In this article Rebecca Henshaw-Keene looks at wasted costs orders following the judgment in Rainer Hughes Solicitors v Liverpool Victoria Insurance Company Ltd & Ors (Rev1) [2024] EWHC 585 (KB).The judgment contains significant guidance on preparing for wasted costs hearings and is an important addition to the line of cases on the requirements in respect of witness statements for non-English speakers. With thanks to Andrew Roy KC for his comments on the article.

Background

This matter arose from an RTA in May 2019 following which the Claimant brought a claim for injury and hire charges totalling almost £50,000. Her daughter-in-law was her passenger at the time. The Defendant had successfully applied to resile from an admission of liability, to plead fraud and to bring a counterclaim in the tort of deceit against the Claimant and her daughter-in-law.

The Claimant’s first language was Turkish. She had previously been represented by a different firm who had prepared a witness statement in Turkish with a certified translation.

The following steps had been taken by the Claimant’s solicitors, Rainer Hughes (“RH”), in preparation for trial:

• A Part 20 Defence for the Claimant was drafted in English and a Statement of Truth was signed by her in English.
• The Claimant’s witness statement had been prepared in English. In that statement, the Claimant said that her daughter-in-law spoke to the third-party driver after the collision. She had further taken delivery of a credit hire vehicle and signed their documentation “not realising that what I was actually signing was an expensive hire agreement”. Further, that she had never heard of the term impecuniosity and did now not want to advance a case on this basis. There was no Turkish version of this statement.
• The Claimant’s pre-trial checklist indicated she needed an interpreter at trial.

At a pre-trial review, RH was ordered to clarify in writing that the Claimant’s witness statements were compliant with CPR Part 32 and that the Statements of Truth complied with CPR Part 22.

RH’s position was that, whilst the Claimant’s English was “proficient”, an interpreter was needed to assist with the stresses of the trial: the Claimant was elderly and suffering from medical issues.  The Claimant’s daughter-in-law had “confirmed in numerous telephone calls that [the Claimant] fully understood the contents of her witness evidence.”

The trial came before HHJ Monty KC in December 2022.

At the outset, Claimant’s Counsel told the Judge that the Claimant was: “unable to read properly her witness statement or the pleadings, which were in English, as she was only proficient in Turkish.”

The Claimant had also not paid the trial fee. Relief from sanction was refused and the claim was struck out. Judgment was entered for the Part 20 claim at £25,000, with costs to be assessed pursuant to CPR r.44.15(c) on the basis that the Claimant and/or her solicitor’s conduct was deemed likely to obstruct the just disposal of the proceedings.

Wasted costs

RH was ordered to “show cause why they should not be jointly and severally liable” for some or all of these costs. They filed a statement saying:

• At an in person meeting it was clear that the Claimant had a “good grasp of English” despite her daughter-in-law assisting her;
• The file handler had said the statement would be translated into Turkish but that was “as further assistance”;
• The Claimant did not request for her statement of pleadings to be translated.

The Defendant took issue with a number of matters:

• It had raised the translation issue in December 2020, noting that the reply to defence of the Claimant was in English despite the assertion she was Turkish and her statement required translation. RH had responded at the time saying that, due to: “time constraints, we were unable to source our client’s statement in Turkish in the first instance. We are aiming to obtain such and will have better opportunity to do this if a stay is agreed”.
• The Claimant’s statement was then served in November 2021 (approximately 11 months post the correspondence above, 12 months prior to the pre-trial review hearing and 13 months prior to the trial).

The wasted costs hearing came before HHJ Monty KC on 25 July 2023. The Judge allowed the application for a Wasted Costs Order and ordered that RH pay:

• Wasted costs arising from the failures relating to the Claimant’s first language being Turkish which he summarily assessed in the sum of £3,000;
• The Defendant’s costs of the wasted costs application which he summarily assessed on the indemnity basis in the sum of £9,500;
• The costs of the Claimant and her daughter-in-law on the wasted costs application summarily assessed in the sum of £4,000.

RH’s statement filed for the application hearing was found to be unsatisfactory, not containing all relevant correspondence and having been written by someone not seemingly involved with the case. There had been four fee-earners on the file at various times, none of whom had given evidence.

The judge found there had been “a proliferation of red flags” and that “without properly translated statements, this was a disaster waiting to happen”

Turning to the wasted costs jurisdiction, the conduct had been negligent in the Ridehalgh v Horsefield [1994] Ch 205 sense: a failure to act with the competence reasonably to be expected of ordinary members of the profession. It was a breach of the firm’s duty to the Court: Persaud v Persaud [2003] EWCA Civ 394 at [27] and Gillian Radford & Co v Charles [2003] EWHC 3180 (Ch) at [20]. Finally, these failures led to costs being wasted.

Turning to proportionality, the Judge found:

“This was a straightforward case where the costs had been increased by Rainer Hughes not accepting the inevitable, and conceding that they were wrong, and instead having argued – without justification – that there was never anything to suggest that Mrs Karadag was other than proficient in English … Rainer Hughes negligently failed to deal with the language issue, have defended this application without calling evidence from those actually involved at the truly material times such as the drafting of the statement, have failed to produce all relevant documents, and have ignored what is in my view clear from the documents. That is why the costs are greater than they should have been”.

RH made the following points on appeal:

The Judge erred procedurally in failing to consider proportionality as a preliminary issue before going on to consider the merits of the application for wasted costs

RH relied on the case of Harrison v Harrison [2009] EWHC 428 (QB), that the wasted costs jurisdiction will only be exercised in cases which are “plain and obvious” and that it is a summary remedy which should be capable of being dealt with in “hours rather than days”.

This was a matter for the Court’s discretion, and not to be lightly interfered with by an Appeal Court. On the basis of the facts as they appeared to HHJ Monty KC in December 2022 when he refused relief from sanction, it appeared to be a clear case. No application was made by RH at the directions hearing that the matter should not proceed on grounds of proportionality, neither was one made in front of Judge Monty at the final hearing. The costs had been by then, obviously, incurred.

The Judge erred substantively in failing to exercise his discretion to dismiss the application on grounds of proportionality

Again, it was said that the discretion of the Judge was a wide one. He was entitled to take into account the fact that, on his assessment, the costs were greater than they should have been because of the unreasonable approach taken by Rainer Hughes to the application. That the final sum awarded was reduced from that put forward by the Defendant was immaterial.

It was agreed between the parties, as stated in Harrison v Harrison, that the jurisdiction was confined to cases which are “plain and obvious”. RH had sought to suggest that this matter was not capable of such an assessment. The discussion on this point centred on RH’s statement written in defence of the application. It had been put forward by a senior partner in the firm. It was not clear, held the Court, whether the partner had ever personally heard the Claimant speak or had been present in any meeting with her, leading the Judge to comment that “the absence of such evidence is in the nature of a deafening silence.”

HHJ Monty KC had been right to see what support, if any, there was for the position adopted by the senior partner, and what the evidence showed about the Claimant’s fluency in the English language.

In summary, the Judge was justified in finding that there had been a clear breach of CPR Part 32 and PD 22, as well as a breach of the overriding objective imposing an obligation on the court to deal with cases justly and at proportionate cost by, among other things, enforcing compliance with rules, practice directions and orders. The identified negligence of the solicitors was a breach of the duty on a legal representative to assist the court in promoting the overriding objective.

Finally, the decision to award costs on the indemnity basis was upheld, again because of the conduct of RH.

Take away points: witness statements

Practitioners will be familiar with the relevant legal provisions. This article contains an overview of them as stated in the leading case of Correia v. Williams [2022] EWHC 2824 (KB)

• The proficiency of a witness in English is key. It matters not, in some cases, what a witness’ “own language” or “mother tongue” is. Witnesses who are bi-lingual or otherwise sufficiently fluent in English can give evidence in English. For further commentary on this, see the decision of Freedman J in Afzal -v- UK Insurance Ltd [2023] EWHC 1730.

• The ability to be cross-examined in English appears to be the obvious litmus test. HHJ Monty KC said: “any witness who required a translator at trial would in my view be deemed to be insufficiently proficient to give evidence at trial in English”

• Also in Afzal, the then current Business and Property Court Guide was considered to be instructive, which read: a witness’s own language includes any language in which the witness is sufficiently fluent to give oral evidence (including under cross-examination).

The ability of the witness to be cross-examined in English is paramount and should be considered at the earliest opportunity. Is the witness’ English good enough to allow them to give their best evidence, in a situation which the witness may find stressful? There is a useful passage in the first instance judgment of HHJ Evans in Afzal (included in the appeal judgment):

“One of the fundamental principles of civil litigation is that parties are entitled to know before they come to trial what it is that a witness is going to say and are entitled to assume that that which the witness says in his statement is expressed in a manner which he will choose to express himself with all the vocabulary and nuance and everything else available to him; and a witness statement that is drafted in a language which is not the witness’s own language invariably will not convey the witness’s evidence in the same manner that it would if it were drafted in his own language.”

As above, a witness who professes the ability to read and understand an English statement, but who has an interpreter to assist at trial, is vulnerable to challenge.

What should be avoided, taking guidance from this case, is an over-reliance on the witness’ family and friends to assist them in preparing for trial.

Take away points: wasted costs

Mr Justice Martin Spencer made clear that a Judge’s discretion in considering proportionality and whether, on the information available, they should exercise their discretion to decline allowing a wasted costs application to proceed, remained a wide one. “No hard and fast rule can be laid down because the circumstances in which a wasted costs application may be made are infinitely varied.”

The judgment does however make clear that respondent solicitors who unreasonably throw up obstacles to a wasted costs application (for example by seeking to defend the indefensible) might not be allowed to rely upon the extra costs thereby generated in support of an argument that the application should be dismissed on proportionality grounds, This is consistent with CPR 44.5(3) which provides that one of the metrics by which proportionality is to be judged is “any additional work generated by the conduct of the paying party”.

It also makes clear that any point that the application should be dismissed on grounds of proportionality needs to be taken at the earliest possible stage.  In practical terms, doing so at the full hearing of the application itself will almost be by definition be too late.  The costs will have already been incurred.  The toothpaste cannot be put back in the tube.  The only options would either be to consign the work generated by those costs to redundancy or to use it to determine the application.  The latter is unlikely to be an attractive option.

Mr Justice Martin Spencer provided guidance for the Court on show cause orders, which practitioners can also follow. Where a Judge decides to make a “show cause” order, they should consider giving a direction that the applicant identify matters referred to in PD 46, paragraph 5.9 being a) what the legal representative is alleged to have done or failed to do and b) the costs that the legal representative may be ordered to pay or which are sought against the legal representative, as early as possible.

This will give the court a basis upon which to make an early assessment of the issue of proportionality because there will then be information on how straightforward or complicated the “negligence” issues are likely to be. The order of HHJ Monty KC had instead read: Rainer Hughes Solicitors do show cause why they should not be jointly and severally liable for some or all of the costs referred to in paragraph 5 above pursuant to CPR 46.8.

Finally, on deadlines, the Defendant was penalised for the fact that their Statement of Costs had been served late and assessed their costs at £9,500 inclusive of VAT. Costs had been claimed in the sum of approximately £15,000.

Ready reckoner: relevant CPR provisions

CPR Part 22 and Practice Direction (PD) 22 deals with statements of truth –

• R.22.1(1): The following documents must be verified by a statement of truth … (c) a witness statement.

• R.22.3: If the maker of a witness statement fails to verify the witness statement by a statement of truth the court may direct that it shall not be admissible as evidence.

• PD 22, 2.4. The statement of truth verifying a witness statement must be in the witness’s own language.

CPR Part 32 deals with witness statements –

• R.32.4(1): A witness statement is a written statement signed by a person which contains the evidence which that person would be allowed to give orally.

• R.32.8: A witness statement must comply with the requirements set out in Practice Direction 32.

The Practice Direction to part 32 (“PD32”) sets out the requirements for the preparation of witness statements:

• PD32: 18.1. The witness statement must, if practicable, be in the intended witness’s own words and must in any event be drafted in their own language.

• PD32: 19.1. A witness statement should – (8) be drafted in the witness’s own language

• PD32: 20.1. A witness statement is the equivalent of the oral evidence which that witness would, if called, give in evidence it must include a statement by the intended witness in their own language that they believe the facts in it are true.

• PD32: 23.2. Where a witness statement is in a foreign language

(a) The party wishing to rely on it must –

(i) have it translated; and

(ii) file the foreign language witness statement with the court; […]

• PD32: 25.1. Where:

(1) an affidavit,

(2) a witness statement, or

(3) an exhibit to either an affidavit or a witness statement does not comply with Part 32 or this practice direction in relation to its form, the court may refuse to admit it as evidence and may refuse to allow the costs arising from its preparation.

There are also provisions in the King’s Bench Guide, Chancery Guide and the Business and Property Courts Guide.

This blog post is written by Angela Frost of 12 King’s Bench Walk.

Hadley v Przybylo [2024] EWCA Civ 250

A Court of Appeal judgment starting with “the first issue for us to decide is whether there is an issue for us to decide” at first blush may not appear to be a case worth your time reading, however this judgment clarifies an important point that comes up regularly at costs budgeting hearings in personal injury claims involving catastrophically injured Claimants. Master McCloud clearly thought it was an important point as ‘leapfrog’ permission to appeal was granted.

The key issue was whether Master McCloud had decided a point of principle, namely whether the costs of a fee earner’s attendance at rehabilitation case management meetings are irrecoverable in law as costs of the litigation.

Only if the Master had decided a point of principle could the Court of Appeal interfere.

At the budgeting hearing Master McCloud disallowed some £52,000 of future costs because she concluded that these were not “incurred in the progression of litigation.”

This was a case involving significant traumatic brain injury and subsequent to the costs budgeting hearing had settled for an agreed lump sum of £5.6 million with an annual sum of £170,000 for care and case management.

The costs budget put forward by the Claimant totalled £1.8 million and ‘on any view’ the incurred costs of over £500,000 were high. Following court-ordered ADR on costs, the only phase in dispute was ‘Issue and Statements of Case.’

The Master’s decision

The issue was identified by Master McCloud as:

Whether “the inclusion of solicitor attendance time in the budget, for attending case management meetings with medical and other professionals in the course of management of the claimant’s rehabilitation needs, and for meetings with financial and court of protection deputies said to be part of inputting into a Schedule of Loss, are in principle costs which may be included in a budget and whether, if so, it is appropriate to include those in the ‘Issues Statements of Case’ phase of the budget on Form H”

Master McCloud looked at the ‘concept of costs’ and asked herself whether the proposed costs in relation to attendance at rehabilitation case management meetings were, in principle, “progressive of the litigation.” The Master concluded that they were not.

Importantly at the Master said at para 16 – “Thus, the (numerous) attendances of the sorts proposed here do not in my judgment progress litigation in this case. Note that I am not here saying that these costs are ‘unreasonable’ or ‘disproportionate’: those would be the tests I would apply if I were accepting that in principle they were ‘costs’ for the purposes of a budget in the first place.”

The Court of Appeal decision

There were a number of matters raised in the Court of Appeal that were given relatively short shrift as ‘obscuring’ the primary issue before them. Of relevance to practitioners is perhaps the confirmation that costs such as those of attending rehabilitation case management meetings are properly to be included in the ‘issue statement of case’ phase. Furthermore, the Court took the view that practice direction 3D10 was a wide provision to cover the whole of civil litigation and the assumptions set out there do not have statutory force, thus the absence of mention of such categories of costs within a section is not determinative of their recoverability.

Did the Master Decide a Point of Principle?

The Defendants position was that she did not. They relied on the fact that the Master had allowed something in the phase, which can only have been for the attendance at case management meetings, and the fact that various comments in her judgment suggested her primary concern was the proportionality of such costs.

In finding that the Master did decide a point of principle the Court referred to various parts of the judgment which supported the view that this is what the Master thought she was doing. The Court of Appeal were cognisant of the fact that the Master’s decision would be capable of citation as support for the principle that such costs are not recoverable costs.

This opened the door for the Court of Appeal to intervene.

Was the Master right?

The court identified the starting point for recoverability of costs in s.51(1) of the Senior Court Act 1981 “costs of and incidental to the proceedings” and the case of In re Gibson’s Settlement Trusts [1981] Ch 179 at 184F-G which set out three criteria summarised as: Utility, Relevance and Attributability.

The Court took the view that use by the Master of the term ‘progressive of litigation’ although possibly meant as shorthand for the utility criterion, was not helpful as there may be costs that cannot be said to ‘materially progress’ the litigation that are nonetheless recoverable under the wide words of section 51 (the Court citing for example the costs of attendance at an inquest).

So whilst the Master may have applied the wrong test, the real issue was whether the Master was right to say that “having a fee earner attending rehabilitation case management meetings…does not fall within the notion of ‘costs’.”

In reality, given the Claimant’s acceptance that challenge as to reasonableness and proportionality was open to the Defendant on assessment and the Defendant’s concession that the role of a legal representative can reasonably include costs for the purpose of furthering the claimant’s rehabilitation, the Court found that there was little between the parties.

These costs were found to be recoverable in principle for three reasons:

1. The Defendant had conceded that these costs could be recoverable subject to challenges on reasonableness and proportionality
2. The Guide to the Conduct of Case Involving Serious Injury and the Rehabilitation Code envisage the involvement of a solicitor in rehabilitation meetings and therefore indicate that as a matter of principle, this was a recoverable category of costs.
3. On the evidence, the Claimant’s solicitors’ involvement in rehabilitation has been beneficial to both parties and the Defendant has engaged in such meetings, thus suggesting that in principle this cost is recoverable.

“It would be wrong to decide that the costs of the solicitors’ attendance at rehabilitation case management meetings are always irrecoverable. Equally, it would be wrong for the claimant’s solicitor to assume that routine attendance at such meetings will always be recoverable. It will always depend on the facts [59]”

However the Claimant’s victory came with a large caveat. The Court of Appeal made it clear that the amounts claimed went well beyond the usual costs of reasonable liaison and warned that if the Claimant’s solicitor operated on the assumption that he was entitled to attend every routine rehabilitation case management meeting then he was wrong to do so.

The Court noted that a solicitor needs to keep an appropriate eye on the rehabilitation plans but that does not justify a default or blanket entitlement.

The Upshot

Although the appeal was allowed, the only real consequence was that the Defendant could take all the reasonableness and proportionality points it wanted to at the assessment stage, points with which the Court had sympathy.

The overall budget was ‘fair and reasonable’ and as such there was no need to send back for budgeting.

The judgment will be useful for Defendants in seeking to reduce budgeted costs for attendance at rehabilitation meetings, but it puts to bed any argument that such costs are not recoverable in law. Claimant solicitors can spend time progressing rehabilitation safe in the knowledge that such costs are recoverable as matter of principle, but they will need to be careful to ensure that such time can be justified on the facts of each case.

This blog was written by Andrew Roy, Deputy Costs Judge & Head of 12KBW’s Costs Team

Introduction 

CFA Lites are very common form of funding operation.  They are sometimes colloquially described as “eat what you kill” agreements.  They generally operate by capping the solicitors’ costs at those recovered from the opposing party.

However, the cap does not always apply.  Nearly all CFAs have clauses protecting the solicitor if the agreement ends before the litigation concludes.  The need for such protection arises because the solicitor’s fees are potentially at risk in litigation over which they no longer any control and into which they no longer have any input.

One of the most common such provisions is what in this case was called a “stick or twist” clause.  Such a clause entitles a solicitor, upon early termination, to elect either to claim their basic charges immediately (“stick”) or wait until the conclusion of the litigation and claim their basic charges and success fee if the client wins (“twist”).

Sellers v Simpkins [2023] EWHC 3296 (SCCO) (Sellers v Simpkins [2023] EWHC 3296 (SCCO) (20 December 2023) (bailii.org)) is salutary illustration as to how such a clause affects a CFA Lite cap. 

The facts

The claimant was injured in a road accident on 4 November 2014.  She instructed Simpkins & Co (“the solicitors”) under a CFA Lite.  The CFA adopted standard Law Society wording.  The relevant provision for present purposes were that:

• It contained a CFA Lite cap.
• The success fee was 0%.
• It contained a “stick or twist” clause in the following terms:

You can end the agreement at any time … you must:

• pay our basic charges and our expenses and disbursements including barristers fees but not the success fee when we ask for them; or
• pay our basic charges and our expenses and disbursements including barristers fees and success fees if you go on to win your claim for damages.

In March 2021, the Claimant terminated the retainer and instructed new solicitors, Fieldfisher.

The claim was settled at a joint settlement meeting in August 2021. The settlement was on a global basis inclusive of costs.

In November 2022 the solicitors delivered their bill to the Claimant.  It totalled £496,983.96, of which £48,000 had been paid on account, leaving a balance of £448,983.96.

In December 2022 the Claimant commenced proceedings for an order for the detailed assessment of the bill under s.70(2) Solicitors Act 1974.

The matter came before Senior Costs Judge Gordon-Saker for a preliminary issue hearing.  The main issue was whether the CFA Lite cap applied in light of the Claimant’s termination of the agreement.

The judgment

The judge referred to Higgins & Co Lawyers Ltd v Evans [2019] EWHC 2809 (QB); [2020] 1 WLR 141.  In that case it was held that a cap limiting the client’s liability to the solicitors (net of any costs paid by the opponent) to a maximum of 25 per cent of the damages received did not operate when the CFA was automatically terminated by the client’s death. 

Interpreting the ratio of Higgins, the Senior Costs Judge held that there was a distinction between the situation where the solicitor is entitled to payment before the claim had been concluded (when the overall cap would make no sense) and the situation where the solicitor waits to see the outcome. In the latter case, the overall cap would make sense.

He rejected the solicitors’ broad argument that the cap cannot apply where the client terminates the agreement before the case is won.  If the solicitor elects to wait for the outcome of the case and the claim succeeds (i.e. “twists”) when the agreement has been terminated before the case is won, there is no difficulty applying the overall cap.

However, the question remained as to whether in this case the solicitors had elected to “stick” or “twist”.

The solicitors did not make a clear and explicit election.  The fee earner stated “I shall seek payment of the costs and disbursements due as per the agreement term indicated above.” He later added “There is real risk my firm faces concerning the costs it has incurred. It is therefore entirely reasonable that now my firm is no longer instructed and risks apparent, the issue of costs owed to the firm must be resolved prior to the file transfer”.  They accordingly refused to hand over the Claimant’s files to Fieldfisher.

The Claimant contended that this was not sufficient to trigger the first bullet point in clause (a) (i.e. an election to “stick”). She argued that there had to be a demand for payment in the form of a bill which complied with s.69 Solicitors Act 1974.

The judge rejected this argument in the following terms:

36. I think that ignores the factual matrix. There was no advantage to elect to await the outcome of the case, or in Ms Bedford’s words to “twist”, because no success fee would be payable in the event of a win. It seems to me that while the [solicitor] did not “ask” for payment until he delivered a bill, in March 2021 he had exercised his right to decide that the Claimant must pay his basic charges, expenses etc without waiting for the conclusion of the claim. Effectively, he had said “I’ll stick”.

37. Had a success fee been payable under the agreement, in view of the emails, the [solicitor] would have had no prospect of arguing that he had exercised his election to await the outcome.

38. Following Higgins, the overall cap did not apply because the [solicitor] had elected to claim his basic charges before the case was won.

Takeaway Practice Points

Several important takeaway points emerge from this case:

• Clients need to aware of the potential consequences of early termination of a CFA, especially a CFA Lite.  They need to be aware that CFA Lite cap will not operate in all certain circumstances.
• It is vital to take into account the full extent of potential costs liabilities when considering an all inclusive settlement.  Whilst this point applies generally, it is particularly important where there is a CFA, as CFAs are generally not tailored to such settlements.  Various points arise here:
• Where there have been previous solicitors (or, for that matter, counsel), unless they have confirmed the extent of the costs they will be seeking, it may not be possible for the client to know how much damages they will ultimately retain. 
• Even where a CFA cap would otherwise be engaged, it is unclear whether and how it would work following an all inclusive settlement.  The solicitor in Sellers argued that the cap could not apply where there is no express costs recovery or ascertainable sum recovered in respect of costs.  In the event, the court did not have decide this argument.
• It is therefore highly advisable before offering or accepting any all inclusive settlement to agree with the client (and clearly record) a notional division of the damages and costs elements.  This at the very least reduces the risk of future disputes, complaints and the like.
• A solicitor should make it crystal clear whether they are electing to “stick” or “twist”.  Whilst the solicitors here won the point, it was an argument which they would have been better to have avoided entirely. They could easily have done so.
• When as here, there is a 0% uplift, there will never be any benefit in “twisting”.  The solicitor should always “stick”.  They may for practical reasons wish to await the conclusion of the claim before actively pursuing payment, but it should be made clear that this is without prejudice to their electing that the costs liability crystallises immediately.

Andrew Roy KC

5 March 2024

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:

1. Be in writing;
2. Must not relate to litigation which cannot be the subject of an enforceable CFA (i.e. criminal proceedings and family proceedings); and
3. 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:

1. 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).
2. State the percentage by which the amount of the fees is to be increased; and
3. 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):

1. 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.
2. In the alternative, the doctrine of quantum meruit was available to the solicitors;
3. 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.