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Howard Dean

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Court arbitrarily increases hourly rates to take account of inflation

Client Alerts09/12/2020

In Cohen v Fine [2020] EWHC 3278 (Ch), HHJ Hodge QC found on appeal that the District Judge had erred in her approach to the conduct of the summary assessment.

In carrying out a summary assessment of the costs claimed, it was necessary for the appeal court to determine what hourly rates should be recoverable for the work done by two of the fee earners. The hourly rates exceeded the applicable band one Senior Courts Costs Office Guideline Hourly Rates (the “GHR”).

The court noted that prior to 2010, the GHR were increased each year, broadly in line with inflation, but had not been revised since then.

It also took note that the 2014 Costs Committee (of which HHJ Hodge QC was a member) recommended changes to the GHR in 2014 which were rejected by the then Master of the Rolls, Lord Dyson.

The court also took note of the judgment of O’Farrell J in Ohpen Operations UK Ltd v Invesco Fund Managers Ltd [2019] EWHC 2504 (TCC), [2019] Costs L.R. 1533, who said that:

“It is unsatisfactory that the guidelines are based on rates fixed in 2010 and reviewed in 2014, as they are not helpful in determining reasonable rates in 2019. The guideline rates are significantly lower than the current hourly rates in many London City solicitors, as used by both parties in this case. Further, updated guidelines would be very welcome.”

 HHJ Hodge QC noted that the present GHR are considerably below the hourly rates actually being charged by the solicitors practising in the courts, saying:

“In my experience of sitting in the Business and Property Courts, both in the North-West and in the Rolls Building, the present Guideline Hourly Rates are considerably below the rates actually being charged by the solicitors who practise in those courts.

 … In my judgment, pending the outcome of the present review, the Guideline Hourly Rates should be the subject of, at least, an increase that takes due account of inflation. Using the Bank of England Inflation Calculator, it seems to me that an increase in the (Band One) figures for Manchester and Liverpool broadly in the order of 35% would be justified as a starting point (appropriately rounded-up for ease of calculation).”

This produced rounded-up figures as follows:

 

A

B

C

D

2010 GHR

£217

£192

£161

£118

135% 2010 GHR

£295

£260

£220

£160

The court then went on to assess the hourly rates that were claimed using the inflation uplifted hourly rates.

Keoghs Comment

The task of considering historical 2010 GHR is already underway as the Civil Justice Council has established a Working Group, chaired by Stewart J, to conduct an evidence-based review of the basis and amount of the Guideline Hourly Rates. 

Whilst the court pays verbal deference to the pending outcome of the present review, receiving parties are likely to place reliance on this judgment when seeking to recover hourly rates.

We consider that this reliance is misconceived and flawed for the following reasons:

  1. Comparing apples with pears

The 2010 GHR were based upon the expense of time focusing on “what it costs lawyers to run their practices”. This “bottom-up” approach required data from solicitors and an estimation of the cost to law firms of an hour of fee-earner time, taking into account the full salary cost paid to fee-earners for those hours and the expenses of the firm that need to be recovered from hours billed for the firm to break even (including a wide range of costs and overheads).

Necessarily this rate will be influenced by the way a given firm is structured, and even such issues as the choice and location of an office and the quality of the “fittings”. Once this figure has been arrived at, a percentage mark-up was added to represent a reasonable profit element.

By contrast, in taking judicial notice of the “hourly rates actually being charged” the court is using a “top down” approach as evidence of inflation.

  1. The hourly rates claimed

Historically, the hourly rates claimed were those that a client would actually pay to his solicitor irrespective of the outcome. Clients had a financial interest in reducing the hourly rate to an affordable level. There was competition amongst law firms for clients to charge an affordable hourly rate whilst still producing a profit, but at a level that secured the work.

This situation changed fundamentally with the introduction of conditional fee agreements. A majority of claims are now funded under conditional fee agreements on a “No win: No fee” (CFA-lite) basis. This CFA funding allows solicitors to claim high hourly rates (say £500 per hour in London for a Grade A fee earner) when successful and nothing or a very low hourly rate when unsuccessful.

As a result, hourly rates claimed between the parties are not reflective of the hourly rates that clients actually have to pay.

  1. The inflation index

The use of the Bank of England Calculator and the Consumer Prices Index is too blunt an instrument. If an inflation index is to be used then it should be the Services Producer Price Index (Office for National Statistics), which provides inflation indices for suppliers of Legal Services.

There is significant doubt over the use of inflationary indices. By way of example, for 2014 the Calculator shows a 14.53% increase, whereas the Costs Committee recommended substantial reductions in hourly rates.

  1. The 35% increase

The starting point of 35% on 2010 GHR is mathematically flawed. It is clear from the circumstances of this case that the work was done between 2015 and 2020. Using the Bank of England Calculator the inflation is as follows:

 

2015

2016

2017

2018

2019

% inflation

15.66%

17.67%

21.88%

25.96%

29.19%


The 35% increase is unsupportable.

  1. Technology and efficient business practices

The use of information technology has significantly reduced law firm overheads and increased profitability. There have been reductions in clerical non-fee earning staff, decreases in the level of fee earners needed to conduct cases through the use of case management systems, appropriate delegation of tasks, process mapping and precedent letters and documents.

The specialisation of firms and subspecialisation in various legal sectors provide economies of scale and concentration of expertise that increase profitability.

The effect of Covid-19 must not be underestimated. It has had, and will undoubtedly continue to have, a massive catalytic effect in driving change in working practices in many law firms.

The legal profession has rapidly advanced their digitalisation programmes to enable them to continue to provide legal services whilst their fee earners work from home. These changes should significantly reduce the overheads of solicitors and significantly increase profitability.

To arbitrarily allow an inflationary increase in hourly rates at a time when the overheads in doing the work are reducing is unsupportable.

  1. This case involved objections to solicitor and own client costs raised by unrepresented litigants in person. The court made findings without the benefit of appropriate submissions of a represented paying party.
  2. In 2014 Lord Justice Dyson, the then Master of the Rolls, considered and rejected an inflationary increase in GHR saying:

“I have considered whether, as a temporary measure, I might revert to the previous solution of altering the current rates in line with inflation. But this would be arbitrary and would be
difficult to justify in the light of the recommendations (albeit not sufficiently evidence-based) that the average rates should in general be reduced.”

In arbitrarily increasing the GHR by 35% the court has pre-empted the CJC review that is being conducted to obtain evidence upon which to make a sound and reliable recommendations as to the appropriate level of GHR.

We should expect to see a significant increase in hourly rates claimed as a result of this case and increased litigation over what is the appropriate starting point for assessment.