Tim Martin Interiors Ltd. v Akin Gump Llp

Tim Martin Interiors Ltd (“TMIL”) borrowed money from the Bank of Ireland (“the Bank”). The loan was secured by a mortgage; and guaranteed by two directors of TMIL; namely Mr Martin and Mrs Jankovic. TMIL defaulted on the mortgage; and, in addition had sub-let parts of the mortgaged property in breach of the mortgage conditions. The Bank instructed solicitors, Akin Gump, to take steps to enforce the mortgage and recover possession. A statement of indebtedness, as at 31 August 2004 purported to show that TMIL owed the Bank £1.15 million. That sum included £114,216 by way of legal fees payable to Akin Gump. On 1 September 2004 the Bank transferred the mortgage to Mr and Mrs Jankovic in consideration of a payment of £1.15 million. Thus Mr and Mrs Jankovic paid the Bank an amount that included Akin Gump’s fees. Akin Gump’s final bill came to £123,984. The Bank approved Akin Gump’s fees and paid them in full in 2004. The mortgage deed contained a clause which required TMIL to pay the Bank’s costs of enforcing its security. On 14 September 2009 TMIL began proceedings against Akin Gump (but not the Bank) seeking taxation of the bill of costs under section 71 of the Solicitors Act 1974. The references in the Act to “taxation” have now been changed to refer to “assessment”. That is the nomenclature I shall use.

Master Campbell conducted the detailed assessment of the costs. He reduced the bill to £31,447 and ordered Akin Gump to pay the balance of the bill amounting to £82,768 into court. Subsequently, with the consent of Mrs Jankovic, he amended his order to require Akin Gump to pay that sum to TMIL. With the permission of Arnold J Akin Gump appeal. The appeal raises two principal issues:

What is the correct approach that the costs judge should adopt on the assessment of a solicitor’s bill at the behest of a third party who is liable to pay it?

If the costs judge concludes that the bill is excessive, what is the appropriate remedial order?

A solicitor charges fees under a retainer between him and his client. The retainer amounts to a contract between them. As with any contract, the liability under the contract is that of the contracting party. Thus the liability to pay fees is that of the client. But there may be an external arrangement which enables the client’s liability to be passed on in whole or in part to a third party, who is not the solicitor’s client. That external arrangement may be an order of the court: for example an order made in contested proceedings for one party to pay the costs of another party. Or it may be a contract: for example an agreement settling proceedings. Or it may a contract which, at least at its inception, has nothing to do with litigation: for example the clause in this case which is a standard feature of mortgage conditions. The solicitor will not be a party to that contract; and his entitlement to recover fees from his client ought to be unaffected by it.

The client is entitled to require the solicitor’s bill to be assessed under section 70 of the Solicitors Act 1974. The Act refers to him as “the party chargeable with the bill”. Section 71 (1) (as amended by the Courts and Legal Services Act 2007) says:

It is this provision that enables someone who is not the client, but who is liable to pay the solicitor’s bill, to have it assessed. There is no dispute that, because the mortgage requires TMIL to pay the Bank’s legal costs, TMIL falls within this section. When TMIL invoked the right conferred by this section it became entitled to have the bill assessed “as if [it] were the party chargeable with it”: in other words, as if it were the client. Not only is that the plain meaning of the statute, it is what a long line of cases say. It is not, I think, necessary to go back further than the last century. Two examples will suffice.

In Re Gray [1901] 1 Ch 239 Cozens-Hardy said:

In Re Longbotham & Sons [1904] 2 Ch 152 Romer LJ said:

In the same case Romer LJ also pointed out one other important difference between the position of a third party and the position of the client himself. So far as the client himself is concerned, he may have instructed the solicitor to act on more than one matter; and the solicitor may have delivered one composite bill. But the third party may only be liable to pay the costs of one matter. In that event he is entitled to have extraneous matters excluded from the bill. As Romer LJ put it:

It is important to note precisely how Romer LJ put this point. He did not say that the costs of extraneous matters must be disallowed as between solicitor and client. He said that the third party had no right to obtain an assessment of the costs of the extraneous matters. For the purposes of the assessment, they are simply left out of account. Thus as between the solicitors and their own client, the client remains liable to pay.

This principle deals with the exclusion of particular items from the bill. It does not deal with the quantum of those remaining. This is what happened in both Re Gray and Re Longbotham & Sons. In Re Gray the tenant of a mine was liable to pay the landlord’s costs of the grant of the lease. The tenant’s liability was based on custom, which required the tenant to pay the costs of drawing, settling and completing the lease. The tenant asked for an assessment of the bill of costs. The bill included a disbursement relating to fees paid to a mining expert. Cozens-Hardy J held that that item would not have been recoverable if the landlord had sued the tenant; and therefore was rightly excluded from the bill for the purposes of the assessment. Likewise the cost of issuing a writ for specific performance was not part of the cost of drawing the lease. Nor was the preparation of the counterpart, which was prepared for the landlord’s convenience. These items, too, were struck from the bill. They were, of course, payable by the client landlord because they were items of expenditure that the client had authorised. But they could not be passed on to the tenant, because they were outside the scope of what he was obliged to pay. Likewise in Re Longbotham & Sons items which were attributable to instructions given by the mortgagee in his personal capacity, rather than in his capacity as mortgagee, were excluded from the bill. As Romer LJ put it:

Once again Romer LJ makes the point that costs which are outside the scope of the third party’s liability “would not have to be taxed or considered”. In other words it is no part of the assessment that such costs are taxed or considered.

As I have said in some cases the limitation on the items that can be passed on to a third party will depend on the effect of an external agreement between them. If there is an admitted agreement for payment of costs, and the only question is its true construction, then the costs judge is entitled to decide the question of construction as part of the process of assessment: Re Hirst & Capes [1908] 1 KB 982. In the present case TMIL’s liability is governed by the clause in the mortgage conditions. It is common ground that the clause is to be interpreted consistently with the decision of the Court of Appeal in Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) [1993] Ch 171. In that case the Court of Appeal held that a clause entitling a mortgagee to recover legal costs from the mortgagor did not extend to costs that were unreasonably incurred or which were unreasonable in amount. Whether costs were unreasonably incurred or were unreasonable in amount was to be determined in accordance with the (then) rules governing the taxation of costs on the indemnity basis under the Rules of the Supreme Court. This applied both to litigation costs, and also to non-litigation costs. The same applies in the present case, save that the rules now applicable are the CPR.

Mr Cox QC argued on behalf of TMIL that where the contract imposed liability on the third party limited to costs reasonably and properly incurred the costs judge, assessing costs under section 71, would be entitled to reduce the quantum of costs claimed for items that were properly chargeable to the third party, as well as excluding items that had nothing to do with the incurring of costs by the mortgagee in his capacity as mortgagee. This would be doing no more than construing the agreement under which TMIL was liable to pay costs and conducting the assessment in the light of that construction. Master Campbell had done precisely that. He said that the decision of the Court of Appeal in Re Cohen & Cohen [1905] 2 Ch 137 was an example of this process. To evaluate this submission it is necessary to look at the facts of that case. Mrs Cotton brought an action against Mr Edwardes for breach of contract; and he brought an action against her in respect of the ownership of a song. In the course of the proceedings Mrs Cotton had authorised her solicitors to incur liabilities for many unusual expenses, for example the employment of leading counsel as well as a junior to settle the statement of claim and to advise on evidence. Before giving instructions for taking these steps she had been advised by the solicitors that the extra costs would have to be paid by herself; and would not be allowed against her opponent even if she were successful in the litigation. Mr Edwardes and Mrs Cotton subsequently settled the actions on terms that Mr Edwardes paid Mrs Cotton’s costs “as between solicitor and client relating to the matters in dispute in the said two actions, such costs to be agreed or taxed.” The Master said that he had taxed the bill item by item and had decided that unusual charges and luxuries were to be borne by the client (Mrs Cotton) rather than by Mr Edwardes. He therefore disallowed the special fees paid to leading counsel. The Court of Appeal upheld his decision. Vaughan Williams LJ said that the agreement should be construed as limited to costs that were reasonable proper and necessary in the actions and that by requiring assessment of the bill Mr Edwardes had not enlarged his liability under the agreement. Romer LJ said:

Applying this principle, he held that Mr Edwardes was not liable to pay the costs of instructing leading counsel. As he put it:

However, this is also directed to the exclusion of an item in the bill, rather than the quantum of an item which is properly included.

What is clear from these cases is that, in considering the effect of the extraneous arrangement or agreement which entitles the client to pass on costs, the court is not determining how much the client is liable to pay under his retainer with the solicitor; but which items of the bill can be passed on to the third party. In Re Gray the limitation on the items that could be passed on depended on the scope of the custom on which the landlord relied. In Re Longbotham & Sons, the limitation on the items that could be passed on depended on the relation of mortgagee and mortgagor. In Re Cohen & Cohen the limitation on the items that could be passed on depended on the true construction of the settlement agreement.

It is, in my judgment, inherent in these cases that to the extent that items in the bill could not be passed on to the third party the solicitor continued to be entitled to look to his client to pay. This was explicitly stated in Re Cohen & Cohen [1905] 1 Ch 345 in which Swinfen Eady J said:

This is exactly what one would expect. The contract to which the solicitor is a party is the contract of retainer between him and his client. His personal entitlement to fees cannot be affected by a different contract to which he is not a party.

Thus far I have been dealing with the scope of the liability on the part of the third party to pay items included in the bill. It is now necessary to consider the extent to which the third party can challenge the quantum of costs charged for items for which he is liable to pay. In the present case, for example, Master Campbell drastically reduced the hourly rate which Akin Gump charged the Bank, and which the Bank paid.

In Re Gray Cozens-Hardy J said:

He referred to an earlier case and concluded on the basis of that case:

This would preclude a challenge to quantum, at all events where the client has sanctioned the quantum. Cozens-Hardy J concluded:

In Re Cohen & Cohen [1905] 2 Ch 137 Vaughan Williams and Stirling LJJ expressly approved this passage.

In my judgment Mr Cox’s reading of Re Cohen & Cohen is not consistent with the long established principle, as approved in Re Cohen & Cohen itself, that on an assessment of a solicitor’s bill on the application of a third party liable to pay it the court must assess the bill as if the client himself had required the assessment. The third party is entitled to raise such objections as the client himself could have raised; and only such objections. As a preliminary to the assessment the court must decide what items it must assess. That is the point of construing the agreement (if there is one). If it decides that there are items included in the bill that it need not assess, then they are isolated and left out of consideration. It is only in that limited sense that they are “disallowed”. But in my judgment construction of the agreement is not to be used as itself an alternative method of assessing the costs on a basis that is less generous to the solicitor than an assessment at the client’s behest would have been.

It is common ground that the assessment of costs in this case was to take place on the indemnity basis. The indemnity basis of assessment of costs is described in CPR rule 44.4. Rule 44.4 (1) makes it clear that the court will not allow costs which have been unreasonably incurred or are unreasonable in amount. Rule 44. (3) says:

In deciding whether costs were unreasonably incurred or were unreasonable in amount the court must have regard to “all the circumstances of the case”. But rule 44.5 (3) specifies particular matters that the court must take into account. It says:

The CPR also deal with what are called “special cases”. CPR rule 48.8 says:

Finally CPR rule 48.3 says:

Master Campbell gave two judgments in this case: one on 25 May 2010 and the other on the following day. In his first judgment he correctly said (§ 1) that the purpose of section 71 was to permit a party chargeable with the bill to seek an assessment of the costs which the party primarily chargeable (the Bank) has already paid its solicitors. He continued by saying, again correctly (§ 2), that the court must construe the contractual documents under which the third party became liable for the costs. He noted that the detailed assessment at the instigation of the third party was to proceed as though it were at the instigation of the party chargeable. He referred to notes in the White Book and continued (§ 3):

I agree with Mr Bacon QC, appearing for Akin Gump, that this is where Master Campbell began to go wrong. He rolled up two separate questions:

What was properly payable as between Akin Gump and the Bank and

What sums (in terms of quantum) could be passed on to TMIL.

In considering the first question the issue was only an issue between Akin Gump and TMIL because TMIL stood in the shoes of the Bank. Thus TMIL would have been entitled to take any point that the Bank could have taken if it (rather than TMIL) had required the costs to be assessed. That is the extent and the limit of the court’s jurisdiction under section 71. However, what was passed on to TMIL under the mortgage was not passed on by Akin Gump. It was passed on by the Bank. So issues arising under that question were not issues as between Akin Gump and the Bank; or between Akin Gump and TMIL (standing in the shoes of the Bank). They were issues as between TMIL and the Bank. The Bank was not party to the proceedings begun by TMIL.

The Master said (§ 4) that costs which did not fall within “the ambit” of the indemnity clauses “must be separated out of the bill and will be disallowed”. He was entirely correct is saying that such items should be “separated out” of the bill; but his use of the word “disallowed” must be understood as meaning that those items formed no part of the assessment that TMIL was entitled to require. Those costs cannot be taken to have been disallowed as between Akin Gump and the Bank.

Later in his judgment (§§ 10-13) the Master dealt with hourly rates. The submission for Akin Gump was that is was the Bank’s right to choose its solicitor and that the court should not interfere with a decision taken between a solicitor and a client. The Master disagreed. He said that it was trite law that costs must have been reasonably incurred and be reasonable in amount; and that in this context that is what section 71 was for; namely to decide the reasonableness of the costs. In my judgment this observation was correct; but only to the extent that the court was deciding the reasonableness of costs as between Akin Gump and the Bank. He continued (§ 12):

Again, that is correct up to a point. On an assessment under section 71 the court is entitled to interfere with the hourly rate agreed between the solicitor and the client; but only to the extent that it could have interfered with it at the behest of the client. The circumstances in which the court can interfere with an hourly rate agreed between client and solicitor on an assessment at the behest of the client are extremely limited; not least because under CPR 48.8 (2) (b) costs whose amount has been agreed by the client are presumed to be reasonable. The Master clearly took the view that his right to interfere was much wider than that. He said:

The case law to which the Master referred was case law dealing with the assessment of the costs to be paid by one party in litigation to another when those costs were to be assessed on the standard basis. In that context the costs incurred must be “objectively reasonable”. However, the assessment of costs upon which the Master was engaged was a different exercise. His task under section 71 was to determine what costs the Bank was liable to pay Akin Gump in respect of matters falling within their retainer as solicitors for the Bank acting strictly in its capacity as mortgagee. The Master said that if a mortgagee instructs solicitors who charge hourly rates which are greater than those that are reasonable for the work in question, then it does so at “its peril”. But as Mr Bacon pertinently observed, the peril is the Bank’s; not Akin Gump’s. It would not have lain in the Bank’s mouth to complain about Akin Gump’s hourly rates which it had itself agreed; any more than a traveller who hails a taxi can expect to get away with proffering the bus fare.

Having adopted this erroneous approach the Master went on to consider whether Akin Gump’s hourly rates were “objectively reasonable” (§ 13); and decided that “it would not be objectively reasonable in this case for the rates charged by City firms to be recoverable from the third party here” (§ 14). This reasoning makes it clear that what the Master was doing was to assess the costs as between the Bank and TMIL, rather than the task which he should have performed; namely an assessment of costs as between Akin Gump and the Bank.

The Master gave another judgment on the following day. He said correctly (§ 3) the TMIL had the right to have the bill assessed “as if it was the Bank”. He also said correctly (§ 4) that the costs were to be assessed on the indemnity basis under CPR 48.8. But in my judgment he made the same error as he had made on the preceding day when he went on to say that the task with which he was charged was to ascertain “the sum that it is reasonable for the claimant to pay”. He referred, in support of this proposition to cases, including the decision of Tugenhadt J in Reynolds v Stone Rowe Brewer [2008] EWHC 497 (QB) § 57. However what the judge said in that paragraph was that that the right question was “what in all the circumstances is it reasonable for the client to be expected to pay?” Once again, therefore, the Master veered from the task of assessing the costs as between the Bank and Akin Gump and assessed the costs as between TMIL and the Bank. It was no doubt for that reason that the Master never once referred to the presumptions contained in CPR 48.8 (2) (a) and (b). This manifested itself, for example, in his decision (§ 8) that where Akin Gump had travelled to the Bank for meetings with the Bank “that is not a charge which can reasonably be visited on the claimant unless there was a compelling reason for the journey in question to be made”. Under section 71 that was not the question. The question was whether the travelling costs could reasonably be visited on the Bank, in whose shoes TMIL was standing.

In my judgment, therefore, the Master’s assessment was fundamentally flawed because he asked himself the wrong question throughout.

TMIL’s underlying complaint was not that Akin Gump had charged the Bank too much; but that the Bank had charged TMIL too much. In order to deal with that complaint two separate assessments needed to be made:

How much could Akin Gump have legitimately charged the Bank for dealing with the matters falling within the scope of its retainer by the Bank acting strictly in it capacity as mortgagee? and

How much of that sum could the Bank legitimately pass on to TMIL?

The first of these assessments was an assessment that should have been carried out under section 71. It was an assessment as between Akin Gump and the Bank, although TMIL was entitled to require the assessment to be made. The second of these assessments was an assessment as between the Bank and TMIL. There were two mechanisms by which this second assessment could have been carried out:

By an assessment under CPR 48.3

By an action for an account by TMIL.

The claim form issued by TMIL did claim an assessment under CPR 48.3. This rule enables the court to assess the costs payable under a contract. But CPR 48.3 (2) specifically excludes from its scope a contract between a solicitor and his client. It must therefore follow that the parties to an assessment under CPR 48.3 will be the parties to the contract in question; and that section 71 (which deals only with the contract of retainer between solicitor and client) is not a substitute for an assessment under CPR 48.2. In other words the Bank (or perhaps Mr and Mrs Jankovic) should have been parties to the assessment of how much the Bank was entitled to pass on to TMIL. It (and they) was not.

There can, I think, be no objection to an assessment under section 71 and an assessment under CPR 48.3 from taking place simultaneously, provided that the costs judge recognises that the two assessments are conceptually distinct.

As mentioned the Master’s eventual order was an order requiring Akin Gump to pay £82,768 to TMIL. Since the manner in which the Master’s assessment was carried out was, in my judgment, fundamentally flawed, this order cannot stand. But in the course of his judgment the Master suggested, by reference to two cases, that Akin Gump would be able to go back to the Bank to request the Bank to pay them the money that they had been ordered to pay to TMIL. On the face of it, this is surprising. The Bank had paid Akin Gump’s bill in full. What right did Akin Gump have to ask the Bank to pay part of the bill again?

Mr Cox disclaimed any suggestion that section 71 itself gave the Master the power to order Akin Gump to make a payment to TMIL. He said that the Master’s power to make an order arose under the general law. Quite what principle of law is in play is difficult to discern. Akin Gump’s contract, as I have said more than once, was a contract of retainer between them and the Bank. TMIL is a stranger to that contract; and can have no right to interfere with it. The liability to pay Akin Gump under that contract is the Bank’s; not TMIL’s. There was some reference before the Master to cases concerned with equitable subrogation. I can see a case for saying that if TMIL, under compulsion, pays a liability which is primarily that of the Bank, then TMIL would be subrogated to whatever claim the Bank would have had against Akin Gump for overpayment of fees. But the Master made no finding that Akin Gump had overcharged the Bank. There was, therefore, no claim by the Bank to which TMIL could have been subrogated. Consequently, in my judgment, the Master’s order requiring Akin Gump to make a repayment to TMIL was wrong in principle.

The appeal must be allowed.