Why Can’t We Have Both? Solicitors’ Liens in Equity and the Taking of New Security

Articles
21 Feb 2023

Candey Ltd v Crumpler & Anor, Re Peak Hotels and Resorts Ltd [2022] UKSC 35

Abstract

The equitable lien is the traditional means by which equity provides a form of security for the recovery by solicitors of their agreed charges for the successful conduct of litigation, out of the fruits of that litigation.  As Lord Briggs explained in the recent case of Gavin Edmondson Solicitors Ltd v Haven Insurance Co Ltd [2018] UKSC 21 at [3]-[4], the solicitor’s equitable lien is a security interest and is enforceable against the proceeds of the litigation up to the amount contractually due to the solicitor, in priority to the interest of the successful client, or anyone claiming through the client. As stated in both Gavin Edmondson and Bott & Co Solicitors v Ryanair DAC [2022] UKSC 8, it also serves the important purpose of promoting access to justice by enabling a client to obtain legal representation in cases and in circumstances where it is likely that payment can only be made out of the proceeds of litigation.

This latest UKSC appeal concerning the solicitor’s lien did not concern the way or the circumstances in which the lien is created; but rather with the circumstances in which it may be inferred that the solicitor has waived or surrendered the lien to which he or she would otherwise have been entitled.

Background

The dispute arose between appellant firm of solicitors (‘Candey’) and the respondent joint liquidators of a BVI company (‘PHRL’).  Candey had acted for PHRL between April 2014 and March 2016 in respect of worldwide litigation, including in proceedings in London, and various other matters.

By August 2015, PHRL was desperately short of funds.  It was indebted to Candey for hundreds of thousands of pounds in overdue legal fees and it did not have the resources to pursue the litigation in which it was involved.  This led PHRL and some of its backers to renegotiate the terms upon which Candey was retained, which ultimately resulted in the parties entering into a new fixed fee agreement (‘the FFA’): Candey agreed to continue to act for PHRL in return for a fixed fee with interest, payment of which was deferred until the handing down of judgment on liability or settlement of the litigation in London, or PHRL entered an insolvency process, or PHRL had received other funds enabling it to pay.   A Deed of Charge was further entered into, purporting to grant to Candey a fixed and floating charge over all of the assets and undertakings of PHRL, ranking behind a charge conferred on PHRL’s litigation funder. It subsequently transpired, however, that the Deed of Charge conferred only a floating charge over PHRL’s assets.

Liquidators were appointed over PHRL in Feb 2016, and the fixed fee under the FFA became payable.  Candey lodged a proof of debt, referring to the Deed of Charge as the security it held for the fixed fee.  Candey made no reference to any pre-existing solicitor’s equitable lien.

Candey then sought payment of its outstanding fees, contending that, as PHRL’s legal representative, these fees were payable in priority to sums payable to other creditors in PHRL’s liquidation, and it asserted for this purpose an equitable lien over sums of money recovered or preserved in the course of the litigation in London.  It also argued that this lien ought to be converted to a charge over that money under section 73 of the Solicitors Act 1974 (‘the 1974 Act’) to secure the unpaid fees in priority to the Liquidators’ expenses and all other claims in PHRL’s liquidation.

The Liquidators responded, inter alia, that Candey had waived or in some other way surrendered its right to the equitable lien; either (i) in accepting additional security for its fees when its retainer was renegotiated (“the pre-liquidation waiver argument”); or (ii) when it submitted a proof of debt in PHRL’s liquidation without referring to the lien (the “post- liquidation waiver argument”).

The Courts Below

Andrew Hochhauser QC (as a Deputy Judge of the Chancery Division) accepted the pre-liquidation waiver argument and found that Candey had indeed waived its entitlement to an equitable lien when renegotiating its retainer and accepting additional security for its fees.  The Deputy Judge, however, rejected the post-liquidation waiver argument.

On Candey’s appeal, The Court of Appeal (McCombe, Moylan and Rose LJJ) upheld the Deputy Judge’s finding on the pre-liquidation waiver, but held that the Deputy Judge had been wrong to reject the post-liquidation argument.  In broad summary, the Court of Appeal focused on the inconsistencies between a putative lien and the Deed of Charge: (i) the Deed of Charge covered assets which would otherwise be covered by the lien; (ii) the Deed of Charge conferred priority on a third party, which the lien did not; and (iii) the FFA provided an interest rate would not have been payable under the lien. These inconsistencies gave rise to an inference that Candey intended to waive the lien, given the incompatibility between the lien and the Charge, and this inference had not been displaced by any express or implied reservation of the lien by Candey when accepting the Deed of Charge.

The Supreme Court

Lord Kitchin (with whom Lord Briggs, Lord Reed, Lord Hamblen, and Lord Stephens agreed) considered it helpful to consider, by reference to the authorities, some of the further features of the solicitor’s equitable lien particularly relevant to the issues arising in the appeal, as follows:

  • The solicitor’s lien is one of many liens arising from the relationship between the parties and which take effect as a form of equitable charge upon property until certain claims are satisfied. Other examples include the vendor’s lien for the purchase money and the purchaser’s lien for the deposit (para 38).
  • The creation of the solicitor’s equitable lien is underpinned by fairness: the client should not get the benefit of a solicitor’s labour without paying for it (para 39).
  • The principle of fairness further promotes the access to justice, as the lien encourages solicitors to take on cases which their clients would not otherwise have been able to afford (para 39).
  • As with other equitable liens, it is non-possessory. Instead, it operates by law as a first ranking right of the solicitor to be paid his or her fees out of the proceeds of the litigation, and as a form of equitable charge which binds third parties with notice of it. It is in this sense akin to a right of salvage (para 40).
  • The lien survives insolvency events concerning the client, and so solicitors acting for a liquidator who recover funds which then form part of the assets in the liquidation will have a lien for their costs – incurred prior to and after the liquidation – over those funds (para 41).
  • There was no great distinction for the purposes of the present appeal between the solicitor’s equitable lien and the right solicitors have under section 73 of the 1974 Act: namely, to secure a declaration that they are entitled to a charge on any property recovered or preserved through their instrumentality for their assessed costs, in relation to the suit or matter in issue. In making a statutory charging order, the court is not giving any solicitor a new right, but is enabling the solicitor more cheaply and speedily to enforce a right he or she already possesses (para 42).
  • Facts which amount to a waiver of the solicitor’s right to an equitable lien will generally also amount to a waiver of the right to a declaration under section 73 of the 1974 Act. Similarly, if the right under section 73 has been waived, the position is likely to be the same in respect of the underlying equitable lien (para 42).

Waiver

Lord Kitchin proceeded to review the authorities, which left ‘no doubt’ that an objective approach must be adopted to the real issue under present consideration.  Whilst the relevant factors must depend on the individual circumstances of each case, he noted two recurring factors held relevant in the authorities: (i) the taking of new security, and whether and to what extent this is inconsistent with solicitors’ rights in equity and under section 73 of the 1974 Act; and (ii) whether, in light of the professional relationship between them, the solicitors had explained to the client that they were reserving their earlier rights.

i) New Security

Lord Kitchin considered several 19th and 20th century decisions which consistently illustrated that the taking of new security was a relevant point to consider.   From these, the following key principles emerged:

  • If the new security is in any way inconsistent with the existing equitable lien and the solicitor takes it without explaining to the client that the existing lien is retained, then it is likely to be reasonable to infer that the new security is intended to replace the lien, and that the lien is surrendered (para 48-54).
  • Where a solicitor takes some form of security for limited and specific purposes, such as counsel’s fees and out of pocket expenses, the solicitor will not be taken as having waived the lien (para 55).
  • A new security with a right to interest is inherently likely to be inconsistent with the retention of an equitable lien which carries no such right (para 60).
  • Where the solicitor takes new security over the asset covered by the original lien, the new security will, on the face of it, displace that lien (para 61).
  • If the new security taken over the same property has a priority different from that of the equitable lien, the inference in favour of a waiver of the lien may be strengthened still further (para 62).

ii) The Solicitor-Client Relationship

In respect of the ‘well-established incident of the professional relationship between solicitors and their clients,’  Lord Kitchin endorsed (at para 64) the observations of Lord Alverstone CJ in In re Morris [1908] 1 KB 473 to the effect that ‘if solicitors take any security which is in any degree inconsistent with the retention of the lien, it is their duty to give express notice to the client if they wish and intend to retain the lien, and that if they do not do so, it is very likely that the lien will be taken to have been abandoned.’

The Present Facts

Lord Kitchin was satisfied that the retention of the lien appeared to be inconsistent with the Deed of Charge and the FFA in at least two ways: (i) the Deed of Charge extended over the same property as the lien; and (ii) the Deed of Charge recognised that it ranked below the charge granted to PHPR’s litigation funder.

Hence, the next question was whether Candey had, either impliedly or expressly, given notice that it was intending to retain the lien, thereby displacing the inference of waiver.  However, Lord Kitchin could not find anything in the Deed of Charge and FFA, nor in communications between Candey and PHRL, that suggested Candey had given such notice.

Accordingly, Lord Kitchin concluded that the Court of Appeal was entitled to find that Candey’s equitable lien was waived when the parties entered into the FFA and the Deed of Charge in October 2015. The lien was not expressly reserved and there were ample grounds to infer that the parties intended the lien to be replaced by the Deed of Charge in conjunction with the FFA.  The appeal was therefore dismissed.

Comment

Interestingly, Lord Kitchin rejected the argument submitted on behalf of Candey that given the demise of legal aid, increase in multi-jurisdictional litigation, and increase in commercial litigation funders and adverse costs insurance providers, it was (i) more important than ever to maintain access to justice; and therefore (ii) by analogy with the doctrine of election, waiver by solicitors of their equitable liens ought to require an unequivocal representation by the solicitors that they are abandoning their equitable right, made with full knowledge of the relevant facts.

Whilst Lord Kitchin ‘readily accepted’ the importance of maintaining access to justice, he did not consider this public policy argument relevant to the question of determining whether such a lien had been waived. He also considered Candey’s analogy with election inapt. Election concerns a situation where the putative elector is faced with two alternative rights that are inconsistent with each other, and where she must make a choice between them.  The present appeal concerned whether solicitors, in taking new security, have waived their equitable lien. That does not involve solicitors making a choice as to giving up one of two rights which exist at the same time, and it is not something solicitors can decide unilaterally to do.

It is now clear that if the new security taken is inconsistent with the features of the equitable lien, it will be inconsistent prima facie with retention of the equitable lien, so that it is incumbent on solicitors to give express notice to their client if they intend to retain the lien. A solicitor is not absolved of that obligation simply because the client has agreed to take independent legal advice in relation to the new security and that is because the independent adviser is not in a better position than the client to discern the solicitor’s intention (para 79). This is a salutary warning to solicitors to actively protect their position and ensure there is clarity regarding the terms on which they are prepared to take security, lest they risk relinquishing their legally acquired rights.


Article by Amy Held and Emily Husain

Author

Emily Husain

Call: 2014

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