IS A CONDITIONAL FEE AGREEMENT UNENFORCEABLE IF THE SOLICITOR BREACHES THE CODE OF CONDUCT? MUCH TO THINK ABOUT?

The judgment of Mr Justice Trower in Winros Partnership v Global Energy Horizons Corporation [2021] EWHC 3410 (Ch) gives much for  lawyers to think about.  Here I want to concentrate on one element  of that judgment- does a failure to comply with the Solicitors Code of Conduct render a Conditional Fee Agreement unenforceable between solicitor and client?  This is a case where no conclusion was reached, the judge finding that such an argument could be arguable, or could be liable to be struck out. Nevertheless these are issues that could impact greatly on the way that advice as to funding is given, CFAs entered into, and disputes resolved.

THE CASE

The judge (sitting with an assessor Master Gordon Saker) was considering an appeal in relation to decisions that had been made in proceedings under the Solicitors Act 1974 whereby the client was seeking an assessment of a bill rendered.  One of the preliminary issues considered was the enforceability of the conditional fee agreement that the client had entered into with the solicitor.

THE JUDGMENT IN THIS ISSUE

On appeal the judge considered the argument, that had been raised below, that the CFAs between the parties were unenforceable for illegality.

Unenforceability issue: breach of the SRA Code of Conduct

1. 1. At the trial before the Master, GEHC made a further argument that the CFAs were unenforceable for illegality. The illegality relied upon was a breach of the Solicitors’ Regulation Authority (“SRA”) Code of Conduct (the “Code”), and in particular the obligations of solicitors to act with integrity and in the best interests of their client, which were said to have been significantly breached by the terms of CFA2 and CFA3.

1. 1. This argument was not identified as being one of the preliminary points the Master had directed to be determined whether by the directions she gave on 16 June 2016 or otherwise, nor was it referred to by the Master in her judgment, presumably on the basis that it was unnecessary to deal with it in the light of her findings that the CFAs were in any event unenforceable for non-compliance with section 58. However, it is resurrected by GEHC in its respondent’s notice as a further ground on which CFA1 and CFA2 were unenforceable. In the light of my conclusions on the section 58 argument, I must consider how to deal with it on this appeal.

1. 1. In his oral submissions, Mr Williams did not attempt to argue that I should decide this point on the merits in the light of the fact that it was not dealt with by the Master. He accepted that it would not be an insubstantial exercise to show how the findings of fact which the Master made evidenced breaches of the Code that were sufficiently serious to mean that the CFAs were unenforceable. He said that all he would therefore seek to do was to show that his case was arguable and, if I was minded to allow the appeal, invite me to remit the issue for a further hearing.

1. 1. The way that GEHC put its case was that the Code has the force of statute, a proposition that was accepted by the Solicitors, and that a contract made or performed in significant breach of the code will be unenforceable.

1. 1. The parts of the Code to which GEHC referred included a number of general duties such as the Solicitors’ obligations under the Code to act with integrity, to act in the best interests of their client, to behave so as to maintain public trust, to give their clients the best information about costs confirmed in writing, to give a full explanation of any CFA and to insist on their clients taking independent advice before making gifts. It is not in issue that many of the statements of general principle reflected duties to which the Solicitors were subject under the Code.

1. 1. In its respondents’ notice, GEHC then relied on a number of acts by the Solicitors in support of its submission that the CFAs were unenforceable because they amounted to acts “in flagrant breach of the Code“. They related both to the making and performance of CFA2 and CFA3. As to the making of CFA2 and CFA3:

i) The terms of CFA2 were said to have been agreed in breach of the Code because they retrospectively required GEHC to pay substantial fees that should have been written off under CFA1 and to pay a fixed and non-refundable Advance Fee in addition to a further 100% success fee.

ii) The terms of CFA3 were said to have been agreed in breach of the Code because they required GEHC to pay a fixed and non-refundable Advance Fee in addition to a further 100% success fee, they stipulated for a success fee which was out of kilter with the de minimis risk taken on by the Solicitors and they included changes to the terms of the retainer so that they were significantly more disadvantageous to GEHC than the terms of CFA2.

1. 1. As to the breaches of the Code which were said to have been committed in the performance of CFA2 and CFA3, they were particularised in GEHC’s respondent’s notice as follows:

i) In relation to CFA2, a wrongful refusal to refund a sum in excess of £600,000 which ceased to be payable by virtue of part of the Solicitors’ success fee under CFA2 having been disallowed on an inter partes assessment, and misrepresentations that CFA2 had ended, that a sum in excess of £3 million was due and subsequently taking payment that was not due.

ii) In relation to CFA3, a misrepresentation to GHC that a win had been achieved and that payment was due when there had been no win, forcing GEHC to make a further advance payment which was not contractually due and threatening to stop work if it did not do so, wrongly appropriating £2.5 million in client money to payment of sums said to be due in circumstances where no sums were in fact payable and asserting that £1.1 million needed to be withheld from money due to GEHC because of estimated future disbursements when the realistic level of future disbursements was far lower.

1. 1. Mr Williams submitted that both the making and the performance of a contract such as the CFAs in a manner that breaches the Code rendered CFA2 and CFA3 themselves unenforceable. As to the applicable principles on illegality in the making of CFA2 and CFA3, Mr Williams relied on Awwad v Geraghty & Co [2001] QB 570, 598H, a case in which the Court of Appeal determined that a solicitor’s retainer was unenforceable because it provided for the solicitor to be paid at a higher hourly rate in the event of success, a provision that was forbidden at the time.

1. 1. As to illegality in the performance of CFA2 and CFA3, Mr Williams relied on the general principle explained by Waller LJ in Colen v Cebrian (UK) Ltd [2003] EWCA Civ 1676 at para [23]:

“If the contract was unlawful at its formation or if there was an intention to perform the contract unlawfully as at the date of the contract, then the contract will be unenforceable. If at the date of the contract the contract was perfectly lawful and it was intended to perform it lawfully, the effect of some act of illegal performance is not automatically to render the contract unenforceable. If the contract is ultimately performed illegally and the party seeking to enforce takes part in the illegality, that may render the contract unenforceable at his instigation. But not every act of illegality in performance even participated in by the enforcer, will have that effect. If the person seeking to enforce the contract has to rely on his illegal action in order to succeed then the court will not assist him. But if he does not have to do so, then in my view the question is whether the method of performance chosen and the degree of participation in that illegal performance is such as to “turn the contract into an illegal contract” … not every illegality in performance will turn a contract into an illegal contract; on one side of the line appears to be Ashmore Benson Ltd v AV Dawson Ltd and on the other St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267. In the latter case the court was concerned with a breach of statute, and performance in breach of that statute. The question in relation to performance, it asked itself, was whether the statute intended to prohibit the type of contract sued on, and held on the construction of the relevant statute that it did not. In the former case the citation by Scarman LJ of the dictum of Jenkins LJ suggests that where illegality by virtue of the common law is concerned the question is whether the common law would say that a contract has by its illegal performance been turned into an illegal contract. Of course much may depend on the question whether the party seeking to enforce the contract needs to rely on the illegal performance in order to succeed.“

1. 1. Mr Gourgey did not concentrate so much on the making of the CFAs but submitted that the short answer to GEHC’s submission was that a contract such as the CFAs will only be rendered unenforceable for breach of statute in respect of its performance where the statute provides for that to be the consequence. He cited two passages from St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267, 283 and 288 (per Devlin J) in support of that proposition:

“There are two general principles. The first is that a contract which is entered into with the object of committing an illegal act is unenforceable … The second principle is that 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, it is unenforceable whether the parties meant to break the law or not. In the latter class, you have to consider not what acts the statute prohibits, but what contracts it prohibits; but you are not concerned at all with the intent of the parties; if the parties enter into a prohibited contract, that contract is unenforceable.” [283]

“If a contract has as its whole object the doing of the very act which the statute prohibits, it can be argued that you can hardly make sense of a statute which forbids an act and yet permits to be made a contract to do it; that is a clear implication. But unless you get a clear implication of that sort, I think that a court ought to be very slow to hold that a statute intends to interfere with the rights and remedies given by the ordinary law of contract.” [288]

1. 1. It was not said that the making of these CFAs was expressly prohibited by any of the terms of the Code, such as occurred in (e.g.) Awwad v Geraghty & Co [2001] QB 570 or Mohammed v Alaga & Co [1999] EWCA Civ 3037. Nor was it said that there were any explicit provisions to the effect that their performance in the manner complained of rendered any of them unenforceable. What was said was that the making and performance of CFA2 and CFA3 involved more general breaches of the Code in the form of conduct which reflected a lack of integrity by the Solicitors, albeit a lack of integrity which is described by reference to a number of more specific breaches of the Code.

1. 1. In my view Mr Gourgey was right to criticise GEHC for not identifying anything in the Code which demonstrates that the sanction for the breaches on which they rely has the effect of rendering either of the CFAs unenforceable for illegality. It is much more difficult to say that conduct of that quality should, even if established, render the making or performance of the relevant contract (in this case CFA2 and CFA3) unenforceable for illegality.

1. 1. The difficulty in reaching a conclusion that the Code contemplated (whether expressly or impliedly) that a contract of retainer in the form of the CFAs entered into or performed in breach of the general provisions relied on by GEHC would be unenforceable, is illustrated by Garbutt v Edwards [2006] 1 WLR 2907. In that case there was a failure to provide costs information (one of the failures also relied on in the present case). Arden LJ (at para [35]) said the following:

“Mr Morgan does not suggest that the statutory framework prevents the formation of a contract of retainer before a sufficient costs estimate has been given. What Mr Morgan submits is that it is unlawful to perform a contract of retainer unless the appropriate costs estimate is given. The correctness of this submission has to be determined as a matter of the true construction of the statutory framework. The fact that statute imposes a requirement to take some step, as here the making of a costs estimate, is not of itself sufficient to render the performance of a contract in disregard of that step unlawful and unenforceable: see for example the St John Shipping case and the Awwad case, which Mr Morgan cited in support of his submissions. What the court has to do is to determine the effect of the requirement as a matter of the true construction of the statutory provision.”

1. 1. Garbutt therefore makes clear that it is necessary to show as a matter of construction of the statutory framework not just that the Solicitors acted in breach of the duty imposed by the statute (in this case the SRA Code) but rather that a contract entered into or performed in breach of that duty was to be illegal or unenforceable. The more general the circumstances in which the duty may be breached, the more important it is to adopt a careful approach to analysing how it is that each breach is said to have that effect.

1. 1. In recognising that the court is not in a position to do more than determine that GEHC’s case on illegality was arguable, Mr Williams adopted a realistic approach to the fact that it would be impossible for me to determine on this appeal that the Master should have decided that CFA2 and CFA3 were unenforceable for that reason. But it goes rather further than that, because I was not shown any aspect of the Master’s findings that demonstrate that such a link had been made and I was unable, on the basis of the submissions that were made, to gain any more than an unfocussed impression of conduct which was capable of amounting to serious breaches of the Code. It is clear however that the Master was very critical of a number of aspects of the Solicitors’ conduct, which may or may not have given rise to claims against them and many of them were not appealed in any event. But those criticisms were not of themselves enough to justify a conclusion that there is an arguable claim that the CFAs were unenforceable on these grounds. Apart from anything else, the fact that the Master did not determine the issue meant that the criticisms she made were not directed towards it.

1. 1. Mr Williams was right to say, however, that the question of unenforceability of an agreement for illegality in its performance is a question of fact and degree. This requires a proper assessment by the court of first instance as to what those facts are and how it is said that the contract of retainer has by its performance been turned into an illegal contract. I am far from saying that GEHC has a strong case, but although I have not found this point very easy, I am not in a position to say that it is unarguable that the conduct of this particular retainer was in sufficiently serious breach of the Code to render CFA2 and CFA3 unenforceable for illegality, and that this is an issue which should have been dealt with by the Master.

1. 1. I have also considered whether it is possible or practical to remit this issue for reconsideration with a direction that requires the Master who hears the matter going forward to determine the point on the basis of the primary findings of fact already made. I do not think that it is. While it remains open for the Master to give case management directions for the remitted hearing which limit the evidence, I am not sufficiently confident that justice can be done in this way to be able to prejudge that issue now. In particular, it is not clear to me that the findings of fact that the Master made were made in light of a proper appreciation by both parties of the allegations that were being advanced by the other on this part of the case or of the particular issues linking the Solicitors’ duties to their conduct in the performance of the CFAs being the matters to which those allegations were intended to refer.

1. 1. However, I consider that the issue to be determined must be properly formulated and the parties are to attempt to agree on its formulation so that it can be included in the order that I make. I should also stress that, in giving this direction I do not intend to prejudge the question of whether or not it remains appropriate for the point to be determined as a preliminary issue. Nor do I rule out the possibility that, once the issue has been properly formulated and the facts relied on have been related to those parts of the Code that are said to cause either the terms of the CFAs or their performance to be illegal, it may be that GEHC’s case will then be seen to be unarguable. In giving this ruling I do not preclude the Solicitors from seeking to have it struck out at that stage.