SOLICITORS CAN’T RECOVER COSTS UNDER AN UNENFORCEABLE CFA: WHAT IS MORE THE CLIENTS CAN RECOVER SUMS BACK

October 16, 2023 · by · in Appeals, Conditional Fee Agreements, Costs

In Diag Human SE & Anor v Volterra Fietta (Re Assessment Under Part III Solicitors Act 1974) [2023] EWCA Civ 1107 the Court of Appeal upheld earlier judgments that solicitors, acting under a conditional fee agreement that claimed more than 100% mark up, could not recover any of the fees involved from their clients.  What is more the clients were entitled to recovery of money they had paid to the solicitors under the terms of that agreement.

“It is for Parliament, not the courts, to make any further inroads into the established public policy prohibition on champertous agreements. There would be little incentive to solicitors to adhere to the straightforward requirements of the regulations laid down for the protection of their clients, if the worst that could happen if they failed to do so would be that they would be paid the amount that the client had agreed to pay for their services win or lose”

THE CASE

The appellants are a firm of solicitors, the respondents their former clients. The solicitors acted for the clients in relation to an arbitration.  The parties initially worked on a private client basis and an engagement letter. In September 2017 the engagement letter became subject to a side letter. One result of that side letter was that, if the arbitration were successful, the uplift on fees would be 280%.  The retainer was terminated and the respondent client sought an assessment of the fees already paid, including an order that they had no liability to pay the solicitor’s fees and were entitled to repayment of those sums that had been paid.  The sums involved were substantial, involving many millions in fees.

The Costs Judge and, on appeal, the High Court Judge, found in favour of the respondent clients.  The solicitors appealed to the Court of Appeal.

THE SOLICITORS UNSUCCESSFUL APPEAL TO THE COURT OF APPEAL

The solicitors were equally unsuccessful when the matter was determined by the Court of Appeal.

    1. The appellants are a firm of solicitors. The respondents engaged them to provide legal advice in relation to an investment treaty arbitration claim against the Czech Republic. Dr Stava is and was at all material times the controlling mind and ultimate beneficial owner of Diag Human SE [“Diag”]. In September 2017 the parties entered into a conditional fee agreement [“CFA”], which provided for the solicitors to be paid on an hourly basis but at a discounted rate for work done pursuant to the agreement, in consideration of which the solicitors would be entitled to success fees in specified circumstances.
    1. The CFA was unenforceable because it included a success fee that could exceed 100% and because it did not state the success fee percentage. The solicitors, however, submit that they are entitled to sever the offending success fee provisions and recover fees at the discounted rate for the work they have done; alternatively they submit that they are entitled to recover fees assessed on a quantum meruit for the work they have done for and at the request of their clients; and, in any event, they submit that they are entitled to retain sums that the clients had paid on account of their costs.
  1. In a judgment that addressed these submissions as preliminary issues in an assessment of the solicitors’ bill, Costs Judge Rowley held against the solicitors on each point. Put shortly, he held that the consequence of the CFA being unenforceable was that the solicitors could recover nothing under their bill, which he assessed at nil, and that they were required to repay to their clients sums that the clients had paid on account. The solicitors appealed to the High Court. On 29 July 2022 Foster J, sitting with Master Simon Brown as an assessor, upheld the decision of the Costs Judge, largely for the reasons he had given: [2022] EWHC 2054 (QB).
    1. As foreshadowed in paragraph 3 of the side letter, paragraphs 5 to 7 set out the sums that would be payable depending on the outcome of the arbitration. Paragraphs 10 to 21 then set out how sums due were to be calculated in the event that the agreement was terminated, depending upon whether the issues of jurisdiction and merits were or were not bifurcated in the arbitration. The side letter concluded with a worked example of how the solicitors’ fees should be calculated on given assumptions including a successful outcome in the arbitration. Subsequent calculations show that the worked example produced an uplift of 280% over the solicitors’ base fees (i.e. their profit costs calculated on an hourly rate). The side letter was duly signed by Dr Stava, this time “for and on behalf of himself and [Diag]”.
    1. There is therefore no doubt that, from 6 September 2017, Dr Stava and Diag were both clients of the solicitors under the agreement that was now set out in the original engagement letter of 23 February 2017 as varied by the side letter [“the September 2017 Agreement”]. Whether the September 2017 Agreement was a new agreement or a variation of the February 2017 Agreement seems to me to be irrelevant to its proper interpretation and the issues in this appeal. What is plain is that the September 2017 Agreement governed the question of fees for any and all work carried out by the solicitors from that date.
  1. It was common ground before the Courts below and is common ground before us that, since the terms in paragraph 5 onwards of the side letter set out terms which were contingent on the outcome of the arbitration, the September 2017 Agreement was a CFA that was subject to section 58 of the Courts and Legal Services Act 1990 [“the 1990 Act”]. It was and is also common ground that, because the success fee was capable of exceeding 100% of base costs and because the percentage was not stated, the CFA failed to comply with the conditions required by section 58 and secondary legislation to those sections and was therefore unenforceable.

DIRE FINANCIAL CONSEQUENCES FOR THE SOLICITORS: AN ARGUMENT THAT CUT NO ICE

One of the arguments employed was the dire financial consequences for the solicitors if the court found against them.  This cut no ice against the “clear an uncompromising” words of the statute.

    1. The solicitors repeatedly emphasised the seriousness of the financial consequences for them if their appeal were to be rejected. This is not a new submission in cases involving challenges to CFAs. It was answered by Dyson LJ giving the judgment of the Court in Garrett v Halton BC [2006] EWCA Civ 1017, [2007] 1 WLR 554 at [27]-[30] where he said:
“27. … The starting point must be the language of section 58(1) and (3) of the 1990 Act. It is clear and uncompromising: if one or more of the applicable conditions is not satisfied, then the CFA is unenforceable. Parliament could have adopted a different model. It could, for example, have provided that where an applicable condition is not satisfied, the CFA will only be enforceable with the permission of the court or upon such terms as the court thinks fit. There is nothing inherently improbable in a statutory scheme which provides that, if the applicable conditions are not satisfied, the CFA shall be unenforceable with the consequence that the solicitor will not be entitled to payment for his services. Such a scheme can yield harsh results in certain circumstances, especially if the client has not suffered any actual loss as a result of the breach. It can also produce results which, at first sight, may seem odd: … . But the scheme is designed to protect clients and to encourage solicitors to comply with detailed statutory requirements which are clearly intended to achieve that purpose. The fact that it may produce harsh or surprising results in individual cases is not necessarily a good reason for construing the statutory provisions in such a way as will avoid such results.
…
30 … To use the words of Lord Nicholls, Parliament was painting with a broad brush. It must be taken to have deliberately decided not to distinguish between cases of non-compliance which are innocent and those which are negligent or committed in bad faith, nor between those which cause prejudice (in the sense of actual loss) and those which do not. It would have been open to Parliament to distinguish between such cases, but it chose not to do so. The conditions stated in section 58(3)(c) and in particular the requirements prescribed in the 2000 Regulations are for the protection of solicitors’ clients. Parliament considered that the need to safeguard the interests of clients was so important that it should be secured by providing that, if any of the conditions were not satisfied, the CFA would not be enforceable and the solicitor would not be paid. To use the words of Lord Nicholls again, this is an approach of punishing solicitors pour encourager les autres. Such a policy is tough, but it is not irrational. The public interest in protecting solicitors’ clients required that the satisfaction of the statutory conditions was an essential prerequisite to the enforcement of CFAs.”
  1. Underlying most of the solicitors’ submissions was the contention that public policy has changed and that we should recognise that change. Exactly what was the change for which the solicitors contend is not clear to me, save that it should have the effect of allowing them to be paid to at least some extent by one means or another. However, the contention must be rejected on high authority and because there is no material on the basis of which we could properly and confidently assert what any new and adjusted public policy might be.

 

OTHER ARGUMENTS THAT WERE REJECTED

The Court of Appeal also rejected an argument that the agreements could be “severed”, so they were entitled to recover costs at the rebated rate.

    1. Even if I were wrong in this conclusion, I would hold that severance is precluded as contrary to public policy. The principal effect of severance would be to permit partial enforcement of the unenforceable CFA. As was pointed out during submissions, if the client lost the arbitration, the effect of allowing severance would be that the solicitors would recover precisely the same amount of their fees as if the CFA had been held to be enforceable. That is not, in my view, a tolerable outcome. Nor is it any answer to submit that there is no disadvantage to the client in enforcing the discounted fee element in respect of work carried out for and at the client’s request. The regime imposed by the 1990 Act is concerned with conflicts of interest giving rise to potential harm to clients: see Garrett per Dyson LJ at [38]-[39].
  1. The effect of implementing public policy, as explained by Dyson LJ at [27]-[30] of Garrett, cited at [21] above, is that “if the applicable conditions are not satisfied, the CFA shall be unenforceable with the consequence that the solicitor will not be entitled to payment for his services”.
Similarly an argument based on quantum meruit was rejected.
    1. It would be contrary to the public policy that forbids partial or total enforcement of the CFA and severance to permit the solicitors to recover on a quantum meruit basis.
    1. Not only is this clear as a matter of principle based on the scope of the public policy prohibition, it would also be contrary to authority. In Awwad the solicitors contended that they should recover fees on the basis of a quantum meruit assessment in respect of services actually rendered: see 574C. That argument was rejected by Schiemann LJ (with whom both Lord Bingham and May LJ expressly agreed on this point) at 596C-E:
“Mr Dutton attempted to make use of that part of the decision in the Mohamed case [2000] 1 WLR 1815 which ruled that the interpreter was entitled to be paid a fair fee for his work as interpreter notwithstanding that his agreement to work as such was part of a champertous agreement which the court refused to enforce. In my judgment this attempt should fail. If the court, for reasons of public policy refuses to enforce an agreement that a solicitor should be paid it must follow that he cannot claim on a quantum meruit. … In the present case, what public policy seeks to prevent is a solicitor continuing to act for a client under a conditional normal fee arrangement. That is what Miss Geraghty did. That is what she wishes to be paid for. Public policy decrees that she should not be paid.”

Restitution

The court rejected an argument based on restitution.

 

THE JUDGMENT OF LADY JUSTICE ANDREWS

This short judgment encapsulates the issues and the decision.
    1. I agree. As Mr Carpenter submitted, this was an attempt to carve out a special regulatory regime for discounted CFAs, with potentially far-reaching consequences. It is for Parliament, not the courts, to make any further inroads into the established public policy prohibition on champertous agreements. There would be little incentive to solicitors to adhere to the straightforward requirements of the regulations laid down for the protection of their clients, if the worst that could happen if they failed to do so would be that they would be paid the amount that the client had agreed to pay for their services win or lose. It makes no difference to the principle if that amount is based on a discount from the solicitors’ usual hourly rate, or subject to a financial cap. If Parliament had wished to provide for the consequences of entry into a non-compliant CFA to be limited to loss of the success fee or other form of contingent remuneration, it would have done so. There has been no indication that Parliament considers a discounted fee arrangement to be any different in character from a “no win, no fee” arrangement or intends that a distinction be drawn between them.
    1. The solicitors’ reliance on Garnat was misplaced. In Garnat the contractual terms on which the solicitors were to be remunerated for the work done at first instance remained the same before and after the excision of the offending provisions. Moreover, and importantly, they would still receive no remuneration for the services that they had agreed to provide on terms that offended against public policy. In this case, by contrast, the terms that were subject to the CFA were those relating to remuneration for all the services provided by the solicitors after the date of the side letter. To allow the solicitors to still receive the discounted rate for that work would completely change the character of the bargain that the parties made. It would also be contrary to principle and authority. However, if the solicitors had still been owed money for work done prior to the execution of the side letter, then even if the side letter amended the retainer so as to transform the contract between the parties into an unenforceable CFA, in my judgment they would still have been entitled to recover those earlier fees. That is the true analogy with Garnat.
    1. As for the alternative claim in quantum meruit, the short answer is that it is not open to the solicitors to claim by the back door any payment for their services which they cannot receive through the front. There is authority of the highest level to that effect, including Orakpo v Manson Investments Ltd [1978] AC 95 and Dimond v Lovell [2002] 1 AC 384, both of which were decided in the context of agreements which failed to comply with consumer protection legislation. Awwad is the most recent pertinent authority that was cited to us, and is directly in point because it specifically addresses contingency fee arrangements. The clients cannot be said to have been “unjustly” enriched by the receipt of services for which solicitors cannot claim to be paid under a contract which failed to comply with the specific requirements that would have made it a lawful and enforceable CFA. Equity will not step in to relieve the solicitors from the consequences of providing services pursuant to an unlawful agreement which they are precluded from enforcing.
  1. That is a further reason why, irrespective of the argument based on s.70 of the Solicitors Act, (which I also accept), I consider the solicitors would have no defence to a claim by the clients for the recovery of fees paid for services carried out under the unenforceable CFA. Garland J’s tentative contrary conclusion in Aratra Potato is wrong, and has been overtaken by later and higher authorities, as confirmed by Stuart-Smith LJ in para 79 above.
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