Oakwood Solicitors Ltd v Menzies – Supreme Court decision on 'payment' of solicitors' bills

In their recent Judgment in Oakwood Solicitors Ltd v Menzies [2024] UKSC 34 the Supreme Court overturned the Court of Appeal decision. The Supreme Court held that deducting fees, payable under a statutory bill, is not a 'payment' within the meaning of section 70 Solicitors Act 1974 (the Act); even when deducted with the client's knowledge and consent.

In essence, this means that firms deducting fees from damages awarded to their clients will not be protected from the limitation periods under section 70 where they fail to secure agreement to a payment of a specific amount; it is not enough to rely on retainer provisions providing for the client's consent to general deductions for fees.

Key Takeaways

• A client's prior consent to general deductions in payment of fees and delivery of a compliant bill of costs to communicate the final fees owed is not sufficient to amount to a 'payment' under the Act.

   

• Solicitors must seek their client's agreement to the specific amount in a bill of costs before deducting fees from funds held on account in order for the deduction to amount to a 'payment'.

   

• Failure to do so will mean no 'payment' has occurred (for the purposes of section 70) and solicitors will not benefit from the limitation protections against challenges to their bills.

Relevant Background

The Respondent (a solicitor firm) acted on a Conditional Fee Arrangement (CFA) for the Appellant in relation to a personal injury claim in which the Appellant accepted a settlement offer for £275,000 in damages plus reasonable costs.

The Respondent provided the Appellant with an interim statute bill for £73,700, of which £38,000 was recovered from the Defendant to the personal injury claim. The Respondent retained approximately £58,000 to cover any potential shortfall in costs and eventually deducted around £35,000 in respect of its own costs, paying the rest to the Appellant.

The Appellant did not understand the basis of the payment of the Respondent's fees, and more than 21 months after the final payment was received from the Respondent, initiated proceedings seeking assessment of the final bill.

Section 70 Solicitors Act 1974

Section 70 sets out the powers of the court to assess a solicitor's bill of costs. The court's powers of assessment were designed as a mechanism to protect clients from solicitors charging excessive fees for their work.

Section 70 also provides significant limitation protections to solicitors. The limitation periods are differentiated by whether or not a payment of the solicitor's bills has already been made, or whether a bill has merely been issued and is then subject to challenge. The rationale follows that a client who has already paid their solicitor's fees, and only then subsequently challenges those fees, is taken to have agreed to the amount and so any challenge is subject to a stricter regime.

The time when a 'payment' (within the meaning of section 70) is made is therefore significant to determining when a client will be time barred from challenging a bill of costs.

The statutory regime under section 70 can be summarised as follows:

Where no payment has been made -

• Clients have an unconditional right to have the bill assessed for one month after the delivery of the bill.

   

• After that one month period and up to 12 months from the delivery of the bill, clients may apply to the courts for an assessment of the bill to be ordered,

   

• After 3 months from the delivery of the bill, the court may only order an assessment of the bill if there are "special circumstances".

However, where there has already been payment of the bill –

• Clients still have the unconditional right to have the bill assessed in the first month after the delivery of the bill.

   

• After the one month period and up to 12 months from the payment of the bill, the court may order an assessment only if there are "special circumstances".

   

• After the 12 months have expired from the payment of the bill, no assessment can be made.

Claim

The Appellant argued that the deduction of the fees payable under the statutory bill issued by the solicitors did not amount to a 'payment' within the meaning of section 70 on the basis that a 'payment' requires an agreement as to the amount to be paid.

The Appellant's position was that payment is a reactive process to a demand for payment made in the bill. According to the Appellant, the client therefore needs to be informed of the sums owed and agree to the specific amount; any prior consent by the client to general deductions for fees is insufficient to satisfy the requirements of a 'payment'.

The Respondent argued that the requirements for a 'payment' under section 70 are satisfied when (i) a retainer is agreed with the client that permits the deduction of fees from funds held on account and (ii) the amount to be deducted is communicated (rather than agreed) by the delivery of the statutory bill of costs. In the Respondent's case, the payment was made simultaneously with the delivery of the bill.

Procedural Background

In April 2021, the Appellant applied for an order for assessment of the bill of costs provided by their solicitors, 21 months after the bill had been issued.

The costs judge held that 'payment' had been effected when fees were deducted from the damages owed to the Appellant, and therefore they were time barred from seeking an assessment.

The Appellant appealed the High Court who allowed the appeal and held that there had been no agreement to the deduction of the fees, and therefore the deduction did not amount to a 'payment' that would commence the timer on the limitation period under section 70 (4). The High Court decision was discussed in our previous article here.

The solicitors appealed to the Court of Appeal who decided that no formal agreement is necessary for a deduction to amount to a 'payment', which was defined as a transfer of money (or equivalent) in satisfaction of a bill with the knowledge and consent of the client. The Court of Appeal considered that, provided a compliant bill has been issued, a client who has already validly authorised the solicitor to deduct his fees does not need to provide additional consent after the delivery of a bill in order for a 'payment' to occur. On this definition of a 'payment', solicitors would be able to rely on retainer provisions to take payment of their bills without seeking further agreement to the amount in the bill itself.

The decision of the Supreme Court

In this closely watched decision, the Supreme Court overturned the decision by the Court of Appeal, which had been led by the Master of the Rolls. In reinstating the High Court decision, it was held that a 'payment' for the purposes of section 70 requires the client's agreement to an exact amount to be charged. There will be no 'payment' simply on the communication of the exact amount (by delivery of a bill) with the solicitor relying on the client's prior consent to general deductions to collect the fees.

The Supreme Court's decision included the following considerations of the purpose of the statutory regime:

• In this case the purported payment was made by a deduction rather than a transfer of funds. A transfer of funds to satisfy a bill indicates the client's acceptance and agreement to the amount in the bill. In equivalent terms, a deduction would therefore require agreement to the specified amount in the bill, and there can be no payment by a mere communication of that amount.

   

• The purpose of the statutory mechanism in section 70 is to protect clients from unreasonable fees. Therefore, they must have an opportunity to consider the detail of the bill. If, as proposed by the Respondent, 'payment' was to take place on communication of the charges and in reliance on prior consent to general deductions, this would diminish the client's protections.

Commentary

The decision has significant implications for the legal profession where it is common for clients to be billed through retainer provisions that provide for payment to be deducted directly from damages.

Firms should be alive to the need to secure agreement to the bill, before deducting their fees from client funds held on account, to ensure that this collection amounts to a payment which will afford them the limitation protections in the Act.

Failure to do so will mean that no 'payment' has occurred (within the meaning of section 70) thereby leaving longer windows open for clients to challenge their bills. In order to maintain the benefit of the limitation protections in section 70, firms should review their billing practices and retainer provisions to ensure that consent is sought after the delivery of the bill and that the client has sufficient time to consider its detail.