Sanctions for Claimant where the Bill of Costs did not match the Costs Budget
The case of MXX (a Protected Party by her husband & Litigation Friend RXX) v United Lincolnshire NHS Trust  EWHC B23 is a stark warning of what can happen where there are discrepancies between the Costs Budget and the Bill of Costs. Master Rowley dealt with an application for sanctions to be imposed upon the Claimant for what the Defendant described as “mis-certification of the Claimant’s budget”.
- The rates claimed in the Costs Budget differed from the rates claimed in the Bill of Costs;
- In addition, the level of time claimed did not match the Costs Budget (by over 140 hours);
- The Defendant said that they suffered prejudice and that a sanction should apply as per r.CPR 44.11;
- The Master found that using higher rates for the incurred rates was a breach of the indemnity principle;
- The statement of truth for a Precedent H is not intended to be a composite statement or one akin to signing an estimate. Master Rowley stressed that “there is absolutely no reason why the incurred costs figure should not be accurate”;
- The Master, however, found that no prejudice had been suffered as the Court would never have approved the rate sought and that the incurred costs discrepancies were not necessarily improper. It would be unreasonable to expect a party to vet the time recorded on a line by line basis and nor was it unreasonable for a solicitor to include time in the budget which the client was potentially liable to pay.;
- The Court held that the appropriate sanction in the circumstances was to disallow all time claimed in the Bill of Costs corresponding to the CMO work. There was nothing wrong with the Bill of Costs in terms of the indemnity principle and the problem lied with the Budget.
The issues arose from a somewhat muddled approach to hourly rates. The Grade 1 rate at the time the case commenced was £335.00, this was later increased to £460.00 and then reduced to £350.00 after the Costs Budget had been prepared. There were also subsequent increases to the rate, first to £360.00 and later to £365.00. The Costs Budget claimed a Grade 1 rate of £465.00. The judgment provides a helpful table which sets out the discrepancies and is reproduced here:
6 Jan 2015
20 Jan 2015
|Grade 4||120 / 140||135||140||140|
At the CCMC the Defendant raised issue as to the hourly rates but the Court declined to deal with them. DJ Thomson advised that he usually allowed an amount for the Costs Management Order at a rate which the Claimant’s solicitors could then apportion. For budgeting purposes only, the DJ indicated he would use an hourly rate of £280.00 per hour but stressed he was not making any decisions as to who did what work.
The Claimant contended that the Costs Budget had been prepared using a set of “composite” or “blended” rates which allowed for increases over time but took into account that some work had already been done at lower rates.
The Court questioned why a revised budget with the reduced rates was not provided in advance of the CCMC. The Claimant stated that they did not know why this had not been undertaken and that it was something which had been overlooked.
In addition to the discrepancies with the hourly rates, it transpired that the time claimed in the Bill of Costs did not marry up to the Costs Budget either. The Claimant advised that this was as a result of “self-editing time which would be vulnerable to challenge”. This included the removal of funding time, non-progressive file reviews and administrative time.
The Claimant sought to argue that setting out each hourly rate would have dramatically changed the layout and the size of the Costs Budget and referred to the Whitebook to contend that hourly rates did not form part of the costs budgeting process.
The Defendant’s Case
The Defendant sought a sanction to be applied pursuant to CPR 44.11 which allowed the Court wide discretion to what sanction (if any) to impose. This included the possibility of disallowance of part or all of the Claimant’s costs.
The Defendant argued that the effect of the overstatement of the hourly rates mean that the Court had been inevitably influenced when setting the estimated costs. It was also stated that the inflated rates meant that the incurred costs were higher than they ought to have been and by the DJ’s own admission at the CCMC, there was nothing he could do to the incurred costs. The Defendant also criticised the Claimant for failing to explain the rates within the Costs Budget and for subsequently failing to notify the Court of the error in the figures after the CCMC.
Of note was that the Defendant sought to persuade the Court that “given the erroneous information” provided that it must be considered to be a good reason to depart from the budget in its entirety. The Defendant also expressed concern that over 140 hours were missing from the Bill of Costs and that the Defendant could no longer rely upon any Costs Budgets filed by the Claimant solicitor.
The Claimant’s Case
Much of the argument centred around the nature of the statement of truth. The Claimant sought to differentiate the statement of truth in the Costs Budget from that in a Bill of Costs. It was argued that the Costs Budget statement of truth was not a statement of compliance with the indemnity principle.
The Claimant also maintained that its approach to costs management was sensible and done in a pragmatic way. It was averred that the approach was not improper or unreasonable when considering whether to impose a sanction.
It was also argued that the error had made no difference to the decisions reached by the Court at the CCMC. Reference was made to the rate used by the Judge in setting estimated costs (which was lower than the Grade 1 rate claimed) and also to the Judge’s comments that incurred costs were to be left for detailed assessment.
The relevance of the missing hours was questioned by the Claimant on the basis that the Bill of Costs would have required more careful scrutiny than the preparation of the Costs Budget.
The Claimant also relied on the unreported case of Tucker -v- Griffiths & Hampshire Hospitals NHS Foundation Trust and argued that if a sanction was to be imposed then the sanction as in Tucker would be just. This was to only disallow the costs of the cost management element of the Bill of Costs. The Defendant sought to differentiate Tucker on the basis that there was a more significant difference between the rates claimed in the Budget and the Bill of Costs.
Master Rowley was critical of the Claimant and highlighted the importance of compliance with the indemnity principle. He said that “whether it is a detailed bill of costs that is being produced, a summary assessment schedule or even simply a breakdown in a letter being provided to the opponent, it is imperative that the costs set out as being payable by the opponent do not exceed the sums payable by the client to their solicitor.”
He continued: “I do not accept that the statement of truth for a precedent H is intended to be a composite statement or one akin to signing an estimate. If that were so, in my judgement, the statement would simply say that the document was a fair and accurate estimate of the costs which it would be reasonable and proportionate for the client to incur in the litigation. But that is not what it says. It specifically refers to incurred and estimated costs separately and it seems to me that a solicitor signing a statement of truth has to consider whether the incurred costs figure is fair and accurate separately from whether the figures for estimated costs are fair and accurate. There is absolutely no reason why the incurred costs figure should not be accurate. There are many reasons to understand that the estimated costs figure is no more than educated guesswork.”
The Court did agree with the Claimant that the erroneous rates had no effect at the CCMC on the basis that the District Judge never had any intention of approving the Costs Budget on the basis of the hourly rates sought. None-the-less they did state that it would have been preferable for an amended Costs Budget to have been filed.
Turning to the missing hours point, the Master did not see an issue with this. It was held that it was not unreasonable for a solicitor to include in the Budget the time that the various fee earners had recorded on their system on the basis that these were sums the client was potentially liable to pay. It was also said that it would be unrealistic to expect a solicitor to vet the time recorded on a line by line basis, particularly given the limit of 1% for preparing the Costs Budget. Whilst the removal of time had contributed to a significant reduction it did not necessarily mean that anything improper had occurred when the Budget was drafted.
The Court therefore found that the errors with the Claimant’s Costs Budget did not prejudice the Defendant and the Court adopted the approach in Tucker. It was stated that it was wrong for the Claimant to have applied an inflated rate to the incurred costs. The Master found that the appropriate sanction was to disallow the items claimed in the Bill corresponding to the CMO work.
Future Impact and Practical Points
The Civil Procedure Rules Committee at its April meeting this year signalled its intent to define incurred costs as any costs incurred up to and including the date of the first costs management order (unless otherwise ordered). It must be made clear that no date has yet been set for this proposed change to the Civil Procedure Rules.
In tangent with Master Rowley’s comments in MXX that there is “absolutely no reason why the incurred costs figure should not be accurate” then it is easy to see a potentially toxic mix. The Costs Budget has to be prepared either with the Directions Questionnaire or 21 days before the first CCMC (unless the Court orders otherwise). This means a scenario where a portion of the incurred costs will be estimated. It does not take much to realise that this opens up a proverbial can of worms. Indeed incurred costs which do not match precisely are likely to be more common place and not less in light of the proposed rule amendment.
By the same token though Master Rowley held it was unrealistic to vet all of the time given the 1% cap for preparing the Precedent H. How is this to be balanced? One way is to part prepare the Bill of Costs at the same time as drafting the Costs Budget. The Bill preparation time is separate to the 1% so you have the time to ensure everything is accurate and it has the added bonus that it speeds up the preparation of the Bill at a later point as it is already part drafted. This is an approach we often take here at PIC.
It’s also worth noting that whilst the Master here found the discrepancies in incurred costs had little effect the Court can take into account the level of incurred costs when setting the estimated amounts at the CCMC. Tactically then, getting the level of incurred costs right is important else you could lose out on some budgeted costs which are more likely to be recoverable. In this way you could end up with a doubly whammy of self-reduced incurred costs and losing out on future costs which may have otherwise been recoverable (had the Court approved a higher budgeted allowance).
The other point of note pertains to the fact that blended rates should not be applied to incurred costs. It seems common sense as to do so invariably impacts on the indemnity principle. The sanction is documented both here and in Tucker and could see the time spent relating to costs management disallowed. More than this though repeat offenders could find themselves embroiled in uphill battles during costs negotiations and assessment.
The key message is to ensure that your Costs Budget is prepared correctly in the first instance. Any discrepancies are likely to be picked upon by the Defendant which could lead to protracted costs litigation and possibly even a sanction. Put simply why run the risk?
If you’re in any doubt or have any concerns in relation to Costs Budgeting and Costs Management, then do not hesitate to get in touch.