It is more important than ever for local authority legal teams to consider opportunities for income generation and the recovery of costs from third parties for legal services. Judith Barnes, Glenn Newberry and Louise Hoyle examine the background.
Local authorities often have the opportunity to recover costs from third parties or generate income by doing third party work. Often the desire is to work for small local community and voluntary organisations and other public bodies. As local authority lawyers who can you work for and what can you charge?
Powers to act for others
One of the key powers is the Local Authorities (Goods and Services) Act 1970. This Act enables local authorities to:
- supply goods or materials;
- provide any administrative, professional or technical service;
- use vehicles, plant or apparatus and appropriate staff; and
- undertake works of maintenance,
for other local authorities and a whole list of other organisations designated as ‘public bodies’ by further Acts of Parliament and Statutory Instruments. The list covers thousands of bodies, including educational establishments, housing associations, “community associations”, health bodies and others.
Section 1(3) goes on to state that “any agreement… may contain such terms as to payment or otherwise as the parties consider appropriate”. This has been interpreted by the courts in the British Educational Supplier v Yorkshire Purchasing Organisation case (1997) to mean that a profit can be generated from those activities. Clearly the public body commissioning the services may need to procure, however, this may be less of a concern for the providing local authority. In any event legal services is not a priority service and would not require full OJEU – so rates are market driven by what a willing buyer is prepared to pay.
Interestingly, amendments made for police authorities, enable Goods and Services Act trading to be undertaken for anybody rather than just public bodies. Similarly for Scottish authorities, subject to a potential cap that may be imposed by Scottish Ministers. Section 2 of the Act requires a separate account to be kept of income received.
Other examples of powers for local authorities to charge and trade include:
- the power to provide restaurants under the Civic Restaurants Act 1947;
- the power to charge for special collections and other additional services as well as commercial waste under the Environmental Protection Act 1990;
- powers to sell surplus computer capacity, eg to enable electronic billing by other utilities and service providers under section 38 Local Government (Miscellaneous Provisions) Act 1976;
- the power to sell electricity from renewable sources under section 11 of Local Government (Miscellaneous Provisions) Act 1976.
There are many more, particularly following the introduction of the Local Government Act 2003, which created another landmark with the introduction of new broader charging and trading powers in sections 93/95. These powers are additional - enabling authorities to charge whenever they have a power to provide a service, and are not under a duty; likewise where there is a desire to trade for a commercial purpose in that function. If there are existing powers to charge and trade elsewhere then the 2003 Act would direct you to those other powers to charge and trade respectively.
The downside of using the charging power in the 2003 Act is that taking one year with another the income should not exceed the costs of the activity. That is not marginal costing, but includes the total cost of the service, ie all overheads including corporate and democratic core as well as covering the costs involved in providing services for the authority itself and potential service enhancements, eg investment in ICT. The authority can choose the definition of service so this could include a number of different but related services, some of which may be more self financing than others and the legislation also permits differential charging so perhaps voluntary/community groups could pay less, whereas commercial organisations could pay more.
When it comes to trading under the 2003 Act the authority must have as the central purpose risk based commercial trading in the private sector. So this power is not relevant when you are seeking to improve your own services by generating a relatively small amount of income under the Goods and Services Act or charging power etc. Here we are talking about operating a commercial trading entity without subsidy through a Part V Local Government and Housing Act 1989 company or industrial and provident society. There is a need for a business case and don’t forget the application of procurement law, competition law and potential application of TUPE requirements amongst other things, including the recent concern by the SRA as to whether local authorities are trading with the public and therefore require a licence under s15 Legal Services Act 2007.
Currently under SRA Practice Framework Rule 4.15 In House Practice local government, local authority lawyers may act for anyone for whom the employer is statutorily empowered to act (with certain conditions attached - see Appendix). There are some other circumstances where there are limitations eg pro bono work and some work for employees, as well as limits on charging for some voluntary organisations and charities – see later.
Case Law on Costs
Moving on to cases where local authorities are able to claim costs from third parties eg in proceedings where costs have been awarded, or in negotiations, where should you start?
There is longstanding case law to suggest that in house costs may reflect those of independent solicitors, so authorities should generally be able to charge up to the Law Society local reference rates or thereabouts.
The first case of Henderson v Merthyr Tydfil Urban District Council  1QB, involved an appeal against a decision on charging. The clerk to the Urban District Council was employed at a fixed annual salary and so when the Council was awarded costs against the other party in the proceedings the registrar only allowed out of pocket expenses on the basis that the work done by the clerk was covered by his salary. The appeal was allowed on the basis that the Council as employer, should be entitled to costs on an indemnity basis and that the amount claimed by the clerk was assumed to be a proper sum paid to him for that proportion of his work unless the contrary could be shown.
In the case of Re Eastwood (Deceased) (also known as Lloyds Bank Ltd v Eastwood (CA) Court of Appeal 12 July 1974  ch/112) it was held that on taxation, that the Bill of costs of a party represented by a salaried solicitor should be treated as though it were the bill of an independent solicitor and the costs allowed could include a figure for profit costs. A sum of £30 representing a "profit element" on the care and conduct of a case by a senior solicitor in the Treasury Solicitor's office was allowed on the basis that such a discretionary item was assessed as reasonable and fair having regard to all the circumstances of the case.
In that case the costs of the Attorney General who appeared on a construction summons of a will with charitable gifts were ordered to be taxed on a common fund basis and paid out of the estate. An item of £75 was included to cover care and conduct of the matter over a period of two years, dealt with in-house by a senior solicitor in the Treasury Solicitor's office. The taxing master reduced the amount to £45 assessed at a rate of £7 an hour and disallowed £30 profit costs on the grounds that the crown was not represented by an independent solicitor but by the Treasury Solicitor's department and that a different cost basis should be applied to a bill of costs of a party represented by a salaried solicitor.
At pages 131/132 of the case report Russell J dismissed the contention that an in-house solicitor had to justify figures for hourly rates of an in-house department. He suggested that it would be unworkable to require a total exposition and breakdown of activities and expenses of a department with a view to ensuring that the principle of indemnity was not infringed. There was also the suggestion that there may be rare cases in which the taxed costs of a successful party will exceed what is needed to indemnify him.
In summary the court ruled:
- The proper method of taxation is to deal with it as though it were the bill of an independent solicitor, assessing a discretionary item having regard to all the circumstances of the case and accordingly assessing a reasonable and fair amount;
- There is no reason to suppose that the conventional method is other than appropriate to the case of both the independent and employed solicitor;
- It is a sensible and reasonable presumption that the figure arrived at on this basis will not infringe the principle that taxed costs should be no more than an indemnity against the expense to which the party has been put; and
- There may be special cases in which it appears reasonably plain that the principle will be infringed if the method of taxation appropriate to an independent solicitor's bill is entirely applied "but it would be impracticable and wrong in all cases of an employed solicitor to require a total exposition and breakdown of the activities and expenses of the department with a view to ensuring that the principle is not infringed, and it is doubtful, to say the least, whether by any method certainty on the point could be reached. To adapt a passage from the judgment of Stirling J in re Doody  1/ch 129, 137, to make the taxation depend on such a requirement would, as it seems to us, simply be to introduce a rule unworkable in practice and to push abstract principle to a point at which it ceases to give results consistent with justice."
From the above it would seem that a local authority solicitor is entitled to charge costs on the same basis as a private practice solicitor. There is also a general presumption that there is an opportunity cost of an authority's solicitor undertaking work in relation to third parties when they could be doing other work for their employer.
In a more recent case, Cole v British Telecommunications plc, 6 July 2000 the Re Eastwood approach was adopted in a contested taxation where Mr Cole had been ordered to pay BT’s costs following an unsuccessful claim. There was an allegation that £168 per hour was above the approximate rate under the indemnity principle to which BT would be entitled. However, the court considered that Re Eastwood established that the conventional method of “taxing the bill of a solicitor in private practice is also appropriate for the bill of an in house solicitor in all but special cases where it is reasonably plain that that method will infringe the indemnity principle …” but that “possibility” of this happening does not justify a detailed investigation in every case.
Charities and voluntary organisations
Over recent months another area of difficulty has become more prevalent, that of acting for charities and voluntary organisations, with the increasing creation of academies, housing registered providers and other charities/bodies to deliver services previously provided by the authority, but at arms length.
This warrants a detailed review of SRA Practice Framework Rule 4.15. The requirements relating to solicitors employed in local government are:
“If you are employed in local government you may act:
(a) for another organisation or person to which or to whom the employer is statutorily empowered to provide legal services, subject to the conditions in (b) to (g) below;
(e) for a charity or voluntary organisation whose objects relate wholly or partly to the employer’s area, provided that there is no charge to the charity or voluntary organisation in non-contentious matters, and in contentious matters the employer indemnifies the charity or voluntary organisation in relation to your costs insofar as they are not recoverable from any other source”
Whilst SRA Practice Framework Rule 4.15 would allow solicitors employed in local government to provide legal services to academies & registered providers it is explicitly subject to (b) - (g), so if they are charities or voluntary organisations whose objects relate wholly or partly to the Council’s area under (e) the Council would not be able to charge them for such services. Whilst not all registered housing associations are charities, many are and they are required to be non profit distributing in order to be able to register; similarly most academies are charities. Alternatively, if the body’s objects do not relate to the Council’s area it would not be caught by the prohibition in (e).
Employed local government solicitors would also need to comply with the conditions which apply to in-house solicitors at all times. These are set out at SRA Practice Framework, namely:
if you are employed in house, you must not act for clients other than your employer except in the following circumstances and where you are able to act without compromising the Principles or your obligations under the SRA Code of Conduct
(a) In order to act for a client other than your employer under Rule 4.10, 4.14, 4.16 and 4.19, you must have professional indemnity insurance cover.
(b) In all other cases you must consider whether your employer has appropriate indemnity insurance or funds to meet any award made as a result of a claim in professional negligence against you, for which your employer might be vicariously liable. If not, you must inform the client in writing that you are not covered by the compulsory insurance scheme.”
There may be other practical issues to consider too, such as the application of VAT, compliance with the Solicitors Accounts Rules (or structuring arrangements to ensure that they can be side-stepped), supervision and other matters. When the Legal Services Act 2007 was brought into full effect in October 2011 it was hoped that the scope for employed solicitors to work for others would have been be relaxed even further, particularly in relation to charities and voluntary organisations. The SRA is introducing ‘light touch’ regulation based on principles and outcomes, yet still seems to have retained what appear to be out dated rules that restrain the ability of local authority lawyers to work for organisations to the benefit of their local communities under the Solicitors Framework.
Practically speaking, this means that working for locally based charities and voluntary organisations, including academies and housing providers, for a fee will require a waiver from the SRA. Some of these have been granted on the basis that charges are fixed so as not to make a profit and so that they are reviewed when the new rules are brought into effect. Representations are also being made to the SRA to drop this outdated restriction and Eversheds local government team supports this move.
Local authorities have discretion as to how to set legal services charging policies, (both internally and externally) in light of the costs of operating the department. Such costs can be apportioned in lots of different ways, for example some authorities set a charging rate irrespective of the level at which work is undertaken, in order to avoid client departments picking and choosing between particular fee earners at different levels to undertake their work. Others allocate costs relative to grade and specific overheads (eg space occupied and actual staff) or some share costs per capita.
So long as rates are set at a reasonable level, either on a contractual basis for third party work or in accordance with the council's external charging policy for costs awarded in litigation, based on local reference levels etc it is unlikely in practice that the basis of the charge out rate will be challenged, unless they appear to be excessive. Clearly it will be sensible to keep local reference rates in mind but in this era of austerity it may be sensible to review external charge out rates and perhaps agree a phased increase over time to creep closer to local rates if you are lagging behind.
If you wish to work for locally based academies, charities and voluntary organisations, then apply for a waiver - hopefully the more authorities that apply the more that will encourage the restrictive Solicitors Code requirements to be dropped.