Unenforceable CFA: Court of Appeal Rejects Severance And Quantum Meruit Arguments As Between Solicitor And Client

Diag Human v Volterra Fietta arose from an investment treaty arbitration claim brought by Diag Human SE and Josef Stava (the clients) against the Czech Republic. The clients engaged the law firm Volterra Fietta (the solicitors) to provide legal advice and services in relation to this claim.

Relevant Background

• In February 2017, the clients and solicitors entered into a valid and enforceable conventional fee agreement.
• This was replaced in September 2017 by a Conditional Fee Agreement (CFA) that provided for discounted hourly rates for the solicitors, in return for specified success fees contingent on success in the arbitration.
• The September 2017 CFA failed to comply with requirements under section 58 of the Courts and Legal Services Act 1990, because the success fee percentage was not stated and could exceed 100%.
• As a result, the entire September 2017 agreement was an unenforceable CFA.
• By 2019, the clients had fallen into arrears in paying the solicitors’ fees under the September 2017 agreement.
• In May 2019, the clients terminated the retainer with immediate effect.
• In August 2019, the clients commenced proceedings under section 70 of the Solicitors Act 1974, seeking an assessment of the solicitors’ invoices submitted under the September 2017 agreement.
• The purpose was to establish that the clients had no liability to pay fees under the unenforceable CFA, and that sums already paid after September 2017 should be repaid.
• The parties agreed certain preliminary issues to be determined on the proper construction of the September 2017 agreement.
• Those issues then came before the Costs Judge for determination in the first instance assessment proceedings.

The solicitors argued that whilst the CFA was unenforceable 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 they were entitled to recover fees assessed on a quantum meruit for the work they have done for and at the request of their clients; and, in any event, they they were entitled to retain sums that the clients had paid on account of their costs.

At first instance before Costs Judge Rowley it was held that:

• • the entire September 2017 CFA was unenforceable for non-compliance with statutory requirements; and
  • the solicitors were not entitled to:

1. 1. 1. Sever the defective clauses and recover fees at discounted rates. This would fundamentally change the character of the agreement and was contrary to public policy against enforcement of non-compliant CFAs.
      2. Recover fees on a quantum meruit basis, as this would also undermine the public policy prohibition.
      3. Retain monies already paid by clients, as the unenforceable agreement meant no fees should have been paid. The assessment process under the Solicitors Act required repayment.

The solicitors unsuccesfully appealed to the High Court, leading to this second appeal.

Grounds of Appeal

The grounds argued by the solicitors were:

Ground 1 – The lower courts were wrong to hold severance was unavailable. Severance would not change the character of the surviving terms, relying on Aratra Potato Co Ltd v Taylor Joynson Garrett [1995] 4 All ER 695.

The solicitors’ position was that severing the non-compliant success fee provisions would not fundamentally change the character of the remaining terms, which provided for payment of fees at a discounted hourly rate.

In Aratra Potato, the court allowed severance of an unenforceable contingent fee clause but held that valid underlying contractual terms for services continued to apply.

Applying this principle, the solicitors argued that severance would remove only the defective success fee clauses, leaving intact the “surviving” discounted fee terms under which they provided services. The character of those unchanged terms would be unaffected.

As such, even after severance, the agreement would remain one for the provision of legal services at a discounted rate in return for payment. The solicitors contended this was still the essential nature of the bargain between the parties.

Ground 2 – The lower courts were wrong to hold quantum meruit was unavailable. The solicitors should still be paid for valuable services provided to the clients.

The solicitors argued that although the CFA was unenforceable, they had still provided legal services to the clients, who received the benefit of that work. If the solicitors went unpaid, the clients would be unjustly enriched. Quantum meruit should therefore apply.

In support, they relied on cases like Mohamed and Aratra Potato where quantum meruit recovery had been allowed despite unenforceable agreements. They argued public policy should not extend to denying payment where valuable services were provided in good faith.

Ground 3 – The solicitors should not have to repay sums already paid. Repayment should only follow if justified by restitutionary principles.

The solicitors’ position was that repayment should only be required if justified by restitutionary principles. In other words, the clients should have to show a restitutionary claim for recovery of the money already paid to the solicitors.

The solicitors relied on Aratra Potato, where the court held that sums paid under an unenforceable agreement did not have to be repaid unless the payee had acted unconscionably or been unjustly enriched.

Applying this principle, the solicitors argued that because they had provided legal services in good faith under the CFA, they had not been unjustly enriched by retaining payments already received. The clients received the benefit of the solicitors’ work, so there were no valid restitutionary grounds requiring repayment.

The Court of Appeal rejected all grounds and dismissed the appeal.

LORD JUSTICE STUART-SMITH:

Ground 1 – The lower courts were wrong to hold severance was unavailable.

“I would hold 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. The September 2017 Agreement, whether it was a new contract or a variation of the February 2017 Agreement, was a CFA with a substantial proportion of the solicitor’s proposed remuneration being conditional upon the contingencies outlined in paragraph 3, that being the stated consideration for the discounting of the solicitors’ normal fees under paragraph 2 of the side letter. Upon severance, it would become a conventional retainer providing simply for the solicitors to charge at a discounted rate, with no conditional element at all. The fact that severance would remove the stated consideration for the solicitors’ agreement to discount their fees emphasises the difference in the nature of the contract before and after severance – before severance the solicitors discounted their fees in return for the prospect of success fees; after severance they discounted their fees for no consideration.” [40]

Ground 2 – The lower courts were wrong to hold quantum meruit was unavailable.

“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. In Awwad the solicitors contended that they should recover fees on the basis of a quantum meruit assessment in respect of services actually rendered: see 574C. That argument was rejected by Schiemann LJ (with whom both Lord Bingham and May LJ expressly agreed on this point) at 596C-E.” [67/8]

Ground 3 – The solicitors should not have to repay sums already paid.

“In my judgment this detailed scheme leaves no room for the solicitors’ argument in the present case that sums paid on account by reference to an agreement that is held to be unenforceable shall only be repaid if the client justifies repayment on restitutionary principles. To my mind it must be irrelevant whether an item of costs is disallowed because it is unreasonable or because it is claimed pursuant to an agreement that is unenforceable. In the present case it is common ground that the solicitors’ bill should be assessed at nil. In other words, no sums at all should have been paid to the solicitors at any stage pursuant to the September 2017 Agreement.

“The consequences that would follow if Ground 3 were to succeed are startling to the point of absurdity. First, where a solicitor’s bill is reduced to below the sums already paid on account by his client because his fees are held to be unreasonable, the client would be entitled to repayment; but where a solicitor’s bill was reduced to nil because the agreement was unenforceable (on public policy grounds), the client would not.” [76/7]