Beyond the Blue Pencil Test | Wider Rights Under Section 71(3)

Relevant Background

• This case involved a dispute over legal fees charged by the solicitor firm Thomson Snell & Passmore LLP (the Appellant) for administering the estate of Mrs Cunnick.

• The sole executor of Mrs Cunnick’s will retained and instructed the Appellant to administer the estate.

• The Appellant’s original costs estimate was between £10,000-15,000 plus VAT and expenses.

• The total fees charged by the Appellant in a series of invoices from October 2019 to August 2021 amounted to £54,410.99 plus VAT and expenses.

• The Appellant transferred sums from the estate to meet their costs claims either upon delivery of the bills or immediately after.

• One of the beneficiaries under the will, Mr Kenig (the Respondent), wished to challenge the fees charged by the Appellant.

• Mr Kenig applied to court under section 71(3) of the Solicitors Act 1974 for an assessment of the Appellant’s eight bills.

• Section 71(3) allows “any person interested in any property out of which the trustee, executor or administrator has paid, or is entitled to pay the bill” to apply to court for an order that the bill be assessed.

• The Appellant opposed Mr Kenig’s application, arguing that:

  • The principles in Tim Martin Interiors Ltd v Akin Gump LLP [2011] EWCA Civ 1574 should govern any assessment. Those principles would make an assessment of their bills fruitless.
  • It is not open to a beneficiary to challenge legal fees paid from estate proceeds where the executor has approved those fees.

• On 1 February 2023, Costs Judge Brown ordered that there should be an assessment of the Appellant’s bills under section 71(3).

• The Costs Judge rejected the argument that Tim Martin governed the assessment.

• The Appellant was given permission to appeal on the ground relating to the argument that Tim Martin should apply.

Tim Martin Interiors Ltd v Akin Gump LLP [2011] EWCA Civ 1574

The relevant principles from Tim Martin Interiors Ltd v Akin Gump LLP (as summarized in paragraph 95 of the judgment) are:

On a section 71 assessment, the costs judge:

• Can eliminate (a) items which ought not to be charged to the third party at all because they are outside the scope of their liability, and (b) items which are only allowable between solicitor and client on a special arrangement basis (i.e. where the solicitor did not warn the client that some costs might not be recovered from the other side)
• Cannot eliminate any other item or reduce the quantum of any item which is properly included, unless the costs judge could have disallowed or reduced that item on a solicitor-client assessment under section 70

So in essence, the costs judge is limited to a “blue pencil” approach of deleting items outside scope or allowed only due to a special arrangement. The costs judge cannot otherwise reduce costs unless it would also have been possible on a solicitor-client assessment.

Grounds of Appeal

The sole ground of appeal that was pursued was:

Are the restrictions outlined in [95] of Tim Martin applicable and binding in an application under section 71(3)?

Appellant’s Position

• Yes, Mr Kenig is restricted to the “blue pencil” approach set out in Tim Martin paragraph 95.
• A costs judge could not eliminate or reduce any items that were properly included, unless it would also have been possible on a solicitor-client assessment under section 70.
• Tim Martin sets binding principles that apply to section 71(3) assessments.

Respondent’s Position

• No, Tim Martin was an application under section 71(1), not 71(3). Lloyd LJ wrongly assumed the two types of application were the same.
• There are material differences between section 71(1) and section 71(3) assessments based on the nature of the applicant’s interests.
• The executor owes fiduciary duties to Mr Kenig as beneficiary. His interest as beneficiary is wider than a normal third party applicant.
• The principles from In re Brown should govern a section 71(3) assessment instead. Those allow a wider enquiry into both scope and quantum.

Decision

The court held that Lloyd LJ in Tim Martin wrongly assumed there was no material difference between section 71(1) and section 71(3) assessments. His judgment does not deal authoritatively with section 71(3) assessments ([50]-[51]).

“Two things may be said with confidence about Tim Martin at the outset. First, the application in that case was an application pursuant to section 71(1) and not section 71(3). Therefore, unless essential to the court’s reasoning on section 71(1), any observations about section 71(3) or its precursor sessions were “obiter”. Second, Lloyd LJ assumed there was no material distinction to be drawn between sections 38 and 39 of the 1843 Act and drew no material distinction between sections 71(1) and section 71(3) of the 1974 Act: see [40] of his judgment, which I have set out at [40] above. This second point may seem surprising, but (a) it is what Lloyd LJ said in terms (“… it seems…”) in [40], (b) in contrast to the multiple references to sections 37 and 38 of the 1843 Act the only reference to section 39 is the passing reference in [40] of Lloyd LJ’s judgment, (c) there is no analysis or even recognition in the judgment of the potential differences between the two sections despite the clear differences in their terms and historical background, and (d) it is also consistent with Lloyd LJ’s frequent references to “a section 71 application” without further specificity. Furthermore, there is no indication that the point was raised by the parties. This is not altogether surprising: if I am right in the outline that I have provided earlier in this judgment, consideration of section 71(3) and its precursors was not necessary to an analysis of the terms of section 38 of the 1843 or the cases decided under that section. The only practical difficulty that emerges from the judgment in Tim Martin is that In re Brown, if treated as a case under section 38 of the 1843 Act, appeared to be something of an outlier, whereas, for the reasons I have explained above, it sits much more comfortably as a case under section 39. This feature, too, was not addressed.” [50]

The court rejected the appeal under Ground 1. It held the principles in Tim Martin do not apply to section 71(3) assessments, which are instead governed by the principles in In re Brown ([51]).

“Whatever the reason for Lloyd LJ’s assumption, in my judgment it was wrong. For the reasons set out at [4] to [26] above, I would hold that there are material differences between applications under section 71(3) and those under section 71(1) because of the different nature of the interests of the third party that the different sub-sections are intended to reflect. The consequence of Lloyd LJ’s mistaken assumption is that his judgment cannot be relied upon as saying anything authoritative about the position that obtains where an application and assessment are brought under section 71(3): his judgment simply does not deal with that question. Furthermore, in my judgment there is no rational basis for transposing the principles that apply to a section 71(1) assessment, as identified in [95] of Tim Martin, to the different circumstances of an assessment pursuant to section 71(3). I would therefore reject the appeal under Ground 1 on the basis of principle and the absence of any binding authority that requires us to apply the Tim Martin principles to an assessment under section 71(3). In my judgment the Costs Judge was correct to find that Tim Martin was distinguishable and should be distinguished – essentially for the reasons he gave – and that the relevant principles to be applied are to be derived from In re Brown, which is binding on us.” [51]

However, that was not the end of it.

The Appellant had submitted that the fact that the executor had paid some of the bills more than 12 months before Mr Kenig made his application provideed a complete answer to any assessment in relation to those bills because of the terms of section 70(4) of the 1974 Act.

The court held that whilst this may provide a complete answer if the application was by the executor, the position is different for a beneficiary applicant. It is arguable,it was held, that different considerations apply based on the knowledge of the person chargeable vs the beneficiary about whether/when bills were paid.

“…while I accept that on the application of the executor, the fact he had paid the bills more than 12 months before would preclude an order that the bill be assessed, the situation in relation to a beneficiary is different since the court is only required “to have regard” to the provisions of section 70 as to applications by the party chargeable. It seems to me to be well arguable that different considerations may apply to an application by the person chargeable (who will know whether and when the bills were paid) as contrasted with an application by the beneficiary (who may have no such knowledge, or may learn of the payment later).” [54]

The Appellant had further argued that the executor’s approval of bills precludes a beneficiary from challenging:

The court held there should be no absolute bar on a beneficiary challenging bills even with executor’s approval, as the “ultimate interest” protected in a section 71(3) assessment is that of the estate and beneficiaries.

“…the starting point is that an assessment under section 71(3) is an assessment as between solicitor and client, I accept that the ultimate interest to be protected on an assessment under section 71(3) is that of the estate and/or the beneficiaries. Second, I consider it to be material that section 71(3)(b) makes express provision permitting an order that payments be made “to or by the applicant, to or by the solicitor, or to or by the executor, administrator or trustee”, which underscores the broader nature of the enquiry under section 71(3) when compared with an assessment under section 70 or section 71(1). Third, it seems appropriate that separate consideration should be given to the position of the beneficiary and the estate in circumstances where the executor/trustee carries no risk because of their ability to pay the solicitor out of the trust property. Fourth, the decisions in In re Brown and Hazard v Lane both contemplated and allowed the beneficiary to challenge the bill even though an executor had approved it.”

“That said, I would accept that the fact of fully informed consent by the executor (if proved) is likely to be a major consideration, which in many cases may prove to be determinative.”

So in summary, the key findings were:

1. Tim Martin does not apply to section 71(3) assessments
2. Beneficiaries may be able to challenge bills where executor could not
3. Executor’s approval does not necessarily bar beneficiary challenges

The core principle being that beneficiaries have separate interests justifying wider rights to challenge bills under section 71(3).