The Court of Appeal’s recent ruling highlights the need to get fee agreements right

October 12, 2023

The Court of Appeal’s recent ruling highlights the need to get fee agreements right

Earlier this month the Court of Appeal handed out an eye-wateringly expensive lesson on the importance of ensuring the drafting of conditional fee agreements  (CFAs) complies with the relevant legislation.

In Diag Human SE & Anor v Volterra Fietta [2023] EWCA Civ 1107 the Court held the law firm was not entitled to its substantial fees – ‘measured in millions’ – because its CFA did not comply with section 58 of the Courts and Legal Services Act 1990 and its secondary legislation.

Lord Justice Stuart-Smith said 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 client had engaged the law firm, Volterra Fietta, to advise it in relation to aninvestment treaty arbitration claim against the Czech Republic. The parties entered into the CFA in September 2017, and it provided for the solicitors to be paid on an hourly basis, but at a discounted rate for work done under the agreement; in consideration of which the solicitors would be entitled to success fees in specified circumstances.

Although the CFA was unenforceable, the solicitors argued that they were entitled to sever the offending success fee provisions, and recover fees at the discounted rate for the work they had done. Alternatively, they submitted that under ‘quantum meruit’ principles of natural justice, they were entitled to recover fees for the work done for and at the request of their clients. They also claimed that in any event, they were entitled to keep the money that the client had already paid on account of their costs.

Unfortunately for the law firm, the Court of Appeal upheld the position of the lower courts and unanimously dismissed all three arguments. The CFA was unenforceable, and the offending aspect of it could not be severed from the rest; and to go on to allow a payment on a quantum meruit basis instead would undermine public policy. This meant the solicitors were not entitled to any fees under the CFA, and must re- pay the sums the client had already paid on account.

The severance issue

The issue of severance is a particularly hot topic in the litigation finance world at themoment, in the light of the Supreme Court’s recent surprise ruling in PACCAR. In its great wisdom, the top court ruled that – despite what the market has always believed – litigation funding agreements (LFAs) that provide for a funder’s fee to be calculated as a share of damages are in effect damages-based agreements. This would render LFAs unenforceable in many cases.

Most LFAs allow for a funder’s fee to be calculated via two different routes, however: either as a share of damages, or a multiple of the sum invested. So in response to the PACCAR ruling, funders are working with clients to amend LFAs in order to ‘sever’ the first route, but leave the second remaining.

With that in mind, the mood music flowing from the Court of Appeal’s comments on severance in Diag Human SE & Anor v Volterra Fietta – while relating to the CFA regime rather than to the LFA issue presented in PACCAR – may not be seen as particularly helpful to the plight of litigation funders.

Lord Justice Stuart-Smith said that ‘to implement the severance proposed by the solicitors would fundamentally change the nature of the contract so that, upon severance, it would cease to be the sort of contract into which the parties had originally entered’.

And Lady Justice Andrews added: ‘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’.

In relation to CFAs at least, the lesson from the Court of Appeal is that when you are drawing up fee agreements with clients, make sure you get it right. If you fail to do so, no mercy will be shown.

– Sentry’s Rapid Raise funding is calculated on an interest basis, based on the
length of time that capital is deployed. Sentry is therefore unaffected by the
Supreme Court’s ruling in PACCAR

October 12, 2023