In-house legal costs in principle
In this article I consider the recovery of in-house legal costs of an organisation other than one which conducts legal business. I will start by referring to the caselaw which establishes that in principle the costs of time spent by in-house legal staff is recoverable.
In Henderson v Merthyr Tydfil Urban Council  1 Queens Bench Division 434 the litigation was conducted on behalf of the local authority by a solicitor employed as its clerk. The local authority sought to recover the cost of his time. At first instance the Registrar refused to allow this cost on the basis that the local authority was not required to pay the clerk in respect of the litigation. On appeal Mr Justice Channell and Mr Justice Bucknill held that a proportion of the clerk’s salary represented payment for the work on the particular piece of litigation, and allowed the local authority to recover that amount.
In Wiggins Alloys Limited v Jenkins  Industrial Relations Law Reports 275 the Employment Appeal Tribunal held that in Industrial Tribunals, costs of in-house lawyers could recovered just as in other litigation. Mr Justice Browne-Wilkinson, as he then was, said:
“We are satisfied that the Tribunal erred. In ordinary litigation, other than in Industrial Tribunals, it is well established that legal costs incurred in litigation by the use of in-house lawyers are as much recoverable as are the costs incurred by employing independent solicitors. If an order for costs had been appropriate, the costs incurred by the legal department of the employers would have been recoverable costs”
In Ladak v DRC Locums  Industrial Cases Reports D39, the Employment Appeal Tribunal considered whether in-house legal costs could still be recoverable in the Employment Tribunal, which turned on whether they fell within the words of the Employment Tribunal Rules of Procedure 2004, allowing for recovery of “fees, charges, disbursements or expenses incurred by or on behalf of a party”. His Honour Judge Richardson said that in his experience it was not uncommon to see awards of costs in favour of receiving parties who have used in-house legal departments. He could see no reason for doubting the correctness of Wiggins Alloys and held that the costs of an in-house legal department could sensibly be described as a charge or expense upon the employer.
I should also note that there will be cases where some work may be carried out by in-house lawyers and some work by external solicitors. In Ultraframe (UK) Limited v Eurocell Building Plastics Limited  EWHC 90069 (Costs) the Defendants disputed the right of the claimant to receive costs for work done in-house in such circumstances. Master Campbell held that there was nothing to prevent a corporate litigant from dividing the legal work between in-house lawyers and independent solicitors as it thought fit, since it would be anomalous if it could recover costs if it chose to contract the work out but not if it chose to have its own employees carry it out, which might be at significantly cheaper rates. However the court would be astute to disallow the time of any work which had been duplicated.
For what in-house work may costs be recovered?
The principle qualification here is that costs may only be awarded in respect of LEGAL work. To put it another way, costs are the creation of statute, and only expenses which are recognised as legal costs may be awarded. This principle goes back a long way, being traced back to Lord Coke’s Commentary written in about 1628, which stated that legal costs and expenses would extend to all the legal costs of the suit but not to the costs and expenses of the party’s travel and loss of time. In The London Scottish Benefit Society v Chorley (1884) 13 Queens Bench Division 872 Lord Justice Bowen said in relation to Lord Coke’s Commentary:
“His meaning seems to be that only legal costs which the Court can measure are to be allowed, and that such legal costs are to be treated as expenses necessarily arising from the litigation and necessarily caused by the course which it takes. Professional skill and labour are recognised and can be measured by the law; private expenditure of labour and trouble by a layman cannot be measured. It depends on the zeal, the assiduity, or the nervousness of the individual. Professional skill, when it is bestowed, is accordingly allowed for in taxing a bill of costs.
The relevant legislation now is section 51 of the Senior Courts Act 1981, which states that the award of costs, “of and incidental to court proceedings”, shall be in the discretion of the court. What counts as “costs” is not defined but legal costs have been distinguished from the costs of being a litigant. In Hunt v R M Douglas (Roofing) Limited, The Times 23 November 1987 Lord Justice Purchase said:
“Certain costs incurred by a litigant in person have never been considered as falling within the category of ‘legal costs’. These are immediately discernible, eg the litigant’s personal expenses of travel to court, his loss of time at court and his loss of earning or profit in whatever capacity he may operate. He has never been allowed to claim in a Bill of costs these items where they arise solely from the occurrence of the litigation.”
To try to put this in more concrete terms, one organising principle in the case of in-house lawyers is that costs may be recovered for work done as the lawyer, but not for work done as the client.
Thus for example work in obtaining factual information about the case from colleagues in the organisation would probably be irrecoverable, as part of the principle that the cost of marshalling the facts is not recoverable, being a cost of being a litigant: see Richards v Wallington (Plant Hire) Limited v Monk & Co (1984) Costs Law Reports, core volume 79. The litigation related to the construction of a bypass and part of the costs sought comprised the cost of time spent by two employees, albeit as more in the nature of expert work than legal work, being described as follows:
Mr Kottler was concerned with the overall presentation and formulation of the claim. He was deciding how it should be put, how it should be presented and what information was needed in order to present the claim and formulate it in accordance with his decisions. Mr Atkinson was performing a subsidiary role, in effect, of digging out the information which was necessary in order to put flesh on the skeleton delineated by Mr Kottler: he was going into the papers and searching and excavating in order to find the factual material necessary to present the claim in accordance with Mr Kottler’s decision.
Mr Justice Bingham, as he then was, said:
“essentially what Mr Atkinson and Mr Kottler were doing, as I understand it and as I think the master understood it, was to dig out the basic factual material which was necessary to prove the claim and on which Mr Quinlan’s expert evidence was to rest. I have no doubt that a great deal of work needed to be done, part of this perhaps being attributable to the difficulties of proof in which Richards & Wallington found themselves and various problems that they had to overcome. But essentially, I think, these two gentlemen were engaged on a factual exercise; they were certainly not independent experts; they were not, in truth, acting as experts at all and, in my judgment, these costs fall within the ordinary costs that a litigant must bear of digging out his own factual material, through his own employees, to prove his own case.”
A number of other cases provide examples of professional people who were not entitled to recover fees for what was not legal work. For example in Capital Fund Limited v Tucker  EWHC 2321 office holders were unable to recover fees, and in Cuthbert v Gair, unreported, 26 September 2009, Master Haworth, it was loss adjusters
In a similar vein, a court will probably not allow a claim for time spent by the in-house lawyer relaying advice from the external solicitor, both because it would be duplicative of the work charged for by the external lawyer, and because it would be treated as non-progressive solicitor-client work.
Other restrictions on work for which time may be claimed will essentially mirror the principles applied in any inter parties assessment. These include the following:
(1) thought needs to be given to whether the claim is or might be subject to costs management and budgeting. If so, it is important to ensure that when the budget is prepared it includes the time of the in-house lawyers. It is important too that during the life of the claim the budget is kept under review so that if it is likely to be exceeded consideration can be given to preparing an amended budget;
(2) if the assessment is on the indemnity basis, the court will only allow costs which were reasonably incurred and which are reasonable in amount; the same applies if the assessment is on the standard basis, but in addition the court will then only allow costs which are proportionate; therefore as with any lawyers in litigation, thought needs to be given as to how to plan the workload so that it can be carried out efficiently and costs effectively, for example by considering the appropriate level of fee earner to do the work;
(3) in considering what costs will be allowed by the court as reasonable, it may be helpful to keep in mind the Gibson principles, taken from Vice Chancellor Megarry’s judgment in Re Gibson’s Settlement Trusts  Chancery 179. For costs to be recoverable, it is necessary that:
(a) the work was of use and service in the claim;
(b) the work was of relevance to an issue in the claim; and
(c) the work was needed because of the paying party’s actions or omissions;
(4) when at the conclusion of the bill the costs draftsman comes to prepare the bill, he or she will need to know the amount of time taken on any particular task, and it will need to be capable of proof; attendance notes and file notes which detail the work done, and the length of time taken on each task are vital; thought should also be given to using reliable time recording systems as with independent solicitors;
(5) costs of arranging funding for litigation, such as arranging a CFA or ATE insurance will not be recoverable, as in Motto v Trafigura  1 Weekly Law Reports 657;
(6) costs of legal research will generally be irrecoverable, with the basic principle being that the costs of researching the law will not be allowed if a solicitor could have been expected to know it: in the Crown and Legal Aid Board ex parte Bruce  1 WLR 1231 Lord Donaldson, Master of the Rolls, said that knowledge of the law is the solicitor’s stock in trade and if expense is involved in adding to or replenishing that stock in trade it is an overhead expense and not something which can be charged to the client. In Perry v Lord Chancellor, the Times, 26 May 1994, Mr Justice Garland said that there may be cases which give rise to unusual legal issues such that time ought to be allowed for discovering the law, and experience suggests that such an argument is likely to be more readily sustainable if for example the case has gone to the Court of Appeal. However I anticipate that where time is claimed for legal research by in-house lawyers, the court will be astute to prevent any impression that in-house lawyers might get away with charging for legal research which lawyers in independent practice would not need to do;
(7) solicitors cannot claim for the costs of administrative tasks which are properly regarded as office overheads; thus time spent photocopying, filing, posting documents and so on will not usually be recoverable;
(8) in the case of independent solicitors, courts are usually reluctant to allow the costs of file reviews which are regarded as non-progressive, or excessive discussions or internal memos between fee earners; the court is likely to be particularly astute to disallow recovery of any unnecessary time which it considers has been caused by the fact of using both in-house and independent solicitors;
(9) as part of the general category of solicitor-client work, the court will not allow recovery of the cost of what is rather disparagingly referred to as hand-holding ie client management and assisting with the client’s emotional needs; I anticipate that in the case of in-house lawyers, the court is likely to start from the assumption that there is even less scope for activities of this sort to be regarded as reasonable;
(10) sometimes work is done in preparing material which is not ultimately used; the fact that the work is not ultimately used does not in itself act as a total bar on recovery of the costs, since for example it may be that work would have been vital to prepare a case but was only not used because a settlement was reached before it was completed; the test is whether it was reasonable to do the work at the time it was undertaken; if work is undertaken before the stage at which such work is usually undertaken in proceedings, it would be prudent to make a note of the reason for doing so: for example if a witness statement is prepared at an early stage because the witness is an employee who may be posted abroad, or if an expert needs to carry out an inspection of something in its current condition;
(11) the costs of mediation can in principle be recovered unless provision has already been made for them in the mediation agreement; however, I would suggest that this is an area where particular care would need to be taken in considering who exactly needs to attend to avoid scope for arguments about duplication and whether the in-house lawyers are really attending in the capacity of clients to give instructions, rather than as lawyers;
(12) some time is recoverable for checking the bill, in addition to time spent drafting it, and given the importance attached to the certificate and to the accuracy of the bill, it ought to be possible to claim some time by an in-house lawyer checking the bill in so far as it relates to the legal work done in-house.
Finally, it should be noted that certain tasks in litigation may only lawfully be performed by qualified lawyers, meaning that non-lawyers cannot recover costs for such work
The starting point is section 25 of the Solicitors Act 1925, which states:
“No costs in respect of anything done by any unqualified person acting as a solicitor shall be recoverable by him, or by any other person, in any action, suit or matter
A Qualified solicitor is defined in section 1 of the Act as a person who has been admitted as a solicitor, whose name is on the roll and has a practising certificate in force.Thus someone who is not qualified cannot claim for what is a solicitor’s work. This would include drafting formal court documents, see Agassi v Robinson  EWCA Civil 1507.
Rates to be allowed for in-house work
In Re Eastwood  Ch 112 the Attorney-General was involved in a case concerning the construction of a will involving charitable gifts. His costs were ordered to be taxed and to be paid out of the estate. Included in the bill were the fees of a senior solicitor in the Treasury Solicitors Office. £75 was claimed in the bill for his time. The taxing master reduced this to £45 by stripping out £30 thought to represent profit, on that a different basis of assessment should be applied because the work was that of a salaried solicitor in-house where there was no need to earn a profit. Mr Justice Brightman upheld that decision but the Court of Appeal allowed the appeal and awarded the full amount claimed by the Treasury Solicitors. Lord Justice Russell laid down the following principles:
- the bill of an in-house solicitor should be assessed as though it were the bill of an independent solicitor;
- the same method should be followed in each case for assessing the hourly rate, which at that time was by reference to the now largely defunct A and B factors;
- it was a sensible and reasonable presumption that costs assessed in this way would not infringe the indemnity principle by exceeding the costs actually incurred;
- there may be special cases in which this would not be the case but it would be impractical and wrong to require in all cases a total breakdown of the activities and expenses of the solicitor’s department.
So clearly the Court was heavily motivated by a desire to avoid a difficult and disproportionate exercise of trying to deconstruct an in-house lawyer’s overheads and profitability, but the last principle has inevitably given some encouragement to receiving parties to try to challenge the hourly rate.
In Maes Finance Limited v W G Edwards and Partners  2 Costs Law Review 198, the paying party tried to argue that the hourly rates recoverable by an in-house solicitor of a finance company should be lower because the overheads would be lower, with, for example, no need to incur advertising costs, no need to be specialists in such a wide variety of work, and because the employees’ salaries would be the same regardless of the complexity or difficulty of the individual case worked on. It was reasonable to assume that the costs incurred by an in-house team would be lower, otherwise it would make no sense commercially to have one. Mr Justice Elias rejected those arguments, although he too acknowledged that there might be special cases where a different approach would be justified – again, without elaborating on how those special cases might be identified.
In Cole v British Telecommunications PLC  Costs Law Reports 310, BT seems to have risked shooting itself in the foot by voluntarily providing evidence to try to support its claimed hourly rates, in the form of a calculation of the total cost of employing all its solicitors of the relevant grade and then dividing that by the target chargeable hours for those solicitors. That was in response to an argument on behalf of Mr Cole that if the claimed hourly rate were multiplied by the expected annual number of hours, an unrealistically excessive cost of the solicitor to BT would be produced. The Court of Appeal again applied Re Eastwood, emphasising the impracticality of more detailed investigations, and held that it was not a special case justifying a different approach.
In Re Arora  UKUT 362 the paying party initially had some success in the Land Valuation Tribunal. It held that the rates claimed for the landlord’s in-house solicitor were on the high side, since an in-house solicitor did not have the costs and expenses of running a private practice, such as office rent, staff salaries or professional indemnity cover. It considered a reasonable hourly rate to be £200 per hour rather than the £250 claimed. The Upper Tribunal overruled that decision for three reasons:
- while the particular costs of rent and staff were not personally by the solicitor, they were still met by his employer, the landlord; the cost of insurance was not incurred, but the risk guarded against by such insurance had to be carried by the employer instead;
- in trying to consider such factors, the LVT was embarking on the sort of analysis which the authorities indicated was inappropriate;
- the work was relatively straightforward but might have cost considerably more if it had been done by a specialist solicitor in an independent firm, without any value being added; there was no justification for allowing less than the reasonable costs which would have been incurred in such circumstances.
The same judge, Martin Rodger QC, reached the same result more recently in another decision of the Upper Tribunal, Sidewalk Properties v Christopher Twinn  UKUT 122. The First Tier Tribunal had sought to avoid following re Eastwood by making its own assessment of an appropriate in-house rate rather than basing the recoverable charges on the rates of solicitors in private practice. Again, it seems to have acceded to an argument that the overheads of in-house solicitors would be less because professional indemnity insurance was not required, regulatory compliance costs would be less and expenses of dealing with the public would not be incurred. Unsurprisingly, the Upper Tribunal found that the First Tier Tribunal was wrong not to have followed the approach specified by the Court of Appeal, but it is informative to see how the Upper Tribunal determined the appropriate rate. It referred to the Supreme Court Costs Office’s Guideline Hourly Rates and selected a rate based on the appropriate grade of fee earner for a solicitor at a firm in the appropriate locality.
In the case of inter parties assessments, practitioners will be familiar with the sorts of arguments which are raised in relation to hourly rates. This is not the place for a detailed rehearsal of those arguments. There are usually three main arguments:
(a) whether it was reasonable to instruct a solicitor in a particular location, which may have a higher hourly rate than one in a different location, typically one which is closer geographically to the client;
(b) whether a fee earner of the appropriate level or grade was used, instead of a more junior fee earner;
(c) whether and to what extent an uplift as against the Guideline Hourly Rates is justified.
I would suggest that a number of particular considerations may apply in the case of in-house lawyers:
(1) in relation to a retainer of independent solicitors, the caselaw such as Wraith v Sheffield Forgemasters Limited  1 WLR 132 considers factors which will not be applicable in the case of in-house solicitors, such as whether the solicitor was recommended to the client;
(2) if there is only one in-house lawyer, or a small legal team, there may not be fee earners of different grades available to choose between, so it is possible that more leeway may be given in that respect, subject always to the overriding consideration of whether it was still reasonable in such circumstances for the work to be done in-house rather than going to external solicitors;
(3) if the organisation has a number of offices in different locations, the court is likely to look carefully at whether an the guideline hourly rate for one of the more expensive locations is justified.
Given that the comparison is with what rates might have been allowed for independent solicitors, the court is likely to have regard to the factors in CPR 44.4(3)
(a) the conduct of all the parties, including in particular –
(i) conduct before, as well as during, the proceedings; and
(ii) the efforts made, if any, before and during the proceedings in order to try to resolve the dispute;
(b) the amount or value of any money or property involved;
(c) the importance of the matter to all the parties;
(d) the particular complexity of the matter or the difficulty or novelty of the questions raised;
(e) the skill, effort, specialised knowledge and responsibility involved;
(f) the time spent on the case;
(g) the place where and the circumstances in which work or any part of it was done; and
(h) the receiving party’s last approved or agreed budget.
17 September 2018