Inner House rules “success fee” charged by solicitor in debt recovery action not a judicial expense

The Inner House of the Court of Session has ruled that a “success fee” payable to the solicitor of a successful defender to a debt recovery action was not recoverable from the unsuccessful party that sought payment of the debt.

The appellant, Catherine Weir, was originally the defender in an action raised by Cabot Financial (UK) Ltd in which they claimed to have acquired a debt of around £7,200 owed by her to the Lloyds Banking Group. Under the terms of business of the solicitors she engaged, she was liable to pay them no more than 25 per cent of the settlement she won in the event of success.

The appeal was heard by the Lord President, Lord Carloway, sitting with Lord Turnbull and Lord Pentland. Smith QC appeared for the appellant and MacGregor QC appeared for the respondents.

Not an expense of process

In January 2018, after an initial period in which she defended the action without legal assistance, the appellant engaged solicitors and accepted terms of business under which she was liable to pay outlays, solicitor/client fees, and a “success fee”. The latter was defined as 70 per cent of the solicitor/client fee but with the total amount being no more than 25 per cent of any damages or settlement.

The respondents abandoned their action after failing to lodge the necessary documentation to vouch their claim, having been ordered to do so by the court. By interlocutor dated 10 July 2018, the sheriff pronounced decree of absolvitor and awarded the appellant expenses on a party and party basis up until 26 October 2017, and on an agent and client, client paying, basis from that date. As part of the solicitors’ account, the appellant sought reimbursement of the success fee.

While the auditor of expenses initially allowed the success fee, it was held by the sheriff that a success fee was not a sum which was incurred for conducting the cause and thus not a proper expense of process as was recoverable under expenses rules. On first appeal to the Sheriff Appeal Court, the sheriff’s approach to the distinction was held to be correct.

Counsel for the appellant submitted that the sheriff had erred in holding that only expenses of process were allowed to be claimed, and that all charges for which the client was liable should be payable. Alternatively, expenses of process ought to be taken to include all those which a client incurred to defend or pursue a cause. If the client entered into a success fee arrangement, that was an expense of process.

The respondents maintained that a success fee was merely a mechanism to fund the conduct of litigation and should be thought of as a bonus for risk. Further, the terms of engagement distinguished between fees payable for conduct of the cause and the success fee.

Private arrangement

Delivering the opinion of the court, Lord Carloway said of the general law that applied: “The taxation of any account in respect of which there has been a finding in expenses in the course of litigation, whether the scale is party and party or agent and client, the allowable expenses must relate directly to the litigation; i.e. the process.”

He continued: “As explained in Milligan v Tinne’s Trs (1971), the charges must be for work done as part of the judicial process and not for items which are incurred outside that process. Provided that principle is adhered to, the expenses are those which are deemed reasonable for conducting the action in a proper manner.”

Applying these principles to the facts at hand, he went on to say: “The ‘success fee’ in this case is not an expense which is part of, or directly related to, the process. It is a private arrangement between solicitor and client which is outwith the boundaries of the process; it is an extra-judicial item. It is a form of incentive to the agent to represent the client in the litigation. It is not related to the work which the solicitor does in carrying out that task.”

Lord Carloway concluded: “That is made clear in the Terms of Business which distinguish between the ‘charge out rate’ of £220 per hour and the success fee. The fee is an extra-judicial cost to the client. As such it is not an allowable item in the taxation of an account following upon an award of expenses, on whatever scale.”

The appeal was therefore refused. It was further held that, as the full amount of the claim for £7,277.52 had been resisted and this was construable as the appellant’s “win”, the payable success fee could not exceed £1,819.38.

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