In the Media

Costs belong to the client

PUBLISHED September 19, 2012

Thursday 20 September 2012 by District Judge Christopher Lethem

Fact or fiction? Solicitors are retained by a client. They issue and prosecute a judicial review of the decision of the secretary of state for the home department (SSHD). They settle the action on terms that include payment of their reasonable costs. Within six months, their client has diverted the costs and disappeared abroad with the cheque.

This was the outcome of Khans Solicitors v Chifuntwe and SSHD [2012] EWHC 2108 (QB). This article provides some pointers to safeguard the practitioner in the situation where their client withdraws instructions owing fees.

The facts
On 29 April 2011, Khans compromised judicial review proceedings on terms that the SSHD would pay its reasonable costs. On 2 June 2011, it commenced detailed assessment proceedings, seeking £9,497 costs. On 13 July 2011, the SSHD offered £6,000 to settle costs. On 2 August, Mr Chifuntwe wrote to the SSHD in the following terms:

'This notice confirms that with effect from 2 August 2011 I have withdrawn consent from Khans Solicitors… they have ceased representing my interests regarding this matter and any related issues to the same matter.

'I further confirm that upon considering your letter dated 13 July 2011 I have accepted your client's offer of £6,000 equivalent to my recoverable money save any costs that may arise due to your client's future delays from the date of this notice. Please make payment in my name… and send cheque including future correspondence directly to me on the above address' (original emphasis).

The solicitor's response was to write to the client on 4 August 2011:

'Please do not involve yourself with legal costs since this has nothing to do with you. Also these are technical matters and certain rules and regulations apply. You as a client have no say so please do not spoil things by contacting [the draftsmen]. These are our costs and only reasonable costs based on the rules can be claimed…'

In August or September, the solicitors wrote to the SSHD, seeking to prevent the £6,000 being released to their client as there was no valid compromise of the costs, and that the costs should be paid to them as these had arisen out of the claimant's instrumentality. They then issued proceedings in the Administrative Court which were struck out on 19 October. On 9 November 2011, the SSHD paid the £6,000 to Mr Chifuntwe. The law report tells us that by the time of the hearing he had gone abroad!

The decision
The solicitors argued that the SSHD knew that they had a lien over the costs and that the lien bound the costs, even if they had been paid over. In support of the argument, they relied on two cases, Ross v Buxton [1889] LR 42 Ch 190 and Re Margaretson and Jones [1897] 2 Ch 314. The principle said to emerge from the cases was that, where a receiving client and the paying party, knowing of the lien and intending to defeat it, compromise proceedings, then this is not permitted. The solicitors lost on the short point that there was no evidence of collusion or an intention to defeat the lien. It was found that all steps had been open and clear to all parties, and indeed the SSHD had not paid until after the Administrative Court proceedings had been struck out on 19 October.

It seems that the solicitors proceeded under two misapprehensions that ultimately led to their downfall. First, they failed to recognise that costs are the client's costs not the solicitors'. Proceeding from that misunderstanding, they failed to understand the importance and nature of their lien and to take steps that were open to them to preserve the position.

It will be recalled that the solicitors wrote to the client indicating that costs were 'nothing to do with him'. This is incorrect - a solicitor can only be remunerated by his client or the Legal Services Commission. A solicitor cannot treat costs recovered inter partes as his own; he must recognise that any costs recovered belong to the client who remains responsible for his costs (Cobbett v Wood [1908] 2 KB 420). This is the whole basis of the indemnity principle, whereby a solicitor cannot recover inter partes more than their client is due to pay to them. Costs compensate the client for their contractual liability to the solicitor (Gundry v Sainsbury<./em> [1910] 1KB 645 CA; Hollins v Russell [2003] EWCA Civ 718; and, more recently, Culkin v Wirral Independent Appeals Panel [2011] EWHC 1526 (QB)). Had the solicitors realised that these costs belonged to the client, then they would have appreciated that the only claim that they would have over the costs was by way of a lien. The alarm bells should have rung and steps could have been taken.

What claim did the solicitors have in relation to the costs? A solicitor with unpaid fees has a potential lien over the client's property in one of two ways. The first are common law liens and the second a statutory lien under section 73 of the Solicitors Act 1974.

At common law, the solicitors have a 'retaining lien', a right to retain client's property in their possession until such time as they are paid their outstanding fees, and a 'preserving lien', a right to ask a court to order that personal property recovered under a judgment obtained by his exertions stand as security for his costs.

Solicitors will be familiar with the retaining lien in relation to a client's papers. Providing the property comes into the solicitor's possession through their position as solicitor, then they have a lien over that property, to the extent that the client's personal liability for costs remains outstanding (Loescher v Dean [1950] Ch 491). The property extends to monies held in the solicitor's client account (see Withers LLP v Rybak [2011] EWHC 1151 (Ch)). This lien is good against the client and anyone claiming through them. It also seems that the lien is good against any claimant in relation to the fund, where the solicitor holds the fund as stakeholder (Withers LLP v Rybak). It does not extend to monies that are the subject of an obligation, for example trust monies, save where the trust is simply the obligation to repay monies to the client (Loescher).

Solicitors more often find themselves in the position of seeking a preserving lien. This lien extends to property recovered or preserved, or the proceeds of any judgment obtained by the work of the solicitor in relevant proceedings (Halvanon Insurance Co Ltd v Central Reinsurance Corporation and another [1988] 3All ER 857). To mount such an application, the solicitors will have to show that they were instructed by the party, that they have unpaid fees owing, that the property in respect of which they seek an order is property recovered, or preserved, or the proceeds of a judgment, and it was recovered as a result of their work. In Halvanon, the court doubted that the right is a true 'lien' as such, but rather the right to ask the court to interfere equitably to protect the rights of the unpaid solicitor.

In practical terms, there may be little difference between this quasi lien and the statutory right under section 73 of the act which provides:
73(1)… any court in which a solicitor has been employed to prosecute or defend any suit, matter or proceedings may at any time:
(a) declare the solicitor entitled to a charge on any property recovered or preserved through his instrumentality for his assessed costs in relation to that suit, matter or proceeding; and
(b) make such orders for the assessment of those costs and for raising money to pay or for the paying of them out of the property recovered or preserved as the court thinks fit.

Again, the basic aspects are the same. The solicitor must have been emplo
yed by the party to prosecute or defend the proceedings, the right extends to property recovered or preserved through his instrumentality and he must have unpaid costs. The advantage of section 73 is that there is a machinery for resolving any disputes as to costs in section 73(1)(b) and for payment out.

So what could the solicitors have done? The moment that they appreciated that their client was trying to remove them from the costs assessment, they should have appreciated that they had lost control over the process. At that stage they could have made application to the court under their common law preserving lien and/or section 73 of the act, seeking a declaration that they had a charge over the funds and freezing the fund until the conclusion of the application. In this way, they would have been able to prevent premature payment to their client.

District Judge Christopher Lethem sits at Tunbridge Wells County Court. He is a regional costs judge