Our latest PodCost, this time featuring Martyn Griffiths of Gatehouse Chambers, begins – as has become the usual – with an update on the fallout from the Supreme Court’s decision in PACCAR.

The case of Diag Human v Volterra Fietta has potential implications for the ongoing battle between funders and those they fund. The law firm provided advice to its client under a discounted conditional fee agreement (CFA). The CFA was found to be unenforceable, but the solicitors argued that the offending parts of the CFA could be severed. Alternatively, they argued that their fees could be assessed on a quantum meruit basis. Costs Judge Rowley ruled that the solicitors couldn't recover any fees due to the unenforceable CFA. This decision was upheld by both the High Court and the Court of Appeal. On 31 January 2024, the Supreme Court refused permission to appeal citing no arguable point of law.

The Court of Appeal had rejected the severance argument for two reasons. At paragraph 41 Lord Justice Stuart-Smith concluded that: ‘… to implement the severance proposed by the solicitors would fundamentally change the nature of the contract so that, upon severance, it would cease to be the sort of contract into which the parties had originally entered.’

The more interesting reason in terms of PACCAR is the view of the Court of Appeal in relation to the ‘choppy waters of public policy’. Lord Justice Stuart-Smith found that ‘severance is precluded as contrary to public policy’ because it would permit partial enforcement of an unenforceable CFA.

In a pithy addition to the main judgment, Lady Justice Andrews concluded that: ‘there would be little incentive to solicitors to adhere to the straightforward requirements of the regulations laid down for the protection of their clients, if the worst that could happen if they failed to do so would be that they would be paid the amount that the client had agreed to pay for their services win or lose.’

In relation to the quantum meruit submissions, Lady Justice Andrews added ‘… the short answer is that it is not open to the solicitors to claim by the back door any payment for their services which they cannot receive through the front.’

While the judgment of the Court of Appeal is not binding in relation to PACCAR, it is persuasive and is likely to be cited by parties caught up in arguments about severing unenforceable terms.  

Funders will no doubt argue that they are in a very different position because they have made loan payments, unlike solicitors who provided services for free under an unenforceable CFA. Funders are also likely to stress that they are once removed from solicitors who are officers of the court and should not be held quite so strictly to public policy considerations. Clients are likely to argue that the DBA regulations are just as strict as the CFA regulations and the legislature must have had similar intentions so far as public policy is concerned.

Jeremy makes the point that in the Volterra Fietta case there was an attempt to rewrite the CFA after the case had ended and the agreement had been completely executed. This is not the same as attempts to rewrite litigation funding agreements in the wake of the PACCAR decision, where the litigation is ongoing, and the costs liability has not yet crystallised.

Martyn then deals with three recent costs decisions.

The first case, Kenig v Thomson Snell & Passmore, explores the rights of beneficiaries who want an assessment of the executor or trustee’s legal costs.  

The law firm relied on the 2011 Court of Appeal authority in Tim Martin Interiors Ltd v Akin Gump LLP and argued that it was not open to a beneficiary to challenge legal fees which had been paid from estate funds to solicitors appointed by the executors to administer that estate.  

A beneficiary could only eliminate items of legal work from a bill which were outside the scope of the retainer or were of an unusual nature or amount and not authorised by the executors. Lord Justice Lloyd correctly predicted that, in the light of this judgment, the number of third-party assessments would reduce and remain low … and he was right.

The judgment in Tim Martin did not differentiate between assessments under s71(1) of the Solicitors Act and s71(3) – between applications made in relation to a contract and applications made by beneficiaries to a will or trust.  

In Kenig, Lord Justice Stuart-Smith concluded that ‘It is plain on the face of section 71 that the third-party applications under sections 71(1) and 71(3) differ in (a) the person who may apply for assessment, (b) the nature of the application which the applicant may make, and (c) the nature of the order that the court may make on such an application.’

After examining the historical legal framework and the judgment in re Brown (1867) LR 4 Eq 464, Lord Justice Stuart-Smith found that there was a long-established distinction between third parties applying under s71(1) and beneficiaries applying under s71(3).

Lord Justice Stuart-Smith concluded that there are material differences between applications under s71(1) and s71(3) of the Solicitors Act. An application by a beneficiary under s71(3) permitted a wider enquiry by the costs judge, going to quantum as well as scope and the judgment in Tim Martin could not be relied on where an application for assessment is brought under s71(3).

Going forwards, we can expect to see more beneficiaries holding trustees to account and challenging duplication of work and excessive time.

Martyn makes the point that this case is yet another reminder to provide clients (and perhaps beneficiaries too) with up-to-date costs information as the matter progresses and to obtain specific consent to unusual items of work.  

Andy highlights that there can be an initial fishing expedition to try to establish whether there has been overcharging but having to reduce costs by 20% on a solicitor/client assessment in order to secure the costs of the challenge, the cost benefit analysis should be undertaken as early as possible.

The second case considered by Martyn is the decision of Senior Costs Judge Gordon-Saker in the case of Sellers v Simpkins. This first instance decision explores the relatively common situation where the client has instructed solicitors under a CFA but they terminate the CFA and move their instructions to another law firm. In this case, the CFA was a CFA ‘lite’ (the solicitors would not seek more in costs than was recovered from the opponent) and the CFA did not seek a success fee.

The Claimant terminated the CFA in March 2021 and instructed new solicitors. The original solicitors wrote to the Claimant at that time saying ‘the issue of costs owed to the firm must be resolved prior to the file transfer.’ They didn’t deliver a bill at that stage.

A joint settlement meeting was planned for August 2021. The original solicitors were asked for details of their costs in advance of that meeting, but none were provided. The claim was compromised at the joint settlement meeting on a global basis inclusive of costs.

The first solicitors did not deliver a solicitor/client bill until more than a year later, in November 2022. That bill was for almost £500,000 and, in the wake of its delivery, the Claimant began detailed assessment proceedings.

By the time the matter reached the SCCO in December 2023, the Claimant’s case had evolved into an argument that, under the CFA, the first solicitor’s entitlement to costs was limited to those recovered from the paying party in the underlying proceedings i.e. the cap in the CFA applied in circumstances where the client terminated the CFA.

The CFA incorporated the Law Society’s standard terms on termination:

‘You can end the agreement at any time … we then have the right to decide whether you must:

  • pay our basic charges and our expenses and disbursements including barristers fees but not the success fee when we ask for them; or

  • pay our basic charges and our expenses and disbursements including barristers fees and success fees if you go on to win your claim for damages.’

The Claimant argued that the solicitors had elected to await the outcome of the case and that the late delivery of the solicitor/client invoice was evidence of this decision. The operation of the cap meant that the solicitors shouldn’t be entitled to more in costs than was recovered from the paying party.  

The senior costs judge decided that there was no requirement for a bill to be delivered to trigger liability when the retainer ended. The fact that the solicitor stated that costs needed to be resolved before the file was transferred was enough to show that the solicitor had elected to be paid straight away (as there was no success fee in any event, why would the solicitors do otherwise?). As a result, the cap did not apply and, subject to the inter partes assessment of those costs, the solicitors were entitled to be paid on an uncapped basis.

This is the latest case in a long line of cases where the terms of the Law Society’s model CFA have been considered by the court.  

Andy adds that where there is a change of solicitor, whatever the retainer, the duplication created by the new solicitors reading into the case should not be the responsibility of the paying party.

Part 36 is the subject of the third case considered by Martyn. Whether Part 36 applies to solicitor/client assessments has been the subject of speculation since the extension of Part 36 to costs assessments as part of the Jackson reforms.

In the case of Zuhri v Vardags, Costs Judge Leonard ruled that it does not.

The law firm issued Part 7 proceedings to collect outstanding legal fees from the client. The proceedings were stayed when the client issued Part 8 proceedings and obtained an order for costs to be assessed. ADR was attempted but failed and the solicitor/client assessment resumed. At this stage, the law firm made a Part 36 offer, referencing both the ongoing Part 7 proceedings and the assessment under the Solicitors Act. They stated that if they obtained a judgment at least as favourable as the offer, they would seek the usual Part 36 benefits. The client appears to have become completely disengaged from the assessment process and did not attend court. On assessment the law firm recovered 98% of its costs and sought the benefits which flow from beating a Part 36 offer.

In his decision, Costs Judge Leonard concluded that it was not possible for secondary legislation such as the Civil Procedure Rules to override primary legislation in the form of the Solicitors Act. This is a strongly reasoned judgment which is likely to be definitive on this point.  

In the last two paragraphs of the judgment, the costs judge made two interesting comments:

‘50. … Had the "one-fifth rule" operated against the [law firm] in this case, the offer could have offered a sound ground for making a finding of special circumstances and awarding the costs of the assessment process to the [law firm] …

51. It occurs to me that it might still be open to the Defendant to revive the Part 7 proceedings, and to take advantage of its Part 36 offer in the context of those proceedings, but that is not a matter for me.’

Martyn and Andy then discuss the best way to secure costs protection in solicitor/client proceedings. The timing of a well-judged offer is crucial, as is the use of Calderbank offers.  

Jeremy wonders if reform of the Solicitors Act could include reviewing the 1/5 rule in solicitor/client assessments. Martyn’s view is that costs judges generally favour the 1/5 rule. It acts as an early warning to clients that they need to cut their legal costs by 20% to recover their costs, which is a significant reduction to achieve.

The increase in disputes between solicitors and clients over fees should serve as a clear warning to solicitors about the importance of protecting themselves on costs throughout the litigation process.  

The rest of this session focusses on practical advice for litigators.  

  1. Retainers and interim billing: Most retainers include provisions for interim billing. Law firms like interim billing because it produces certainty and potentially reduces the scope of the Solicitors Act. However, issuing interim statute bills shortens the time frame for clients to challenge fees billed and it can be difficult for a client dealing with ongoing litigation to challenge their own legal fees at the same time as they are fighting their opponent. Costs judges generally dislike interim billing for these reasons. If firms use interim billing, they must clearly explain to clients how it affects their rights to challenge fees. The terms regarding interim billing in the retainer should be consistent and clear. If they are not, the law firm could find itself having to issue a new bill and the client being able to challenge all the fees issued over the lifetime of the case.

  1. Estimates of costs: There are regulatory requirements about providing accurate costs estimates at the time of engagement and as the case progresses. While it’s common to give an early-stage estimate, firms should ensure they update the estimate as needed and inform clients if the estimate is likely to be exceeded. It's essential to stick to whatever promises are made in the retainer regarding estimates.

  1. Costs budgets as quasi-estimates: Clients may try to treat an inter partes costs budget as an estimate of their solicitor/client costs. Without regular costs updates, clients might argue they expected their actual bill to reflect the inter partes budget. It's crucial to maintain a clear distinction between inter partes costs and solicitor/client costs in communications with clients, making it clear that the liability to pay your own solicitor is distinct from the recovery of inter partes costs.

  1. Fixed costs: The extension of fixed recoverable costs will produce greater shortfalls between recoverable costs and solicitor/client fees. There will be an increase in solicitor/client assessments because the result isn’t what they wanted. Solicitors who haven't protected themselves adequately on costs may become targets for clients seeking to improve their overall commercial outcome.

Andy makes the point that a client may initiate solicitor/client proceedings not necessarily because they're unhappy with the fees or information received, but because of a suboptimal outcome in the case. He highlights that it’s the client’s net position which is important. If the client gets a reasonable amount back from the paying party, this will affect their appetite to reduce the shortfall.  

The full version of this very practical and extremely relevant edition of the PodCost can be viewed and listened to via the usual platforms.

The contents of this article are for general information purposes only and do not constitute legal advice.  While we endeavour to ensure that the information in this document is correct, no warranty, express or implied, is given as to its accuracy and we do not accept any liability for error or omission.