The Gazette 1976

GAZETTE

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

Alberta,

British Columbia/ Manitoba/

New South

Wales,

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.

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.

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.

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.