In this article, Henry King provides commentary on the case of Diag Human SE v Volterra Fietta [2023] EWCA Civ 1107, concerning an unenforceable discounted conditional fee agreement (CFA). The judgment underscores the need for all practitioners acting under a CFA to take great caution when agreeing success fees.
This is a short case comment on Diag Human SE v Volterra Fietta [2023] EWCA Civ 1107. This, and a number of other articles, foreshadowing 12KBW’s CFA series to follow in 2024.
The Conditional Fee Agreement (“CFA”) is subject to a wealth of regulations. This article provides a very short overview of one of them, namely that a success fee cannot exceed 100%.
A Short History of CFAs
As is set out in the judgment, CFAs were illegal and contrary to public policy until 1990. They were thus unenforceable.
Thereafter, s.58 Courts and Legal Services Act 1990 permitted a limited class of CFAs to be enforceable. Those CFAs had to comply with the above section. If not, the legal advisor acting under the CFA would not be entitled to recover anything by way of fees from the client in the event that things went south.
In short, CFAs must:
- Be in writing;
- Must not relate to litigation which cannot be the subject of an enforceable CFA (i.e. criminal proceedings and family proceedings); and
- Must comply with any such requirements as the lord chancellor prescribes.
So far, so good. However, many CFAs also have a success fee element within them. This is as consideration for the fact that a legal representative is (in essence) gambling on a win.
Should a legal advisor be seeking a success fee in addition, the CFA must also:
- Relate to proceedings of a description specified by order made by the Lord Chancellor. (This very rarely arises. This only applies to proceedings brought pursuant to s.82 of the Environmental Protection Act 1990 per r.2 The Conditional Fee Agreements Order 2013. This is unlikely to trouble the audience reading this article).
- State the percentage by which the amount of the fees is to be increased; and
- That percentage must not exceed (at present) 100%.
Prior to 2013, the success fee was recoverable from the other side. In some cases, that remains the case (see the ongoing case of Hirachand v Hirachand [2021] EWCA Civ 1498; [2022] 1 WLR 1162 – the appeal in this case was heard in the UKSC in January 2024).
Facts of Diag
Briefly:
- Between February 2017 and September 2017, the solicitors acted under a conventional retainer.
- Following discussions, by side letter, the solicitors started to act at a discounted rate of 70% of their hourly rates. In consideration of the discount, the solicitors would be entitled to a success fee that was to be calculated in accordance with the outcome of the arbitration.
The solicitors had comprehensively failed to abide by the requirements of s.58 in relation to success fees. Not only had the success fee percentage not been stated in writing, it amounted to 280% on a worked example (see paragraph 11). It was thus common ground that the agreement as a whole was a CFA and thus was prima facie unenforceable (see paragraph 6).
The solicitors mounted three grounds on which they could recover their fees (or a part thereof):
- That the success fee provisions were severable and thus under the doctrine of severance, the offending provisions were severable entitling the solicitors to the 70% “discounted” fees.
- In the alternative, the doctrine of quantum meruit was available to the solicitors;
- In any event, the solicitors should be entitled to retain the sums paid on account of costs.
The Decision
The Senior Courts Costs Office (Master Rowley), the High Court (Foster J) and the Court of Appeal (Stuart-Smith, Andrews and Newey LJJ) all roundly rejected the solicitors’ contentions.
In overview, the appeal was rejected on the grounds that the solicitors were seeking to make an unenforceable CFA enforceable. This would be contrary to public policy.
In slightly more detail:
- As to severance:
- There is a three stage test as is set out in Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613, [2007] ICR 1539 at paragraph 40. The severance sought in this case by the solicitors fell foul of the third stage of this test, namely that “The removal of the unenforceable provision does not so change the character of the contract that it becomes ‘not the sort of contract that the parties entered into at all’.”
- It was held that the severance sought would fundamentally change the character of the retainer from a CFA to a conventional retainer albeit for discounted rates (see paragraph 40 and 45).
- Further, and in any event, the position was contrary to public policy. Per paragraph 62: “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.”
- As to quantum meruit:
- This was rejected for the same reasons. The Court of Appeal quoted from the decision in Awwad v Geraghty & Co [2001] QB 570 as follows: “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”.
- This reasonably short reasoning put an end to that argument.
- Finally, as to the restitution point:
- the Court of Appeal were uncomplimentary when it was held that “[t]he consequences that would follow if Ground 3 were to succeed are startling to the point of absurdity.”
- Put bluntly, the Court of Appeal held that there was no good reason, particularly in the light of the public policy considerations outlined, that a different result should obtain where no fees at all should have been received by the solicitors on account.
- 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.
Comment
This decision serves to underscore the need for all practitioners acting under a CFA to take great caution when agreeing success fees. Clarity of wording and compliance with the legislation is key.
Indeed, it is worth mentioning (if only in passing) the following cases:
- Gloucestershire CC v Evans [2008] 1 W.L.R. 1883 was discussed in Winros (below) as follows, broken up for ease of reading:
- The argument revolved around the question of whether the prescribed percentage increase (100%) was to be measured by reference to the increase over the costs at risk or the increase over the basic charges.
- The Solicitors basic charges were £145 per hour which would be discounted to £95 per hour on a loss (so the costs at risk were £50 per hour) but increased to £290 per hour on a win. The Court of Appeal held that the increase over the basic charges was what mattered because that was the increase over the fees payable with all of the conditional elements removed.
- Dyson LJ explained as follows: “a conditional fee agreement provides for a success fee if it [the CFA] provides for the amount of any fees to which it [the CFA] applies to be increased, in specified circumstances, above the amount which would be payable if it [the amount of fees to which the success fee is applied] were not payable only in specified circumstances.”
- And further that: “the lawfulness of the percentage increase is measured not by reference to the costs at risk, but by reference to the fees that would have been payable if the CFA were not a CFA” (at paragraphs 20 and 27).
- This colours the analysis of the Court of Appeal in Diag (though it was not expressly referred to).
- In the (rather more recent) case of Winros Partnership v Global Energy Horizons Coporation [2021] EWHC 3410 (Ch), the High Court held that where an advance fee was payable, this is of little import. When assessing a success fee, it is “simply wrong to have regard to any other amounts that may be payable under the CFAs apart from the increase in the basic charges for which the client is liable in the specified circumstances.” (at paragraph 69).
These two cases make it yet more clear that the basic charges must be ascertained first, then the success fee calculated on top, and that success fee must be calculated with caution.
Public policy remains a potent weapon for clients in absolving them of liability for fees under CFAs. The scheme is deliberately “draconian” to ensure compliance with the relevant regulations.
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