Waiver of a solicitor’s equitable lien: Candey Ltd v Russell Crumpler and another
The Supreme Court has considered the circumstances in which a solicitor may waive or surrender their lien.
In Candey Ltd v Crumpler and another it held that a firm of solicitors called Candey Ltd had waived its equitable lien by agreeing new security arrangements part way through its retainer. The court applied an objective test to assess whether the parties intended that the lien should no longer exist following agreement of a fixed fee agreement and deed of charge. Lord Kitchin gave the judgment of the court and held that there were grounds to infer that the parties had intended the lien to be replaced by the new arrangements.
The Nature of the Solicitor's Equitable Lien
A solicitor's equitable lien is a form of security enforceable against the proceeds of a dispute conducted by the solicitors on behalf of a claimant. The lien entitles the solicitor to recover from the proceeds of the dispute sums which it is contractually entitled to under the terms of its retainer. The lien arises in equity from the relationship between the solicitor and the client and takes the form of an equitable charge on property.
It is based on the principle that it would not be just for a client to benefit from a solicitor's work without paying for it. The lien ranks in priority to the interests of the client and anyone claiming through it and can be enforced against third parties with notice of it to either prevent them from dealing inconsistently with the security and hold them to account if they do.
Formal litigation is not required to give rise to a lien but the solicitor must provide services relating to the making of the client's claim which significantly contribute to the preservation or recovery of a fund over which the solicitor can then assert their lien. Liens have an important function in promoting access to justice in that they encourage and enable solicitors to take on cases which claimants would otherwise not be able to bring.
Importantly, the lien creates an equitable charge which survives the client's insolvency such that solicitors acting for a company in liquidation will ordinarily have a lien for their fees incurred both prior to and after the liquidation.
The case concerned a dispute between Candey and the liquidators of Peak Hotels and Resorts Ltd.
Candey had acted for Peak Hotels in worldwide litigation between April 2014 and March 2016 including proceedings issued in the High Court in London in 2014. Peak Hotels owed Candey a substantial amount in unpaid fees by August 2015 and lacked the funds to continue with its claims. This led it to renegotiate a fixed fee arrangement which was to be secured through a floating charge over all its assets. Payment of the fixed fee was deferred until judgment or settlement of the London litigation, receipt of funds enabling the client to pay, or the client's entry into an insolvency process. It excluded Candey's outstanding invoiced fees and disbursements.
Peak Hotels was placed into liquidation on 8 February 2016. The fixed fee became payable and Candey lodged a proof of debt making reference to the deed of charge but no reference to any equitable lien. The litigation in London settled on 3 March 2016 resulting in payments to Peak Hotels. Candey was then dis-instructed by the liquidators and asserted a lien over those payments some time later.
The liquidators investigated the secured claim asserted by Candey in its proof of debt. They concluded that Peak Hotels had been unable to pay its debts on the day when the charge was created and so the charge only protected the value of Candey's services provided after that time pursuant to section 245 of the Insolvency Act 1986. That section provides for avoidance of floating charges in certain prescribed circumstances including when the grantor is insolvent. The liquidators asserted that the value of Candey's post liquidation services should be calculated based on the services actually provided by Candey instead of the fixed fee. The court ultimately agreed with this analysis following an earlier application by the liquidators.
Candey first asserted that it had an equitable lien over the proceeds of the litigation in addition to its security under the deed of charge in March 2018. At that point it applied for the lien to be converted into a charge over money under section 73 of the Solicitors Act 1974. That provision allows the court to declare that a solicitor is entitled to a charge over the proceeds of litigation in relation to their fees.
The liquidators successfully argued at first instance that Candey had waived its right to the equitable lien through accepting the deed of charge in October 2015. Candey appealed that decision.
The Court of Appeal gave judgment in favour of the liquidators on 23 January 2020. It held that Candey was taken to have waived its lien through accepting the deed of charge. This is because the terms of the new security were inconsistent with the lien in that:
- it covered assets which would otherwise be covered by the lien;
- it conferred priority to a third party when the lien did not; and
- the fixed fee agreement provided an interest rate of 8% which would not have been payable under the lien.
The Court of Appeal concluded that these inconsistencies led to the inference that Candey intended to waive its lien and that there had been no express or implied reservation of the lien by Candey when it accepted the new security arrangements.
The Supreme Court's Analysis
The Supreme Court applied two key principles in its analysis.
First, it had to consider "whether, in all the circumstances, considered together, it is to be inferred that it was the intention of the parties that the solicitor's lien should no longer exist". In other words, it had to adopt an objective test to determine whether the new security was intended to supplement the solicitor's lien or replace it. The parties' subjective intentions were not relevant to the analysis.
Second, it had to examine whether the solicitor had given express notice to the client that it intended to retain the lien despite it being inconsistent with the new security arrangements. The court observed that it was well established in the case law that a solicitor who takes any security "in any degree inconsistent" with the retention of a lien has a duty to give express notice to the client if it wishes to retain the lien.
These principles were to be applied regardless of whether the new security was taken by the solicitor over the same or different property to that covered by the lien. However, the position is clearer where the new security is taken over the same property. In that case, there is a new arrangement between the solicitor and its client which is on its face incompatible with the retention of the lien.
It also noted that the inference of waiver will be stronger still if the new security over the same property has a priority that is different from the equitable lien. The equitable lien is a first charge on the fund which will rank ahead other encumbrances and so the solicitor's acceptance of a lower ranking security may be a strong indication of the parties' intention to abandon the lien.
It further observed that a new security with a right to interest is likely to be inconsistent with the retention of an equitable lien. This is because the lien carries no such right to interest.
In applying these principles, the court held that the new security arrangements were inconsistent with Candey's retention of its lien in at least two ways:
- The deed of charge extended over the same property as the lien. It did not matter that the new security also covered additional property which was not covered under the lien. The fixed fee agreement provided that it superseded and replaced any previous agreement between the parties regarding fees. This reinforced the conclusion that the parties had intended to abandon the lien given that the new security covered the same property.
- The deed of charge ranked below a charge held by another of Peak Hotels' creditors. This adjustment of the priorities showed that Candey had agreed to substantially alter that position by accepting the new security. Any suggestion that the lien had survived and had priority would undermine the express agreement that another creditor's charge had priority over all the client's assets.
The liquidators also argued that the new security arrangements were inconsistent with Candey's retention of the lien as they contained provisions for the earning and securing of interest which were not present in the original lien or retainer. The Supreme Court rejected this argument and disagreed with the Court of Appeal's conclusion that it amounted to an inconsistency which further supported abandonment of the lien. The Court of Appeal had failed to appreciate that it was the fixed fee agreement and not the deed of charge that made the provision for interest. The correct approach was to ask what the position would have been if there had been a fixed fee agreement with a provision for interest but no deed of charge. In those circumstances, the lien would have applied to the retainer which would have included the interest rate under the fixed fee agreement. The inconsistencies between the deed of charge and the equitable lien were therefore crucial to the Supreme Court's conclusion that the parties had intended to abandon the lien.
The court then considered whether the inference that Candey had intended to waive its lien had been displaced by any express or implied reservation of the lien by Candey when accepting the deed of charge.
Candey argued that the fact that the fixed fee agreement required the client to take independent legal advice meant that it had no duty to advise on its intention to retain its lien. The Supreme Court rejected this argument. It held that "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 advisor is not in a better position than the client to discern the solicitor's intention".
The Supreme Court considered the provisions of the fixed fee agreement and deed of charge and the evidence of what Mr Candey said to one of the directors of Peak Hotels to determine whether there had been any express or implied reservation of the lien. It agreed with the Court of Appeal's analysis that there was no evidence that the equitable lien had been reserved.
This decision sets out the principles to be applied when considering whether a solicitor has waived its equitable lien through accepting a new form of security from its client. First, the court will apply an objective test to whether, in all the circumstances, the parties intended that the lien should no longer exist. The Supreme Court held that the fact that the new security covered the same property as the equitable lien and afforded the solicitor with a lower ranking security than the lien was inconsistent with the continued existence of the lien. It also held that a new form of security which provided a right to interest when the equitable lien afforded no such right is likely to be inconsistent with retention of the lien although that did not apply in this case. The court will then consider whether any express or implied reservation of the lien by the solicitor displaced the inference that the parties intended to waive the lien.
The court also considered the recent decision of the Court of Appeal in Belsner v CAM Legal Services Ltd  EWCA Civ 1387. (See our publication on that decision here.) In that case the Court of Appeal held that solicitors owed no fiduciary duty to a client or potential client when negotiating the terms of their retainer and were entitled to act in their own interests. The court expressed no view on whether Belsner was correctly decided and said that it did not touch on the issue in this case because it did not affect any duties that the solicitors may otherwise owe professionally or by statute. That point was engaged in relation to the solicitor's duty to explain to an existing client of its intention to retain its equitable lien when taking security that was inconsistent with it. Equally, the court did not determine whether that obligation also extended to a situation where the additional security was not inconsistent with the lien. There is some (albeit weaker) authority for that extended position.
It is therefore important that solicitors clearly explain the position to their clients if they intend to reserve their equitable lien when accepting any additional security for their fees. The consequences of failing to do so could be expensive, particularly if the client becomes insolvent. As a matter of caution solicitors would be well advised to do so whether or not the additional security is consistent or inconsistent with the survival of the lien.