Kerry Underwood discusses Vilvarajah v West London Law Limited  EWHC 23, in which a senior costs judge slashed costs after deeming a CFA unreasonable and unfair to the client.
In Vilvarajah v West London Law Limited  EWHC 23, the Master said ’£420.00 is an unreasonable rate for any of the fee earners involved in this case, whether as between solicitor and client or as between parties.’
A Master in the Senior Court Costs Office (SCCO) has the status of a district judge. While this decision is not binding on any other court, in reality a decision of a costs master carries more weight than that of a district judge.
Here, on a Solicitors Act 1974 (SA 1974) solicitor and client assessment, the SCCO set aside the retainer under the provisions of section 61(1) of the SA 1974.
That section reads:
(1) No action shall be brought on any contentious business agreement, but on the application of any person who –
(a) is a party to the agreement or the representative of such a party or
(b) is or is alleged to be liable to pay, or is or claims to be entitled to be paid, the costs due or alleged to be due in respect of the business to which the agreement relates,
the court may enforce or set aside the agreement and determine every question as to its validity or effect.
(2) On any application under subsection (1), the court –
(a) if it is of the opinion that the agreement is in all respects fair and reasonable, may enforce it
(b) if it is of the opinion that the agreement is in any respect unfair or unreasonable, may set it aside and order the costs covered by it to be assessed as if it had never been made
(c) in any case, may make such order as to the costs of the application as it thinks fit.’
It should be noted that this section does not apply specifically to conditional fee agreements (CFAs), but covers retainers between solicitors and their clients generally in contentious work.
In Vilvarajah, the solicitor was acting for the defendant and success was defined as any reduction in the first solicitors’ bill. Thus, even a saving of a few pounds, effectively a heavy defeat, would, under the terms of the CFA, be treated as a success. There was no damages-based cap and no cap on fees by reference to the amount saved, or indeed to anything else.
For all interests and purposes, this was a full bill at full rates, win or lose. To put this in context, the original solicitors’ bill which was in dispute was £20k. The solicitors charged their client £31,945.48.
Even if the whole bill had been disallowed, that is the first bill, and the costs of obtaining the disallowance of that bill were over 50 per cent higher than the bill itself.
The CFA was a no win, lower fee agreement and not a no win, no fee agreement.
The rate of £420 per hour could not be justified by the fact that there was a discounted rate in the CFA as, on the facts, a failure to achieve success within the definition contained in the CFA was highly unlikely, and in any event the discount from the full rate was modest.
The judge considered that the calculation of the success fee was peculiar, as it was not based on any risk assessment, but on the proportion of the discounted rate to the primary rate, and those figures were themselves arbitrary.
That partly makes sense.
It is true that the very existence of a success fee reflects the fact that the solicitor will not get paid in the event of defeat, and therefore risk is relevant in the sense, in that if there is no real prospect of defeat, due to the way the CFA is worded (as was the case here), the solicitor should indeed only get a very modest success fee to reflect matters such as part 36 risk etc.
Once it is established that there is a risk, then the discounted rate is highly relevant.
In any case where there is a significant risk, then if the solicitor is acting on a no win, no fee basis, they risk getting nothing and the success fee should reflect that fact.
If, however, the agreement is a no win, lower fee agreement, then the solicitor is only at risk of losing part of their costs, as they will receive something, even in the event of defeat.
Take the example of a case that is very high risk and, on the face of it, warrants a 100 per cent success fee.
If the agreement provides for £300 an hour in the event of a win, and £250 an hour in the event of defeat, then the solicitor is only at risk of one-sixth of costs and the success fee should be correspondingly lower to reflect that.
The judge was also critical of the lack of explanation given to the client in relation to the CFA, and that the CFA was only discussed with the claimant in a 30-minute appointment without a detailed attendance note of what was said and without correspondence, before or after.
The judge said he would have expected a letter to be sent to the claimant in advance of the meeting, with a draft copy of the CFA explaining its terms, and a follow-up letter after the agreement was signed, with copy of the signed CFA enclosed and an explanation of the key points.
The Master also said that there was no suggestion that the claimant was given any advice on the prospects of success in the case and the likelihood that the client would have to pay the success fee.
As we have seen above, the client was virtually certain always to have to pay the success fee.
The judge also said: ‘Crucially, there is nothing to suggest that the defendant gave the claimant any advice that the primary rate was unusual or that there was no prospect at all that he would recover these rates from his opponent …
‘£420.00 is an unreasonable rate for any of the fee earners involved in this case, whether as between solicitor and client or as between the parties.’
However, in the previous paragraph of the judgment, referring to the hourly rates charged by the first set of solicitors, the judge said that the hourly rates agreed in September 2012 of £350, £200 and £135 were not unreasonable.
Allowing for around eight per cent inflation in the intervening five years, that takes that rate to £392 an hour (albeit for a grade A rate). The judge referred to that as ‘high’, but not unreasonable.
That leaves open the question of having a standard rate for all fee earners.
It should be noted that this is the way the fixed costs system and the fixed county court advocacy fees in non-fixed cost cases work. It is also the way the current pilot scheme in commercial court cases up to £250k works.
Here, although not mentioned specifically by the judge, it appears that no section 74(3), SA 1974 warning was given.
The judge refers to the primary rate as being ‘unusual’, which is a word drawn from section 74(3) and CPR 46.9. The Underwoods Model Conditional Fee Agreement includes the following: ‘In so far as any costs or disbursements are of an unusual nature or amount these costs might not be recovered from the other party.’
That is clearly what the judge is referring to in paragraph 35 of the judgment, although he does not set out the relevant provisions.
Thus, there are many factors which distinguish this case from my proposed method of working, which is to charge a high hourly rate – I suggest £400 per hour – but always, without exception, to protect the client by capping all costs of all kinds, whether they be basic costs or the success fee or a combination of both, by reference to damages.
However, I accept that the reference to a rate of £420 per hour as being unreasonable is potentially problematic.
In Vilvarajah, the solicitors were always going to charge the full £420 per hour, provided they got a penny off the original solicitors’ bill – that is a very different situation.
I do not share the general view that courts are unable to touch the hourly rate, as my opinion is that the court does have a residual jurisdiction over solicitors in our capacity as officers of the court.
It is, however, true that courts will rarely interfere with hourly rates as between solicitor and client, but they are free to challenge the amount of work done and who it should have been done by.
I am afraid that this is a classic case of ‘hard cases and bad law’ or whatever the expression is, in that the solicitors should never have sought to uphold their bill when there was no effective protection to the client at all and when in reality it was not a CFA.
That begs the question of whether the court would have interfered had this been a straightforward hourly rate, payable win or lose, and not a CFA. I suspect not.
My advice remains the same: charge at a rate of £400 per hour, but protect the client by limiting all costs, that is base costs as well as the success fee, by reference to damages.
If a client challenges that, then calculate carefully what in fact the hourly rate works out as – divide the total fee by the number of hours worked. The hourly rate will be often relatively low due to the limitation of the charge to the client by reference to a percentage of damages.
If the client pursues the matter, then reconsider your position.
Remember also that this only applies to cases where proceedings have been issued, as, if you follow my model, you will have a section 57, SA 1974 CFA in place prior to issue, which is a straightforward percentage with no reference to the hourly rate. This was recently upheld by a full High Court judge in Bolt Burdon Solicitors v Tariq  EWHC 811 (QB).
It should be noted that the SA 1974 and its predecessors look at what was referred to in Re Stuart, ex p Cathcart  2 QB 201 as the ‘mode of obtaining the agreement’, and in that case the court said that if a solicitor makes an agreement with a client who fully understands and appreciates that agreement, that satisfies the requirement as to fairness.
So, the issue of fairness is confined to looking at how the agreement was entered into.
In Cathcart, the court continued: ‘…but the agreement must also be reasonable, and in determining whether it is so the matters covered by the expression “fair” cannot be reintroduced.
‘As to this part of the requirements of the statute: “148. The outcome of the case provides no particular assistance, but in the course of his judgment Lord Esher M.R. gave the following guidance on the proper approach under those statutory provisions:
“By s.9 the Court may enforce an agreement if it appears that it is in all respects fair and reasonable. With regard to the fairness of such an agreement, it appears to me that this refers to the mode of obtaining the agreement, and that if a solicitor makes an agreement with a client who fully understands and appreciates that agreement that satisfies the requirement as to fairness. But the agreement must also be reasonable, and in determining whether it is so the matters covered by the expression ’fair’ cannot be re-introduced. As to this part of the requirements of the statute, I am of opinion that the meaning is that when an agreement is challenged the solicitor MASTER GORDON-SAKER Approved Judgment Vilvarajah v West London Law must not only satisfy the Court that the agreement was absolutely fair with regard to the way in which it was obtained, but must also satisfy the Court that the terms of that agreement are reasonable. If in the opinion of the Court they are not reasonable having regard to the kind of work the solicitor has to do under the agreement, the Court are bound to say that the solicitor, and an officer of the Court, has no right to an unreasonable payment for the work he has done and ought not to have made an agreement for remuneration in such a manner. On this question it is quite clear to me that we cannot arrive at any other conclusion than that arrived at by the Divisional Court. It is impossible to say that work which according to information given by the taxing master to the Divisional Court would be properly remunerated by a sum of £20 can be reasonably charged at £100. The decision of the Court below must be affirmed, and the appeal dismissed.’’’
In the case of Bolt Burdon, the High Court said that it found the analyses in that case helpful to the extent of identifying that the issues of fairness and reasonableness must be considered separately:
‘Fairness relates principally to the manner in which the agreement came to be made. Reasonableness relates principally to the terms of the agreement.’
Two major points arise.
It should be remembered that in Bolt Burdon, a full High Court judge upheld a 50 per cent contingency fee in circumstances where the solicitors would have only earned a fraction of the amount of the contingency fee had they charged the client on the usual hourly rate.
Note too that the Master found as a fact that the client had not fully understood and appreciated the agreement, and that, even by comparison with other CFAs, it was a complicated agreement.
The judge also pointed out that the claimant was liable to pay a substantial success fee on top of the primary rate. In a CFA where the charge to the client is limited by damages, this is unlikely to happen. Thus the judge found that the agreement was unfair and should be set aside.
In those circumstances, it is arguable that his comments in relation to unreasonableness were obiter, as they were not necessary, given that he had already set the CFA aside.
The judge’s comments that the primary rate could not be justified by reference to the discounted rate, due to the fact that the CFA was structured in such a way that any result was bound to be regarded as a win, leaves open the possibility of the primary rate being justified by reference to a limitation on the total charge to the client by reference to damages.
While not seeking to minimise the potential problems caused by the statement ‘£420.00 is an unreasonable rate for any of the fee earners involved in this case, whether as between solicitor and client or as between parties’, this case is clearly distinguishable on many bases from the method that I advise.
The purpose of the SA 1974 is to protect clients in relation to solicitor and own client bills and costs. An absolute cap on the charges to be made to the client, by reference to damages, gives that protection and, very obviously, much greater protection to a client than a very much lower hourly rate where the client has to pay win or lose.
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