The latest case on solicitors deducting costs from damages in fixed costs cases is causing a stir, but Rob Marven KC and Ben Williams KC of 4 New Square Chambers argue that it is a decision on unusual facts, and that some key issues went unexplored.
Mr Justice Lavender’s recent decision in Belsner v Cam Legal Services Ltd  EWHC 2755 (QB) is the latest blow to solicitors representing claimants in the volume personal injury market. Already under siege from lawyers representing former claimants demanding refunds on allegedly excessive success fees, in Belsner Lavender J held that the effect of s 74(3) of the Solicitors Act 1974 (‘s 74(3)’/‘SA 1974’) was that no deductions at all could be made from the client’s damages, even though the client had entered a retainer which expressly authorised that. This contractual provision, the judge held, did not give the ‘informed consent’ which he held was required under CPR 46.9(2) in order to disapply s 74(3).
The judge’s ruling that costs cannot be deducted out of damages, even in the face of an express contractual authorisation, is potentially devastating to some sections of the personal injury market. Since the Jackson reforms abolished recoverable success fees and introduced very limited fixed inter partes costs for most fast track level claims, the ability to deduct at least part of the unrecovered costs from damages has become essential. In this short note, however, we argue that there are grounds for distinguishing Belsner in the very large number of cases where PI solicitors have placed a contractual cap on the amounts they can deduct from compensation. We also suggest that some important and potentially decisive issues were not explored in the Belsner case.
The Facts of Belsner
Belsner arose from a detailed assessment of a solicitor’s bill on the application of their former client the claimant. The solicitors had acted for the claimant in her claim arising from a road traffic accident when she was knocked off the motorcycle on which she was a pillion passenger. The solicitors’ CFA retainer documents had set out the claimant’s liability for basic charges, success fee and disbursements; and (broadly speaking) indicated that her liability could be expected to exceed inter partes recovery. Significantly, however, the CFA did not provide any overall cap on the amount of costs payable by the claimant to the solicitors. Many solicitors of course do do this, caps on deductions of around 25% being common in the market.
The claimant’s claim settled within stage 2 of the so-called portal process (formally, the Pre-Action Protocol for Low Value Personal Injury Claims in Road Traffic Accidents) for £1,916.98. The solicitors deducted (only) £385.50 for their costs from these damages, but the terms of the CFA would have entitled them to charge the claimant an amount that not only extinguished her damages entirely, but then still left her liable for a balance of £605.90. It hardly needs saying that if the solicitors had enforced these obligations, the PI claim would have been a pointless financial disaster for the claimant, even though she had won.
Until recently, the terms of SA s 74(3) and CPR 46.9(2) were probably known to very few solicitors. Section 74(3) is an artefact of the old county court scales of costs, which were abolished in 1999. Until the Jackson reforms, it could rightly have been seen as an obsolete piece of legislation, awaiting repeal when Parliament came round to it. However, the advent of fixed costs has given a new, but probably unintended, lease of life (Jackson himself emphasised that his new costs system would entail deductions from damages – he wanted claimants to have ‘skin in the game’ and he commended the 10% increase in general damages which resulted from Simmons v Castle to help finance it). However, there provisions are now becoming very familiar to PI solicitors in disputes with former clients about deductions from damages.
SA 1974 s 74(3) provides that:
‘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.’
However this can be disapplied by CPR 46.9(2) which provides that:
‘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.’
The Ruling in Belsner v Cam Legal
Even though court proceedings had not been issued in Belsner, it was conceded that SA 1974 s 74(3) was engaged. It is far from clear to us that this was correct. However, in light of this position, the issue for the court to decide was whether s 74(3) had been disapplied by CPR 46.9(2). The solicitors’ argument was that the CFA retainer represented the required ‘written agreement’, so s 73(4) was ousted. However the judge held that mere agreement in the contractual sense did not suffice and that the client’s ‘informed consent’ was required; this requirement arose, the judge said, ‘because of the fiduciary nature of the relationship’ between solicitor and client.
The judge noted that it had not been suggested on behalf of the claimant that informed consent meant 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’. As to what was required, the judge observed that the solicitors’ client care letter had given the claimant an estimate of their basic charges on the assumption that (as it turned out did happen) the claim resolved within stage 2 of the protocol. In respect of this scenario, the judge observed that:
‘If it had been pointed out to the Claimant 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, then that may have affected the Claimant’s consent to the agreement between them 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. It may, for instance, have led the Claimant to ask whether her liability could be capped, or to approach a different firm of solicitors, who would cap her liability. Prima facie, therefore, it ought to have been disclosed.’
The judge then said:
‘It does not seem to me that it would have been an unduly onerous burden to require the Defendant to make this disclosure. It would not involve explaining all of the detail and complexity of the provisions of the Civil Procedure Rules and the Protocol which I have set out. Nor would it have required identifying every possible outcome of the Claimant’s claim. Rather, it involved taking the outcome which the Defendant had itself assumed for the purposes of its estimate of costs and stating what the recoverable costs might be in that case.’
The judge then went on to observe that the CFA documents were very similar to those in Herbert v HH Law, which the Master of the Rolls had there described as ‘a clear and comprehensive account of [the client’s] exposure to the success fee and HH’s fees generally’. However he observed that: the agreement in Herbert differed it that it included an overall costs cap of 25% of damages; and no argument had been advanced in Herbert based on CPR 46.9(2).
Applying Belsner v Cam Legal
There will no doubt now be much debate about the application of this decision where the terms of the CFA are different. We suggest that the fact that the claimant’s liability for costs (beyond inter partes recovery) was uncapped, which on realistic figures meant there was every prospect of her damages being more than extinguished by her costs liability, was central to the approach taken in judgment. It was because of the absence of such a cap that an estimate of the solicitors’ costs alone did not enable the claimant to understand her exposure to costs from her own resources unless she was also given an indication of inter partes recovery, so that she could appreciate what the difference was.
These features are obviously not present where a CFA provides an overall cap to the client’s costs liability. There is obviously no risk of the client’s damages being extinguished, and so this striking feature does not exist to be brought to the client’s attention. Further the client does know her exposure from her own resources without being told any fixed costs figures: it is the cap; and the resources in question are moreover a new fund of money recovered as a result of the solicitors’ actions, so there is never any risk to the client’s own funds, and she can only ever be a net beneficiary if she wins the litigation. It is therefore strongly arguable that where there is a cap on deductions from damages, the client’s consent is informed because (in short) the client does know where she stands.
As we have said, some points also went unexplored in Belsner, which is unlikely to be the last word on the subject, an intent to appeal having been indicated and other cases also being in the pipeline. We will mention just two points apt for further exploration.
Firstly, the court in Belsner was not asked to decide whether s 74(3) only applied when ‘proceedings in the county court’ had been issued. But that point is clearly open for argument on the plain words of the statute – and indeed is regularly argued at county court level. Once it is appreciated that s 74(3) reflected the old county court scale costs, it is plainly arguable that it does not extend to cases which settle under a pre-action protocol (although that argument would of course not apply to issued cases, where fixed costs are payable under stage 3 of the portal or section IIIA of CPR 45).
This judgment’s approach to construing the phrase ‘express agreement’ in r 46.9(2) by reference to a solicitor’s fiduciary duty is also surely open to further argument. The conventional view is that a fiduciary relationship only arises when the solicitor-client relationship is itself established, which (at least generally) would only be when the initial retainer has been executed: i.e. that a solicitor is not acting as a fiduciary when stipulating its initial terms of retainer. When a solicitor is proposing (and at least potentially even negotiating) its own terms of remuneration, necessarily acting in its own financial interests, it is to say the least open to question how or why the solicitor can be expected entirely to subordinate its financial interests to its potential client’s financial interests, which is what a fiduciary relationship would generally require.
The position may be compared with that of a trustee. Trustees are fiduciaries, and it is trite that they cannot profit from their trust. But the commercial world is full of many very well remunerated trustees. That is because a putative trustee is not acting as a fiduciary when stipulating his terms of appointment. If he stipulates terms of remuneration before appointment, then the fiduciary relationship that subsequently follows does not prevent from profiting from the trust in accordance with the terms of appointment.
For these reasons, the ambit and even the correctness of the Belsner case is far from clear, and it may not be the disaster that (judging by social media) many solicitors initially thought. However, given that an appeal may take a year to come on, it is obvious that the claimant PI industry will need immediately to revisit their terms of retainer – and that solicitors who do not presently apply an overall cap to damages must now give that the most urgent consideration.
Disclaimer: this article is not to be relied on as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.
© Robert Marven and Benjamin Williams, October 2020.