Solicitors waive equitable lien?

Candey Ltd (Appellant) v Crumpler and another (as Joint Liquidators of Peak Hotels and Resorts Ltd (In Liquidation))In what circumstances can solicitors be considered to have waived their equitable lien?

Overview

This appeal concerned the circumstances in which solicitors can be said to have waived their equitable lien – a form of security for solicitors’ legal fees for the successful conduct of litigation out of the money the client recovers or preserves through that litigation (or its settlement).

Background

Candey Ltd (“Candey”) acted as a solicitor for Peak Hotels & Resorts Ltd (“PHRL”) between April 2014 and March 2016 in respect of various matters, including an action in the High Court in London (the “London Litigation”).

In October 2015, the parties entered into a fixed fee agreement under which Candey agreed to continue to act for PHRL in return for a fixed fee of £3,860,637.48, which was payable on the handing down of judgment on liability or settlement of the London Litigation, PHRL entering an insolvency process, or PHRL receiving funds. A deed of charge was entered into on the same day, granting Candey a floating charge over PHRL’s assets.

PHRL was placed into liquidation in the British Virgin Islands in February 2016. The Respondents (the “Liquidators”) were appointed by the BVI court as liquidators of PHRL. Accordingly, the fixed fee became payable and Candey lodged a proof of debt.

The London Litigation was settled by PHRL shortly before trial and Candey was dis-instructed by the liquidators in March 2016. As part of the settlement, PHRL received sums of US$10,013,000, £1,648,000 and US$1.5 million (collectively, the “Settlement Proceeds”). The Settlement Proceeds are the funds over which Candey asserted a lien. Candey contended that its outstanding fees were payable in priority to sums payable to other creditors in PHRL’s liquidation pursuant to its equitable lien.

The Decisions of the Courts Below

The deputy judge found that Candey had waived its entitlement to an equitable lien when it renegotiated its retainer and accepted additional security for its fees in October 2015. The Court of Appeal agreed with the deputy judge on this point. Candey appealed to the Supreme Court.

The Supreme Court’s Decision

The Supreme Court unanimously dismissed the appeal. The Court began its analysis by setting out certain features of a solicitor’s equitable lien applicable to the appeal, including importantly that: (1) the lien is based on the principle that it is not just that the client should get the benefit of a solicitor’s labour without paying for it; and (2) 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 falling in the liquidation, will have a lien for their costs (incurred prior to and after the liquidation) on those funds.

The Court then turned to the test for determining whether a solicitor’s equitable lien has been waived, finding that this issue depends on intention of the parties. In cases such as this one, where an intention to waive was not express and is instead sought to be inferred, the question will be whether an intention to waive the lien can be inferred taking into account all of the circumstances of the case. The intention must be assessed objectively in light of all the circumstances.

One relevant consideration is whether the solicitor has taken additional security. Where additional security has been taken, a court must determine to what extent the taking of new security is inconsistent with the lien, and whether the solicitor explained to the clients that they were reserving their rights to an equitable lien. If the solicitor takes additional security which is inconsistent with the existing lien and does so without explaining that the lien is being retained, then a court will likely infer that the lien has been surrendered. This is especially the case where the solicitor takes new security over the asset covered by the original lien. An agreement to take such a charge will, on the face of it, displace that lien.

The Court then applied the legal principles to the facts of the case, finding that PHRL originally retained Candey on the basis of Candey’s standard terms and conditions, which contained no express security arrangements. At this point, Candey had and retained its equitable lien. However, that position changed in October 2015, when the parties entered into the fixed fee agreement and the deed of charge, which the Court found formed a package of rights and obligations and new security arrangements which were inconsistent with the equitable lien.

The Court based its decision on two primary reasons: (1) the new security created by the deed of charge extended over the same property (the Settlement Proceeds) as the equitable lien; and (2) the fixed fee agreement and deed of charge expressly conferred priority to one of PHRL’s backers in the event of insolvency, therefore creating different priorities than under the equitable lien.

The Court also found that Candey did not expressly or impliedly reserve its rights to an equitable lien, noting that no provision in the fixed fee agreement or deed of charge achieved that purpose, nor was there any evidence of communications between Candey and PHRL to that effect.

As a result, the Court found that the Court of Appeal was entitled to find that Candey’s equitable lien was waived when the parties entered into the fixed fee agreement and deed of charge.

Judges: Lord Reed, President, Lord Briggs, Lord Kitchin, Lord Hamblen, and Lord Stephens

Counsel: David Lord KC of Three Stone, Daniel Saoul KC of 4 New Square and Stephen Ryan of Three Stone (instructed by CANDEY LLP) for the Appellant; David Holland KC of Landmark Chambers and Stephen Robins KC of South Square (instructed by Stephenson Harwood LLP (London)) for the Respondents