Client costs estimates

Much has been written on the subject of costs estimates provided to the court and one’s oppenent in litigation and this is an important subject. However, to consider so called inter partes estimates in isolation is to miss the equally important subject of solicitor/client estimates. The recent decision in the Supreme Court Costs Office case of Mastercigars v Withers LLP (2007) may bring this subject back to the forefront of solicitor’s minds.

The case concerned the assessment of 16 bills presented to the Claimant by the Defendant for work done totalling over £1 Million. A preliminary issue was the effect of an estimate of costs provided to the Defendant in May 2005 for a total of £206,570.

The Defendant sought to argue on the basis of 2 principal submissions. Firstly, it was argued that the way the case developed between the estimate in May 2005 and the final trial meant that considerably more work had to be done than had been anticipated. Most obviously, the estimate was based upon a 4 day trial whereas in fact that trial had actually lasted 18 days. There was also much more work done in relation to obtaining evidence from witnesses, many of whom were based in Cuba. Finally, it was argued that the estimate, crucially, did not take account of the additional costs of instructing a QC and this was expressly mentioned in the covering letter that accompanied the estimate.

The need to conduct additional work was accepted by both sides but the issue regarding Counsel’s fees was not. Under cross examination, the Defendant was forced to concede that Counsel’s fees were in fact less than the amounts contained in the estimate and therefore could not possibly account for the difference between the estimate and the final bills. This damaging concession did much to weaken the force of the Defendant’s submissions generally and the Court specifically commented that the credibility of the Defendant’s witness was undermined by this climbdown.

The second submission on behalf of the Defendant was that the Claimant had been aware of the increasing costs. It was submitted that Mr Kenyon, who was the managing director of the Claimant and who gave evidence on behalf of the Claimant, was actively involved in the day to day running of the litigation and was therefore aware of the changing nature of the case. Mr Kenyon was, it was submitted, an experienced businessman who should have actively requested an updated estimate as the case became more complex. Furthermore, it was contended that Mr Kenyon had, in fact, received a copy of a much higher estimate provided to the Court at the listing stage and was present in court when it was handed in. This was disputed by the Claimant and crucially, the Defendant could not provide any contemporaneous attendance notes to support this contention. The Court commented that, absent such attendance notes, the evidence in support of this contention must be treated with caution. The judge added that, in litiagtion involving such sums of money and of such complexity, the absence of attendance notes was surprising.

The Claimant’s argument was very simple. They had been given an estimate of costs and, whilst Mr Kenyon may have been involved in the litgation, he was not made aware of the additional costs that were being incurred. The requirement of the Client Care Code to give the client accurate and up to date costs estimates was emphasised and a failure to do so should limit a client’s costs liablity to the estimate provided. It was not for the client to request an updated estimate, rather it was the duty of the solicitor to provide one.

The Court concluded that the Claimant’s submissions were correct. Being aware of the fact that the case was becoming more involved and might be incurring additional costs was not the same as being made aware of the extent of their additional costs liablity. There was no cogent evidence that the Claimant had received an updated estimate and therefore the Claimant’s costs liablity would be limited to the estimate provided, subject to the specific concessions made by the Claimant.

The potential ramifications of this decision cannot be overstated. This was a complex piece of commercial litigation with a client who was experienced and fully involved in the litigation. Nevertheless, he had been given an estimate of the likely cost and, absent an express revision of this estimate, was entitled to rely on the same. The failure to provide an updated estimate resulted in a loss of up to £800,000 of costs to the solicitor, not because of the way they had conducted the litigation, but for a failure to comply with the Client Care Code. The solicitor giving evidence for the Defendant had admitted that, whilst he was familair with the requirements of the code and sought to apply it to all cases, he could not actually recollect the precise details of what it required him to do. One suspects he will now be very familair with those requirements.

In fact, the requirements in relation to giving costs information have changed and can now be found in section 2.03 of the all new Solicitors’ Code of Conduct:

There is, however, a potential escape clause at section 2.03 (7)

The new requirement also contains a potentially important, albeit small, change. The Client Care Code said that a solicitor ‘should’ give the client the best information possible, whereas the new section 2.03 says that the solicitor ‘must’. The distinction may be important.

In the Court of Appeal case of Garbutt v Edwards (2005), it was held that a failure to provide an estimate to one’s client at all did not invalidate the retainer between the client and the solicitor. This was based on the fact that the requirement to give an estimate was not mandatory and was merely directory, meaning that a failure to comply did not necessarily result in a breach of the rules. This was important because the Solicitors Practice Rules have the force of subordinate legislation, Swain v The Law Society (1983), and therefore any breach of the rules potentially invalidates the entire retainer. In light of the new wording of section 2.03, is it open to argue that a failure to provide mandatory costs information invalidates the retainer such that no costs are payable at all? One suspects that the Courts will not be keen to reach such a conclusion but it would be interesting to see how the courts would decide such a question.

Finally, there is the vexed question of how does this affect the liability of one’s opponent. If the costs of the Defendant in this case were being paid by the other party to the litigation, would their liability have been similarly limited? The indemnity principle would suggest yes. If Mastercigars owed their solicitors £200,000, another party simply cannot be liable for a sum in excess of this amount.

However, the Court of Appeal in Leigh v Michelin Tyres (2003) have expressly disavowed the concept that a party’s liablity for their opponent’s costs is limited to the level of an estimate provided to them. How does one square the circle? If the same estimate is given to the court, the opponent and one’s client at allocation and the case settles shortly thereafter with costs greatly in excess of the estimate, the client’s liablity would seem to be limited to the level of the estimate but the paying party’s liablity is not. This is a fundamental breach of the indemnity principle and cannot be correct. The Court of Appeal in Garbutt were at great pains to stress that the requirements to give estimates in the Solicitor’s Practice Rules were for the protection of the interests of clients, not for the benefit of paying parties to avoid their costs liablity. This argument, in various forms, has been a theme of the running battle between Claimants and Defendants in the Conditional Fee Agreement costs war where Defendants were accused of seeking to obtain a windfall from failings that were properly a matter between a solicitor and their client. The answer is that the indemnity principle makes the two inseparable. A paying party’s liability for costs is tied to the client’s liability to their solicitor. If there is a reason why the client’s liability is limited, where an estimate is too low or there is a failure to advise properly in relation to a Conditional Fee Agreement, then the paying party is entitled to the same limit on their liablity. Whilst the indemnity principle continues, so will this apparent dichotomy.

Paul Jones
Technical Director
LCN

Cases Cited:

Mastercigars v Withers LLP (2007) (SCCO) 25/4/07 (Unreported)
Garbutt v Edwards [2005] EWCA 1206
Leigh v Michelin Tyres [2003] EWCA Civ 1766
Swain v The Law Society [1983] AC 598