The snowball effect

In the aftermath of Herbert -v- H H Law Ltd  I thought at the time, that there was a lot more litigation to come, dealing with some of the unanswered questions in that case and some further points which were simply not raised within it.

It was therefore with interest that I saw at the weekend the case of Belsner v Cam Legal Services Limited [2020] EWHC 2755 (QB) handed down last Friday. It is an important case, which at this stage of it’s life, a first tier appeal in the High Court, raises more questions than it answers. I have little doubt that the case should go to the Court of Appeal as it raises important issues of principle and practice, concerning solicitor-own client costs disputes.

The case concerns an assessment of costs between a solicitor’s firm and its former client, in the aftermath of the successful conclusion of a low value personal injury claim. An appeal was brought by the client from a decision of District Judge Bellamy that she pay to her former solicitors a success fee of just £208.80.

When considering the retainer documents the High Court judge noted:

14. The CFA provided for a success fee of 100% of the basic charge, subject to the cap (as required by section 58(4B) of the Courts and Legal Services Act 1990 and Article 5 of the Conditional Fee Agreements Order 2013) of 25% of the total amount of any general damages for pain, suffering and loss of amenity and damages for pecuniary loss, other than future pecuniary loss.

15. None of the documents, however, provided for an overall cap on the amount recoverable by the Defendant from the Claimant, save in the event that the claim for damages for pain and suffering was less than the small claims limit: see paragraph 9 of the Client Care Letter. Solicitors can, and some do, propose that the amount which they are entitled to claim from their client in a case of this nature is limited to a percentage (say 25%) of the damages ascertained or agreed. The Defendant, however, did not propose such a cap.

The consequence of not having a “cap”, was that leaving aside the success fee,  unrecovered basic charges due and payable under the CFA could easily erode or indeed consume the modest personal injury damages that the client was entitled to. The client was not told of the potential extent of the liabilities she had assumed under the contract of retainer, because she was not told there might be a substantial shortfall between her costs liabilities to her own solicitor and her recovered costs from the third party.  In the event the solicitors did not charge the client the unrecovered basic charges. But these matters formed the bedrock of fact when the High Court had to consider the arguments put forward as to why the client should not have to pay a success fee, or indeed any item of cost not recovered in her original personal injury claim.

Now section 74(3) of the Solicitors Act 1974 provides as follows:

(3) The amount which may be allowed on the assessment of any costs or bill of 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 of any counterclaim.”

Rule 46.9(2) provides:

(2) Section 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.

 Against that backdrop, the client sought to argue that she should not have to pay the success fee for the following reasons:

65. For the Claimant, Mr Kirby submitted that:

(1) The relationship between the Claimant and the Defendant was a fiduciary one. The Defendant was not permitted to retain a profit derived from that relationship without the fully informed consent of the Claimant.

(2) There is an obvious disparity in knowledge between solicitor and client. That is so whether the case falls within paragraph (2) or (3) of CPR 46.9.

(3) The language of the two paragraphs is identical.

(4) CPR 46.9 has to be read as a whole. That is what Soole J said at paragraph 46 of his judgment in Herbert v HH Law [2018] 2 Costs LR 261 (although on appeal the Master of the Rolls confined himself to saying that it was common ground that paragraphs (3) and (4) should be read together).

(5) It would be illogical to treat paragraphs (2) and (3) differently.

(6) Informed consent is required in a case falling under paragraph (3) even if the “express approval” relied on by the solicitor took the form of “a written agreement which expressly permits” the item of costs in question. That was the case in Herbert v HH Law, which concerned the success fee payable under a written conditional fee agreement, the relevant terms of which are set out in paragraph 5 of the Master of the Rolls’ judgment.

(7) The Defendant could have chosen to enter into a contentious business agreement pursuant to section 59 of the Solicitors Act 1974. That would have given the Claimant the right to apply for a determination whether the terms of the agreement were fair and reasonable. It appears to be the Defendant’s position that the Claimant has less protection under CPR 46.9(2) than she would have had under a contentious business agreement.

66. Mr Kirby accepted that the Defendant stated in the Client Care Letter, in its Terms and Conditions of Business and in the Law Society’s Conditions attached to the CFA, that the Claimant could be charged fees in excess of those recoverable from the Insurers, but he submitted that this was not sufficient to mean that her agreement to these terms constituted informed consent. That required a full and fair exposition of the relevant factors, and the factor which was not identified to the Claimant was the amount of the costs recoverable from the Insurers. It would have been simple for the Defendant to say that if the claim settled at Stage 2, the net profit costs could be fixed at £500.

The point the client wished to establish was that her lack of informed consent, vitiated the written agreement, which included the obligation that she would pay a success fee, and on that basis there was no effective agreement for the purposes of rule 46.9(2) and thus in turn, no charges could be recovered from the client in excess of the amount of recovered costs from the third party to her personal injury claim.

The counterblast on behalf of the solicitor’s firm was put as follows:

67. For the Defendant, Mr Bacon submitted that:

(1) Paragraphs (2) and (3) of CPR 46.9 are obviously and deliberately different and are dealing with different things.

(2) The language of paragraph (2) of CPR 46.9 focuses on the content of the contract between solicitor and client, whereas paragraph (3) concerns questions of reasonableness and whether a client has given “express or implied approval” to incur an item of cost.

(3) The language and purpose of paragraph (3) is notably and deliberately different from that of paragraph (2). In particular, the key word in paragraph (3) is “approval”. This is the word which creates the requirement for informed consent. It is not to be found in paragraph (3).

(4) Where paragraph (2) is satisfied, the costs still have to be assessed. They will not be allowed if they are unreasonable and paragraph (3) will come into play at that stage. Indeed, the Defendant’s costs have been assessed and a sum substantially greater than that actually charged was allowed, which must be on the basis that that sum was not unreasonable.

(5) Allowing the Claimant’s appeal would result in a wholesale change of the basis on which solicitors advise their clients in fixed costs cases. The Law Society’s Model CFA would be insufficient to meet the threshold proposed by the Claimant. The only relevant passage in that document is in the following terms:

“If we and your opponent cannot agree the amount [of costs], the Court will decide how much you can recover. If the amount agreed or allowed by the Court does not cover all our basic charges and our expenses and disbursements, then you pay the difference.”

(6) Indeed, it would mean that solicitors working in the lowest value area of personal injury litigation had a higher burden, in terms of the advice which they were required to give to their clients, than those dealing with cases of much higher value and complexity.

(7) It is not practical to expect solicitors to advise their clients on the amount of costs to the paid by the respondent to the claim, since these can vary in accordance with, inter alia, the amount of the claim and the stage at which it settles, and whether the claim remains under the Protocol.

(8) There is an expectation that a client will pay a contribution towards the costs of bringing an action. General damages in personal injury cases were increased by 10% to go some way to offset this.

(9) Sir Rupert Jackson said as follows in his Supplemental Report of 2017, in answer to the question why he did not seek to limit the amount of costs payable by a claimant to his or her solicitor in a fixed costs case:

“Given the multifarious kinds of litigation it is not feasible to preordain how much clients must pay to their lawyers in every individual case. Also, that would be an unacceptable interference with freedom of contract. The best that we can do is to restrict the recoverable costs. This incentivises lawyers (who are in competition with one another) to keep the actual costs down, so that the client’s shortfall in costs recovery (if it wins) is as low as possible.”

When giving his judgment, the High Court judge found that informed consent by the client was required in respect of the agreement contemplated under rule 46.9(2): and that without informed consent there would be a breach of a fiduciary duty owed by the solicitor to the client affecting the validity and enforceability of the agreement:

68. I do not consider that this appeal can be determined by a simple comparison between the wording of CPR 46.9(2) and (3). The requirement for informed consent which applies in cases under CPR 46.9(3) does not arise because of the use of the word “approval” rather than the word “agreement”. The requirement for informed consent arises because of the fiduciary nature of the relationship.

69. It goes without saying that an agreement for the purposes of CPR 46.9(2) must be a valid and enforceable agreement. It follows, for example, that an agreement procured by fraud or misrepresentation would not suffice. Nor, obviously, would an agreement whose performance would involve a breach of fiduciary duty. To that extent, therefore, CPR 46.9(2) requires informed consent.

70. A solicitor who wishes to rely on CPR 46.9(2) must not only point to a written agreement which meets the requirements of the rule, as the Defendant did, but must also show that his client gave informed consent to that agreement insofar as it permitted payment to the solicitor of an amount of costs greater than that which the client could have recovered from another party to the proceedings. For this purpose, the solicitor must show that he made sufficient disclosure to the client.

71. The key question in this case is therefore whether the Defendant made sufficient disclosure to the Claimant for the purposes of section 74(3) and CPR 46.9(2). There were, broadly, three possibilities which were given canvassed in argument. At one extreme, neither party suggested that a solicitor is obliged to give a detailed and comprehensive explanation of the provisions of the Civil Procedure Rules and the Protocol concerning fixed costs. On the other hand, the Defendant’s position was, in effect, that it is sufficient for a solicitor to disclose to the client that the agreement 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, without giving any detail as to what the limits are on such recovery. In between was the position contended for by Mr Kirby, which was that the solicitor was obliged to give some indication of what the limit on recovery might be.

He then went on to find:

89. I have considered carefully the argument that it was sufficient for the Defendant to disclose that the amount that the Insurers would be liable to pay in respect of the Defendant’s basic charges was fixed by the provisions of the Civil Procedure Rules. It was open to the Claimant either to ask for more detail or to look up the relevant provisions for herself. The nineteenth century authorities referred to by Simon J in FHR European Ventures LLP v Mankarious provide some support for this argument by way of analogy, but they all concerned businesses and trade usages, whereas the present cases concerns a consumer and some detailed and complex provisions of the Civil Procedure Rules and the Protocol. Those cases were applied in Medsted Associates Ltd v. Canaccord Genuity Wealth (International) Ltd because the clients in that case were wealthy Greek citizens who were likely to be experienced investors, but not in Hurstanger Ltd v Wilson, where the clients were vulnerable and unsophisticated, nor in FHR European Ventures LLP v Mankarious.

90. Each case has to be decided on its own facts. In this case, it is a very striking feature of the agreement being proposed to the Claimant by the Defendant that the Defendant’s estimated basic charges were five times the amount which the Claimant might be entitled to recover from the Insurers if her claim settled for less than £10,000 at Stage 2 in the Protocol and that, in that event, she might have to pay the first £3,200 of her damages to the Defendant. This was so striking that it ought, in my judgment, to have been brought specifically to the Claimant’s attention, if she was to give informed consent to the agreement insofar as it permitted payment to the Defendant of an amount of costs greater than that which the Claimant could have recovered from the Insurers, that, while the Defendant’s estimate of costs was £2,500 plus VAT, she might recover only £500 or £550 plus VAT from the Insurers..

91. I conclude that the Claimant did not give her informed consent to the agreement and the Defendant cannot rely on it for the purposes of CPR 49(2).

The consequence was that there was no effective agreement, in place due to the breach by the solicitors’ firm of its fiduciary duties, that complied with rule 46.9(2) and permitted the solicitor to charge the client fees not recovered from the third party in the original action, namely the success fee. This conclusion could be viewed as a surprising one for a number of reasons. 

The first reason is that a personal injury solicitor who has been faithfully using the Law Society Model CFA without qualification or modification for the purposes of his case load may now be in some difficulties, on the basis of the analysis set out above, if that turns out to be analysis upheld by the Court of Appeal. It is surprising that no success fee should be recoverable, where that obligation to pay a success fee, its manner of calculation and clear advice that it would be irrecoverable and payable was given in the  CFA.  But many cases will have different facts which should form a basis for distinguishing this case: it should also be noted that the Law Society Model CF does contain an overall cap: and that will prove quite important. The simplest answer may be that “agreement” in the statutory section should be construed to relate to the particular issue of agreement to the charge that has been made and billed, rather than the overarching contract of retainer.

The second is that the scope and application of section 74(3) which appears on it’s literal wording to apply only to costs in litigated claims in the County Court does not appear to have been raised in this case and that is significant, as most cases are not issued but settled by negotiation beforehand. It may be, strained statutory construction might be said to apply to section 74(3) to extend its remit to unlitigated cases, but it is not immediately obvious why that  should be so. 

Thirdly, perhaps the most problematic of the conclusions of the High Court judge is the conclusion that the solicitor’s firm owed and breached a fiduciary duty, vitiating the written agreement made when they were negotiating their own remuneration, and before assuming their role as the client’s solicitor; that is an ostensible fiduciary duty that arose before the fiduciary relationship came into existence.

But fiduciary duties do not exist in such a vacuum.  After all, as has been observed  ‘to say that a man is a fiduciary only begins analysis; it gives direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary?’

In Kelly v Cooper [1993] AC 205, the Privy Council approved the following statements of principle when considering how fiduciary duties are shaped by the nature and extent of the obligations assumed by the parties  to a relationship:

Similar considerations apply to the fiduciary duties of agents. The existence and scope of these duties depends upon the terms on which they are acting. In New Zealand Netherlands Society “Oranje” Inc. v. Kuys [1973] 1 W.L.R. 1126 , 1129-1130, Lord Wilberforce, in giving the judgment of this Board, said:

“The obligation not to profit from a position of trust, or, as it is sometimes relevant to put it, not to allow a conflict to arise between duty and interest, is one of strictness. The strength, and indeed the severity, of the rule has recently been emphasised by the House of Lords: Phipps v. Boardman [1967] 2 A.C. 46 . It retains its vigour in all jurisdictions where the principles of equity are applied. Naturally it has different applications in different contexts. It applies, in principle, whether the case is one of a trust, express or implied, of partnership, of directorship of a limited company, of principal and agent, or master and servant, but the precise scope of it must be moulded according to the nature of the relationship.

As Lord Upjohn said in Phipps v. Boardman , at p. 123: ‘Rules of equity have to be applied to such a great diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of each case.'”

In Hospital Products Ltd. v. United States Surgical Corporation (1984) 156 C.L.R. 41 , 97, Mason J. in the High Court of Australia said:

“That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.”

It may be in the light of these and similar observations in many other authorities, that the correct legal principle is that the contract of retainer once it is made, informs the scope of the fiduciary duties that a solicitor owes, rather than the other way round. No doubt all shall become clear in the year to come.

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