High Court Rules On Ability To Deduct Fees From Funds Held

LAWFUEL – The Legal Newswire – A recent High Court case contains some important lessons for lawyers, notably that you cannot deduct fees from funds held for a client without express authority, and that you must finish the work for which you have been retained unless you can give reasonable notice of termination, as Duncan Webb, Professor of Law at Canterbury University, explains.

Heslop v Cousins* contains a number of lessons for the solicitor in the hurly burly of practice. Of particular note is the fact that some of the conduct of Mr Cousins that the court criticised is of a nature that some practitioners may engage in from time to time in the belief that they are acting in accordance with their obligations. They will no longer have the ability to plead ignorance in this regard.

The background to the case was a relatively complex conveyancing transaction. The complexity was caused in part by the fact that the Heslops (who were property developers) had fallen upon hard times and were compelled to sell the block of land on which they lived. The land was in two lots, but on one title. One block of land had a house and granny flat on it (the lifestyle lot) and the other part of the land was yet to be developed (the orchard lot). Because a rezoning of the land from residential to rural was highly likely, the Heslops were keen to retain the orchard lot and they had found a purchaser who was willing to effectively carve out the orchard lot from the contract of sale by granting back an option to purchase that land for $1 when a separate title was issued.

Things became messy because under this arrangement there were insufficient funds to discharge the BNZ mortgage on the land, and the bank was taking an uncompromising line. This meant that money had to be found elsewhere, including from family members. Mr Cousins agreed to act on the conveyance and in respect of the negotiations with the BNZ.

Things finally looked to be in place to settle the transaction when Mr Cousins stated that he would act no further unless his outstanding fees were paid. Notice of this was given to the Heslops only at a very late stage (arguably on the afternoon of the final day upon which settlement could be completed). Moreover, Mr Cousins refused to hand over the relevant funds held on trust on the basis that he had a lien over those funds, and that he was entitled to deduct his fees from funds held in trust.

The plaintiffs could not pay these fees and the settlement did not proceed. Consequently, the BNZ sold the property under its power as mortgagee and the plaintiffs lost the opportunity to repurchase the orchard lot for $1. The plaintiffs then instructed the defendant to release all funds held in trust on their behalf to another solicitor. The defendant refused to do so until his fees were paid in full, claiming that he had a lien over or right of set-off against the funds held and that he was entitled to deduct fees from funds held on trust where an invoice had been issued.

The court found Mr Cousins to be wrong in all of these matters. Perhaps of most interest is the fact that this case is now clear authority for the proposition that a solicitor may not take fees from trust funds without authority from the client. While Regulation 8 of the Solicitors’ Trust Account Regulations 1998 may on its face seem to say this is not the case, Chisholm J rightly looked to s89 of the Law Practitioners Act 1982. This clearly states that funds held on trust may only be paid out to the client or on the directions of the client. This must include payments to the lawyer for fees. Clearly the act will prevail over the regulations in this regard.

In a nutshell, this means that a solicitor may deduct fees only if authorised to do so by the client. Such an authorisation may be given in advance of an invoice being raised.

Most solicitors will have had the unpleasant but necessary task of informing a client that unless fees are paid, the lawyer will not undertake further work. There is, of course, nothing wrong in doing so (although it might be commendable to work for nothing in some cases). However, this case makes clear the presumption that a solicitor is required to finish the work for which he or she has been retained unless he or she gives reasonable notice terminating the retainer.

Indeed, there is further authority to suggest that unless it is made clear to the client at the outset that fees will be charged and must be met periodically, the lawyer must complete the “whole retainer” before the right to charge fees arises. This is yet another good reason for a clear letter of engagement to be used.

In this case, Mr Cousins may well have had cause to terminate the retainer. However, the notice was woefully inadequate and evoked strong words of condemnation from Chisholm J. It was also at the heart of a substantial award of damages. Obviously, what will be reasonable notice will vary from case to case, but a fair guiding principle will be the time it would take a client to find and properly instruct an alternative lawyer to take over the work. Certainly a threat to terminate the retainer in an instance where the client is in an impossible position cannot be used to extract fees.

A further error on the part of Mr Cousins was to think that he had a right to retain funds just because they were held in his trust account. The Heslops had gathered funds from various sources to meet the amounts required for settlement. As such, they were in the trust for the particular purpose of facilitating the sale of the property. Chisholm J followed an established line of authority in finding that a solicitor has no lien or right of set-off if funds have been deposited into the solicitor’s trust account for a particular purpose. Rather, the solicitor is obliged to use the funds for the particular purpose for which the funds have been entrusted to the solicitor.

It is possible that in the heat of transactional battle and the cost-competitive arena, there is a risk that a confusion of loyalties may arise. Heslop v Cousins reminds us that at all times a practitioner’s obligations to the client’s interests are overarching. It may well be that in the new world of the Lawyers and Conveyancers Act the obligation to provide clients with information about the retainer and fees in advance will, if adhered to, obviate some of these difficulties. In any event, any lawyer who wants to practise in a low risk environment will use a comprehensive letter of engagement to explain these and other matters to clients at the outset and to avoid misunderstandings and unexpected conflicts with clients down the track.

*Heslop v Cousins, High Court Christchurch, 15 June 2007, Chisholm J CIV 2005 409-2833.

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