For many years, disputes about retainers have been at the heart of the “Costs Wars” fought historically against solicitors by compensating parties, and more latterly by their former clients. Unless and until the indemnity principle is fully abolished, such disputes on an inter partes basis are likely to continue, and between solicitor and client will never go away as the prize is very great.
An unenforceable or legally dubious retainer can make a costs challenge well founded and deprive a solicitor of all or part of her fees. It is therefore not the case that retainer challenges are coming back into vogue: they never went out of fashion, but the protagonists and the arguments have evolved over the years.
In this article, I shall look at both challenges arising from the drafting of conditional fee agreements, and challenges arising from the costs purportedly incurred under them.
A pre-requisite for drafting an enforceable Conditional Fee Agreement (CFA) is that it must comply with the terms of the Courts and Legal Services Act 1990 and the provisions of the Conditional Fee Agreements Order 2013, otherwise the statute will deem the CFA to be unenforceable. If the CFA is unenforceable, then the client is under no obligation to pay her solicitors anything.
That in turn means that on any assessment of costs between the parties to the substantive litigation, applying the indemnity principle, the measure of costs that the client can recover will be “nil”. To add insult to injury, if the lawyers have paid themselves from the judgment sum or settlement, and their disbursements, they could find themselves having to refund the client that money and stand the disbursements themselves.
But if the use of a CFA is problematic, or potentially so, for the lawyers using them, in turn they represent an opportunity for their opponent to litigation, to probe the terms of the lawyers retainer, and to seek to make enforceability arguments. If those arguments succeed, then the lawyers will recover nothing in respect of their costs. So how will such challenges be mounted and what considerations will apply?
The starting point for a paying party is to scrutinise any bill of costs closely and see whether it refers to the existence of a CFA funding arrangement. This should be set against what else is known about how costs are being funded, derived from the conduct of the substantive litigation.
Next, disclosure of the CFA will be sought and should be firmly resisted. If a genuine issue can be shown about the potential enforceability or otherwise of the retainer, then the court will put a receiving party to their election to produce the CFA. Often the genuine issue can arise simply because of a miscertification of the Bill of Costs. The paying party will then look to see if the CFA is defective, perhaps because it claims more than 100% by way of success fee or does not include the statutory cap on success fees at first instance and on appeal, or fails in some other regard to meet the statutory requirements.
The test for determining whether a CFA is enforceable or unenforceable was set out in Hollins v Russell  1 WLR 2487
The key question, therefore, is whether the conditions applicable to the CFA by virtue of section 58 of the 1990 Act have been sufficiently complied with in the light of their purposes. Costs judges should accordingly ask themselves the following question: “Has the particular departure from a regulation pursuant to section 58(3)(c) of the 1990 Act or a requirement in section 58, either on its own or in conjunction with any other such departure in this case, had a materially adverse effect either upon the protection afforded to the client or upon the proper administration of justice?” If the answer is “yes” the conditions have not been satisfied. If the answer is “no” then the departure is immaterial and (assuming that there is no other reason to conclude otherwise) the conditions have been satisfied.
This test was confirmed in Garrett v Halton BC  1 WLR 554 to relate to the degree of non-compliance with the statutory provision: rather than its effect upon the client in the sense of a detriment, or whether financial prejudice has been sustained.
It follows that when the lawyers acting under the CFA, must defend an enforceability challenge, often the best argument that they will have is that the breach, is in fact immaterial. Other arguments might be raised but there are problems with them.
For example, a common argument, is that there is a “fallback” position such as a private retainer should the CFA fail. But the concept of two parallel retainers in this context does not work. The receiving party would be surprised to be told, that notwithstanding the making of the CFA, she was still liable to pay the lawyers costs win or lose. Any objective observer would conclude that the purpose of a DBA was to supersede any pre-existing privately paid retainer.
Another argument is that offending provisions in a CFA, might be capable of severance, saving part of the CFA. This is an argument based on Zuberi v LexLaw Ltd  EWCA Civ 16, a case which concerned a Damages Based Agreement (DBA). However, Lewison LJ was there describing the position at common law and the well-known test of severability where a contract is illegal at common-law. Where statutory unenforceability is concerned, the doctrine of severance does not apply.
A third argument is that if an agreement is unenforceable, then the court can allow a quantum meruit. But for the court to allow a quantum meruit claim on a restitutionary basis would run counter to the statutory policy of unenforceability.
A fourth fallback position is that it might be argued that disbursements are still payable, even if fees are not. But this argument hinges upon whether and when the client put the solicitor in funds for the disbursements. If the receiving party did so, before judgment then the position is governed by paragraph 115 of Hollins, which deals with the scenario where a client puts a solicitor in funds or draws down on a litigation funding loan to do so.
Enforceability arguments do not just arise in inter partes costs disputes: in the recent case of Diag Human Se and Stava v Volterra Fietta  EWHC 2054 (QB) enforceability arguments were used by a former client to defeat a solicitors bill for just under $3 million on the basis that the CFA the solicitors had been retained under, was unenforceable and could not be saved.
In October 2022, the Court of Appeal handed down judgments in two cases which are of considerable significance for the law and practice of solicitor-own client costs disputes, brought under section 70 of the Solicitors Act 1974. These are the cases of Belsner v Cam Legal Services  EWCA Civ 1387 and Karatysz v SGI Legal LLP  EWCA Civ 1388.
The judgments were handed down together as the cases were heard consecutively by the same division of the Court of Appeal, the Master of the Rolls, the Chancellor of the High Court and Nugee LJ earlier in October 2022. The context of the cases is well known: many solicitors who conduct personal injury claims and make deductions from their clients’ damages, for success fees or other unrecovered costs, have subsequently found themselves embroiled in a solicitor-own client costs dispute, when their former client instructs new representatives, to challenge their bills of costs.
These two cases reached the Court of Appeal on issues respectively as to whether the solicitors were limited to the costs they recovered inter partes and a modest success fee due to failing to obtain their client’s informed consent, and whether the solicitors had “won” the assessment, and were entitled to their costs of an assessment, because they had capped their costs on a delivered bill.
Turning first to the case of Belsner the main issue in the case was whether the work done by the solicitors was “non contentious” business, rather than “contentious” business with the consequence that section 74 (3) of the Solicitors Act 1974 and rule 46.9(2) CPR either applied or did not apply at all. Section 74(3) it should be remembered provides:
8. Section 74(3) concerns the proportionality of the amount claimed by solicitors in respect of their costs. It provides that: “[t]he amount which may be allowed on the assessment of any costs … in respect of any item relating to proceedings in the county court shall not, except in so far as rules of court may otherwise provide, exceed the amount which could have been allowed in respect of that item as between party and party in those proceedings, having regard to the nature of the proceedings and the amount of the claim and … counterclaim”.
Rule 46.9(2) states:
9. Part 46.9(2) provides a long-standing exception to that statutory provision as follows: “[s]ection 74(3) of the Solicitors Act 1974 applies unless the solicitor and client have entered into a written agreement which expressly permits payment to the solicitor of an amount of costs greater than that which the client could have recovered from another party to the proceedings”.
In addition, the argument was made and accepted in the High Court, that a solicitor and client stand in a fiduciary relationship: that failing to obtain a client’s informed consent to the retainer, involved a breach of fiduciary duty which vitiated the claim to fees due under it, save in respect of those fees recovered from the opponent and a modest success fee calculated on the fees so recovered.
The Court of Appeal summarised the issues thus:
13. Against that background, the key questions that will require determination are: (i) whether section 74(3) and Part 46.9(2) apply at all to claims brought through the RTA portal without county court proceedings actually being issued, (ii) whether the Solicitors are required to obtain informed consent from the Client in the negotiation and agreement of the CFA, either due to the fiduciary nature of the solicitor-client relationship or through the language of Part 46.9(2), (iii) if informed consent was required, whether the Client gave informed consent to the terms of the CFA relating to the Solicitors’ fees, (iv) whether, in any event, what can be regarded as the term in the Solicitors’ retainer allowing the Solicitors to charge the Client more than the costs recoverable from the defendant to the RTA claim was unfair under the CRA 2015, and (v) what are the consequences of the determination of these issues on the assessment in this case.
And concluded in relation to all of them:
14. For the reasons that appear in this judgment, I have decided in summary that (i) section 74(3) and Part 46.9(2) do not apply at all to claims brought through the RTA portal without county court proceedings actually being issued, (ii) the judge was wrong to say that the Solicitors owed the Client fiduciary duties in the negotiation of their retainer, (iii) although the Solicitors were not obliged to obtain the Client’s informed consent to the terms of the CFA on the grounds decided by the judge, the Solicitors did not comply with the SRA Code of Conduct for Solicitors (the Code) in that they neither ensured that the Client received the best possible information about the likely overall cost of the case, nor did they ensure that the Client was in a position to make an informed decision about the case, (iv) the term in the Solicitors’ retainer allowing them to charge the Client more than the costs recoverable from the defendant was not unfair within the meaning of the CRA 2015, and (v) the court can and should reconsider the assessment on the correct basis, which is under paragraph 3 of the Solicitors’ (Non-Contentious Business) Remuneration Order 2009 (the 2009 Order), which requires the Solicitors’ costs to be “fair and reasonable having regard to all the circumstances of the case”. The costs actually charged to the Client in this case were fair and reasonable.
Also of interest was the Court of Appeal’s obvious concern for the business model of the representatives instructed by the client in this case at paragraph 15 of the judgment:
Finally, it is also unsatisfactory that solicitors like checkmylegalfees.com can adopt a business model that allows them to bring expensive High Court litigation to assess modest solicitors’ bills in cases of this kind. The Legal Ombudsman scheme would be a cheaper and more effective method of querying solicitors’ bills in these circumstances, but the whole court process of assessment of solicitors’ bills in contentious and non-contentious business requires careful review and significant reform.
Of significance going forward the Court of Appeal fired some warning shots about the potentially unfair structuring of some retainers and the need to comply with professional duties:
84. In this case, the Client was given most of the information she needed to make those decisions, with the exception of one vital matter, namely the fixed recoverable costs that the defendant’s insurers would pay within the RTA portal. It would have been straightforward for the Solicitors to inform the Client of the level of the fixed recoverable costs that could be recovered at stages 1 and 2. The Client was told that the Solicitors estimated their base costs at £2,500 (net of VAT and disbursements), and that many such claims would settle within the RTA portal after production of medical evidence and financial losses. She was also given an estimate of £2,000 for her damages. Had she also been told of the level of the fixed recoverable costs, she would have been able to compare the likely recoverable costs with the amount she was being asked to agree to pay the Solicitors. As the Client submitted to us, she would then have known that she was assuming a liability to pay the Solicitors five times the costs she would be getting back from the defendant. I do not think that the Solicitors can be said to have complied with either [8.7] or [8.6] of the Code without providing that information.
85. For these reasons, the Solicitors neither ensured that the Client received the best possible information about the likely overall cost of the case, nor did they ensure that she was in a position to make an informed decision about whether she needed the service they were offering on the terms they were suggesting.
86. In my judgment, it is wholly unsatisfactory for solicitors generally, and these Solicitors in particular, routinely to suggest that their clients agree to a costs regime that allows them to charge significantly more than the claim is known in advance to be likely to be worth. Solicitors do not resolve this unsatisfactory state of affairs by allowing a discretionary reduction of their charges after the case is settled. It would, in theory, be possible for there to be an order made under section 56 of the 1974 Act to deal with this problem, and perhaps some of the others I have identified in relation to current practice, by the establishment of reformed general principles applicable to the determination of the proper remuneration of solicitors in respect of non-contentious business within the pre-action online portals.
Although the Court of Appeal was not concerned with the failure to provide best possible information, in that it did not affect the outcome of the case, which focused on whether a fair fee had been charged to the client, the Ombudsman certainly would be concerned with such failures and the potential would exist for a remedy to be granted.
Turning to the other case of Karatysz, although ostensibly a shorter decision on simpler point, it is of equal importance for solicitors to understand the key points which arise from this judgment, given issues which can arise when billing personal injury clients, in low value litigation for low levels of fees. The first point, is that given a solicitor will invariably be capping the costs they have incurred set against what they expect the client to pay, what is the actual amount of the bill for the purposes of section 70(9) of the Solicitors Act 1974?
Facetiously, one might note that despite all the powder and shot spent in the Court of Appeal, in the end the court simply decided that the amount of the bill of costs, is the amount that the client is asked to pay!
But the Court of Appeal further went on, to explain how a bill of costs should be structured:
46. The Client argues that certainty is needed. I agree. Properly drawn bills ought in future to state the agreed charges and/or the amounts that the solicitors are intending by the bill to charge, together with their disbursements. They should make clear what parts of those charges are claimed by way of base costs, success fee (if any), and disbursements. The bill ought also to state clearly (i) what sums have been paid, by whom, when and in what way (i.e. by direct payment or by deduction), (ii) what sum the solicitor claims to be outstanding, and (iii) what sum the solicitor is demanding that the client (or a third party) is required to pay.
Finally, the Court of Appeal was again critical of the practice of bringing High Court proceedings for disputes over costs where objectively trivial amounts were at stake at paragraph 45:
45. The Client allowed checkmylegalfees.com to bring this costly case on her behalf, when she had almost nothing to gain. As Lavender J demonstrated at , she recovered £177.50 before DJ Bellamy, which was all that was really at issue except massive sums by way of costs. The process whereby small bills of costs are taxed in the High Court is to be discouraged. It is far more economic to use the Legal Ombudsman scheme which is a cheaper and more effective method of querying solicitors’ bills in these circumstances. Moreover, whilst it has not been necessary to decide whether there were “special circumstances” in this case under section 70(10), because the Client has not succeeded on her appeal, there remains a lesson to be learned from this case. Firms such as checkmylegalfees.com and their clients should be in no doubt that the courts will have no hesitation in depriving them of their costs under section 70(10) if they continue to bring trivial claims for the assessment of small bills to the High Court, even if those bills are reduced on the facts of the specific case by more than one fifth under section 70(9). The critical issue is and always will be whether it is proportionate to bring this kind of case to the High Court. In this case, it was not.
At a stroke, this means that where a claim is brought for a refund of a few hundred pounds, applying these dicta, even if a refund is ordered by the court on assessment, there is an excellent argument that the client should be deprived of their costs for acting disproportionately, to seek such a trivial sum by way of High Court proceedings when they should reasonably use the Ombudsman service.
There are a number of points to bear in mind, going forward. First, it is time to revisit their firm’s retainer documentation and client care letter. Although the solicitors in this case escaped consequence, the Master of the Rolls was critical of the way the retainer was structured, and the failure to give advice to the client about likely levels of recovered fixed costs.
Secondly, it is time to revisit the way cases are billed and whether the form of bill used by the firm which are sent out at the current time reflect the views of the Court of Appeal at paragraph 46 and whether they need to be revised.
Thirdly, claims for the return of low value deductions are probably dead in the water now, if pursued as a solicitor own client assessment, as the Court of Appeal has indicated that a client should not recover the costs of doing so if the proceedings are disproportionate.
A version of this article first appeared in PI Focus magazine Challenging Times for PI Focus.