Receipt and transfer of costs

Version 18 of the Handbook was published on 1 November 2016. For more information, please click "History" above.

Rule 17: Receipt and transfer of costs

17.1

When you receive money paid in full or part settlement of your bill (or other notification of costs) you must follow one of the following five options:

(a)

determine the composition of the payment without delay, and deal with the money accordingly:

(i)

if the sum comprises office money and/or out-of-scope money only, it must be placed in an office account;

(ii)

if the sum comprises only client money, the entire sum must be placed in a client account;

(iii)

if the sum includes both office money and client money, or client money and out-of-scope money, or client money, out-of-scope money and office money, you must follow rule 18 (receipt of mixed payments); or

(b)

ascertain that the payment comprises only office money and/or out-of-scope money , and/or client money in the form of professional disbursements incurred but not yet paid, and deal with the payment as follows:

(i)

place the entire sum in an office account at a bank or building society branch (or head office) in England and Wales; and

(ii)

by the end of the second working day following receipt, either pay any unpaid professional disbursement, or transfer a sum for its settlement to a client account; or

(c)

pay the entire sum into a client account (regardless of its composition), and transfer any office money and/or out-of-scope money out of the client account within 14 days of receipt; or

(d)

on receipt of costs from the Legal Aid Agency, follow the option in rule 19.1(b); or

(e)

in relation to a cheque paid into a client account under rule 14.2(e), transfer the costs element out of the client account within 14 days of receipt.

17.2

If you properly require payment of your fees from money held for a client or trust in a client account, you must first give or send a bill of costs, or other written notification of the costs incurred, to the client or the paying party.

17.3

Once you have complied with rule 17.2 above, the money earmarked for costs becomes office money and must be transferred out of the client account within 14 days.

17.4

A payment on account of costs generally in respect of those activities for which the practice is regulated by the SRA is client money, and must be held in a client account until you have complied with rule 17.2 above. (For an exception in the case of legal aid payments, see rule 19.1(a). See also rule 18 on dealing with mixed payments of client money and/or out-of-scope money when part of a payment on account of costs relates to activities not regulated by the SRA.)

17.5

A payment for an agreed fee must be paid into an office account. An "agreed fee" is one that is fixed - not a fee that can be varied upwards, nor a fee that is dependent on the transaction being completed. An agreed fee must be evidenced in writing.

17.6

You will not be in breach of rule 17 as a result of a misdirected electronic payment or other direct transfer from a client or paying third party, provided:

(a)

appropriate systems are in place to ensure compliance;

(b)

appropriate instructions were given to the client or paying third party;

(c)

the client's or paying third party's mistake is remedied promptly upon discovery; and

(d)

appropriate steps are taken to avoid future errors by the client or paying third party.

17.7

Costs transferred out of a client account in accordance with rule 17.2 and 17.3 must be specific sums relating to the bill or other written notification of costs, and covered by the amount held for the particular client or trust. Round sum withdrawals on account of costs are a breach of the rules.

17.8

In the case of a trust of which the only trustee(s) are within the firm, the paying party will be the trustee(s) themselves. You must keep the original bill or notification of costs on the file, in addition to complying with rule 29.15 (central record or file of copy bills, etc.).

17.9

Undrawn costs must not remain in a client account as a "cushion" against any future errors which could result in a shortage on that account, and cannot be regarded as available to set off against any general shortage on client account.

Guidance notes

(i)

This note lists types of disbursement and how they are categorised:

(a)

Money received for paid disbursements is office money.

(b)

Money received for unpaid professional disbursements is client money.

(c)

Money received for other unpaid disbursements for which you have incurred a liability to the payee (for example, travel agents' charges, taxi fares, courier charges or Land Registry search fees, payable on credit) is office money.

(d)

Money received for disbursements anticipated but not yet incurred is a payment on account, and is therefore client money.

(ii)

The option in rule 17.1(a) allows you to place all payments in the correct account in the first instance. The option in rule 17.1(b) allows the prompt banking into an office account of an invoice payment when the only uncertainty is whether or not the payment includes some client money in the form of unpaid professional disbursements. The option in rule 17.1(c) allows the prompt banking into a client account of any invoice payment in advance of determining whether the payment is a mixture of office and client money (of whatever description), or client money and out-of-scope money, or client money, out-of-scope money and office money, or is only office money and/or out-of-scope money.

(iii)

If you are not in a position to comply with the requirements of rule 17.1(b), you cannot take advantage of that option.

(iv)

The option in rule 17.1(b) cannot be used if the money received includes a payment on account - for example, a payment for a professional disbursement anticipated but not yet incurred.

(v)

In order to be able to use the option in rule 17.1(b) for electronic payments or other direct transfers from clients, you may choose to establish a system whereby clients are given an office account number for payment of costs. The system must be capable of ensuring that, when invoices are sent to the client, no request is made for any client money, with the sole exception of money for professional disbursements already incurred but not yet paid.

(vi)

Rule 17.1(c) allows clients to be given a single account number for making direct payments by electronic or other means - under this option, it has to be a client account.

(vii)

"Properly" in rule 17.2 implies that the work has actually been done, whether at the end of the matter or at an interim stage, and that you are entitled to appropriate the money for costs. For example, the costs set out in a completion statement in a conveyancing transaction will become due on completion and should be transferred out of the client account within 14 days of completion in accordance with rule 17.3. The requirement to transfer costs out of the client account within a set time is intended to prevent costs being left on client account to conceal a shortage.

(viii)

Money is "earmarked" for costs under rule 17.2 and 17.3 when you decide to use funds already held in client account to settle your bill. If you wish to obtain the client's prior approval, you will need to agree the amount to be taken with your client before issuing the bill to avoid the possibility of failing to meet the 14 day time limit for making the transfer out of client account. If you wish to retain the funds, for example, as money on account of costs on another matter, you will need to ask the client to send the full amount in settlement of the bill. If, when submitting a bill, you fail to indicate whether you intend to take your costs from client account, or expect the client to make a payment, you will be regarded as having "earmarked" your costs.

(ix)

An amendment to section 69 of the Solicitors Act 1974 by the Legal Services Act 2007 permits a solicitor or recognised body to sue on a bill which has been signed electronically and which the client has agreed can be delivered electronically.

(x)

The rules do not require a bill of costs for an agreed fee, although your VAT position may mean that in practice a bill is needed. If there is no bill, the written evidence of the agreement must be filed as a written notification of costs under rule 29.15(b).

(xi)

The bill of an MDP may be in respect of costs for work of the SRA-regulated part of the practice, and also for work that falls outside the scope of SRA regulation. Money received in respect of the non-SRA regulated work, including money for disbursements, is out-of-scope money and must be dealt with in accordance with rule 17.

(xii)

See Chapter 1, indicative behaviour 1.21 of the SRA Code of Conduct in relation to ensuring that disbursements included in a bill reflect the actual amount spent or to be spent.