A good day for firms facing shortfall deduction disputes from former clients

On 27 October 2022, the Court of Appeal handed down its much-anticipated decisions in the cases of Belnser v CAM Legal Services Limited [2022] EWCA Civ 1387 (“Belsner”) and Karatysz v SGI Legal Limited [2022] EWCA Civ 1388 (“Karatysz”).

The facts of Belsner

In February 2016, the claimant was involved in a road traffic accident as a passenger on a motorcycle. When instructing the defendant, the claimant entered into a CFA and terms of business which set out that a success fee of up to 25% could be deducted from her damages at the end of the claim if she was successful. The terms of business provided the claimant with an estimate of the basic charges of £2500.00 plus VAT and disbursements that the defendant would have to incur to settle her claim, but it also went on to say that this could alter significantly for various reasons.

The claimant’s claim was settled for a total sum of £1,916.98 in damages. In addition, fixed recoverable costs and disbursements of £1,783.19 were paid to the claimant. The defendant paid £1,531.48 to the claimant (being the agreed damages less £385.50 success fee as per the terms of the CFA). The defendant later served its bill on the claimant in support of the deduction from damages made by it and this totalled £3,588.40 plus VAT, giving a total of £4,306.07.

The claimant challenged the bill alleging that CPR 46.9(2) had not been complied with and accordingly, the defendant could not recover from her a greater amount in costs than it was entitled to recover from the original tortfeasor.

CPR 46.9(2) reads as follows:

“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”

So far as relevant section 74(3) of the Solicitors Act 1974 reads:

“…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… exceed the amount which could have been allowed in respect of that item as between party and party in those proceedings…”

At first instance, the High Court concluded that a written agreement in a purely contractual sense was not enough. A claimant must have informed consent went entering into an agreement which ousts the protection afforded by CPR 46.9(2) and section 74(3) of the Solicitors Act 1974 (“SA 1974”). It was determined that the requirement for informed consent arose because of the fiduciary nature of the relationship between the claimant and the defendant.

The High Court held that the defendant had not made sufficient disclosure in respect of the likely recoverable costs on an inter partes basis versus the costs that may be incurred by the defendant in acting for the claimant that she was responsible for but had no reasonable prospect of recovering from her opponent.

Accordingly, the High Court concluded that the claimant had not given her informed consent to the agreement and the defendant could not rely on it for the purposes of CPR 46.9(2).

The defendant sought to challenge that decision on appeal to the Court of Appeal.

The facts of Karatysz

In May 2016, the claimant was involved in a road traffic accident. When instructing the defendant, she was sent a CFA and client care letter that was to form the basis of the agreement between them. Much like in Belnser the CFA permitted the defendant to deduct a 25% success fee from the claimant’s damages in the event of success. In addition, the agreement set out that section 74(3) of the SA 1974 would not apply and that the defendant’s charges were payable in full even though they may not be recovered in full from her opponent.

The claimant’s claim was settled for a total sum of £1,250.00 in damages. In addition, fixed recoverable costs and disbursements of £1,116.00 were paid to the claimant. The defendant paid £794.50 to the claimant (being the agreed damages less £455.50: £312.50 success fee and £143.00 ATE premium).

The defendant later served its bill on the claimant which sought basic charges of £1,717.00 plus VAT, a success fee of 100% of basic charges capped at 25% of the relevant recovered damages i.e. £260.42 plus VAT, a medical report fee of £180.00 plus VAT and the ATE insurance premium of £143. This gave a total of £2,731.90, however, this was not stated on the face of the bill. The bill gave credit for the £1,116.00 that had been received from the claimant’s opponent’s insurer, Aviva, and limited the remaining balance to £455.50 representing the success fee and ATE premium payable by the claimant. The total of the two figures was £1,571.50, however, that figure was also not stated on the face of the bill.

The claimant challenged the bill and following assessment before a District Judge the net effect of the decisions were:

the total amount of the bill was £2,731.90.
that the defendant’s success fee would be limited to 15% as a result of which the defendant was only entitled to retain £278.00 from the claimant’s damages (£143.00 in respect of the ATE premium plus £135.00 in success fee) rather than the £455.50 that it had previously deducted.
the defendant was ordered to pay the costs of the assessment proceedings.

On appeal to the High Court, Lavender J concluded that the total amount of the bill claimed was £1,571.50, and not £2,731.90 as determined by the District Judge. The claimant sought to challenge this decision.

The decisions of the Court of Appeal

In Belsner, there were five issues to be determined in that appeal (see paragraph 13):

Whether section 74(3) and CPR 469.9(2) apply at all to claims brought through the RTA Portal without county court proceedings actually being issued?

Whether the defendant was required to obtain informed consent from the claimant in relation to negotiation and agreement of the CFA, either due to the fiduciary nature of a solicitor-client relationship or through the language of CPR 46.9(2)?

If informed consent was required, whether the claimant gave informed consent to the terms of the CFA relating to the defendant’s fees?

Whether, in any event, what can be regarded as the term in the defendant’s retainer allowing the defendant to charge the claimant more than the costs recoverable from the defendant to the RTA claim was unfair under the Consumer Rights Act 2015 (“CRA 2015”)?

What are the consequences of the determination of these issues on the assessment in this case?

In a unanimous victory for the defendant, the Court of Appeal determined:

Section 74(3) and CPR 46.9(2) do not apply at all to claims brought through the RTA Portal without county court proceedings actually being issued (see paragraph 60).

The judge was wrong to say that the claimant was owed fiduciary duties by the defendant in the negotiation of their retainer (see paragraphs 73 and 74) and the defendant was not obliged to obtain the claimant’s informed consent under CPR 46.9(2) given it had already been concluded that CPR 46.9(2) did not apply (see paragraphs 67 to 69).

Although the defendant was not obliged to obtain the claimant’s informed consent to the terms of the CFA on the grounds decided by the judge, the defendant did not comply with the SRA Code of Conduct (“the Code”) concerning information about the likely overall cost of the case, nor did they ensure the claimant was in a position to make an informed decision about the case (see paragraphs 84 and 85).

The terms in the defendant’s retainer allowing them to charge the claimant more than the costs recoverable from the defendant in the RTA claim was not unfair within the meaning of the CRA 2015 as such an argument relied upon the application of section 74(3) of the SA 1974 and CPR 46.9(2). (see paragraphs 91 and 92).

On reconsideration of the defendant’s bill, the costs actually charged to the claimant by the defendant were fair and reasonable as required by the Solicitors’ (Non-Contentious Business) Remuneration Order 2009 (see paragraph 99).

Whilst critical of the defendant for failing to provide sufficient information to comply with its obligations under the Code, the Court of Appeal expressed its dissatisfaction at the practice of firms bringing High Court litigation to assess modest bills putting forward the Legal Ombudsman scheme as the appropriate route for dealing with such disputes. This is an important point for practitioners which removes the risk of firms being ordered to pay thousands of pounds in solicitor-client assessment costs.

In Karatysz, the issues to be determined by the Court of Appeal were:

Did the judge misunderstand the authorities on section 70(9) of the SA 1974?

Whether a bill of the type served could only be assessed if it stated the base costs, and whether that meant that the judge decided the meaning of the “amount of the bill” contrary to the rationale of section 70(9) of the SA 1974?

Whether it mattered that the defendant never demanded £1,571.50?

Whether the judge gave adequate weight to the defendant accepting that the bill was £2,731.90?

Whether the judge was therefore wrong to find the bill totalled £1,571.50?

Much like in Belsner, the answers to the questions posed by the court were decided unanimously in favour of the defendant with the Court of Appeal concluding:

The judge did not misunderstand the authorities on section 70(9) of the SA 1974 (see paragraph 28).

The judge did not decide the case contrary to the rationale of section 70(9) of the SA 1974 and, in fact, he did what he was supposed to do in the circumstances of the case. He decided the amount of the bill on its proper interpretation by asking himself what the bill was actually demanding to be paid (or to have been paid) by way of fees (see paragraph 36).

The point raised by the claimant that the defendant had never demanded £1,571.50 was a bad one as it made no difference whether the amount had been paid, and if it had, the identity of the paying party (see paragraph 37).

It was inappropriate to seek to rely on statements made before the issued were properly identified and the judge gave adequate weight to the defendant’s initial acceptance that the bill was for a higher amount (see paragraphs 41 and 42).

The judge was correct in concluding that the bill totalled £1,571.50.

Therefore, for those cases that do make it to court the decision in Karatysz provides a further boost to practitioners in that it provides clarity (see paragraph 46) on how a bill should be presented and for the purposes of determining the amount of the bill under section 70(9) of the SA 1974 the proper question to ask is: “what is the total sum that the bill is demanding be paid to the Solicitors, whether or not all or part of that total sum has actually been paid?”

What does this mean for lawyers?

The standout points are there for all to see in the judgments, most notable of them being that unless court proceedings are issued a claim is non-contentious business for the purposes of the SA 1974 and so section 74(3) and CPR 46.9(2) do not apply.

Equally important are the decisions reached that a solicitor does not owe a client fiduciary duties when negotiating their retainer with a client, that the terms in a retainer allowing a solicitor to charge a client more than the amount of the costs recoverable from an opponent in proceedings do not (certainly in the context of a claim brought and compromised prior to the issuing of proceedings) fall foul of the CRA 2015, and that the amount of the bill for the purposes of section 70(9) of the SA 1974 is the total sum that the bill is demanding be paid to the solicitor.

There are also other notable take-away points from both decisions. Most notably the warning shot sent by the Court of Appeal’s judgment in Belsner concerning compliance with the Code when giving information to clients and the guidance given in Karatysz concerning the content of a properly drawn bill prepared by a solicitor and served on a client.

The former point is capable of being guarded against by ensuring retainer documentation is clearly drafted and information on costs in comprehensive whilst remaining in a comprehensible format for lay persons. In addition, placing a limit on a client’s liability to pay you (by imposing an overall cap on unrecovered legal costs) may provide the clarity required to avoid challenges. The latter point appears to be something which may take on increasing significance if, as some commentators are suggesting, the service of a simple “gross sum bill” in non-contentious cases does not meet the requirements of section 70 of the SA 1974 sufficient to start the timescales for assessing running.

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