In early October, the Court of Appeal handed down a costly warning on the importance of ensuring a Conditional Fee Agreement is compliant with relevant legislation. An abrupt lesson which was at the mercy of Diag Human SE & Anor v Volterra Fietta (Re Assessment Under Part III Solicitors Act 1974) [2023] EWCA Civ 1107. Volterra Fietta, were a firm of Solicitors, who had acted for the Appellants in an investment treaty arbitration against the Czech Republic, and were denied millions of pounds worth of fees, because the CFA did not comply with s.58 of the Courts and Legal Services Act 1990 and it’s secondary legislation.
The parties entered into the CFA in September 2017, providing 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 a success fee in specified circumstances.
The main issue was, although the CFA was rendered unenforceable because “it included a success fee that could exceed 100% and because it did not state the success fee percentage” – were the Solicitors entitled to sever the provision for a success fee and recover their fees at a discounted rate? In the alternative, the Volterra Fietta 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.
The Court of Appeal upheld the lower Courts’ decisions and unanimously dismissed all three arguments. It was held that Volterra Fietta could not obtain any payment under the CFA by severing the non-compliant parts. Stuart-Smith LJ said the Courts below were correct to conclude that the third stage of the three-stage test for severance was not satisfied – that being “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’”.
Stuart-Smith LJ went on to reject Volterra Fietta from claiming any payment on a quantum meruit basis instead, stating “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.”
“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.”
The Court also held that the Appellants were entitled to a refund of the fees they had paid on account, as they had not received any benefit from the unenforceable CFA.
Concurring, Andrews LJ 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”.
The significance of Diag Human SE & Anor v Volterra Fietta (Re Assessment Under Part III Solicitors Act 1974) [2023] EWCA Civ 1107 confirms the strict approach of the Courts to the enforceability of CFAs and the consequences of non-compliance. Stuart-Smith LJ noted too that, while the sums in play here were substantial, “the issues that arise in this appeal are important irrespective of the sums at stake in the present case.”
“They are capable of arising in much less exalted circumstances and could be of major significance to solicitors and clients even where the sums involved are more modest by many orders of magnitude.”
The valuable lesson from the Court of Appeal being that when you are drafting a CFA, make sure you get it right. If you fail to do so, no mercy will be shown which could lead to a very expensive mistake.
You can find the full case here.
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