Deductions: Shortfall and Success Fees
Does your retainer limit your recovery? It is common practice for firms to have a carefully thought out template CFA retainer that they use on all cases (where appropriate, of course). These my be documents which have been so carefully considered that they only need updating with the requisite case specific detail such as (but not exhaustive of) the client’s name, the action to which it relates, the date of the agreement, hourly rates and the success fee (not simply mentioning the caps, but detailing the success fee that you assessed when you undertook your risk assessment to determine what level success fee should apply).
Though such template documents are normally failsafe, sometimes their relationship to any Terms of Business or Client Care Letter, that may also be sent to a client, can be overlooked. If consideration is not given to all documents and how they interplay with one another, a solicitor could sadly find themselves in a situation where they have worked hard, got a good result but yet end up recovering significantly less than was originally hoped or intended... and I am not talking about inter partes costs recovery here, but Solicitor and own client assessments (Deductions from damages of success fees, as well as any shortfall on costs.)
As a Costs Draftsman of over 20 years, I find myself advising more and more commonly advising on queries relating to retainers and client deductions and more often than not on retainers which do not work in symmetry with Terms of Business.
The recent case of St. James v Wilkin Chapman LLP [2024] EWHC 1716 (KB) is a High Court Appeal decision which highlights this issue. I highly recommend giving it a read, especially if it’s been a while since you considered your own retainers.
The Case:
The Respondent (WCL) had acted for the Claimant (Mr St James) in a personal injury action which settled for £65,000.00 damages. WCL secured an inter partes costs recovery of £52,250.00 and some £13,750.00 was deducted for solicitor and own client fees. The Claimant challenged the whole of this sum.
There were three decisions made to which the Claimant's appeal related. These were:
(1) the decision (on 7 November 2022 [2023] EWHC 739 (SCCO)) that Mr St. James' liability to WCL in respect of base costs was not limited to the sums in respect of base costs recovered from the opponent to the underlying claim ('the CFA Lite Point');
(2) the decision (on 20 July 2023) that WCL's base costs are not otherwise limited to the sums recovered from the opponent by virtue of the fact that such costs were unusual in amount and therefore were presumed unreasonable pursuant to CPR 46.9(3)(c) and/or of WCL's failure to have obtained Mr St. James' informed consent to the incurring of costs in excess of the approved between the parties costs budget ('the budget point').
(3) the decision on (20 July 2023 [2023] EWHC 1856 (SCCO)) that WCL's base costs are not otherwise limited to the sums recovered from the opponent by virtue of WCL's failure to provide any or any proper costs estimates to Mr St. James (and in addition therefore a failure to seek the Claimant's informed consent to the incurring of such costs) ('the estimate point');
(1) The Retainer Issue:
The Claimant’s case was that they were provided with a Client Care Letter ('CCL') dated 22 May 2015 which was provided with a standard form CFA Agreement, which itself included the Law Society Conditions.
A dispute arose about the contractual status of the Client Care Letter and whether it formed part of the agreement (it’s terms were argued as conflicting with the terms of the CFA itself).
Without wanting to oversimplify what was a rather technical point (the Judgment makes an interesting read), the issue essentially came down to whether the Client Care Letter had any impact on WCL’s ability to recover inter partes costs. In particular whether the Client Care Letter was incorporated into the agreement between the parties and, if it was, its affect on the solicitor’s ability to recover costs that were not recovered from the initial Defendant.
The Appeal Judge found that the Client Care Letter was incorporated into the agreement and found that:
“In the circumstances, I conclude that the Costs Judge erred in his finding that in this case WCL had the right to recover costs which were not recovered from the other side from Mr St. James as a matter of contract. The CCL turned the CFA into a ‘CFA-Lite’. It follows that Mr St. James is only liable to a deduction of the success fee from his £65,000 damages, in the agreed sum of £3,668.71.”
That is some £10,000.00+ difference to what WCL had originally sought from the Claimant, by way of deduction from damages.
(2) The Budget Point:
WCL produced a Cost Budget which was later approved by the Court, at a reduced amount. The Claimant argued that neither the draft Budget nor the reduced Court approved budget was communicated to them. Unfortunately WCL then went on to exceed the court approved budget, the “overspend” for which was not recovered during the inter partes costs recovery.
Though there is much to be considered on this point, of interest is the Judge’s comment that the previous Cost Judge’s conclusion, that suggested that not keeping the client informed about costs which were being incurred 'might well be viewed as looking after the client's interest at the solicitor's own expense' was “perverse”. He continued to say that such a view was “no such thing. It is conduct wholly inconsistent with a core duty imposed on solicitors under the Code of Conduct (r.8.9) which requires solicitors to;
"…ensure that clients receive the best possible information about how their matter will be priced and, both at the time of engagement and when appropriate as their matter progresses, about the likely overall cost of the matter and any costs incurred."
In summary, the court found that WCL had failed to inform the Claimant about exceeding the costs budget and their intention to recoup those irrecoverable costs from the Claimant’s damages.
(3) The Estimate Argument
This is, again a complex and case specific issue as the issue here wasn’t actually that the Claimant had placed reliance on the overall estimate, but whether the Claimant was reasonably expected to have been able to rely on the statement contained within an estimate provided to him which stated “none of the above requires any payment from you“ (referring to estimated costs).
The original Costs Judge concluded that the Claimant could not demonstrate any reliance upon the estimates he was given, absent that reliance, the amount he could be reasonably required to pay was not limited by any estimate.
However, the Judge determining the Appeal found that:
“the substance of the case was not about the estimate itself: it was about the clear assurance that the client would never be required to pay the solicitor's costs if there was a shortfall in recovery from the other side. Unless it was suggested that, for some reason, a client ought not to have relied on this assurance (because they should have known, for some reason, it was false or wrong), reliance can, in a case such as this, readily be presumed. In this particular case, the absence of further estimates or involvement in the settlement of costs with th e other side only fortified the reliability of the assurance. Put another way, why would the client not rely upon the fact that he or she was told they would not in fact be required to pay any of the solicitors costs? It is obvious that, by making such a statement (echoing, of course, the statement in the CCL), Mr St. James was deprived of the opportunity to find an alternative solicitor who was prepared to act on a true CFA-Lite basis.”
Summary:
The Appeal Judge, Mr Justice Constable, allowed an appeal against a decision that WCL was entitled to deduct additional costs from the Claimant’s damages. The Judge held that the terms of the Client Care Letter meant that the solicitor was only entitled to deduct a success fee. The solicitor was not entitled to deduct further costs that had not been recovered from the Defendant.
This ruling re-enforces the recent raised profile and trend of the need for informed consent and it drives home that best practice is transparency in solicitor/client billing.
As profit margins seem to be tightening, there is an even greater need for an awareness of your complete retainer documents and an clearly communicated understanding from you and your client as to what your client’s total potential liability is in respect of costs. It now goes without saying that it is important to provide regular updates to your client about all things costs, and in the event of change, ensure that clear explanation is given ( to include the impact such changes could have on the client).
If you have any questions about this case or any other costs related issues surrounding Solicitor and own client costs please contact the writer, Charlene Turner, here or a member of the Litigation Team at Paramount Legal Costs. We are currently in the process of setting up new, up to date training on Solicitor and own client costs (amongst many other exciting areas), so if you would be interested in discussing what we can offer you, please contact our Training Manager and current member of the ACL Council, Kris Kilsby, here.
