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.