Belsner v CAM Legal Services Ltd and claiming the shortfall from your client

Belsner v CAM Legal Services Ltd [2020] EWHC 2755 (QB) held that a lawyer must make sufficient disclosure so that their client can provide informed consent when it comes to recovering any shortfall in costs from them.  It was held that, in this case, the defendant had not made sufficient disclosure to the claimant despite a seemingly detailed retainer letter.  Following this decision, hundreds of similar claims have been intimated alleging that clients did not provide informed consent and, as such, should be reimbursed their success fee and/or any shortfall in costs that they were required to meet.

Judges in the Court of Appeal found that the deductions made were "fair and reasonable" and, therefore, did not need to be paid back.  However, solicitors ought to ensure that the client receives "the best possible information about the likely overall cost of the case" and are in a position to make an informed decision in order to comply with the SRA Code of Conduct.

Recoverable costs in Personal Injury Claims 

In most low-value personal injury claims, the recoverable costs are fixed i.e. only a set amount will be recoverable by the winning party from the losing party.  In many cases, lawyers acting on a Conditional Fee Agreement (CFA) will, therefore, contract with their client to ensure that any additional costs incurred by them, which are not recoverable, are instead paid by their client.  These unrecovered costs are usually deducted from their client's damages, along with a success fee which is usually 25% of the damages.  Once upon a time, the success fee was also recoverable from the losing party, however, following the Jackson Reforms this was abolished. 

Given the fixed and, arguably low, level of costs which can be recovered from the losing party, an ability to recover the shortfall from the client is necessary for many personal injury firms to operate profitably.  Assuming the shortfall does not erode the client's damages too much then, hopefully, both the lawyer and the client ought to be content with the arrangement; the client is assisted in making a claim with the expertise of a professional and both are then fairly compensated.  

The Facts of Belsner v CAM Legal Services Ltd [2020] EWHC 2755 (QB) 

In February 2016, the claimant was involved in a road traffic accident.  The claimant was riding as a passenger on another's motorcycle.  Following a collision with a car, she was knocked off and suffered various injuries.  Following the incident, the claimant was put in touch with the defendant who, in March 2016, sent her a client care letter which included a copy of its Terms and Conditions of Business and a CFA.

The CFA and Terms and Conditions of Business set out that:

"If your claim is above the small claims limit, you can claim from your opponent part or all of our basic charges and disbursements."

"The success fee will be deducted from your damages at the end of your claim. The success fee cannot be more than 25% of your damages (inclusive of VAT), although there may be other costs or disbursements to be deducted from your damages such as the insurance premium."

"We reserve the right to charge you the actual costs taking into account any recoverable costs from the Defendant."

"Most Personal injury claims settle by negotiation after medical evidence and details of financial losses had been obtained.  I estimate that the basic charges for the work necessary to obtain this information will be £2,500 (excluding VAT and disbursements – see paragraph 26 below). We will update this estimate of costs every six months sand inform you if it appears that any estimate may be exceeded.  This could change significantly for a number of reasons…"

"We will not usually send you a bill for our basic charges, success fee and disbursements until the Conditional Fee Agreement ends.  It is important that you understand that you will be responsible for paying any bills.  However, assuming you win your claim I expect to recover some of our charges and expenses from your opponent."

"The charges agreed between us may exceed the costs recoverable from another party.  This means that in practice there may be a proportion of your costs which you will have to bear yourself irrespective of any order for costs which may be made against the opposing party or parties."

The defendant pursued the claim on behalf of the claimant and liability was admitted by the driver.  The underlying claim was settled and resulted in the claimant receiving £1,916.98 in damages and £1,783.19 (inc VAT) in respect of fixed costs and disbursements.  The defendant then paid the claimant £1,531.48, being the damages less the success fee of £385.50 (although it appears that there was a mistake in their calculations here and, in fact, the success fee could have been higher).  However, the defendant failed to provide the claimant with a bill of costs or an invoice at this stage.  On that basis, the claimant then instructed alternative solicitors to issue a Part 8 Claim Form seeking an order that the defendant serve a bill of costs on the claimant. 

The defendant later served its bill on the claimant; the defendant's professional charges were £3,588.40 plus VAT of £717.67.  Therefore, in total, the defendant's costs were £4,306.07 (inc. VAT).  We have set out below the shortfall asserted by the Defendant on this basis.

Defendant's total bill = £4,306.07
Defendant charged claimant = £385.50
Fixed costs received = £1,783.19 
Shortfall in costs = £2,137.38

The defendant was therefore asserting that, given the claimant received damages of £1,916.98, had the remaining amount of the defendant's fees been sought from the claimant, she would have had to pay an additional £220.40 on top of the success fee AND all that she recovered in damages. Had the Defendant chosen to enforce payment of the shortfall in costs against the Claimant (which appeared to have been a possibility agreed within the CFA and Terms of Business) it would have been devastating for the claimant, despite the fact that she had, technically, been successful in her claim.  

QBD decision 

The Court considered whether the requirements under CPR 46.9(2) had been complied with.  CPR 46.9(2) states 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".  Section 74(3) states 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… exceed the amount which could have been allowed in respect of that item as between party and party in those proceedings…". 

The Court specifically considered the definition of "written agreement" and held that a written agreement in the purely contractual sense was not enough. A claimant must have sufficient information to make an informed decision.  For example, had the claimant in this matter been informed that she may only recover £500 to £550 she may have reconsidered the instruction (particularly given that she had been advised that costs would likely be in the region of £2,500).  The Judge held that it would not have been too burdensome for the Defendant to set this out, particularly given that they had advised (correctly) on the likely stage of resolution of the claim.  The Judge stated "it would not involve explaining all of the detail and complexity of the provisions of the Civil Procedure Rules and the Protocol… 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".  In conclusion, the Court found that a lawyer who wished to rely on CPR 46.9(2) had to have a written agreement with their client who, in turn, had been given sufficient information to provide informed consent to that agreement.  The client understood and permitted payment to the lawyer of an amount of costs which could be greater than the amount which they may recover from another party to the proceedings. It was held that, in this case, the defendant had not made sufficient disclosure to the claimant to give informed consent.  The requirement for informed consent arose because of the fiduciary nature of the relationship. 

Following this decision, hundreds of similar claims have been intimated alleging that clients did not provide informed consent and, as such, should be reimbursed their success fee and/or any shortfall in costs that they were required to meet.  This decision (and the Court of Appeal judgment) therefore have ramifications for any firm which has required this of their client. 

Court of Appeal  

On 4 to 6 October 2022, the Court of Appeal heard the appeal in this case, the master of the rolls, the chancellor of the high court (Lord Justice Flaux) and Lord Justice Nugee presiding.  Within the Appeal, the Court heard these such claims have led to costs recovery lawyers receiving 12 times the amount their clients recover.  This is, clearly, at complete odds with the intention of the Judge in the underlying case.  

The CoA Judgment was handed down on 27 October 2022.  It was held that CPR 46.9(2) and Section 74(3) of the Solicitors Act 1974 did not apply to claims brought through the RTA portal (such as this one) unless county court proceedings were actually being issued.  As such, the QBD judge was wrong to say that the defendant owed the claimant fiduciary duties in negotiating their retainer.  The defendant's deductions had been "fair and reasonable in
all the circumstances" and the success fee did not need to be repaid to the claimant.  However, solicitors ought to ensure that the client receives "the best possible information about the likely overall cost of the case" and are in a position to make an informed decision in order to comply with the SRA Code of Conduct.

Whilst the defendant was successful on every point in law, the Court did comment that claims pursued through the RTA portal did appear to often set a claimant up for costs liabilities in excess of what their claim was likely worth.  Whilst the defendant in this matter had voluntarily not charged the shortfall to the claimant, this was not generally an overall acceptable mechanism to ensure clients were not left out of pocket. 

The Judge stated "the Solicitors capped their fees voluntarily at a fair and reasonable level after the event, even if they ought to have told the Client what she would recover by way of fixed costs in the RTA portal, and even if they ought to have agreed in advance when they entered into the CFA to the cap they later applied voluntarily... In future, I hope that solicitors will not suggest CFA or other fee arrangements to their clients that allow for fees that they would not dream of actually charging"

Notes for Lawyers  

Lawyers ought to ensure that their clients are well informed of their potential exposure on costs. A client ought to have sufficient information to make a decision as to the likely costs they may be required to meet.  Engagement letters ought to be clearly drafted.  Information on fixed costs ought to be included in engagement letters, however, care should be taken to ensure this information is comprehensible to a lay person.  The real difficulty is that litigation is highly unpredictable.  It is often, therefore, very difficult to predict the path it will take which, in turn, informs the likely costs involved. Alternatively, a limit on your client(s)' liability on costs to you may provide a clear position on costs (e.g. a percentage as an overall cap for any shortfall in costs which can be charged).  The QBD's decision was clearly based on the unpleasant possibility that a client may end up owing their lawyers more than they recover in damages.  Provisions within the retainer to prevent this eventually should, therefore, protect a firm from future scrutiny in respect of costs.  The CoA judgment reinforces that solicitors ought to ensure that the client receives "the best possible information about the likely overall cost of the case" and are in a position to make an informed decision in order to comply with the SRA Code of Conduct.