Roger Pearson looks at a recent decision which could leave defence solicitors' fees subject to proprietary claims by the plaintiffs
The decision of Michael Burton QC sitting as a deputy judge in the case of the United Mizrahi Bank (UMB) v Doherty & ors in the High Court on 28 November last year could have the effect of rendering fees paid to defence solicitors vulnerable to attack if their clients are unsuccessful.
The case in question involved an action in which Mareva and proprietary injunction orders were in place to freeze specified assets. Cohen says that the profession has, in the past, taken comfort from provisos contained in such orders which allow those subject to them to pay legal fees out of assets that could be subject to proprietary claims.
The making of such provisos has traditionally entailed a balancing act. The prejudice to the plaintiff – namely dissipation of assets against which he may lay claim in the payment of legal fees – has been balanced against the prejudice to the defendant who could be deprived of legal representation subject to his ability to gain legal aid.
The plaintiffs' solicitor, Yehuda Cohen of Nabarro Nathanson, says Burton's decision did not create any new law but clarified that the profession cannot take it for granted that fees paid to them under such provisos are in all circumstances safe.
He says that the principle applies to all cases in which proprietary claims are brought by a plaintiff and not just to cases where there are injunctions with or without provisos.
Cohen's client, UMB, refused to agree to the defendants using assets to fund legal fees, even though those particular assets were not the subject of Mareva or proprietary injunctions.
UMB maintained that it had a proprietary interest in the funds which it intended to seek to trace into the hands of the defendant's solicitors.
The defendants sought a declaration that, despite UMB's stance, the assets could legitimately be used to pay defence costs in the action.
But the judge refused to make such a declaration. He agreed that provisos of this nature were sufficient to protect a defendant from action for contempt of court if otherwise protected assets were used in this way.
However, he went on to say that the provisos did not absolve solicitors from claims by the plaintiffs that fees the solicitors had received were in fact being held on constructive trust for the plaintiffs and should be repaid to them.
Cohen stresses that the decision does not mean that where a proprietary claim is ultimately successful solicitors will have to repay their fees in every case. In some cases there will still be sufficient assets to meet the plaintiff's claim.
He says solicitors would be able to defend such a claim if they could show they did not know that the plaintiffs had a proprietary interest in the money they had received.
But he warns that, while solicitors do not have to assume that allegations made against their clients are true, it would be imprudent to ignore situations where they ought to have known they were receiving money that was in breach of trust.
"Solicitors acting in such a cases should be cautious and ensure that assets paid to them are not at risk as proprietary assets," says Cohen.