England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM The Hon Mr Justice McKay

		Royal Courts of Justice Strand, London, WC2A 2LL
		08/05/2013

Sir Stephen Sedley:

The story so far

1. Mr Chifuntwe, the first respondent to this appeal, had a dispute with the Home Secretary, who is the second respondent. He instructed Khans Solicitors and paid them £1500 on account of their fees. Khans instructed counsel and brought judicial review proceedings on his behalf. The Home Secretary settled the claim and agreed to pay Mr Chifuntwe's costs. Khans submitted a bill for just under £9,500; in July 2011 the Home Office offered £6,000 in settlement of it.
2. At this point Mr Chifuntwe wrote a letter to the Treasury Solicitor's costs draftsmen, dated 2 August 2011, with copies to his lawyers. The letter withdrew his instructions to solicitor and counsel with immediate effect, accepted the Treasury Solicitor's offer of £6,000 in settlement of his costs and required the money to be paid directly to him. The letter continued:

"… it is my understanding that since I have already paid my solicitors money they have shown little interest particularly in helping me to get my full recoverable costs back."

It went on to express concern that

"… my recoverable money is at risk of being reduced or even not paid back at all..."

3. Two comments should be made on this letter. First, it fails to say that not more than £1,500 of the recoverable costs were owed to Mr Chifuntwe; the rest was Khans'. Secondly, this court has no reason to think that Khans were in fact mishandling Mr Chifuntwe's case in any material respect.
4. Khans responded two days later with a letter warning Mr Chifuntwe not to interfere with the recovery of their costs. Then on 8 August they wrote to the Treasury Solicitor:

"We refer to our telephone conversation earlier today and write to confirm that Mr Chifuntwe is attempting to avoid paying costs properly due to us which would appear to be well in excess of £9,000. That is why we believe there is no other reason for him to contact you directly and accept £6,000 being the sum offered by the Treasury Solicitors Department, without the benefit of independent legal advice.

We are consulting counsel on the matter as to the claim that should be issued against Mr Chifuntwe and whether or not the Treasury Solicitor should also be included as a party, e.g. not to part with any costs in this matter (presently) that we understand have been agreed between you and Mr Chifuntwe directly (since his withdrawal of retainer with us).

We appreciate what you say, i.e. that you are of the opinion that strictly legally speaking, you can release £6,000 costs agreed with Mr Chifuntwe directly to him. However, we are of the opinion that since you are on notice of our very substantial claim (because of which we believe Mr Chifuntwe has withdrawn his retainer and accepted a much lower sum, i.e. to avoid payment of our costs) it will be imprudent to do so in the circumstances… There may be ethical/professional issues which we will also be looking into.

…………"

The letter concluded by asking the Treasury Solicitor to wait for five working days while counsel's advice was obtained.

5. On 17 August the Treasury Solicitor's costs draftsmen made an improved offer in the sum of £7,125, apparently forgetting that Mr Chifuntwe had already accepted their offer of £6,000. On 19 August, realising this, they withdrew it.
6. Khans followed their letter of 8 August 2011 with judicial review proceedings. These did not seek to prevent the Home Office paying their former client direct, but sought to avoid the £6,000 compromise which Mr Chifuntwe had entered into. The proceedings were issued on 21 September, but were struck out by Thirlwall J on 19 October because they related to a private law claim. We are not asked to decide whether this was a correct course for the court to take (cf. 54 CPR 20), but we are told that Khans did not learn of the strike-out until 4 November.
7. On 9 November 2011, by when Khans had taken no further step to protect their interests, the Treasury Solicitor paid the agreed sum of £6,000 to Mr Chifuntwe, who – as Khans had warned them might happen – has vanished with it.
8. Khans then issued these proceedings under CPR part 8, claiming a declaration that the £6,000 compromise was not valid, and either a charge or a lien upon the (ex hypothesi) unpaid and as yet unassessed costs. The first defendant to the claim, Mr Chifuntwe, has been perceptible in the proceedings only by his absence. The second defendant, the Home Secretary, has contended successfully, first before Master Campbell, the costs judge, and then on appeal before Mackay J, that in the absence of any proof that she had colluded with Mr Chifuntwe to cheat Khans, she bears no further liability for costs.
9. The question for this court, following the grant of permission for a second appeal by Jackson LJ, is whether the master and the judge were right.

The decided cases

10. Mr Biggs, for Khans, and Mr Radley-Gardner, for the Home Secretary, have helpfully put before us a compendious body of authority from which the development of the law can be deduced. Because we do not propose to cite them all in detail, we will first list the cases and then describe as shortly as we can what we derive from them.
11. The cases are:

Welsh v Hole (1779) 1 Doug. 238; 99 E.R.155 (Lord Mansfield)

Read v Dupper (1795) 6 T.R. 361; 101 E.R.595 (Lord Kenyon CJ)

Ormerod v Tate (1801) 1 East 463; 102 ER 179 (Lord Kenyon CJ)

White v Pearce (1849) 1 Hare 276; 68 E.R.113 (Wigram V-C)

Brunsdon v Allard (1859) 2 El. & El. 19 (QBD)

The Hope (1883) 8 P.D. 144 (CA)

Ross v Buxton (1889) LR 42 ChD 190 (Stirling J)

Re Margetson and Jones [1897] 2 Ch 314 (Kekewich J)

Re Fuld (No.4) P.727 (Scarman J)

Manley v The Law Society [1981] 1 WLR 335 (CA)

12. Scarman J in Re Fuld (No.4) stressed the readiness of the court, and the breadth of its powers, to safeguard a solicitor's entitlement to recover his costs. It has been accepted in the present case, accordingly, that if payment was improperly or irregularly made to Mr Chifuntwe, the Home Office must make the payment again to Khans – though in what sum is a question to which we shall also come.
13. It has always been accepted that an attorney has a lien for his own fees on money which comes into his hands on a client's account. The difficulties begin to arise where the money has been paid to the client, so that no possessory or effectual lien has yet come into existence.  The line of authority which begins with Lord Mansfield's judgment in Welsh v Hole is consistent in holding that where the paying party has colluded with the opposing party to keep fees out of the hands of that party's lawyers – in other words, to cheat them - payment to the opposing party is not a good discharge of the costs debt. Ormerod v Tate was such a case – "a mere shuffle between the plaintiff and defendant," said Lord Kenyon, "to cheat the attorney of his lien." Judgment for the attorney, he considered, corresponded with "convenience, good sense and justice".
14. The evidential material in the present case does not implicate the Home Office or the Treasury Solicitor in any such collusion. The correspondence shows them to have taken notice both of the correspondence and of the abortive proceedings, and to have waited till the latter were disposed of before making payment to Mr Chifuntwe. It also shows Mr Chifuntwe to have constituted himself, by the date of payment, the sole receiving party. Mr Biggs has therefore fallen back on the proposition that the Treasury Solicitor's knowledge of Khans' unsatisfied interest in the recoverable costs was sufficient to impress the fund with a trust in their favour, or otherwise to render payment to Mr Chifuntwe ineffective to discharge the Home Secretary's liability for costs.
15. Is such notice a sufficient alternative to collusion?  Lord Mansfield in Welsh v Hole was prepared to say it was:

"I am inclined to go still farther, and to hold that, if the attorney gives notice to the defendant not to pay till his bill should be discharged, a payment by the defendant after such notice would be in his own wrong, and like paying a debt which has been assigned, after notice."

It is also noteworthy that, although the claim in Welsh v Hole failed in the absence of either collusion or notice, Lord Mansfield was clear that the court, if alerted, had power to intervene in order to preserve the costs from dissipation.

16. More than one of the decided cases have come close to making law of Lord Mansfield's obiter dictum. One is White v Pearce, where a bona fide compromise of foreclosure claim was held not to relieve the paying party and his lawyer of their obligation to the receiving party's lawyer. Another appears to be Lord Kenyon's decision in Read v Dupper. Here notice had been given by the successful plaintiff's attorney not to pay the award of damages and costs direct to his client because the client had not yet paid his bill. Lord Kenyon made absolute a rule nisi requiring payment to be made afresh. He said:

"The principle upon which this application is to be decided was settled long ago, namely that the party should not run away with the fruits of the cause without satisfying the legal demands of his attorney, by whose industry, and in many instances at whose expense, those fruits are obtained. If indeed the money has been paid over bona fide to the plaintiff, before notice from his attorney of his lien, such payment would have been good; but here the payment was made in violation of the notice, which cannot be suffered."

He went on to recall Lord Mansfield's analogy of an assigned debt and to remark that, here too, once notice was given, the debtor "shall not afterwards be suffered to avail himself of a payment to the principal in fraud of such notice."

17. Pausing here, it would seem that Lord Kenyon's ratio decidendi was not the equitable analogy of an assigned debt but the giving of notice not to pay – the class of act on which Khans likewise rely as both necessary and sufficient. This, if taken alone, might be problematical: William Garrow, arguing at the bar against the rule, had pointed out that "an innocent defendant disposed to pay a just debt might be forced to arbitrate between the plaintiff and his attorney on adverse demands made by each, and incur the risk of paying the money twice if he decided wrong". But Lord Mansfield had given the answer, and Lord Kenyon echoed it:

"In Welch v Hole Lord Mansfield compared this case to the case of an assignment of a chose in action, which indeed in legal strictness cannot be done; but still according to the rules of equity and honest dealing if the assignee gives notice to the debtor of such assignment, he shall not afterwards be suffered to avail himself of a payment to the principal in fraud of such notice."

18. The facts of The Hope were simple. A lawsuit brought by seamen against ship-owners for unpaid wages was compromised by a cash payment made by the company direct to the plaintiffs, who promptly embarked without paying their solicitors. There was no notice not to pay, and the Court of Appeal (Brett MR, Lindley and Fry LJJ), oversetting the judgment below, declined to make the ship-owners pay again in the absence of any proven mutual intention to defeat the solicitor's lien. What is significant, however, is that the court appears to have been prepared to put notice on a par with collusion as a ground for what it called "equitable interference" with the payment. Lindley LJ, adopted a passage in Archbold's Practice, ed. Chitty, 13^th ed., p.143:

"… unless such notice [of lien] has been given, or there has been … collusion or fraudulent conspiracy, the client … may compromise with the other party and give him a release without the intervention of his solicitor…"

19. The Hope, like Re Margetson, did not turn on the efficacy of notice because none had been given. But the encouragement given by Lindley LJ to regard notice as equivalent to collusion did not appear to chime with the earlier decision of a Queen's Bench divisional court (Lord Campbell CJ, Wightman, Erle and Crompton JJ) in Brunsdon v Allard.
20. The facts of Brunsdon v Allard were complex, but they involved an honest compromise of orders for damages and costs in cross-actions in which Mr Brunsdon had employed different attorneys. One of them, Hope, gave notice claiming a lien on all the damages and costs recovered by his former client in the action he had conducted, and now applied for an order to enforce his claim. Lord Campbell CJ, having dealt with collusion, said:

"Although an attorney has a lien for his costs … that does not prevent the parties to the action from coming to a compromise, the result of which is that the attorney loses his lien, provided that the arrangement is not a mere juggle between the parties, entered into by them in collusion to deprive the attorney of his costs. …. We cannot make this rule absolute [i.e. allow the claim] without affirming Lord Mansfield's doctrine that the attorney's lien became, by notice to the defendant, equivalent to an equitable assignment to the attorney of the judgment debt. But we are not prepared to go that length."

Crompton J amplified this aspect of the decision:

"Nor is the attorney's lien equivalent to the equitable assignment to him of the judgment debt. It is a right subject to that of the parties to the suit to make a bona fide compromise between themselves."

Erle J expressed "regret that the indefinite language used by Lord Mansfield and Lord Kenyon should have misled [counsel] by inducing him to make this application to the court", adding – if the reporter did not mishear him – that the words "equitable lien" were "intensely undefined".

21. We do not regard the decision in Brunsdon v Allard as either binding on us or entirely satisfactory. It appears to us not to sit comfortably either with the line of previous authority or with the later decision of this court in The Hope. Although the headnote to The Hope says that Brunsdon v Allard was approved, there is no mention of it in the judgments; it features by name only in counsel's argument. If its reasoning is, at it seems to be, that notice could only operate, if at all, by analogy with an equitable assignment, we would respectfully differ. The true parallel is with collusion, not because the two are the same or even similar but because both operate in equity to interpose the unpaid attorney's entitlement between the paying and the receiving party.
22. Stirling J's carefully reasoned decision in Ross v Buxton contains a valuable analysis of the state of the law towards the end of the 19^th century.  He was right, in our judgment, to conclude that collusion and notice were parallel routes to equitable interference with the disposal of damages and costs:

"[W]here a valid compromise has been entered into under which a sum of money, the fruit of the action, is coming to the plaintiff, the defendant or his solicitor is not at liberty, after express notice by the plaintiff's solicitor of his claim to a lien, to pay that sum over to the plaintiff in disregard of the notice."

23. .      The authorities to which we have referred were shown to this court in Manley v The Law Society, a case on the legal aid fund's first charge on money recovered. It was held that the parties' intention to defeat the charge by means of a settlement was tantamount to collusion in ordinary litigation. Since notice did not arise even as an analogy, Lord Denning MR's summary of the authorities, as he himself said (at 347C-D), was obiter. It is relevant, nevertheless, that he derived from the authorities a unitary proposition (with emphasis added by us) that

"if the defendant has notice of the solicitor's lien, and made the agreement with the plaintiff collusively so as to deprive the solicitor of his lien, the solicitor can recover from the defendant his costs…"

24.  In this uncertain situation, Mr Biggs resorts to the statement of the law in the current Annual Practice, §7C-239:

"… even if the compromise is bona fide, and involves payment to the claimant, and the defendant has previously received notice from the claimant's solicitor of his lien for costs, he must not pay the claimant in disregard of it."

25. Mr Radley-Gardner for his part adopts the formulation in Snell's Equity (32^nd ed., 2010) §44-033:

"A solicitor's lien may be defeated by a compromise of the action if it has been fairly entered into, but not if it is purposely designed to defeat the lien, or is otherwise an attempted fraud on the solicitor by persons who have been given express notice of his lien."

26. Both passages rely on the authority of Ross v Buxton.

Discussion

27. The single issue remaining in this case is the efficacy or inefficacy of the notice given by Khans to the Treasury Solicitor not to pay the claimant the costs awarded to him. The ability of a client to dismiss his lawyers and to continue in person is undoubted. Mr Chifuntwe was accordingly free in principle both to compromise his claim for costs and to take payment of the agreed sum himself. Neither act, of course, relieved him of his obligation to Khans in the full amount of his solicitor and client bill, less the £1,500 paid by him upfront. But the reality faced by the courts for over two centuries has been that unless the courts can protect them in such situations, lawyers as often as not will never see the money that is owed to them. In principle it is unacceptable that a client can compromise his own solicitor's legitimate interests for any sum he chooses, leaving the solicitor to sue him for money which he has now taken and spent. In practice, provided the solicitor moves rapidly, notice of his interest ought to be sufficient to block both compromise of the debt and payment to the client. The question is whether and how this can be done.
28. In our judgment it can be done. No authority inhibits us from holding, as we would do, that a paying party who is on notice that the receiving party's solicitor has a claim for fees upon part or all of the sum due pays the receiving party directly at his own risk. Collusion is not necessary. But such a principle by itself will not resolve this case, nor, we suspect, most other cases.
29. There is, first, the problem raised by Garrow (or possibly his junior, Espinasse) in Read v Dupper: if, as is frequently the case, there is a dispute between client and solicitor which affects entitlement to the funds in question, how is the paying party to know whom to pay? Following from this, what should the paying party do in order to discharge the debt without incurring interest charges by reason of delay? And what relevance do the paying party's knowledge and state of mind have? It is one thing to expect a solicitor to understand what is at issue when notice of entitlement is given by another solicitor; it may be another to expect a litigant in person to do so. Is implied or constructive notice sufficient for this purpose? Can the solicitor who has paid in breach of notice and has to pay again recover the debt from his client? If not, is it an insured or an insurable hazard?
30. All of these questions are capable of being answered. It may well be that, either in the concluded proceedings or in fresh ones, provision should be made for the paying party to lodge the outstanding funds in court to abide a decision as to their proper allocation, leaving solicitor and client to resolve any argument between themselves. As to this, the standard terms on which solicitors accept instructions may need revision. It may also be that the court should be prepared to deal compendiously with the quantification of costs as between the parties and their distribution as between solicitor and client.
31. But anterior to all these questions is the possibility that the receiving party's solicitor (or rather ex-solicitor) may have forfeited his claim or abandoned his notice not to pay. That, it is argued, is what happened here. It is said on behalf of the Treasury Solicitor that he (or rather his costs draftsman) held back from paying Mr Chifuntwe until the court proceedings brought by Khans were at an end. It is also pointed out that those proceedings did not seek to prohibit payment but sought only to challenge the purported compromise figure, and that the warning letter of 4 August 2011 which had preceded them had been sent to Mr Chifuntwe alone. Putting it shortly, Mr Radley-Gardner's case is that his client had done nothing wrong and cannot now be expected to make good Mr Chifuntwe's defalcation.
32. Mr Biggs' response is that, regardless of the judicial review proceedings, Khans had on 8 August put their position squarely to the Treasury Solicitor, who was accordingly on clear notice that by paying the amount agreed to Mr Chifuntwe he would be depriving Khans of their fees. The rest, Mr Biggs submits, is unfortunate but immaterial.

Conclusions

33. In our judgment, the law is today (and, in our view, has been for fully two centuries) that the court will intervene to protect a solicitor's claim on funds recovered or due to be recovered by a client or former client if (a) the paying party is colluding with the client to cheat the solicitor of his fees, or (b) the paying party is on notice that the other party's solicitor has a claim on the funds for outstanding fees. The form of protection ought to be preventive but may in a proper case take the form of dual payment.
34. Khans had done nothing to suggest that they were resiling from their notice not to pay Mr Chifuntwe. Nor, however, had they done anything realistic to secure payment. In our present view their proper course was to apply in Mr Chifuntwe's compromised judicial review proceedings (in which notice of a costs assessment had been served by Khans on 2 June 2011) for the Treasury Solicitor to pay the costs into court to abide allocation by the court. It was equally open to the Treasury Solicitor to make the application.
35. This course would have relieved the Home Office of the risk of making an invidious choice between solicitor and ex-client, and have protected the interest both of Khans and of Mr Chifuntwe in the costs fund. The final amount to be paid in would have remained open to negotiation and, failing agreement, to assessment. The first £1500 of it, but no more, would have been payable either directly or out of court to Mr Chifuntwe. The balance would have been released to Khans.
36. The difficulty in the present case, since none of this was done or proposed by either side, is to decide where the consequent loss (assuming that Mr Chifuntwe remains out of reach) should fall. In our judgment it falls into two parts.
37. The first part is the compromise of his costs at a figure of £6,000 which Mr Chifuntwe reached on his own behalf with the Treasury Solicitor by his letter of 2 August 2011. At that point of time Mr Chifuntwe was acting in person and the Treasury Solicitor was not on notice of any contrary claim on Khans' part. For better or for worse, we consider the compromise to have been binding. Whether such actions can in future be forestalled by solicitors' arrangements with their clients is an important question but not one for this court.
38. The second part concerns the disbursement of the agreed sum to Mr Chifuntwe at a point of time when the paying party, the Home Secretary, was on clear notice not to pay to Mr Chifuntwe money which was in every material sense (apart from £1500 of it) Khans'. We recognise that for the rest the Treasury Solicitor's conduct was irreproachable, but we consider that in this one respect his costs draftsman erred, albeit from the best of motives.  As in White v Pearce, so here, the payment cannot stand as a good discharge of Khans' claim and must be made again.
39. The compromise of Mr Chifuntwe's costs at £6,000 will therefore stand (and to that extent the appeal will be dismissed), but the second defendant is to pay that sum to Khans, less the £1,500 which Mr Chifuntwe was entitled to – and did – recoup from it. To that extent the appeal succeeds.

Mr. Justice Ryder:

40. I agree.

Lord Justice Rix:

41. I also agree.