where this happens, the protection from assessment afforded by CPR 3.18 is triggered. The defendant is then required to show “good reason” to depart from the budget before the court will conduct an item by item assessment of the costs being claimed. Where the court is not satisfied there is “good reason”, the defendant may be ordered to pay the costs as claimed within the bill without assessment - as CPR 3.18 is designed to reduce the scope of, and need for, detailed assessment.

In Tucker, having expressly found Irwin Mitchell’s approach to budgets to be “improper” thus satisfying the test set out in CPR 44.11(1)(b), the “non-phased” items in the bill relating to the costs management process at £24,379.78 inclusive have been disallowed. This is a substantial sum of money and is a stark reminder that the courts will not tolerate improper or unreasonable conduct from parties or their legal representatives.

The approach to costs budgeting that occurred in Tucker appears to have been adopted by Irwin Mitchell since the costs budgeting regime was implemented. As a result, it is more than likely there will be many more cases where costs budgets certified by Irwin Mitchell with a statement of truth will be in breach of the indemnity principle and subject to similar condemnation and sanction from the court.

Keoghs Comment

Compensators and paying parties need to be astute when dealing with claims for costs that are subject to an approved budget.

Whilst the above practice of using “composite hourly rates” in budgets is an apparent feature of Irwin Mitchell’s general conduct, it is not a practice solely adopted by them. Other legal representatives unfortunately appear to be acting in a similar manner.

We are now seeing exaggeration of budgets by manipulation of the grade of fee earner and the number of hours actually incurred and Keoghs shall be bringing these unreasonable behaviours to the attention of the court in due course.