Supreme Court rules percentage-based advocate fees unethical, quashes proceedings: B. Sunitha vs. State of Telangana (2017)

Case Name: B. Sunitha vs. The State of Telangana & Anr.

[Judgment Date]: 5th December, 2017

Can a lawyer demand a fee based on a percentage of the compensation awarded to a client? The Supreme Court of India recently addressed this critical question, examining the ethical boundaries of the legal profession. The Court considered whether a cheque issued for such a fee constitutes a legally enforceable debt under Section 138 of the Negotiable Instruments Act, 1881. The judgment emphasizes the fiduciary relationship between lawyers and clients, and the importance of maintaining professional ethics. The judgment was delivered by a bench comprising Justices Adarsh Kumar Goel and Uday Umesh Lalit, with Justice Adarsh Kumar Goel authoring the opinion.

Case Background

The appellant’s husband died in a motor accident on July 30, 1998. The appellant, along with her children and parents of the deceased, engaged the respondent, an advocate, to file a claim for compensation before the Motor Accident Claims Tribunal (MACT). The MACT awarded compensation, and the appellant paid the respondent ₹10 lakhs towards his fees over time.

On October 25, 2014, the respondent allegedly forced the appellant to sign a cheque for ₹3 lakhs, despite her stating she had no funds. The respondent claimed his fee was 16% of the total compensation received by the appellant, as indicated in an email dated November 2, 2014.

The cheque was dishonored, and the respondent filed a complaint under Section 138 of the Negotiable Instruments Act, 1881, alleging that the appellant had committed an offense by issuing a cheque that was returned unpaid due to insufficient funds. The appellant approached the High Court of Judicature at Hyderabad to quash the proceedings, arguing that there was no legally enforceable debt.

Timeline

Course of Proceedings

The High Court of Judicature at Hyderabad dismissed the appellant’s petition to quash the proceedings, holding that the Advocates’ Fee Rules were merely for guidance and did not bar claiming fees beyond what was fixed under the Rules. The High Court noted the respondent’s claim included fees for engaging advocates in the High Court and the Supreme Court.

The appellant then appealed to the Supreme Court, arguing that the fee claim was unethical, against public policy, and violated Section 23 of the Indian Contract Act, 1872. The appellant contended that the cheque was not issued in discharge of a legally enforceable debt, and the respondent had exploited his fiduciary relationship with her.

Legal Framework

The Court considered Section 138 of the Negotiable Instruments Act, 1881, which deals with the dishonor of cheques for insufficient funds. This section stipulates that if a cheque is dishonored due to insufficient funds, the issuer is deemed to have committed an offense and is liable to be punished.

The Court also examined Section 23 of the Indian Contract Act, 1872, which states that the consideration or object of an agreement is unlawful if it is forbidden by law, defeats the provisions of any law, is fraudulent, involves or implies injury to the person or property of another, or is regarded by the court as immoral or opposed to public policy.

The Court also referred to Rule 20 of Part VI, Chapter II, Section II of the Standards of Professional Conduct and Etiquette, which states:
“An advocate shall not stipulate for a fee contingent on the results of litigation or agree to share the proceeds thereof.”

Arguments

Appellant’s Arguments:

• The appellant argued that charging a percentage of the decretal amount by an advocate is against public policy and professional ethics, violating Section 23 of the Indian Contract Act, 1872.
• The appellant submitted that the cheque issued could not be considered as being in discharge of any legally enforceable debt.
• The appellant contended that no presumption arose in favor of the respondent that the cheque represented a legally enforceable debt.
• The appellant argued that the presumption of a legally enforceable debt stood rebutted by the settled law that a claim towards an advocate’s fee based on a percentage of the result of litigation was illegal.
• The appellant submitted that signing the cheque was an act of exploitation of the fiduciary relationship between the advocate and the client.
• The appellant relied on the judgments in In the matter of Mr. G., a Senior Advocate of the Supreme Court [(1955) 1 SCR 490], R.D. Saxena versus Balram Prasad Sharma [(2000) 7 SCC 264], and V.C. Rangadurai versus D. Gopalan [(1979) 1 SCC 308] to support the argument that such fee arrangements are against public policy.

Respondent’s Arguments:

• The respondent argued that the statutory presumption under the Negotiable Instruments Act, 1881 should apply since the cheque issued by the appellant was dishonored.
• The respondent submitted that no ground was made out for quashing the proceedings.
• The respondent contended that there was no legal bar to his claim for professional fees.
• The respondent did not dispute that the appellant had already paid ₹10 lakhs towards fees.
• The respondent admitted there was no written agreement about the quantum of fee nor any account maintained.
• The respondent did not dispute the email dated November 2, 2014, where the fee claim was based on 16% of the decretal amount received by the appellant.

The primary innovativeness of the appellant’s argument was that the cheque was not for a legally enforceable debt, thereby rebutting the presumption under Section 139 of the Negotiable Instruments Act, 1881. The appellant argued that the fee arrangement itself was unethical and against public policy, rendering the debt unenforceable.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether fee can be determined with reference to the percentage of the decretal amount.
2. Whether the determination of fee can be unilateral, and if the client disputes the quantum of fee, whether the burden to prove the contract of fee will be on the advocate or the client.
3. Whether professional ethics require regulation of exploitation in the matter of fee.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that the respondent’s claim for fees based on a percentage of the decretal amount was against public policy and professional ethics. The Court ruled that the cheque issued by the appellant could not be treated as being in discharge of any legally enforceable debt.

The Court emphasized that the relationship between a lawyer and client is fiduciary, and the advocate is in a position of trust. The Court stated that the advocate must independently prove the contract for fees if the client disputes the amount.

The Court quashed the proceedings against the appellant, holding that the complaint filed by the respondent was an abuse of the process of law. Although the respondent sought to withdraw the complaint, the Court did not permit it, citing the serious professional misconduct involved.

What weighed in the mind of the Court?

The Court was primarily concerned with maintaining professional ethics in the legal profession and protecting clients from exploitation. The Court emphasized the fiduciary nature of the lawyer-client relationship and the need to uphold public policy. The Court was also influenced by the need to ensure access to justice, which is hindered by unethical fee practices.

Logical Reasoning:

The Court rejected the argument that the statutory presumption under Section 139 of the Negotiable Instruments Act, 1881 should apply, because the underlying debt was not legally enforceable due to the unethical nature of the fee agreement. The Court considered alternative interpretations but found them inconsistent with the ethical standards of the legal profession.

The Court’s decision was based on the principle that an advocate’s fee should not be contingent on the outcome of litigation, as this could lead to a conflict of interest and undermine the integrity of the legal profession. The Court emphasized that the legal profession is a service-oriented profession, and the relationship between a lawyer and client is one of trust and confidence.

The Court quoted the following from the judgment: “The relationship between the lawyer and the client is one of trust and confidence.”

The Court also quoted: “An advocate shall not stipulate for a fee contingent on the results of litigation or agree to share the proceeds thereof.”

The Court also quoted: “The claim of the respondent advocate being against public policy and being an act of professional misconduct, proceedings in the complaint filed by him have to be held to be abuse of the process of law and have to be quashed.”

There was no dissenting opinion in this case. The judgment was delivered by a bench of two judges, with Justice Adarsh Kumar Goel authoring the opinion.

The decision has significant implications for the legal profession, reinforcing the importance of ethical conduct and fair fee practices. It clarifies that advocates cannot demand fees based on a percentage of the decretal amount and that such agreements are against public policy. This ruling protects clients from exploitation and ensures that the legal profession remains a service-oriented profession.

This ruling may lead to further scrutiny of fee arrangements between lawyers and clients, promoting transparency and fairness. It also underscores the need for a robust regulatory mechanism to check violations of professional ethics.

Key Takeaways

✓ Advocates cannot charge fees based on a percentage of the decretal amount.

✓ Agreements for fees contingent on the result of litigation are against public policy and professional ethics.

✓ The relationship between a lawyer and client is fiduciary, and the advocate is in a position of trust.

✓ If a client disputes the fee, the burden of proof lies with the advocate to prove the contract.

✓ The legal profession is a service-oriented profession, and its integrity must be maintained.

✓ This ruling may lead to further scrutiny of fee arrangements between lawyers and clients, promoting transparency and fairness.

Directions

The Court directed that the issue of professional misconduct by the respondent be dealt with at the appropriate forum.

Development of Law

The ratio decidendi of the case is that fee arrangements based on a percentage of the decretal amount are unethical and against public policy. This judgment reinforces the existing ethical standards for the legal profession and clarifies that such fee arrangements are not legally enforceable. There is no change in the previous position of law but a reaffirmation of the same.

Conclusion

The Supreme Court’s judgment in B. Sunitha vs. State of Telangana is a significant ruling that reinforces the ethical standards of the legal profession. The Court held that advocates cannot demand fees based on a percentage of the decretal amount, and such agreements are against public policy. The judgment protects clients from exploitation and ensures that the legal profession remains a service-oriented profession. The Court quashed the proceedings against the appellant and directed that the issue of professional misconduct by the respondent be dealt with at the appropriate forum.