What a difference a detailed assessment makes ...
In 2013, at the end of a 44-day trial in the Commercial Court, the Claimant in Deutsche Bank AG v Sebastian Holdings Inc and Alexander Vik was awarded damages of USD243M plus 85% of its costs on the indemnity basis. This was a hard-fought case and the victory at trial must have been a cause for celebration, especially when the Second Defendant was also ordered to make a payment on account of costs of GBP34.5M (approximately two-thirds of the maximum potential costs).
The celebrations were probably short lived because of the Claimant’s concerns about the cost of pursuing a ‘conventional’ detailed assessment of its costs and the Second Defendant’s ‘willingness and ability’ to pay the assessed costs at the end of that process. The Claimant’s legal team anticipated that it would take two years to prepare a bill of costs, that the costs of bill preparation would be GBP1.67M and that the total costs of getting through a detailed assessment hearing would be around GBP2M.
These concerns prompted an application for directions by the Claimant in advance of the bill of costs being prepared.
The Claimant proposed that preliminary issues, including the experts’ fees and counsel’s brief fees (totalling around GBP37M), would be dealt with first. The Claimant’s solicitors, Freshfields, would then serve a ‘Hybrid Bill’ for their costs of around GBP22M. The Hybrid Bill would have three parts divided into time periods, with each part being assessed before the bill for the next part was served. The chief difference in format between what is normally seen on assessment and the format suggested by the Claimant would be that the documents schedules would be a composite of preparation time and attendances.
The Claimant’s application was opposed by the Second Defendant, and it came before Senior Costs Judge Gordon-Saker in December 2017. Judge Gordon-Saker decided that the paying party was entitled to know at the outset what was claimed against him and to have sufficient information to enable him to decide whether he wished to challenge the bill. Assessing the reasonableness of components of the bill without knowing what was claimed for other components would be ‘difficult’.
Judge Gordon-Saker was not prepared to make an order which prescribed the format of a bill of costs which had not yet been prepared. He indicated that a bill in the format suggested by the Claimant ‘should’ be capable of fair assessment provided it was coupled with schedules setting out the number of routine communications between the Claimant and the various parties.
The Judge was not prepared to order that the bill could be served and assessed in stages because the Second Defendant should have all the information to enable him to decide which items to challenge and why before the first hearing. The bill of costs could be served in parts, so long as everything was served before the start of the first assessment hearing. Standard directions were given for the costs assessment. Fifteen court days were allocated for preliminary issues and another 30 days for the remainder of the assessment. Costs of the Claimant’s application for directions were reserved.
The bill of costs was served in January 2019 in the alternative format proposed by the Claimant. It totalled approximately GBP53M (85% of the total costs of GBP62M). There were 40 documents schedules, one for each month of work done. Points of dispute were served in July 2019 and the reply in December 2019. The composite Points of Dispute and Reply ran to 483 pages and during the assessment supplemental points of dispute and replies were also served.
Fast forward five years to December 2022 and the judgment of Judge Gordon-Saker in relation to the costs of the detailed assessment process. The judgment was delivered just before Christmas, but it was not an early Christmas present for the Claimant.
The total costs claimed were reduced by around 32% which included a reduction to the solicitors’ profit costs of 40%. This was a lower-than-average outcome considering that costs were awarded on the indemnity basis. The news for the Claimant didn’t get any better when the costs of the assessment process were dealt with. The Claimant was ordered to pay the Second Defendant’s costs of the 2017 application for directions and the Claimant was only awarded 60% of its costs of the detailed assessment. In both cases the summary assessment of the costs of costs would be on the standard basis.
The judgment deals with several different elements of the various hearings and their effect on the detailed assessment process:
• An application for directions might have been expected after service of the bill of costs and Points of Dispute, but there was no need for one before service of the bill in this assessment which was ‘procedurally straightforward’.
• The relative success of the parties in relation to the various preliminary issues and whether the Second Defendant’s partial success justified a different order being made.
• The inclusion of costs in the bill which should have been identified and excluded when the bill was prepared.
• The amount by which the claim for costs was reduced.
• The fact that most of the hearing was held remotely because of the pandemic.
• That the parties did not settle once they had sufficient notice of the ‘court’s direction of travel’ when dealing with the many repetitive arguments and themes.
• The length of the detailed assessment hearing.
The reasons why the detailed assessment hearing lasted for 97 days – more than twice as long as was originally anticipated – were identified as:
• The way in which time was recorded by the Claimant’s solicitors.
• The lack of documents, and particularly attendance and file notes, in the Claimant’s solicitors’ files which required a degree of ‘forensic archaeology’ – the Claimant’s costs lawyer had to resort to explaining the tasks carried out during a particular month and showing any documents that he had been able to find. To make things worse, the files were stored on a server ‘in no obvious order, which precluded any structured pre-reading’.
• The fact that the Second Defendant challenged virtually everything claimed in the bill.
As the Master pointed out, ‘A paying party who has caused the assessment to be prolonged will, in the ordinary way, pay for the costs (on both sides) of that prolongation’ if the usual order for costs of the assessment is made. However, ‘a paying party should not pay for the costs of prolongation caused by the receiving party.’ The absence of attendance notes and other documents and the way in which time was recorded (‘vague and composite entries’) justified the receiving party only being awarded 60% of its costs of assessment.
If a receiving party has to adopt a ‘forensic archaeology’ approach to finding support for time claimed in a bill of costs, the costs recovery is likely to be adversely affected and some or all of the costs of assessment will be at risk.
Commentary by Andy Ellis
At Practico, we kept an eye on the costs elements of this case from the time it went to directions pre-bill. Back in 2017 the assessment coincided with instructions we had to prepare a bill for similarly huge sums in a major international commercial case that went to trial in Guernsey. Any intelligence we could glean from contemporaneous assessment proceedings where the practicalities of assessing very large bills were being considered by the Senior Costs Judge would, we hoped, be useful to deploy.
Easily said with hindsight, but we felt at the time that the Claimant made a strategic error in seeking to approach the assessment in piecemeal fashion, without first calculating and presenting the grand total sought to be recovered.
We took the view that it was essential to collect and collate the gross costs with a clear audit trail through invoicing. Then to present that controlled data as a high-level summary that would at least give the paying party knowledge of their maximum liability at the outset and a picture of which litigation-specific workstreams the costs attached to. Ideally, the assessment itself would progress via a process of sampling – albeit such an approach would have needed a degree of co-operation between the parties that was seemingly out of reach in Deutsche Bank.
As things turned out, our Guernsey case settled before we could test the court’s appetite for a more creative approach to assessment, and the parties were spared anything like a record-breaking 97-day assessment.
It is clear from the judgment that Deutsche Bank had no choice but to submit to this exceptionally heavy assessment because Mr Vik made no settlement offer and challenged every item. We do not know how much the costs of assessment added to the bill, but 60% of the Claimant’s costs plus the Defendants’ own costs will no doubt become another eye-watering sum.
For those of us involved in high-value litigation there are some points of general interest, with no easy solutions:
• Pre-bill directions in very large cases are potentially very useful but proposals to vary format should be carefully thought through because they must be capable of assisting the paying party to understand its maximum liability as soon as possible.
• It is an unfortunate by-product of modern case and document management systems that the compilation of the bundle that a costs judge needs is not only a huge task – it always was – but is made more difficult by the configuration of the systems, patchy compliance with informative time-recording, and the proliferation of email as the dominant evidence of activity and work product.
• Whilst paying parties will be alert to such vulnerabilities in the justification of costs incurred, and can exploit them to secure significant reductions, such a deep dive into the detail comes at exceptionally high cost and the failure to make Part 36 offers or engage with ADR is likely to prove unwise at the final reckoning.
The contents of this article are for general information purposes only and do not constitute legal advice. While we endeavour to ensure that the information in this document is correct, no warranty, express or implied, is given as to its accuracy and we do not accept any liability for error or omission.