The Gazette 1976

GAZETTE

Alberta, 1 British Columbia/ Manitoba/ 1 New South Wales, 4 and Ontario \ The basic scheme in each case is to require solicitors to pay the whole or part of the interest into a specially created fund administered by trustees representing, typically, the profession, lawyer- appointees of the Attorney-General and a lay element. The objects of the fund are widely drawn and include law reform, legal aid, legal education, law libraries, legal research, etc. The sums generated are very large. In Ontario, for instance, with 10,000 or so lawyers, the income in the fund in the year ending March 1976 was some $4m. with a projected figure of over $5m. next year. Should we have such legislation here? The arguments in favour appear to be the following: 1. Interest on client account does not "belong" to solicitors. This income is a by-product of the fact that solici- tors in the course of their ordinary business neces- sarily hold client moneys. In the debates on the Solicitors' Bill in 1965, their retention was justified not on the basis of any moral or legal entitlement to the money, but simply on the ground that it was not practicable to account to individual clients for amounts held on short deposit. It is, therefore, right to ask which has the better claim to the money — the solicitor, the client or public purposes? The solicitor's claim would, on any view, appear to be the weakest. The client's claim might be said to look the strongest. But when the relative advantages are compared, the idea of a public fund would seem to have an even stronger claim. The advantage to the client in the ordinary transaction is likely to be so small as virtually to be de minimis. (The interest on £10,000 Iield on deposit for 7 days at the present rate paid by banks ( 6j per cent) is £12.46, on which tax must be paid at the rate for unearned income.) By contrast, the value of the fund when aggregated for all solicitors' firms for the whole country over a year certainly runs into millions of pounds. Moreover, the client would retain his absolute right to ask for the interest, if he wished. 2. It would hit hardest those firms that do least for the kind of public purposes that would benefit. The City firm, for instance, with vast sums on deposit does little to provide legal services to the dis- advantaged sectors of the community or to support public causes. The members of these firms make the best living of any in the profession. There would seem to be some elementary justice in a proposal which required the largest "sacrifice" from them. 3. The money would be extremely welcome at any time, but especially at a period when needed improve- ments in the provision of legal services, including many desired by the profession, are impossible (and likely to remain so) for lack of funds. Several arguments to the contrary must, however, be considered:— 1. It would not be fair to single out solicitors. Others, such as estate agents, hold client moneys on deposit. But two wrongs do not make a right. Moreover, solicitors set considerable store on placing their own rectitude beyond question; as the creators and guardians of the system of equity, lawyers should be the first to do equity. 2. The money is being used to subsidise uneconomic work, especially in the legal aid field. For this argu- ment to be convincing, it would have to be shown that a substantial number of firms, now doing a sig- nificant amount of legal aid work would become uneconomic.

SOLICICITORS AND INTEREST FROM CLIENTS' ACCOUNTS An English viewpoint by Michael Zander, L.L.M. (London School of Economics) A normal feature of a solicitor's practice is to hold money for clients pending the completion of trans- actions in hand. Most of such monies are held for short periods of a few days or a week or two in con- nection with conveyancing, trust and probate matters. It is customary to place a substantial proportion on deposit. Most firms of solicitors make a significant profit from the interest earned on such client accounts. The justification always given for this is that it would be impracticable for the banks to calculate the interest due to any particular client on short deposits in a general client deposit account. This is not at all convincing since it would be easy for the solicitor himself to calculate the number of days for which the money had been held on deposit and to look up in a ready reckoner the amount of interest due to the client at the going bank lending rate. There is, therefore, an obvious case for saying that the money ought in fact to be returned to the client. But the question addressed here is whether there is not an even stronger case for saying that it ought to be paid instead into a new fund to be used for a variety of public purposes in the legal services field. Such legislation has recently been passed in Canada and Australia. At present solicitors are under a legal duty to pay to their clients: interest earned as trustees, or where the client stipulates for such payments or where "having regard to all the circumstances", including the amount and length of lime for which the money is likely to be held, interest ought in fairness to the client to be earned for him. (Solicitors Accounts (Deposit Interest) Rules 1965 made under the Solici- tors Act 1965). Rule 3 states that "it shall be deemed that interest ought in fairness to a client to be earned for him" where over £500 is received for, or on account of, the client which is likely to be held for two or more months. Apart from this, the Rules give no guidance as to what is thought to be fair. A case heard in the Chancery Division in 1975 showed that the profession was in fact making very substantial profits from these moneys. A six partner London firm sought to argue that they were entitled to earned income relief on interest on the client account. They lost. ( Northern! (Inspector of Taxes) v. White and Leonard and Cor bin Greener (1975) 2 All ER 481.) In one of the relevant tax years, the firm had "earned" £3,495 on client account but had accounted to the clients for only £1,011. It therefore retained about £2,500. If this were typical, the country's 7,000 or so firms would be retaining some £17.5m. (As will be seen below, on current figures this figure could be broadly typical.) Certainly an ordinary small firm would commonly have a hundred thousand pounds or more in the client account, a substantial portion of which would be on deposit. In large City firms the amounts may run ito millions of pounds. Legislation to use such interest for public purposes has, in the past few years been passed, inter alia, in 62