Retainers and Legal Costs Recovery: The Rules

A case concludes successfully, costs are awarded and the file goes to the costs draftsman. Only then does someone notice that the hourly rates recorded on the ledger exceed those permitted by the retainer.

The work may have been necessary and the rates commercially reasonable. However, those points do not resolve the underlying question on whether the client (or the defendant in some cases) is legally liable to pay the charges claimed?

Retainer agreements underpin legal costs recovery. Getting them right at the beginning, and reviewing them during the instruction, helps prevent problems that careful bill drafting cannot necessarily repair later.

What does a retainer agreement do?

A retainer establishes the relationship between a law firm and its client. It should identify the work covered, the charging arrangements and the parties’ expectations and responsibilities.

The agreement may comprise an engagement letter, incorporated terms, funding documents and subsequent amendments. These documents should work together without contradictory provisions.

The terms of the retainer should explain who is instructing the firm, which specific services are included and what requires further agreement.

For example, advice about a dispute may not automatically extend to conducting proceedings or an appeal. Scope matters because undertaking additional work does not, by itself, establish the contractual basis for charging for it.

Client liability and costs recovery are different

The first question is what the client owes under the agreement. The second is what an opponent must pay under a costs order or settlement. These figures may differ. A client might owe £30,000 while recovering only £22,000 from the opponent because of reductions to rates, time or proportionality.

However, where the indemnity principle applies, recovery generally cannot exceed the liability incurred by the client.

The principle concerns legal liability, rather than whether an invoice has already been paid. An outstanding liability can support recovery; the absence of payment does not automatically defeat a costs claim.

Our guide to the indemnity principle in legal costs explains the wider framework.

Can you claim a higher hourly rate than the retainer allows?

Ordinarily, a firm cannot simply substitute a higher hourly rate when preparing the claim against an opponent.

If, for example, the agreement permits £250 per hour, with no effective variation or other relevant provision and the ledger subsequently records 100 hours at £300. The recorded total is £30,000, but the contractual charges for those hours remain £25,000, excluding VAT. A higher ledger figure does not create liability for the difference.

The opponent may also challenge whether 100 hours were reasonable or whether £250 is recoverable. The contractual figure establishes a potential ceiling, not a guaranteed award. Identifying the discrepancy before negotiations begin avoids presenting a claim on an unsupported basis.

Do guideline hourly rate increases change the agreement?

A change to guideline hourly rates does not automatically amend the client’s retainer. The guidelines assist with assessment, but they do not independently authorise a law firm to increase its legal fees.

Some agreements incorporate a benchmark or contain a rate review mechanism. Whether that permits an increase depends on the wording, applicable law and compliance with the required process.

You should check who must be notified, what explanation is required and when the new rate takes effect. Avoid assuming that a general review clause answers every question.

Our article on uplifts on guideline hourly rates addresses the separate evidence needed to justify enhanced rates against an opponent.

What about fixed fees, estimates and caps?

Different fee structures create different questions. An estimate forecasts likely expenditure; a contractual cap may limit liability; a fixed fee usually covers defined work for an agreed amount.

Where a fixed fee applies, additional recorded time does not automatically increase what the client owes. Further charges require a proper contractual basis. Equally, exceeding an estimate does not necessarily mean the indemnity principle has been breached. The agreement and circumstances must be examined.

Nevertheless, inadequate updates can create complaints or challenges to the bill. Clear distinctions between estimates and binding limits help clients understand the likely cost of legal services.

The description used should match the arrangement’s actual effect.

What is a retainer fee?

The expression “retainer fee” can describe different arrangements. It may refer to an advance payment towards future work, or a fee for agreed ongoing access to legal advice. The label alone does not determine what the payment covers or whether it has been earned.

If the client pays £5,000 on account, that payment does not necessarily limit the total charges to £5,000. Conversely, receiving the money does not automatically entitle the firm to treat it as earned income.

The agreement should explain its purpose, how it will be applied and whether further payments may be requested. Clients should understand whether they are purchasing defined services or providing money towards future invoices.

Retained funds and payment of legal fees

Money held for a client raises accounting obligations alongside contractual questions. Under the SRA Accounts Rules, funds received towards fees before delivery of a bill generally constitute client money, subject to the rules’ exceptions.

Where client account money will pay costs, a bill or other written notification of costs incurred must precede the transfer, which must meet the applicable requirements.

Retained funds should not be treated as available simply because the firm anticipates a future invoice. Client money must also be returned promptly once there is no proper reason to retain it.

Holding money does not resolve a dispute about whether the underlying charges are contractually payable.

Can charging arrangements change during the instruction?

A retainer can sometimes be varied, but the change must be legally effective. For a proposed prospective increase, explain the revised charges, commencement date and likely financial impact. Follow the agreement’s requirements and consider whether further consent is necessary.

Changes to the scope of legal representation need similar attention. A new application, appeal or separate dispute may require additional terms.

You should not assume that revised paperwork retrospectively cures a historical charging problem. A variation intended to increase an opponent’s liability for work already completed requires particular scrutiny.

Addressing the issue before further work is undertaken usually provides a clearer position for everyone involved.

Does an approved budget override the retainer?

An approved costs budget does not create a contractual right to charge the client. Budgeting addresses recoverable expenditure through costs management. The retainer remains relevant to the client’s liability.

Approval of £40,000 for a phase does not automatically justify recovery of that amount where the work and permitted charges support only £30,000. Conversely, a contractual liability above the budget does not guarantee that the excess will be recovered.

Our costs budget service helps firms plan expenditure and consider recovery risks. Reviewing the retainer alongside budgeting can reveal inconsistencies before they affect a substantial part of the claim.

How do counsel’s fees and disbursements fit in?

The retainer should explain how external expenses are incurred and charged, including experts, court fees and legal counsel. You should distinguish an estimate of the solicitor’s own charges from an estimate including disbursements. Otherwise, the client may reasonably misunderstand the overall figure.

You should also check whether authority is required before incurring particular expenses and retain evidence of instructions or approval where appropriate.

An opponent can still challenge necessity, amount or recoverability. The fact that an invoice exists does not guarantee its allowance.

Supporting invoices and an explanation of the work help when preparing bills of costs.

Do different funding arrangements change the analysis?

Yes. Conditional fee agreements, damages-based agreements, legal aid and fixed recoverable costs require consideration of their particular rules.

CPR 44.1(3) accommodates certain conditional fee arrangements limiting payment to sums recovered in the proceedings. A conditional liability does not automatically prevent recovery. However, this is not unrestricted permission to claim charges unsupported by the agreement.

Legal aid involves specific statutory provisions, while fixed recoverable costs operate under their own framework. Neither should be analysed solely through an ordinary private hourly retainer example.

Our legal aid costs service provides support with publicly funded billing requirements.

What should firms check before claiming costs?

Law firms should review the original agreement, incorporated terms, amendments, rate notices and funding documents alongside the ledger.

They should also check that the correct client and legal entity are identified, the work falls within scope and the charges reflect the relevant periods. Clarify caps, discounts and special payment provisions.

Client understanding also matters. Costs information should be clear, with appropriate support where circumstances make financial decisions harder.

For ongoing legal matters, schedule reviews when the scope, staffing, rates or funding changes. Waiting until detailed assessment can leave less room to address problems and may complicate costs negotiations.

Get the costs position right from the beginning

A retainer review helps establish a sound basis for charging and recovery. It does not guarantee that every charge will be allowed, but it can identify avoidable contractual problems.

ARC Costs can discuss proposed rates, charging arrangements and recovery issues before substantial work is undertaken.

Where a concern has already emerged, our costs lawyers can help examine the documents and identify the next steps.

Call 01204 397302 or email info@arccosts.co.uk to discuss the support your instruction needs.

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