When clients depart and take the cash with them

It is always sad, when a solicitor and a client part company during the course of litigation, and such sadness can rapidly develop into financial pain, on a former solicitors part, if his client goes on to recover the costs he has agreed to pay the solicitor from the opposing side in litigation and then does a runner with the cash.

In such circumstances, it is commonly thought, that all the unfortunate solicitor can do, is gnash his teeth, and consider a (probably) fruitless claim for breach of contract against the defaulting client: who may well have disappeared, or if traceable, will have quickly dissipated the cash.

In such a context the recent case of Khans.v.Chifuntwe and the Home Office [2013] EWCA Civ 841 is of considerable interest.

The facts were set out with care by Lord Justice Sedley:

1. Mr Chifuntwe, the first respondent to this appeal, had a dispute with the HomeSecretary, who is the second respondent. He instructed Khans Solicitors and paid them £1500 on account of their fees. Khans instructed counsel and brought judicial review proceedings on his behalf. The Home Secretary settled the claim and agreed to pay Mr Chifuntwe’s costs. Khans submitted a bill for just under £9,500; in July 2011 the Home Office offered £6,000 in settlement of it.

2. At this point Mr Chifuntwe wrote a letter to the Treasury Solicitor’s costs draftsmen, dated 2 August 2011, with copies to his lawyers. The letter withdrew his instructions to solicitor and counsel with immediate effect, accepted the Treasury Solicitor’s offer of £6,000 in settlement of his costs and required the money to be paid directly to him. The letter continued:

“… it is my understanding that since I have already paid my solicitors money they have shown little interest particularly in helping me to get my full recoverable costs back.”

It went on to express concern that

“… my recoverable money is at risk of being reduced or even not paid back at all…”

3. Two comments should be made on this letter. First, it fails to say that not more than £1,500 of the recoverable costs were owed to Mr Chifuntwe; the rest was Khans’. Secondly, this court has no reason to think that Khans were in fact mishandling Mr Chifuntwe’s case in any material respect.

4. Khans responded two days later with a letter warning Mr Chifuntwe not to interfere with the recovery of their costs. Then on 8 August they wrote to the Treasury Solicitor:

“We refer to our telephone conversation earlier today and write to confirm that Mr Chifuntwe is attempting to avoid paying costs properly due to us which would appear to be well in excess of £9,000. That is why we believe there is no other reason for him to contact you directly and accept £6,000 being the sum offered by the Treasury Solicitors Department, without the benefit of independent legal advice. We are consulting counsel on the matter as to the claim that should be issued against Mr Chifuntwe and whether or not the Treasury Solicitor should also be included as a party, e.g. not to part with any costs in this matter (presently) that we understand have been agreed between you and Mr Chifuntwe directly (since his withdrawal of retainer with us). We appreciate what you say, i.e. that you are of the opinion that strictly legally speaking, you can release £6,000 costs agreed with Mr Chifuntwe directly to him. However, we are of the opinion that since you are on notice of our very substantial claim (because of which we believe Mr Chifuntwe has withdrawn his retainer and accepted a much lower sum, i.e. to avoid payment of our costs) it will be imprudent to do so in the circumstances… There may be ethical/professional issues which we will also be looking into.…………”

The letter concluded by asking the Treasury Solicitor to wait for five working days while counsel’s advice was obtained.

5. On 17 August the Treasury Solicitor’s costs draftsmen made an improved offer in the sum of £7,125, apparently forgetting that Mr Chifuntwe had already accepted their offer of £6,000. On 19 August, realising this, they withdrew it.

6. Khans followed their letter of 8 August 2011 with judicial review proceedings. These did not seek to prevent the Home Office paying their former client direct, but sought to avoid the £6,000 compromise which Mr Chifuntwe had entered into. The proceedings were issued on 21 September, but were struck out by Thirlwall J on 19 October because they related to a private law claim. We are not asked to decide whether this was a correct course for the court to take (cf. 54 CPR 20), but we are told that Khans did not learn of the strike-out until 4 November.

7. On 9 November 2011, by when Khans had taken no further step to protect their interests, the Treasury Solicitor paid the agreed sum of £6,000 to Mr Chifuntwe, who – as Khans had warned them might happen – has vanished with it.

8. Khans then issued these proceedings under CPR part 8, claiming a declaration that the £6,000 compromise was not valid, and either a charge or a lien upon the (ex hypothesi) unpaid and as yet unassessed costs. The first defendant to the claim, Mr Chifuntwe, has been perceptible in the proceedings only by his absence. The second defendant, the Home Secretary, has contended successfully, first before Master Campbell, the costs judge, and then on appeal before Mackay J, that in the absence of any proof that she had colluded with Mr Chifuntwe to cheat Khans, she bears no further liability for costs.

9. The question for this court, following the grant of permission for a second appeal by Jackson LJ, is whether the master and the judge were right.

The Court of Appeal, after consideration of much antique authority, dating from the eighteenth and nineteenth centuries went on to hold that the following was the law: that the court would intervene to protect a solicitor from a defaulting client:

33. In our judgment, the law is today (and, in our view, has been for fully two centuries) that the court will intervene to protect a solicitor’s claim on funds recovered or due to be recovered by a client or former client if (a) the paying party is colluding with the client to cheat the solicitor of his fees, or (b) the paying party is on notice that the other party’s solicitor has a claim on the funds for outstanding fees. The form of protection ought to be preventive but may in a proper case take the form of dual payment.

34. Khans had done nothing to suggest that they were resiling from their notice not to pay Mr Chifuntwe. Nor, however, had they done anything realistic to secure payment. In our present view their proper course was to apply in Mr Chifuntwe’s compromised judicial review proceedings (in which notice of a costs assessment had been served by Khans on 2 June 2011) for the Treasury Solicitor to pay the costs into court to abide allocation by the court. It was equally open to the Treasury Solicitor to make the application.

35. This course would have relieved the Home Office of the risk of making an invidious choice between solicitor and ex-client, and have protected the interest both of Khans and of Mr Chifuntwe in the costs fund. The final amount to be paid in would have remained open to negotiation and, failing agreement, to assessment. The first £1500 of it, but no more, would have been payable either directly or out of court to Mr Chifuntwe. The balance would have been released to Khans.

36. The difficulty in the present case, since none of this was done or proposed by either side, is to decide where the consequent loss (assuming that Mr Chifuntwe remains out of reach) should fall. In our judgment it falls into two parts.

37. The first part is the compromise of his costs at a figure of £6,000 which Mr Chifuntwe reached on his own behalf with the Treasury Solicitor by his letter of 2 August 2011. At that point of time Mr Chifuntwe was acting in person and the Treasury Solicitor was not on notice of any contrary claim on Khans’ part. For better or for worse, we consider the compromise to have been binding. Whether such actions can in future be forestalled by solicitors’ arrangements with their clients is an important question but not one for this court.

38. The second part concerns the disbursement of the agreed sum to Mr Chifuntwe at a point of time when the paying party, the Home Secretary, was on clear notice not to pay to Mr Chifuntwe money which was in every material sense (apart from £1500 of it) Khans’. We recognise that for the rest the Treasury Solicitor’s conduct was irreproachable, but we consider that in this one respect his costs draftsman erred, albeit from the best of motives. As in White v Pearce, so here, the payment cannot stand as a good discharge of Khans’ claim and must be made again.

39. The compromise of Mr Chifuntwe’s costs at £6,000 will therefore stand (and to that extent the appeal will be dismissed), but the second defendant is to pay that sum to Khans, less the £1,500 which Mr Chifuntwe was entitled to – and did – recoup from it. To that extent the appeal succeeds.

This case is an extremely useful one for a former solicitor to rely on, when a dispute arises with a former client. In the longer term, the case may have other ramifications. What, if, for example, the former client compromises the claim for costs at a level far below the reasonable expectation of recovery on assessment, to spite his former solicitors ? To what extent, do solicitors have a right of audience to address the court on “their” fees, when they come to be assessed ? These and other questions will, as the Court of Appeal recognised, be worked through in other cases.

How Jackson will increase costs and boost profitability

The raison d’etre of the package of reforms, known as the Jackson reforms, is to reduced perceived levels of disproportionate costs to more proportionate levels.  One of the more interesting questions which will fall to be slowly answered over the coming months, is the extent to which costs might actually increase due to the Law of Unintended consequence, or even if they do not increase in absolute terms, will lead to improvements in the profitability of some solicitors practices.

The purpose of this post, is to consider ways in which this might occur, mixing law freely with consideration of behavioural economics and behavioural psychology.

1. The move to an Alternative Business Structure

In The Times this morning the Direct Line Group announced its venture linked with Parabis, to set up an Alternative Business Structure. It also proclaimed that this had nothing to do with the £21 million it would formerly have received from referral fees. Hmmm. Be that as it may, any insurance company or claims management company or trade union which wishes to stay in the business of receiving a steady stream of income from claims, should now be seeking to package up claims capture capability with the provision of litigation services. This in turn has the potential to generate further costs savings through economies of scale and the removal of transactional costs with increased profitability. The ban on referral fees is thus a powerful motor, driving forward in the personal injury field, the move to ABS.

2. Success fees at 100% subject to the statutory cap

In the last 3 1/2 months, there has been no race to the bottom, with solicitors refusing to charge success fees, in cut throat competition. Instead, the consensus in the industry, is that success fees should be charged, and the client will have to take the hit. Given that the average success fee is now routinely pitched at 100%, subject to the statutory cap of 25% of general damages and past special damages, the quantum of success fees, which in the majority of cases, ranged in the past from 12.5% to 62.5%, has actually increased albeit that it is the client who is now liable to pay them.

3. Punishing the insurance industry for non-compliance

Some insurance companies deal with claims efficiently, and always answer their correspondence timeously. Others do not. The overriding objective has now had a new limb (f), added to it, to emphasise, the importance of compliance with rules, practice directions and court orders.

With the move to an expressly Singaporean model, of rigidity and inflexiblity in court procedure, there are nowextreme sanctions for non compliance. Insurance companies who fail to comply with Protocol requirements, or who do not act promptly to set aside default judgments, can expect little leeway. Non-compliance generates more  costs, through dropping out of Portal schemes, the reasonable issue of proceedings, and applications for sanctions for non-compliance. Conversely, the claimants’ solicitors can and should have their claim ready, with documents, and statements in place to force the pace once issued.

4. Costs budgeting

The costs budgeting rules represent a clear opportunity for the likely receiving party’s costs to be ratcheted up, at the start of the case. First as they have no application at all to pre-issue costs, a solicitor is free to spend what he wants prior to the issue of proceedings and will do so, to avoid any potential strictures of budgeting. Something like 2/3 to 3/4 of all costs, are incurred pre-issue.

Secondly it gives an excellent opportunity, to establish hourly rates, document time and overall levels of costs anchoring expectations for a detailed assessment, promoting unease in the mind of the likely paying party.

5. More issued claims

The carefully constructed Fixed Fee matrix for Fast Track cases, positively encourages claimants to issue proceedings, and to run them to as late in the day as possible as the longer the case goes on, the higher the costs recovered, per case.

6. The chilling effect of QUOCS

The realisation that in the vast majority of cases that even a successful defendant, will have to stand its own costs, due to the regime of Qualified One Way Costs Shifting, means that each and every case, now has a settlement value.

In circumstances, where a lost case means that the costs Order, does not even count as an unsatisfied judgment, means that, again, built into the system is an incentive to run every case, that a claimants solicitors practice has.

Moreover, even if a defendant successfully couches a part 36 offer which it succeeds on at trial, as its own costs can only be set off against the claimant’s damages, not damages and the claimant’s costs, the situation will arise where a claimant’s damages are wiped out to zero, but his solicitors will still recover substantial costs, up to the point in time that the part 36 bites.

7. Part 36 offers in detailed assessment proceedings

These are utterly unnecessary, where a regime of provisional assessment is in place to control costs. But if a receiving party can couch a part 36 offer accurately for the purposes of an assessment  then they will receive not only 10% of the costs of the bill, but part 36 interest on the costs on the bill, indemnity costs of the detailed assessment and part 36 interest on the detailed assessment costs. Thus, with one stroke, the £1500 cap on assessment costs prescribed by provisional assessment, can be made otiose.

8. Damages based agreements (DBAs), BTE and the Small Claims Track

If the Small Claims Track limit is raised to £5000 for personal injury claims, then those claims will not disappear. Instead, the 70% of motorists who have BTE, will have a positive incentive to use it and those who don’t have BTE, or if BTE is withdrawn in its current form, will have an incentive to use Damages Based Agreements (DBAs) or appropriately drafted CFA Lites with waivers, to continue to litigate the case: which would mean lower damages for claimants, but potentially higher fees for solicitors than those prescribed, by for example, the Portal scheme.