UK: How To Avoid Becoming A Casualty Of The Costs Wars

Among the quickest ways to lose a client or sour a good result are misunderstandings or errors in respect of costs. Worse still, certain errors can expose solicitors to the risk of claims. Despite this, it is surprising how often clients are not kept properly informed. This article acts as a reminder of best practice and the potentially serious consequences of failing to meet the standards required.

Although rarely hitting the headlines, costs errors can and do lead to claims against solicitors - we have seen a number in recent years and they show no sign of abating. It is all too easy to pay lip-service to obligations in relation to costs, but solicitors do so at their peril.

The principal guidance is found at Solicitors’ Practice Rule 15 which provides that solicitors shall give information about costs and other matters in accordance with the requirements of the Solicitors’ Cost Information and Client Care Code 1999 (as amended) ("the Code"). Failure to do so may result in disciplinary proceedings, costs being disallowed and/or compensation being ordered. The Code is of general application and it states certain parts will not be appropriate to every case - the duty is on the solicitor to consider what is appropriate for each client. In addition to some general rules, specific guidance is given in respect of publicly-, third-party-, and privately-funded matters and clients who are represented under a Conditional Fee Arrangement ("CFA").

Practitioners need to be familiar with the whole of the Code, but the key points from the general rules are that a solicitor should:

• at the outset give the best information possible about the likely overall costs and how they will be calculated, broken down between fees, VAT and disbursements. "Best information possible" can include a fixed fee, a realistic estimate, a forecast within a possible range or, if these are not possible, the best information possible about the costs of the next stage of the matter;

• explain whether the fee is an estimate or quotation and explain the difference;

• explore the availability of alternative funding arrangements, even if the firm does not take on the work on that basis; and

• explain any relevant arrangement with a third party such as a funder, fee sharer, or introducer.

In addition to the generally applicable Code, CPR Rules 43 to 48 and the accompanying Practice Directions set out a variety of requirements in respect of costs in litigation. Section 6 of the Practice Direction for Rules 43 to 48 deals with the estimate of costs that should be filed with the allocation and listing questionnaires in multi-track or fast-track cases.

The Practice Direction sets out the format and content of the estimate. It provides that, where a party is seeking to recover costs, if they have previously filed an estimate and the final costs claim exceeds the estimate by 20 per cent or more, that party will have to file a written statement explaining why the estimate has been exceeded. If they fail to do so, or the court is not satisfied by the reasons given, or the paying party demonstrates that it has reasonably relied on the prior estimate, the court may take this as evidence that the costs being claimed are unreasonable or disproportionate and will disallow those costs accordingly (see also Leigh vMichelin Tyre Plc (2003) which provides that if there is a substantial difference between the estimated costs and the costs claimed, the court will look for an explanation. In the absence of a satisfactory explanation the court might conclude that the difference itself is evidence from which it can conclude that the costs claimed were unreasonable). In such circumstances, the finger of blame for the irrecoverable costs is likely to point firmly in the direction of the solicitors.

Tales from the CFA frontline On 1 November 2005, the CFA Regulations 2005 were introduced. They belatedly sought to bring an end to the first "costs war". This had stemmed from challenges to CFAs on the basis that, if there was a material breach of the Regulations, the CFA was unenforceable as against the client and, as a result, in accordance with the indemnity principle, also unenforceable against any party ordered to pay that client’s costs. Essentially, the change revoked the previous costs Regulations and left the requirements to be determined by the Code. However, many believed that this might simply create the climate for a second costs war where liability insurers would argue that the court should find CFAs to be unenforceable for breaches of the Code in precisely the same way as they had previously done for breaches of the Regulations.

Garbutt v Edwards (2005) was not a CFA case but did deal with this issue. The paying party claimed that the receiving party had not received a costs estimate from his solicitor, contrary to the requirements of the Code. The solicitor also failed to serve an estimate of costs at the application and listing questionnaire stages, in breach of the requirements of the CPR. The paying party argued that a solicitor who had breached the Code was not entitled to recover his fees and that, therefore, the indemnity principle prevented the receiving party from recovering those costs. The Court of Appeal held that a failure to observe the Code did not render the retainer unlawful and, therefore, the costs were recoverable. However, the Court did confirm that it was a question for the discretion of the judge assessing costs to determine whether a reduction should be made where those costs would have been significantly lower if an estimate had been provided. In doing so, the Court recognised that a failure by a solicitor to comply with the Code could potentially leave a client out of pocket.

In the jointly-heard appeals of Myatt v National Coal and Garrett v Holton Borough Council (2006) concerning CFAs, the Court of Appeal, in an attempt to avoid further satellite litigation on costs, found that the extent of the enquiries required by a solicitor into the existence of before-the-event ("BTE") insurance would depend on the particular circumstances of each case and that the relevant factors included:

• the nature of the client;

• the circumstances in which the solicitor was instructed;

• the nature of the claim; and

• the cost of the after-the-event ("ATE") insurance premium.

In Myatt, although there was no BTE insurance, the Court of Appeal found that the solicitors had failed to investigate sufficiently whether or not the client had any BTE insurance. The Court went on to hold that this was a material breach of the regulations and that, although there was no actual prejudice as no BTE insurance existed, the CFA was unenforceable. In Garrett, it was held that, if a solicitor is obliged to recommend a particular ATE insurance product as a result of being a member of a panel, it is not sufficient to tell the client that the firm is on the panel. The Court held that the solicitor had failed adequately to explain what was involved in panel membership and its significance, and that this was a material breach of the regulations and that the CFA was unenforceable. The House of Lords has recently refused permission to appeal in both cases.

Although the decisions relate to pre- November 2005 CFAs, they provide a useful illustration of the pitfalls for the unwary solicitor, particularly given the wide discretion of the courts in relation to costs. It is all too easy for solicitors to assume that the Code does not apply to them or their clients. Solicitors may, for example, assume that they do not have a duty to consider whether their corporate clients should be advised about the availability of ATE insurance - they do have such a duty and breaching it may well lead to a claim. As reports in the legal press suggest more commercial clients are seeking advice on alternative methods of funding, this is a real issue for all solicitors.

The key lessons to be learned by all solicitors, whether working for individuals or companies are:

• follow the Code, provide the best information possible and confirm any advice in writing;

• ensure that when an estimate of costs is required by the CPR, this is properly prepared and that a copy is provided to your client; and

• keep the client regularly updated and inform them (and, if relevant, the other parties and the court) as soon as it becomes apparent that any estimate that has been given is likely to be exceeded and the reasons why.

Those who wish to challenge costs will face an uphill struggle due to the court’s desire to avoid satellite litigation based upon technical, but immaterial, breaches. The decisions in Garbutt and Garrett provide a theoretical framework for those challenges to be made even in circumstances where no actual prejudice has been suffered but, in practice, claimants alleging negligence will have to prove loss.

As to the second costs war, the battle seems set to continue, albeit perhaps not on the same scale as the challenges to CFAs that occurred previously. By following the guidance given in the Code and the Rules in the CPR, solicitors should be able to maximise their chances of getting through it with their client relationship in one piece.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.