Recovering legal costs successfully

The issue of costs recovery often ends up being a low priority for lawyers, regardless of its importance to their law firms. Here, Richard Allen, a senior consultant with Burcher Jennings and with Virtual Pricing Director, gives a helpful overview of how to recover in full, the legal costs between parties – a subject which many regard as both a mystery and a minefield. (Updated 28 March 2023)

Matters often start out with a stressed client and considerable sums at stake. This, added to the pressures of other clients and cases, means that the focus tends to be on the legal work. Agreeing a detailed retainer and clearly recording costs information is often undertaken with little enthusiasm compared to the case itself.

This leads to mistakes, omissions and cut-corners that reduce the level of costs recoverable. In effect, firms are throwing money away — money that they have earned.

Like so many things, successful costs recovery does not entail a huge effort. It simply requires your team to follow agreed processes that are simple but reliable, and to follow the rules. For example, in multi-track litigation, filing your costs budget a day late without good reason will result in you recovering no costs at all, apart from applicable court fees.

There are two main types of legal costs. ‘Solicitor and client costs’ are where your client simply pays you, usually for non-contentious work. ‘Between the parties’ costs are where you are looking to recover costs from the opposing party, in a contentious matter – usually litigation.

The retainer

This document should set out:

• What work will be carried out - what is the client getting for the fee
• If appropriate, what work is not included - eg tax advice
• Who will do this work - senior and junior fee-earners
• When will it be done - likely timings for each stage of work
• How much it is estimated to cost - your hourly rates, or a fixed fee

Include any proposed updates in hourly rates, by date or period (annually).

In the case of a conditional fee agreement (which provides a description of the cause of action and the proposed defendants) the client must receive a full engagement letter as well.

Clearly set out any assumptions that the costs estimate is based on, as any subsequent changes will be measured against these. For example, a trial might be assumed to last two days with one expert witness and two lay witnesses. If the case changes and becomes witness-heavy, the costs estimate must be reviewed and updated as soon as possible. This is especially the case with proceedings in the multi-track, where a costs budget is required by the court.

One cannot recover from another party more than your own client is liable to pay you as their lawyer. Your retainer is evidence to show that there is no breach of this ‘indemnity principle’.

Proportionality

Pursuing any matter for a client, contentious or non-contentious, always involves issues of economics and value (and for some clients, simple affordability). If your client is hoping to receive £50,000 but may receive only £10,000 or even nothing, what level of legal fees is reasonable?

The Civil Procedure Rules set out what is proportionate and what the court takes into account in deciding the amount of costs (the ‘Pillars of Wisdom’, below). Proportionality depends on the sums in issue, complexity, conduct, non-monetary relief, and reputation or public importance. ‘Any additional work generated or expense incurred due to the vulnerability of any party or any witness’ is also expected to be taken into account before long, as part of an upcoming rule change.

Proportionality applies to any costs assessed by the court on the standard basis (CPR 44.3(2), to protect the paying party from excessive costs. Any doubt about reasonableness is decided in favour of the paying party. In contrast, there is no proportionality in the case of costs assessed on the indemnity basis (CPR 44.3(3), where any doubt about reasonableness is decided in favour of the receiving party.

The court decides the basis of costs to be assessed. The standard basis is the usual basis. The indemnity basis is ordered only where provided by the rules (such as under CPR Part 36.17(4)(b)), or as a matter of discretion to penalise a paying party for their conduct.

How can you satisfy your client that your costs are proportionate?

Hourly rates are loathed by many clients, for the obvious reason that charging by the hour encourages solicitors to spend more time than is really necessary on each matter.

In contrast, ‘value pricing’ and pricing models in general are a real opportunity to create win-win situations that avoid complaints and disputes further down the line. Value pricing aligns a price to what a specific client in a specific matter perceives to be good value. Even in litigation, where costs can be so difficult to predict, some progressive firms still manage to offer fixed fees and other attractive pricing models

Costs management

Costs management is an integral, prescribed aspect of multi-track litigation. The Civil Procedure Rules are extensive and continue to get updated, but there are some basic steps to follow.

Prepare your initial budget in line with your case plan, including all time required, the personnel and the disbursements. The assumptions for your case are already pre-determined by the guidance note to (CPR PD 3E) , which is a must-read for anyone doing budget work. Then, once the work gets underway, use the data from your time recording together with relevant information from your case management system, plus any paper file to capture all of your incurred costs.

Once a case is in progress, immediately apply to the court to vary the budget if developments in the litigation mean that costs are clearly going to change upwards or downwards (CPR 3.15A (1). Speed is important. The court will be less sympathetic in dealing with a retrospective application.

Of course, if your firm lacks the systems and the processes that allow you to track costs progress against the budget, this is far more difficult.

(Rather than applying to vary the costs budget, some litigators prefer instead to argue at the detailed assessment stage why they should recover more in costs than were allowed in a costs and case management order; but this approach has a greater risk of failure.)

"The two quick wins to improve profitability in law firms are typically legal costs management and pricing. Any improvement in either of these goes straight to the bottom line"
Martyn Jennings, chief executive, Burcher Jennings

Conduct

Conduct is the single most important element in justifying the level of costs incurred, where the other side's behaviour has caused costs to increase. This includes conduct before and during the proceedings, as well as the efforts made to try and resolve the dispute (rule 44.4(3)

It can be your salvation when applying to vary a costs budget, opposing proportionality arguments on assessment (CPR 44.3 (5)(d), or demonstrating ‘good reason’ to depart from an approved or agreed budget.

On budgeting, an opponent's ‘oppressive behaviour’ can be relied upon to support an application to vary a budget, where it has caused the applicant to spend money disproportionately (CPR PD3 G13).

Using a costs lawyer

A costs lawyer is a regulated legal professional, overseen by the Costs Lawyers Standards Board and ultimately the Legal Services Board. They are the experts in costs law and practice and can be invaluable for any firm undertaking the recovery of contested costs, whether employed in-house or externally.

Few fee-earners have the time or expertise to deal with the preparation of costs budgets and bills of costs. During the last thirty years, there has been a constant shift between firms employing in-house costs expertise and using external suppliers. Much now depends on a firm’s size, its volume of litigation and therefore the amount of between the parties costs work generated. Most large firms use a combination of both.

What should you consider when instructing a costs lawyer?

• Their areas of specialism. Like solicitors, many costs lawyers are general practitioners and have the depth of experience to deal with any type of costs matter. Others specialise in preparing and arguing costs claims in specific areas of law, such as personal injury and clinical negligence or commercial litigation. Choose a costs lawyer who is knowledgeable in your practice area.
• Accessibility. The digitalisation of the detailed assessment and summary assessment process is continuing apace, so the location of your costs lawyer is less important if you are providing your files and time recording data electronically. However, if you still operate a paper file and often need costs work undertaken on your premises (eg if you cannot release your file while a case is at a critical stage), location is important.
• Digital expertise. With all costs lawyers now preparing an electronic bill of costs (usually with bill drafting software), costs lawyers with strong digital skills are a great advantage. They can utilise the time recording data in XML, CSV or Excel formats and import this into the bill drafting software.
• Cost. Ensure the costs lawyer’s hourly rate and any other charges are both reasonable and proportionate for the type and value of the case being dealt with, so they are recoverable.

Costs assessment

It is often said that if you are attending a costs assessment, then you have failed. It is an overgeneralisation, but there is a lot of truth in this statement. If your bill of costs has been properly prepared, your opponent should know the costs claimed are justified. And if not, your costs lawyer’s pragmatic advice and skilled negotiations should have resulted in a settlement.

A costs lawyer’s job is to present even a badly run case in the best possible light. If there are flaws, these must be highlighted at the outset and sensible advice given regarding what to expect and what to accept in negotiations.

Tactics play their part, but one must not forget the costs risk involved in proceeding to any costs assessment. In larger cases, especially in the Senior Court Costs Office (SCCO), the costs of points of dispute, replies and the assessment hearing can run to several thousands of pounds and sometimes tens of thousands.

Time recording

A costs judge will require evidence of work done and time spent if there is a challenge. So in the matter of costs, “attendance notes are pound notes”.

The minutes soon add up. If ten fee-earners in a firm each omit to record a six-minute unit every day, for forty-seven weeks of the year, that is 235 hours missed in a year. At an hourly rate of £150 per hour, that's £35,250. Time leakage is fee leakage.

Top five time recording tips

• Avoid relying on case management systems that allocate predetermined time for some tasks. Such systems lead to complacency and usually under-value the time spent.
• Don’t allow the pressure of work to result in less detailed recording of the work done. With fee-earners often doing their own typing and time recording entries, this is often a problem area.
• Include why the work was done, what was done, what if any result or conclusion was achieved, and any action points, as well as the time spent. It’s the detail that is important.
• You can recover the time spent preparing time entries, especially those which are substantive and record work that advanced the matter, including routine telephone attendance notes – as well as meetings, hearings, preparation, perusal and consideration time.
• If the other side’s conduct is driving up costs, emphasise this in your attendance notes. Set out your views on the other side’s conduct to them in communications and reserve the right to refer such conduct to the court at any future costs assessment.

See also:

• Pricing for law firms
• Cash flow management for law firms
• Legal cashiering – an overview for partners and managers
• Law firm financing options