Accurate Costs Estimates: the Reynolds case

In the Queen’s Bench Division case Reynolds v Stone Rowe Brewer (A Firm) [2008] EWHC 497, Tugendhat J addressed not only the importance of providing accurate costs estimates for clients from the outset of their case, but also the effect of providing updated or revised estimates as their matter progresses. As a result, this judgment must be treated by all solicitors as a strict reminder of our professional obligation to provide accurate costs information to our clients.

The starting point when looking at costs estimates is found in the Solicitors’ Code of Conduct 2007 which came into force on 1 July 2007. As such, in accordance with r 2.03 of the Code, solicitors are obliged, as a matter of professional conduct, to give clients, ‘the best information possible about the likely overall cost of a matter both at the outset and, when appropriate, as the matter progresses.’ Unfortunately, the phrase ‘best information possible’ is not defined in the rules and so solicitors must take heed of guidance offered by the courts in recent case law. In Reynolds Tugendhat J considered previous authorities dealing with costs estimates and in particular looked at the following three important decisions.

(1) Wong v Vizards [1997] 2 Costs LR 46: the solicitors had expressly provided the client with an estimate on a ‘worst case basis’ and Toulson J (as he then was) had to consider whether it was unreasonable for the client to be charged more than the estimate provided on this basis. While accepting for the solicitors that the estimate must not be treated as a binding fee agreement, Toulson J confirmed that it amounted to a clear and considered indication to the client of his maximum costs liability upon which the client had placed reliance. Toulson J also confirmed that the solicitors were not entitled to claim costs which varied substantially from previous estimates without prior warning to the client, especially where the estimate had been provided on a ‘worst case’ basis. Taking all of this into consideration Toulson J allowed the solicitors a margin of approximately 15% over the worst case estimate provided but no more.

(2) Anthony v Ellis and Fairbairn (A Firm) [2002] 2 Costs LR 277: Sir Oliver Popplewell adopted the Wong principle when considering a bill delivered which was greatly in excess of the estimate provided at the outset of the proceedings. As Tugendhat J points out in Reynolds, Sir Oliver Popplewell drew assistance from Wong in that, ‘the sum claimed by the solicitor ought not to vary substantially from that previously estimated without prior warning to the client, more especially if that estimate was expressed to be on a worst case basis’. Sir Oliver Popplewell also adopted a margin of approximately 15% over the estimate as being the proper figure which the solicitors could claim.

(3) Mastercigars Direct Limited v Withers LLP [2007] EWHC 2733 (Ch): Mastercigars had instructed Withers in relation to a trademark dispute. On appeal, Morgan J stated that solicitors are entitled to receive reasonable remuneration for their services in accordance with s 15 of the Supply of Goods and Services Act 1982. In deciding what is reasonable, he referred to the earlier case of Leigh v Michelin Tyre Plc [2003] EWCA Civ 1766 in which Dyson LJ said an estimate may be a useful yardstick by which to measure the reasonableness of the costs being claimed. Morgan J accepted on the one hand that an estimate is one of the factors to be taken into account when assessing the reasonableness of costs, but on the other hand he rejected the idea that solicitors are automatically entitled to add a margin on top of their estimate and in doing so he confirmed that the greater the margin by which the bill exceeds the estimate, the greater the explanation required from the solicitor.

The facts and judgment in Reynolds
In September 2004 Tracy Reynolds instructed Stone Rowe Brewer (SRB) in connection with a dispute she had with a building contractor whom she had employed to refurbish her residential property in Kew. In December 2004 SRB sent out their advice on going forward and confirmed by way of costs estimate that, ‘If the matter did proceed through to a trial, it is more than likely that your costs would be in the region of £10,000 to £18,000 plus VAT, and this is only of course an estimate which could be increased depending on how strenuously the matter is defended.’ As the case progressed, SRB regularly invoiced Tracy Reynolds and informed her in correspondence that their costs estimates must be revised due not only to changes in the case and unexpected events, but also due to her demanding nature (for example they referred to the large volume of detailed correspondence received from her). As such, between November 2005 and August 2006 SRB revised their costs estimates on no less than four occasions as follows:

• 29 November 2005 – £25,000 to £30,000 plus VAT;
• 29 March 2006 – £35,000 to £40,000 plus VAT;
• 30 June 2006 – up to £60,000 plus VAT;
• 31 August 2006 – £55,000 plus VAT

By September 2006 the running billed costs had risen to almost £60,000 of which the sum outstanding to them was just over £25,000 including VAT. SRB refused to act further and new solicitors were instructed who assisted Tracy Reynolds at trial where she succeeded on all elements of her case and was awarded damages in excess of £55,000.

On assessment, Master Rogers confirmed that, ‘the whole point of the estimate situation is that they [clients] should be kept informed as they go along so that they can indeed decide if they want to bring an end to the litigation’. Whilst Master Rogers accepted that costs can go up, he stressed that the problem rests with clients not being informed of the true extent to which their costs are rising so they are not in a position to make a ‘meaningful decision’ on whether to continue with the litigation. Taking this all into account, Master Rogers concluded that SRB had given an original estimate upon which Tracy Reynolds was entitled to rely and on this basis they were bound by the original estimate of £18,000 plus the 15% margin available under the established Wong principle. He allowed the 15% margin, ‘because estimates are estimates and cannot be accurate’.

SRB appealed on the basis that Master Rogers had not given a reasoned judgment and nor had he taken into consideration the fact that they had provided Tracy Reynolds with regular estimates and revised costs information as the matter progressed. However, on appeal at the High Court, Tugendhat J upheld Master Rogers’ decision and confirmed that the costs judge had asked himself the correct question: what in all the circumstances is it reasonable for the client to be expected to pay? In answering this question he confirmed that the costs judge, ‘was entitled to have regard to the estimates’ provided to the client. By considering ‘the interpretation’ which the parties put on the original estimate given at the outset of the case Tugendhat J concluded that the revised estimates were merely attempts to correct the earlier under-estimate and they were not attributable to any significantly unusual developments or change in the facts. He agreed that the costs judge was fully entitled to come to the view that had SRB followed the rules relating to the professional conduct of solicitors and provided a correct estimate to the client from the outset, then Tracy Reynolds would not have acted as she did and she would not have pursued the litigation because she would not have been able to afford to do so. Therefore, Tugendhat J held that as SRB’s original estimate was a considerable under-estimate upon which Tracy Reynolds had reasonably relied, SRB were bound by that original estimate despite providing the client with regular costs estimates and despite having done the work charged for.

Implications
The Reynolds judgment has fundamental implications for all solicitors and careful consideration must be given not only when providing a costs estimate at the outset of a case, but also when revising estimates as the case goes on. While SRB may well have under-estimated their costs at the outset, they provided an initial estimate based on the information available at the time, they expressly confirmed that the estimate could be increased depending on the circumstances of the case and they provided regular costs updates and revised estimates which were not exceeded. It is difficult to see what else they could have done, but the Reynolds decision suggests the answer lies in providing clients with a more detailed and well thought out initial costs estimate, combined with more regular and prompt revised estimates when necessary. This means we must keep a keen eye on costs as the matter progresses and cross-reference our costs with previous estimates given. If an estimate will be exceeded, we must carefully consider whether we can justify the increase and provide a full explanation to the client so that they can make an informed decision on the cost-benefit of going forward.

While it is often very difficult to give a detailed costs estimate when you are first instructed due to the fact that you cannot predict exactly how a case will turn out, the Reynolds judgment reminds us that clients are fully entitled to rely on our initial estimate when making their decision on whether to proceed with a certain course of action, and with this in mind, we must spend time making our initial costs estimates as accurate as possible. We must also provide updated estimates, if necessary, on a more regular basis, before our billed costs exceed our previous estimate. With this in mind, there is a risk that solicitors may now pitch their initial costs estimates too high in order to protect themselves on assessment. The problem with this is that by overstating costs, clients may be forced to take a second opinion from your competitors in the hope that they can under cut a quote. Clients may also be deterred from pursuing the case altogether, even where they stand a good chance of succeeding.

Perhaps the solution to this costs estimate minefield is to provide carefully thought out estimates at the outset by relying on senior colleagues’ actual experience of taking the matter all the way to trial, combined with regular billing and detailed updated estimates at each significant stage of the matter: discussing instructions with supervising partners and Heads of Department to obtain a good indication from them as to how much, in their experience, it will cost to take the matter to trial. Solicitors should consider not only the clarity but also the extent of instructions provided by clients: this would help to decide the appropriate level of detail required for initial costs estimates. If substantial instructions are received then providing a detailed ‘costs plan’ should be considered, setting out specific estimates for each specific stage on a step-by-step basis, accounting for all possible foreseeable eventualities. If, on the other hand, unclear instructions are initially received then the initial estimate could be limited to the foreseeable and anticipated work and the client informed that as the matter progresses, he/she will be provided with a more detailed estimate. While this does not get away from the fact that no matter how hard we try, solicitors cannot predict the unpredictable and nor can we refuse instructions from overly needy and demanding clients who take up significant amounts of our time, we must never forget our professional obligation to provide clients with the ‘best information possible’ in respect of costs.

This article, written by Shelley Cumbers, was first published in Family Law Journal –  January 2009

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