COST BITES 1: USE OF A PARTNER IN A BOUTIQUE FIRM CAN LEAD TO LOWER COSTS

There are many cases in which judges make observations about costs which merit wider circulation.   This series looks at those kinds of matters.  It starts by looking at the observations of Mr Justice Foxton in Hotel Portfolio II UK Ltd & Anor v Ruhan & Anor [2022] EWHC 1695 (Comm). There are some important points made about costs generally in this part of the judgment, in particular about the use of partners in a boutique litigation firm.

“While Mr Ruhan has suggested that the percentage of partner time at 45% is too high, it is necessary to have regard to the use of a small, boutique, firm of solicitors by HPII, with Mr Russell as an ever-present in a lean team. That model can sometimes involve a higher proportion of partner time but a lower overall level of costs than using a medium or large city firm. Viewed in this context, I am not persuaded the 45% figure is too high (and I note that it is considerably less than the 69% of partner time incurred by Mr Stevens, who also instructed a small, boutique, firm of solicitors).”

THE CASE

The judge had given judgment in a dispute relating to allegations of breach of fiduciary duties following the development of hotels. He was considering an application for an account of costs.

THE JUDGMENT ON COSTS

1. 1. There is no dispute that the court should order payments on account of costs in HPII’s favour under CPR 44.2(8). As the commentary to the White Book notes at 44.2.12:

“Necessarily, the determination of a “reasonable sum” involves the court in arriving at some estimation of the costs that the receiving party is likely to be awarded by the costs judge in the detailed assessment proceedings or as a result of a compromise of those proceedings. In a case of any complexity, the evidence and submissions arguably relevant to that exercise may be extensive. The court has to guard against the risk that it may be drawn into costly and time-consuming “satellite” litigation. There is no rule that the amount ordered to be paid on account should be the “irreducible minimum” of what may be awarded on detailed assessment (Gollop v Pryke, (Warren J)) …. [A] reasonable sum would often be one that was an estimate of the likely level of recovery subject, to an appropriate margin to allow for error in the estimation. This can be done by taking the lowest figure in a likely range if the range itself is not very broad. In determining whether to order any payment and its amount, account needs to be taken of all the relevant factors including the likelihood (if it can be assessed) of the claimant being awarded the costs they seek or a lesser and if so what proportion of them; the difficulty, if any, that may be faced in recovering those costs; the likelihood of a successful appeal; the means of the parties; the imminence of any assessment; any relevant delay and whether the paying party will have any difficulty in recovery in the case of any overpayment.”

1. 1. HPII filed evidence in the form of the thirteenth witness statement of Mr Russell of Spring Law dated 25 May 2022 to the effect that its costs of these proceedings come to some £3,258,878.80, excluding the costs of providing the Deeds of Indemnity. Arriving at that figure has understandably required the allocation of certain categories of costs incurred for more than one purpose, and the exclusion of costs which would not be recoverable on assessment. Mr Russell explained in his witness statement and a detailed appendix the steps which have been taken to identify the recoverable costs of these proceedings for the purposes of the payment on account application (it being HPII’s position that a pragmatic approach has been adopted for this purpose, without prejudice to HPII’s entitlements on any detailed assessment). This has involved:

i) excluding in their entirety HPII’s costs in unsuccessfully seeking to resist applications for security for costs and in seeking fortification;

ii) splitting certain heads of costs on a 50:50 (or in some cases 75:25) basis as between these proceedings and the SFO Proceedings;

iii) allowing for costs recovered from the respondents to certain s.236 applications; and

iv) excluding the costs of preparing material which in the event was not deployed.

1. 1. My general impression is that Mr Russell had conducted a careful and conscientious exercise with a view to arriving at the costs recoverable in these proceedings. However, it will be apparent that doing so had involved a number of judgments, and it is possible that a Costs Judge might reach different conclusions on these issues to those reached by Mr Russell.

1. 1. In addition, Mr Kokelaar has raised issues of principle as to whether certain categories of costs are capable of being “costs of and incidental to the proceedings” for the purposes of s.51 of the Senior Courts Act 1981.

1. 1. First, the costs of the application to restore HPII to the register for the purpose of pursuing these claims. I see scope for argument as to whether or not these fall within s.51, and in my view that issue of principle is best assessed by a Costs Judge who will have greater visibility as to the purposes of the restoration application (and how far it was also concerned with other claims). I will therefore remove these (in the amount of £13,000) for the purposes of the payment on account application.

1. 1. Second, solicitor’s costs incurred in arranging funding and ATE insurance. Mr Kokelaar argued that funding costs are not recoverable (referring to Hunt v RM Douglas (Roofing) Ltd (1987) The Times, 23 November, cited in Motto & Ors v Trafigura Ltd and Anr [2012] 1 WLR 657, [105], [107]) because such costs are ultimately attributable to litigant’s need to fund the litigation as opposed to being a cost of the litigation. In reliance on an observation in Motto, he argues that legal costs in negotiating or arranging funding are similarly irrecoverable. Mr Hodge (who argued the costs issues on HPII’s behalf) accepts that this is an arguable point, and one best determined by a Costs Judge. I have therefore left these costs out of account when assessing the amount of the payments on account.

1. 1. Third, he suggests that the costs in row 5 of schedule 2 of the appendix were undertaken by the liquidator in general factual investigations and are not recoverable. However, I am satisfied that a proportion of that work was concerned with pre-action investigation of the claims against the Defendants, and to that extent is recoverable. The issue of what the right proportion is raises the same issue of judgment which applies when allocating other heads of recorded costs between different purposes.

1. 1. Fourth, he argues that costs incurred in connection with section 236 applications are not recoverable because they are costs of other proceedings. I accept that a party who, for example, seeks to pass on the claim brought against it to a third party in another set of proceedings cannot recover the costs incurred in the second set of proceedings as costs of and incidental to the first set (Aiden Shipping v Interbulk [1986] 1 AC 895, 981). However, s.236 proceedings are not substantive proceedings, but applications to enforce the liquidator’s statutory right to obtain documents from certain categories of persons who are under a legal duty to assist the liquidator in the liquidation. Where (as here) the purpose of seeking the documents under s.236 is to investigate and advance a legal claim, I see no reason why these are not costs of and incidental to that claim. The purpose of such applications is very similar to that of applications for third party disclosure under CPR 31.17, ‘subject access requests’ under the Data Protection Act 2018 which are an increasingly common feature of litigation or Norwich Pharmacal applications. Subject to issues of reasonableness and proportionality, I do not see why costs of these kinds incurred for the purposes of litigation are not capable of being costs “incidental to” that litigation The documents obtained through the s.236 requests in this case were vital to HPII’s case, producing a number of documents which shed crucial light on the true position, including documents to which one or other defendant was a party which had not been disclosed by them (see e.g. Judgment, [125]). I see no reason why this head of costs would not be recoverable on a detailed assessment.

1. 1. Making the adjustments I have indicated, with some rounding down, I will reduce HPII’s headline costs figure for payment on account purposes to £3,000,000. So far as that figure is concerned:

i) The hourly rates are in line with current Commercial Court guidelines.

ii) While Mr Ruhan has suggested that the percentage of partner time at 45% is too high, it is necessary to have regard to the use of a small, boutique, firm of solicitors by HPII, with Mr Russell as an ever-present in a lean team. That model can sometimes involve a higher proportion of partner time but a lower overall level of costs than using a medium or large city firm. Viewed in this context, I am not persuaded the 45% figure is too high (and I note that it is considerably less than the 69% of partner time incurred by Mr Stevens, who also instructed a small, boutique, firm of solicitors).

iii) I accept that the post-judgment costs of £383,238.22 seem high given the relative lack of activity over that 4 month period and I have concluded it would be appropriate to make an adjustment in my starting point to allow for a potential reduction in this figure on detailed assessment (reducing it to £2.9m).

1. 1. I have taken the other matters into the account, and the issues which might arise as to the allocation of the costs of common work streams between different cases, in arriving at a percentage figure. While HPII has an order for indemnity costs, that of itself will not impact on the allocation issues (otherwise a claimant who incurred common costs in two sets of litigation and obtained orders for indemnity costs in both would be recovering more than the costs actually incurred), albeit it will have a positive impact so far as HPII is concerned when issues of reasonableness are raised.

1. 1. Taking all of these matters into account, I am satisfied that it is appropriate to order a payment on account of costs excluding the costs of the Deeds of Indemnity of 70% of £2.9m, and I will round the resultant figure to £2m. A payment on account in that amount will be made against both Defendants on a joint and several basis. Once again, HPII has undertaken to keep each Defendant informed about any payment made by the other.

1. 1. So far as the Deeds of Indemnity are concerned, Mr Hodge asks the court summarily to assess those costs now. As this figure is in the nature of a disbursement, there is limited scope for the Defendants to challenge these costs. The burden lies on the Defendants to establish that they were unreasonably incurred and the figure of the 10% is in line with my own experience of costs of this kind. However, in circumstances in which I am not summarily assessing the entirety of the costs, I have decided I should order an interim payment on account of these costs as well, but one which reflects the limited scope for dispute. Accordingly:

i) Mr Ruhan will be required to pay £108,000 (90% of £120,000) by way of a further interim payment in respect of the costs of the Deed of Indemnity provided in his favour; and

ii) Mr Stevens will be required to pay £162,000 (90% of £180,000) by way of a further interim payment in respect of the costs of the Deed of Indemnity provided in his favour.

Time for payment

1. 1. The Defendants have been aware of the level of HPII’s costs since the Pre-Trial Checklists were filed for the PTR in October 2021, and have been aware of the outcome of the trial since 14 February 2022. Accordingly I see no reason to grant any period longer than 28 days for payment on the costs order.

Interest on costs

1. 1. I am satisfied that the Defendants should be required to pay simple interest on recoverable costs incurred by HPII from the date of payment. The Defendants faintly argued that no order was appropriate in this case because HPII’s costs had been met by a funder. However, I am satisfied that it would not be appropriate to take this issue into account. This is a case in which funds have been expended to meet HPII’s legal costs under a commercial arrangement entered into by HPII to secure funding for those costs. That arrangement (which might have been a loan, but in this case would have involved assigning a share of HPII’s recovery to the funder) does not mean that HPII has not been “out of pocket” in respect of legal costs (and indeed the logical extension of the contrary argument would be that HPII should recover no costs at all because such a claim would fall foul of the indemnity principle).

1. 1. For these reasons, I am satisfied that it is appropriate to make an order in terms of paragraph 16 of HPII’s draft order under which:

i) Simple interest on costs will be paid at 2% over the Bank of England base rate from the date of payment of such costs by the claimants to their legal representatives until 28 days from the hand-down of this judgment.

ii) Interest under the Judgments Act 1838 is payable on the overall outstanding balance of the amount ordered to be paid on account, to run from 28 days from the date of hand-down of this judgment to the date of payment.

iii) Simple interest will continue run on the balance of costs recoverable by the claimants (above the payment on account) at 2% above the Bank of England base rate for a period of 12 weeks from the date of hand-down of this judgment and at the Judgments Act 1838 rate thereafter.