COST BITES 190: INTERIM STATUTE BILLS, DISCOUNTED CFA ARRANGEMENTS AND PARALLEL REALITY- A DIFFICULT MIXTURE

In Blue Manchester Ltd v Howard Kennedy LLP [2024] EWHC 2823 (SCCO) Costs Judge Nagalingham considered the issue of whether interim bills sent out under the terms of a discounted CFA.  The judge found that interim bills rendered in these circumstances could not be interim statute bills. As a result they were all open to assessment.

“The hurdle the Defendant has repeatedly failed to overcome is the parallel reality in which they were inviting the Claimant to exist. One where in the event of one outcome (i.e. success), then the charges for a particular period of time would increase (by the application of a top-up charge), but in the event of another outcome (failure), the charges would remain the same. On the Defendant’s case, that left the Claimant in a scenario in which the time limits under the Solicitors Act could start to run from two different dates depending on the outcome of the litigation. In my view, absent an explicit agreement to such an arrangement, that means bills 1 to 15 are incapable of being interim statute bills and therefore such status is not conferred on any of the same.”

SOME ISSUES OF SOLICITOR & OWN CLIENT COSTS CONSIDERED: WEBINAR ON OAKWOOD -v- MENZIES 13th NOVEMBER 2024

In Oakwood Solicitors Ltd (Respondent) v Menzies (Appellant) [2024] UKSC 34 the Supreme Court overturned the Court of Appeal decision that the sending out an account and deducting costs from damages meant a bill had been “paid” for the purpose of a Solicitors Act assessment.

The decision has important ramifications for any solicitor who deducts costs from the client’s damages.  The significant elements of this decision are considered in a webinar on the 13th November 2024. Booking details are available here.

This webinar looks at:

• The key findings in Oakwood
• The practical implication of Oakwood
• The steps that the Supreme Court has said a solicitor can take to protect their position
• Dealing with current cases where this issue may arise
• Heading off problems in the future

THE ISSUES IN THE BLUE MANCHESTER CASE

The claimant solicitors were seeking the assessment of a series of bills of costs that had been rendered by the defendant solicitors.   There was an issue in relation to some of the bills as to whether they were interim statute bills”. If they were then the issue was whether there were “special circumstances” which meant that the bills could be subject to assessment.

The defendant had instructed the defendant to act on its behalf in an arbitration relating to a hotel.

Initially the matter proceeded by way of private retainer.

The arrangement then changed to one of a discounted CFA. The defendant solicitors worked at a lower rate with an agreement that the rate would be made up if the arbitration was successful.

THE TERMS OF THE RETAINER

The judge considered whether the terms of the revised retainer permitted interim statute bills to be sent.

1. 1. It is the Claimant’s case that in or around November 2020, after the Claimant had filed its response to the arbitration (but prior to sight of the Hilton Group’s evidence), the Defendant provided a costs estimate. This is found at pages 409-410 of the hearing bundle and sets out an ultimate figure of £909,357.20. It is a detailed document which breaks down all the constituent parts of the Defendant’s costs estimate and the Claimant’s case is that it proceeded to instruct the Defendant on the basis of that estimate.

1. 1. Insofar that it is alleged that the Claimant was told that by around March 2021 the Defendant’s fees to date were in the region of £750,000, the Claimant does not accept it was told that further fees of around £1.1m would be required to take the matter to a conclusion. The Claimant says such a figure was never formally communicated in writing either.

1. 1. The Claimant does accept that by late Spring / early Summer 2021 the costs were escalating, and that an agreement was struck for the Claimant to enter into a no-win, reduced fee agreement with the Defendant.

1. 1. The Claimant relies on an engagement letter dated 7 May 2021 (page 82 of the hearing bundle) which provides that “This engagement letter sets out the basis on which we will carry out work for you in this matter, and subject to the terms of the Conditional Fee Agreement which we have agreed will apply to our fees from 21 December 2020.”

1. 1. The CFA itself is found at page 103 of the hearing bundle and is dated 1 July 2021. It was signed on 16 July 2021.

THE ARBITRATION

The arbitration did not result in success.   This meant that the solicitor was confined to the discounted rates.

1. The Claimant’s case is that the CFA provided for discounted rates which equated to around 87.5% of the Defendant’s “Normal rates”, and that the where the “Win the Arbitration” clause of the CFA was triggered, the Defendant was entitled to uplift their fees in line with their “Normal rates”.

THE JUDGE’S DECISION

The judge found that the terms of the retainer did not allow for the service of interim statute bills.

1. 1. These costs only proceedings have been brought by the Claimant, who sought an order for detailed assessment of a total of 23 bills the Defendant had sent them within a bill date range of 29 January 2021 to 28 October 2022.

1. 1. Although each bill has it’s own six-digit reference number, I have adopted the numbering (1-23) from the list of disputed bills set out in the claim form. By agreement, bills 16-23 of that list (dated 29 July 2022 to 28 October 2022) shall be subject to a Solicitors Act assessment of the profit costs only.

1. 1. Bills 1 to 15 are all dated more than 12 months before the date of the Part 8 claim form. The Defendant’s case is that bills 1 to 15 are all compliant interim statute bills, that the funding arrangement with the Claimant permitted them to raise interim statute bills, and that there are no special circumstances such that the court might otherwise be minded to exercise its discretion and order assessment of some or all of the 15 bills in dispute.

1. 1. Although I have adopted the terminology of “bill”, I acknowledge that at times the Claimant has preferred the terminology of “invoice”, and that in many such assessments both terms are used interchangeably when describing the same document, and depending on how each party views that document.

Bills 1 to 15

1. 1. The disputed bills are contained in a list above. In terms of presentation, each bill is consistent. Each bill has a section for “Bill status:” and in each instance, the Defendant has recorded that status as “Interim Statute”. Of course, simply writing the words “interim statute bill” or similar does not make that document a compliant statute bill. It does, I accept, provide an indication of what the document is intended to be.

1. 1. I say “intended” because each bill also includes the words “This invoice is due for immediate payment”.

1. 1. Each bill is signed, and where applicable also appends a “Time Detail” printout in lieu of a bill narrative.

1. 1. As such, the bills delivered bear all the hallmarks of a valid statute bill.

Agreement to raise interim statute bills

1. 1. The Claimant first engaged the Defendant in November 2018, and this is when the Defendant sent their original terms of business. However, the terms under which the Defendant acted for the Claimant were altered on 7 May 2021 and on the basis that the altered terms would apply from 21 December 2020. As such, it is the altered terms which apply to bills 1 to 15.

1. 1. Under section 5 of the letter dated 7 May 2021, the agreement states that “Payment of our fees, and the amount of those fees, is subject to the terms of the attached Conditional Fee Agreement”. Within section 5 is a sub-section named “The Timing of our Bills”. This sets out that:

“We will send you bills (at the Discounted Rates set out in the Conditional Fee Agreement) on a monthly basis. We will send you bills for any additional fees which become due under the Conditional Fee Agreement when they become due. 

We may bill you at any time for disbursements or specific expenses incurred already, or shortly to be incurred.

The status of our bills is explained in paragraph 5 of our Terms of Business.”

1. 1. The 7 May 2021 letter, 5^th paragraph, sets out the relationship between the client care letter, terms of business and the CFA. In so far that Mr Stacey argues that the CFA takes precedence over the letter, but not the terms of business, I disagree.

1. 1. The Defendant clearly sets out that “The contents of this letter and our Terms of Business are subject to the attached Conditional Fee Agreement dated 4 May 2021 and should be read subject to that agreement which take precedence over the terms of this letter insofar as they differ.” I do not consider the Defendant intended to create a scenario whereby there was no means by which any tension between the terms of business and the CFA could be resolved. The CFA represented a change to the funding model between the parties and it is perfectly logical that the CFA terms would take precedence where any terms differed.

1. 1. What I can say with certainty is that nothing in the letter dated 7 May 2021 alone creates an agreement for the raising of interim statute bills.

1. 1. The terms of business which accompanied the 7 May 2021 letter addresses the delivery of bills at section 5 of the same. It strikes me that the key sentences of that section are that “Bills will usually be rendered on a monthly basis or more often in litigation and in some other matters, where a significant amount of work has been carried out.” and that “Unless otherwise stated, each bill issued to you is a final bill covering the total charge for the work carried out within the stated period.”

1. 1. Section 5 also states that “unless otherwise stated, each bill has the status of a statute bill which means that in the event of non-payment we are entitled to issue proceedings for recovery through the courts after the expiration of one month from the date of delivery of the bill.”, before referencing the Solicitors Act 1974 and informing the Claimant they had “certain rights” under the same.

1. 1. The terms of business governing bills 1 to 15 deal with the actual payment of bills at section 6 of the same, and in so far as the Defendant relies on section 6 of the terms of business, I note that the 3^rd, 4^th and 5^th paragraphs of the same have no bearing on my decision. The 2^nd paragraph concerns the potential use of client monies in one matter to pay for another matter. It is therefore only the 1^st paragraph which is of any potential relevance.

1. 1. The 1^st paragraph of section 6 of the terms of business provides that payment of bills are due on delivery, and that interest will be applied if a bill is not paid within 1 month. The section also permits the retention of the papers until a bill is paid in full, and the use of client monies (held or received) to pay bills, after the client has been advised of the bill in question.

1. 1. It is not clear to me that section 6 can be read as relating only to the issuance of interim or final statute bills. Section 6 addressed the payment of bills generally. Section 5 in my view simply acknowledged that different types of bills may be raised. These include, unless otherwise stated, statute bills and final bills.

1. 1. There is nothing controversial about Mr Stacey’s submissions as to clauses covering payments on account. Payments on account are commonly collected for work to be done / costs to be incurred. However, the index bills do not purport to be requests for payments on account of work to be done. The Claimant’s case is that they were requests for part payment of work that they accept had already been done. The different between the parties is the status of those bills.

1. 1. The terms of business are not drafted in a way that means it was illogical or contractually impermissible for the Claimant to treat the bills in question as requests for payment for work done, without at the same time treating them as statute bills to which time limits for challenge automatically applied.

1. 1. That leaves the CFA to consider. The CFA, at clause 2.1, confirms it covers all work from 21 December 2020 onwards. Clause 4.2 sets out the ‘normal’ rates the ‘discounted’ rates. As set out above, clause 4.3 provides “We will bill you at the discounted rates, together with any disbursements, on a monthly basis. The amounts billed in this way will be payable by you regardless of the outcome of the Arbitration”.

1. 1. Whilst Mr Stacey is correct that the CFA does not refer to payments on account, it is also true to say that the CFA is not concerned with payments generally. Clause 4.3 references billings. The only extent to which clause 5 deals with payment is in terms of immediate payment being due for the balance of normal rates if the arbitration was won.

1. 1. Clause 5 deals with the Claimant’s liability for the Defendant’s fees and provides that “5.1 If you Win the Arbitration (as defined in paragraph 1 above), you will be liable for our fees at the normal rates (up to a maximum of the sum of our discounted rates and the Capped Balance), together with disbursements. We will invoice you for the balance of our normal rates (up to the Capped Balance over and above the discounted rates) which will be due for immediate payment.”

1. 1. Other than clause 5, there is nothing in the CFA which explicitly explains at what point any bill raised takes on a particular status, save for where clause 10 addresses the Claimant’s ‘right to apply for an assessment’. That is presented in the following terms:

“You have the right to an assessment by the court of the amount of the fees and/ or disbursements which are payable by you under this agreement, by making an application under section 70 of the Solicitors Act 1974. But there are time limits for that application, including an absolute right to assessment if you apply to the court within one month of delivery to you of the bill of costs, and a gradual reduction of the right the longer it is left thereafter, which we will inform you about if asked. You are of course welcome to seek advice from another law firm about this but would have to pay for that.”

1. 1. So where does that leave us? My conclusion is that the letter dated 7 May 2021, attached terms of business and subsequent CFA combine to create a right to raise interim statute bills. However, that is not a clear right and in my view it falls to the Defendant, in these circumstances, to be have been clear as to the true status of the bills being raised.

1. 1. In my view, and when taken in combination with the fact that all of the bills in question were being paid at discounted rates (and so in the knowledge that further charges could be raised relating to the same work), it was incumbent on the Defendant to be clearer both in their dealings with the Claimant and the language of the relevant funding documents.

1. Thus, and contrary to the arguments put forward by Mr Stacey, where clause 10 of the CFA talks of “an absolute right to assessment if you apply to the court within one month of delivery to you of the (emphasis added) bill of costs”, the Claimant was entitled to conclude this was a reference to a single bill of costs to be delivered upon conclusion of the proceedings.

RAISING A STATUTE BILL IN A DISCOUNTED CFA SETTTING

The situation was even more acute.  The judge held that it was difficult to see how the sending out of “discounted” bills which could, potentially, be increased if the action were successful meant that the bills sent out were interim statute bills.

1. 1. Mr Stacey cited paragraph 81 of Ivanishvili but this section of the judgment cannot be read in isolation, nor was it a finding made by the court. It is a reflection of counsel’s submissions in that case. Thus whilst Costs Judge Leonard agreed with the general proposition put forward by counsel in Ivanishvili, he also reflected (at paragraph 82), that Nicklin J’s analysis in Sprey was more nuanced:

“82. I agree, but at paragraphs 25 and 40 of his judgment Nicklin J highlighted the difficulties of reconciling the necessary qualities of completeness and finality in an interim statutory bill, with the fact that under a CFA, a solicitor’s charges are not finalised until its conclusion..: 

“At the heart of an assessment is whether the sum charged by the solicitors to the client is reasonable. The charge for work done at 40% of the normal rates might well be reasonable, but at 100% not reasonable. A client would not know until the end of the claim… at which rate he was being charged…”

1. 1. I accept there is no entitlement or claim for a success fee in the index matter. I also accept there is a significant difference when seeking to contrast 40% and 100%, as against 87.5% and 100%. However, the point is that the “client would not know until the end of the claim… at which rate [they] were being charged…”.

1. 1. In terms of the Claimant’s knowledge, a key plank of the Defendant’s case is to invite this court to conclude that the question of how to treat a balancing or ‘top-up’ payment is now irrelevant, because no balancing payment was sought (as a consequence of the success provision of the CFA not being achieved).

1. 1. The problem with that line of argument is that it doesn’t extinguish the fact that finality in the bills could not be known until the matter had concluded. If there was any doubt about that, one only needs to read the small-print on the face of every bill.

1. 1. Otherwise, a scenario is created whereby the time for challenging a bill runs from one date in the event of non-success, but a later date in the event of success, even though the Defendant’s argument is that the bill in either case is essentially the same (save for the application of some formulaic adjustments).

1. 1. Thus, and as much of the case law suggests, unless the parties had contracted into the scenario the Defendant now seeks to argue for, there seems to me to be no force in the argument that a discounted rates bill can be declared ‘final’ on two separate dates and yet still meet the criteria of an interim statute bill.

1. 1. This is the paradox the legislation seeks to avoid, or else there is a lacuna in the Solicitors Act which the Defendant has not directed me to. Had the Claimant been successful in their case, the Defendant would have raised a balancing top up bill, which would have covered all work done and therefore would open up all time charged under those bills to be assessed. At that point, the Claimant would have had an absolute right to an assessment within one month of delivery of that bill.

1. 1. That being the case, how can it then be the client’s assessment rights are entirely contingent on the outcome of (in this case) the arbitration, such that there is in-built jeopardy in choosing when to challenge bills – bearing in mind that in a time sensitive deadline driven financially valuable case a client will naturally want their solicitors to be focused on their case, not a solicitor/client dispute.

1. 1. The hurdle the Defendant has repeatedly failed to overcome is the parallel reality in which they were inviting the Claimant to exist. One where in the event of one outcome (i.e. success), then the charges for a particular period of time would increase (by the application of a top-up charge), but in the event of another outcome (failure), the charges would remain the same. On the Defendant’s case, that left the Claimant in a scenario in which the time limits under the Solicitors Act could start to run from two different dates depending on the outcome of the litigation. In my view, absent an explicit agreement to such an arrangement, that means bills 1 to 15 are incapable of being interim statute bills and therefore such status is not conferred on any of the same.

1. 1. In my view the Defendant has acknowledged the potential for a two tiered system of assessment rights which is entirely dependent on the outcome. If permitted, it would make it very difficult for a client to decide when to challenge bills.

1. I am also not persuaded that there is some form of ‘tipping point’ in discounted fee agreements whereby one percentage difference leads to a two tier system but another doesn‘t. In any event, at the level of sums incurred by the Defendant in this matter, a 12.5% ‘top-up’ was always going to be lead to significant extra sums being sought from the Claimant.