Before: The Hon. Mr. Justice Lightman
 
 

B E T W E E N

JUDGMENT
 
DATED: 25 March, 1998

Mr. Justice Lightman:

On 9 June 1997 Deputy Master Price ordered that an issue arising on the pleadings in this case be determined pursuant to Ord 14A of the RSC. On 4 November 1997 Master Bragge determined that issue in favour of the Plaintiff and this is an appeal by the Defendant against that decision. The issue is short, but of some public importance, namely whether a party to an agreement with a solicitor for the payment of a share of the fees earned by that solicitor in consideration of the introduction of clients and the provision of other associated services is legally enforceable, and if it is not legally enforceable, whether that party has a claim against the solicitor in restitution for the value of the introductions and the services which he has rendered.

Under Ord 14A, the Court can decide any question of law at any stage of the proceedings if that question is suitable for determination without a full trial of the action and such determination will finally determine the entire action or any claim or issue therein. Order 14A is accordingly not apt for determining a question which involves a question of fact. There are two issues of fact in this case. The first is whether the agreement alleged by the Plaintiff was ever made: the Defendant denies this. The second is whether the Plaintiff, when (as he alleges) he entered into the agreement, was aware of the prohibition on a solicitor entering into such agreements contained in the Solicitors Practice Rules ("the Rules") made under the Solicitors Act 1974 ("the Act"). The Plaintiff claims that he was not: the Defendant does not admit that this was so. What I am invited to do for the purpose of this application is to assume in favour of the Plaintiff both these facts and to decide the legal effect of the agreement if made and if entered into by the Plaintiff innocently. I accept this invitation since the question of law is suitable for determination without a full trial and the determination will finally determine the action if the Defendant succeeds and will in any event finally determine this issue of law.

The Plaintiff according to his Statement of Claim is "a leading member of the Somali community living in the United Kingdom ... who from time to time assisted refugee Somali nationals with their applications for asylum and for residence in the United Kingdom". He pleads that this status and role in his community led to his entry into an oral contract with the Defendant (a firm of solicitors), the terms of which were as follows:

(1) the Plaintiff would introduce Somali refugees to the Defendant, who would apply for legal aid and represent the refugees on their applications for asylum;

(2) the Plaintiff would help the Defendant in various ways in preparing and presenting the applications;

(3) in consideration for these services, the Defendant would pay commission equivalent to one half of any fees received by it from the Legal Aid Board in respect of any Somali nationals who became clients of the firm and who sought and obtained legal aid;

(4) the Defendant would regularly disclose copies of all payments received by it from the Legal Aid Fund in respect of the Somali nationals who became clients of the firm.

The Plaintiff claims that pursuant to this contract he has introduced some 243 Somali nationals as clients to the Defendant, on whose behalf the Defendant has made application for, and obtained, legal aid to assist in their applications for asylum, and in return the Defendant has already paid him £18,887.18. The Plaintiff however claims that further sums are outstanding and due to him and by this action he seeks payment of these sums. In short his case is that the Plaintiff and the Defendant agreed to exploit the Plaintiff's leadership of his community for their mutual profit and have developed a substantial business in the referral by the Plaintiff of Somali immigrants to the Defendant in return for a substantial reward.

It is common ground that the alleged agreement is contrary to r 7 of the Rules. The Plaintiff contends that nonetheless the contract is valid and enforceable, and that, if even it is otherwise, the Plaintiff nonetheless has a valid claim in restitution. The defence is that no such agreement was made and that, if it was made, because of such breach the agreement is in any event illegal and unenforceable and that for the same reason a claim in restitution is likewise barred. The issue is accordingly whether the breach of r 7 debars a claim to enforce the agreement and a claim in restitution.

The material provisions of the Act read as follows:

"31(1) ... the Council [of the Law Society] may if they think fit make rules, with the concurrence of the Master of the Rolls, for regulating in respect of any matter the professional practice, conduct and discipline of solicitors.

(2) If any solicitor fails to comply with rules made under this section, any person may make a complaint in respect of that matter to the [Solicitors Disciplinary] Tribunal [set up under Section 46 of the Act.]

37(1) The Council, with the concurrence of the Master of the Rolls, may make rules ... concerning indemnity against loss arising from claims in respect of any description of civil liability incurred [by a solicitor or an employee of a solicitor]."

The Rules, made by the Council of the Law Society with the concurrence of the Master of the Rolls pursuant to s 31(1) of the Act, (so far as material) provide as follows:

"3. Solicitors may accept introductions and referrals of business from other persons and may make introductions and refer business to other persons, provided there is no breach of the [Practice] rules and provided there is compliance with a Solicitors Introduction and Referral Code...

7.(1) A solicitor shall not share or agree to share his or her professional fees with any person except:-

(a) a practising solicitor;

(b) a practising foreign lawyer;

(c) the solicitor's bona fide employee, which provision shall not permit under the cloak of employment a partnership prohibited by paragraph (6) of this rule;

(d) a retired partner or predecessor of the solicitor."

The Solicitors Introduction and Referral Code ("the Code") promulgated under r 3 of the Rules contains the following section ("the Section"):

"2(3) Solicitors must not reward introducers by the payment of commission or otherwise. However, this does not prevent normal hospitality."

A non-compliance with the Section constitutes a breach of r 3, for under the terms of r 3 the acceptance of an introduction or referral otherwise than in compliance with the Section constitutes a breach of r 3.

Disciplinary jurisdiction over solicitors who commit breaches of the Rules is vested concurrently in the Tribunal and the High Court (see s 50(1) of the Act). The powers given to the Tribunal by the Act to punish for breach include striking off the roll, suspending from practice and ordering payment of a penalty not exceeding £5,000 which shall be forfeit to the Crown (see s 47).

In exercising the statutory power conferred by s 31, the Law Society is acting in a public capacity for the protection of the public and the Rules which it makes have the effect of subordinate legislation. The House of Lords decided that this was the case in respect of the rules made under s 37 and made it quite clear that this was equally the position in respect of the rules made under s 31: see Swain v. Law Society [1983] 1 AC 598 at 608D-E and 614E-G.

The rule making power contained in s 31 is conferred for the purpose of securing the public interest in the integrity and independence of the Solicitors profession. The primary concern of s 31, the Rules and the Code is the protection of clients, but that is not its only concern. It is to be noted that neither r 3 nor r 7 nor the Section admit of an exception if the clients consent. The Section places a blanket ban on solicitors giving a reward in any form (including eg. the reciprocal referral of clients) for the introduction of business. Rules 3 and 7 places a blanket ban on solicitors sharing or agreeing to share fees subject only to four very limited exceptions. How necessary these regulations are to protect the interests of clients and the interest of the public is easy to see. It is most undesirable that there should be a trade in referrals to a solicitor, where the sole consideration in the mind of the person making the referral should be the best interests of the persons referred and not personal gain. The existence of an agreement to give a reward or to share fees creates the unacceptable risk of exploitation of those in need of legal advice and assistance and of referrals and introductions which are not in the clients' interest being made for pecuniary gain. The existence of the agreement and the relationship of the solicitor and the other party to the agreement may be incompatible with the duty of undivided loyalty owed by the solicitor to the client, and creates the risk of the solicitor being influenced by his fee-sharer into giving advice which is not in the particular client's best interests in order not to offend the fee-sharer (see Cordery on Solicitors Vol 1, E para 233). Further the client may be expected to bear in one form or another the cost of the consideration which the solicitor has agreed to furnish. As an example, in this case where (if the alleged agreement was indeed made) the share of the fees agreed to be paid is one half of that earned by the solicitor, there must be substantial grounds for anxiety that either the clients will only receive one half of the services to which they are entitled or the Defendant will be charging (in this case the Legal Aid Fund) double what it should. It is however unnecessary to explore further the purpose behind the Rules and Section: it is sufficient that the legislature through its chosen delegate, the Council of the Law Society, has perceived the mischief and banned it. So far as solicitors are concerned, the general rule is that clients are not merchantable commodities to be bought and sold.

The Plaintiff's case is that there is nothing illegal or inherently wrong in a solicitor agreeing to share his fees or to pay an introduction fee for work; that the provisions of rr 3 and 7 are merely designed to regulate the professional conduct of solicitors and, in the event of breach, to give rise to disciplinary offences by the solicitors concerned; that they are not intended to penalise third parties innocently dealing with solicitors unaware that the solicitors are acting in breach of the rules of their profession or to enable the solicitors, by invoking the Rules, to retain at the expense of the third parties the benefit of the services rendered without paying anything for them; and that accordingly the Rules do not render the contract illegal or unenforceable. None of these considerations however can have any force if the Rules have statutory force and prohibit the entry into or performance of such contracts.

The applicable principle stated by Devlin J. in St Johns Shipping Corp v. Joseph Rank Ltd [1957] 1 QB 267 at 283 is well established law:

"... the Court will not enforce a contract which is expressly or impliedly prohibited by statute. If the contract is of this class, it does not matter what the intent of the parties is; if the statute prohibits the contract. If the statute prohibits the contract, it is unenforceable whether the parties meant to break the law or not."

It is equally clear that it makes no difference whether the illegality arises directly under statute or under subordinate legislation: see In re Mahmood and Isphahani [1921] 2 KB 716 at p 728 and Boissevain v. Weil [1950] AC 327, [1950] 1 All ER 728.

As I have already said, the Rules do constitute subordinate legislation. The question to be determined is accordingly whether r 7 prohibits the making by a solicitor of a contract for the sharing of fees. The answer is plainly in the affirmative. The Rule expressly prohibits a solicitor both from entering into such contracts and from making any payment in performance of such a contract. If the Plaintiff were to succeed in this claim, the Court would be sanctioning the entry into agreements for payment which are forbidden and would be requiring the solicitor to do what statute forbids him from doing (i.e. paying). I should add that the entry into the contract and its performance are likewise prohibited by r 3 for non-compliance with the Section: for they constitute the agreement to reward and the rewarding of the Plaintiff for the introduction of clients.

It is no answer for the Plaintiff to say that this practice of sharing fees or the giving of such a reward is countenanced in other professions not equally regulated in this regard by statute or would be countenanced but for the Rules and the Code. Nor is it an answer that the Plaintiff was ignorant of the Rules and the Code when he entered into the contract (see Devlin J. in St Johns Shipping above). It is highly blameworthy of a solicitor to enter into such a contract, and the more so if he fails to warn a party with whom he deals of the provisions of the Rules: any competent solicitor fit to practise law should know the Rules and, if he knows of the Rules, honesty and his professional duty require him before entering into any such contract to inform any person who makes to him proposals of arrangements which involve a breach of the Rules that they indeed do so. I do not have to consider whether the failure to make disclosure can give rise to a cause of action on the part of the other party to a transaction. There may be a duty on the part of the solicitor to disclose the ban on such agreements and a claim against the solicitor in damages may be available for breach of this duty. But it is clear that such failure cannot validate what is otherwise an illegal contract.

I should add that, if (as I am bound to assume) the Plaintiff was ignorant of the rr 3 and 7 and the consequences of breach of these rules, and if this ignorance is prevalent, it is to be hoped that this judgment will dissipate that ignorance so that such a claim as the present and such a plea of ignorance will not again be made and any current practice of rewarding introductions and of sharing fees (unless the agreement falls within the statutory exceptions) and indeed of paying commissions will be brought to an immediate and summary end. This is particularly important in such sensitive areas as immigration where the clients are likely to be peculiarly susceptible to exploitation,

The Plaintiff claims that by reason of the provisions of r 7, if the contract is illegal and cannot be enforced, the Court should recognise and enforce an obligation on the part of the Defendant to pay the reasonable value of the introduction and services rendered.

There are circumstances where a plaintiff, disabled from proceeding with a claim in contract, can nonetheless recover the fair value of the services which he has provided and of the benefit which the other party has accepted pursuant to the contract. The law may in these circumstances impute to the other party an obligation to pay the reasonable value of those services to avoid him being unjustly enriched. The principle is pithily stated by Deane J. in Pavey & Matthews Pty Ltd v. Paul (1986-7) 162 CLR 221 (a case where a quasi contractual claim was upheld in face of a statute which declared the contract unenforceable by the plaintiff but not the defendant). At page 256 he said:

"The quasi-contractual obligation to pay fair and just compensation for a benefit which has been accepted will only arise in a case where there is no applicable genuine agreement or where such an agreement is frustrated, avoided or unenforceable. In such a case it is the very fact that there is no genuine agreement or that the genuine agreement is frustrated, avoided or unenforceable that provides the occasion for (and part of the circumstances giving rise to) the imposition by the law of the obligation to make restitution." Deane J. went on to explain that, though the action is founded on an obligation arising independently of the unenforceable contract, that does not mean that the existence or terms of the contract are necessarily irrelevant. It will ordinarily be permissible for the parties to refer to the contract as evidence (but as evidence only) on the questions whether what was done was done gratuitously and what is the appropriate amount of compensation; and the defendant will be entitled to rely on the contract to limit the amount that is recoverable as fair and reasonable remuneration to the contract sum. I would add that the defendant must likewise be entitled to rely on a provision in the contract which limits the remuneration to payment out of a specified fund or source of funds available to the defendant.

In my view, a claim in restitution is barred in this case for the following reasons:

(a) no such claim is available where the statute forbids the making of the contract and the grant of this remedy is a method of nullifying the statutory prohibition. In Boissevain v. Weil [1950] AC 327 a plaintiff sought to recover the sterling equivalent of a loan made in French francs in breach of the Defence Regulations. The House of Lords rejected the claim. Lord Radcliffe said (at p 341):

"If reg. 2 did extend to this transaction it forbade the very act of borrowing, not merely the contractual promise to repay. The act itself being forbidden, I do not think that it can be a source of civil rights in the courts of this country. It is very well to say that the respondent ought not in conscience to retain this money and that that consideration is enough to found an action for money had and received. But there are two answers to this. Firstly, when the transaction by which the money has reached the respondent is actually an offence by our laws, the matter passes beyond the field in which the requirements of the individual conscience are the determining consideration. Secondly, ... if this claim based on unjust enrichment were a valid one, the court would be enforcing on the respondent just the exchange and just the liability, without her promise, which the Defence Regulations has said that she is not to undertake by her promise. A court that extended a remedy in such circumstances would merit rather to be blamed for stultifying the law than to be applauded for extending it. I would borrow the words which Lord Sumner used in Sinclair v. Brougham: 'The law cannot de jure impute promises to repay, whether for money had and received or otherwise, which, if made de facto, it would inexorably avoid'. His principle is surely right whether the action for money had and received does or does not depend on an imputed promise to pay."

(b) a claim in restitution must be limited (by virtue of the provisions of the contract) to a payment out of the fees received from the referred clients, and any such payment must therefore involve a sharing of those fees, which is itself prohibited by rr 3 and 7; and

(c) even if the payment were not necessarily to be paid out of the fees received, nonetheless it would in substance be a payment in consideration of the introduction of clients: such payment accordingly would be in non-compliance with the Section and accordingly in breach of r 3.

I therefore answer the question raised in the sense that the pleaded agreement, if made, is illegal and unenforceable and that an alternative claim in restitution is not maintainable. I accordingly allow the appeal and dismiss the action.