By Sean Linley, Costs Draftsman 
An important lesson for litigators in the SCCO decision of ST v ZY [2022] EWHC B5 (Costs) (21 February 2022) where Senior Costs Judge Gordon-Saker, found that a solicitor could not recover costs incurred in excess of the approved Costs Budget, by way of a shortfall where there had been failure to clearly advise the Claimant that "the budget was being exceeded by a wide margin and that, as a result, those costs might not (and, indeed, almost certainly would not) be recovered from the Other Side". It was not enough to advise the Claimant that "some costs might not be recovered from the other side". 
The case of ST v ZY [2022] related to a claim arising from a Road Traffic Accident involving a minor. A costs claim of £187,506.24 was made by the Claimant's solicitor with the sum of £132,000.00 (inclusive of interest and costs of the assessment proceedings) agreed with the Defendant. This left a short-fall of over £55,000.00. The Claimant solicitor sought approval from the Court to recover a short-fall capped at £53,719.16 (inc. VAT), a success fee of 12.5% and the ATE premium. Approval of the between the parties sum was also sought (and later given).  
The Court noted that there were significant over-spends in the Issue/Statements of Case, Witness Statement and ADR/Settlement phases which totalled £31,304.68 (exc. VAT).  
In addition it was noted that the costs of preparing the costs budget and subsequent costs management (the 1% and 2% caps) had been exceeded by over £11,000.00. The Claimant solicitor conceded this over-spend between the parties but claimed it as part of the short-fall.  
Senior Costs Judge Gordon-Saker stated that: 
"38. Not surprisingly, in her points of dispute, the Defendant relied on CPR 3.18(b) which provides that on detailed assessment the court will not depart from the approved budgeted costs unless satisfied that there is good reason to do so. 
39. In their reply, filed on ST’s behalf, IM advanced no argument that there was a good reason to depart from the budget in relation to the issue/statements of case and ADR/settlement phases and offered to accept the approved figures. In doing so they conceded £25,052.69 which they now seek to recover out of C’s damages." 
It was noted that: 
"[The Claimant] was told that there would be a shortfall and the letters estimated what the shortfall would be. In March 2020, the month before the claim was settled, the shortfall was estimated at £43,500 plus value added tax." 
The Law 
The Court then considered the provisions of CPR r46.9(3) which provides that in a solicitor own client assessment: 
"Subject to paragraph (2), costs are to be assessed on the indemnity basis but are to be presumed – 
(a) to have been reasonably incurred if they were incurred with the express or implied approval of the client; 
(b) to be reasonable in amount if their amount was expressly or impliedly approved by the client; 
(c) to have been unreasonably incurred if – 
(i) they are of an unusual nature or amount; and 
(ii) the solicitor did not tell the client that as a result the costs might not be recovered from the other party." 
The Claimant's solicitor sought to argue the "excess costs (over both the budget and the caps) were neither of an unusual nature nor of an unusual amount." The Court agreed that they were not of an unusual nature and accepted that "the excess costs were incurred in respect of the sort of work that would usually be done". 
The Claimant then sought to contend that: 
"46 [...] “unusual amount” should be read in the context of “unusual nature”. I can see no reason for that construction. It seems to me that the purpose of the rule is to apply the presumption that the costs were unreasonably incurred if they were unusual and the client was not told that they might not be recovered from the other party by reason of being unusual. Costs can be unusual either because of their nature (not of a type usually incurred) or because of their amount. Paying a brief fee of £50,000 when the usual fee would be £5,000 would be unusual and one can easily see that the solicitor should be at risk if the client is not informed that the fee might not be recovered because of that. The amount can be unusual without the nature being unusual. 
47. Mr Waszak also submitted that “unusual” should be read as being between solicitor and client. However that seems to me to ignore the purpose of the rule. To avoid the presumption the solicitor is required to explain to the client that the costs may not be recovered because they were unusual. “Unusual” must therefore be read in the context of a between the parties assessment. Of course we are not here concerned with costs which are merely “unreasonable”. A solicitor is not required to inform the client that particular costs may not be recovered because a court may conclude that they were not reasonably incurred or reasonable in amount. 
48. Finally Mr Waszak submitted that the costs overall were not unusual. That, it seems to me, is not the test. The question is whether particular costs were unusual in nature or amount. There is unlikely to be a case where all of the costs are unusual in nature or amount." 
Senior Costs Judge Gordon-Saker considered matters and concluded that: 
"49. Were the excess costs unusual in amount? In my judgment they were. In approving the budget at £53,401.72, rather than at £147,981.50, [4] the court arrived at the figures which it considered would be reasonable and proportionate to take the case to trial. In respect of issue/statement of case, that reasonable and proportionate figure was exceeded by over 100 per cent. In respect of witness statements, the reasonable and proportionate figure was exceeded by over 400 per cent. In respect of ADR/settlement, the reasonable and proportionate figure was exceeded by over 150 per cent. These figures are so far over what they should be, and what the court has already decided that they should be, that they must be unusual in amount. 
50. I accept that IM did tell ST throughout that there would be costs which would not be recovered from the Defendant and which would be deducted from the damages. At the initial discussion about funding [5] ST was told that: 
“we would hope to conclude this case without incurring any significant amount of costs and so hopefully any shortfall will not equate to much in relation to the compensation”. 
51. In the costs update letter dated 12th July 2019 IM wrote: 
“Now that your case has been issued in Court, it is possible that the Court will set a budget which limits the amount of costs that the parties would have to pay to each other. We will advise you of this further if and when it arises.” 
52. In the costs updates ST was given specific estimates of what the shortfall would be. In March 2020 the estimate was £43,500 plus value added tax. The shortfall claimed is £53,719.16 including value added tax, so the final estimate before settlement was very close. I have found nothing to suggest that ST was told about the budget or about the effect of the budget. 
53. To avoid the presumption applied by CPR 46.9(3)(c), the solicitor must tell the client that as a result the costs might not be recovered from the other party. That must mean as a result of their unusual nature or amount. Telling the client that some costs might not be recovered from the other side is not sufficient. ST should have been told that the budget was being exceeded by a wide margin and that, as a result, those costs might not (and, indeed, almost certainly would not) be recovered from the other side. 
54. Accordingly, in my judgment, the costs in excess of the budget and in excess of the caps imposed by CPR 3.15(5) are to be presumed to have been unreasonably incurred. 
55. I should add that I think it very surprising that a solicitor would not tell their client that the budget had been exceeded and that the costs in excess of the budget would not be recoverable. At that point the client is moving from pursuing a claim in which reasonable and proportionate costs will be recoverable to a claim where no further costs will be recoverable in respect of some or all of the phases. 
56. Instead IM appear to have been happy simply to ignore the budget and incur costs which they would or should have known would not be recovered from the Defendant.
The Court was unequivocal. If a solicitor is to over-spend in a Costs Budget then it must make crystal clear to the client responsible for those costs that the budget has been exceeded and that costs in excess of the budget will likely not be recoverable. The client should be told what the level of anticipated over-spend is. It is NOT sufficient to simply state some costs will not be recovered.  
This should be a warning to litigators in all cases with a Costs Management Order and not just those requiring Court approval, where a short-fall will be sought from the client. The Court is clear in the requirements of a solicitor where there is an over-spend and there will be vulnerabilities as to recovery of any short-fall where the Court's guidance goes unheeded.  
We are always happy to have a no obligation chat about how we may be able to assist with all aspects of costs litigation. You can give us a call on 01482 534567 or email for a friendly discussion with our experienced team. 
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