Blue pencils and green crayons

It is now more than a quarter of a century since I started undertaking work in the field of costs and litigation funding. The year 2000 saw a big uptick in costs work, with the advent of the Conditional Fee Agreements Regulations 2000 and the invention of the enforceability challenge.

Commonly recognised to have been a mistake, the regulations were repealed from 2005, but lingered in a sort of half life, as conditional fee agreements made under the old regulations persisted for many years afterwards.

In a nutshell, if a conditional fee agreement did not comply with the formality requirements of the governing statute or the Regulations, then the prescribed statutory penalty was unenforceability. If the conditional fee agreement was unenforceable, then for practical intents and purposes the client owed the solicitor nothing.

If the solicitor was owed nothing, then applying the indemnity principle, the most that could be recovered from a paying party on an inter partes assessment was “nothing”.  

Now many years later, enforceability arguments have never really gone away: they have simply evolved as time has gone by and the most recent case which has concerned issues of enforceability is that of Diag Human SE v Volterra Fietta (a Firm) [2023] EWCA Civ 1107 a case which involved a number of interesting points. But the underlying problem was very simple. The solicitors in the case had put in place, with their client an unenforceable conditional fee agreement.

1. The appellants are a firm of solicitors. The respondents engaged them to provide legal advice in relation to an investment treaty arbitration claim against the Czech Republic. Dr Stava is and was at all material times the controlling mind and ultimate beneficial owner of Diag Human SE [“Diag”]. In September 2017 the parties entered into a conditional fee agreement [“CFA”], which provided for the solicitors to be paid on an hourly basis but at a discounted rate for work done pursuant to the agreement, in consideration of which the solicitors would be entitled to success fees in specified circumstances.

2. 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 solicitors, however, submit that they are entitled to sever the offending success fee provisions and recover fees at the discounted rate for the work they have done; alternatively they submit that they are 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 submit that they are entitled to retain sums that the clients had paid on account of their costs.

The sums involved were significant:

7. Second, the sums in play in this appeal are considerable, with the clients’ claim against the Czech Republic being measured in billions and the fees claimed by the solicitors being measured in millions. The precise figures do not matter. That said, 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 actual retainer was described in these terms:

8. There was an initial agreement recorded in a letter dated 23 February 2017 from the solicitors and addressed to Dr Stava and Diag [“the February 2017 Agreement”]. The letter referred to Diag as the client of the solicitors. To signify agreement to its terms, Dr Stava signed the letter “for and on behalf of [Diag]”. There was an issue, which it is not necessary to resolve, about whether Dr Stava either was or became the solicitors’ client under the February 2017 Agreement.

9. The February 2017 Agreement was conventional, with the solicitors’ remuneration being based on hours worked at rates that were set out in the agreement. It provided for monthly billing and for monies to be paid on account. It incorporated the solicitors’ standard terms of agreement, to which it is not necessary to refer further. It is common ground that it was valid and enforceable.

10. In September 2017 discussions took place. It does not matter who initiated them, but it is apparent that the existing fee arrangements were giving rise to difficulty. As a result, on 6 September 2017 the solicitors issued a side letter, the contents of which give rise to this appeal, as follows:

“Dear Dr Stava

This is a side letter to the engagement letter (the “Engagement Letter”) signed between Diag Human SE (“Diag”) and Volterra Fietta. To the extent of any inconsistency between the terms of this side letter and those of the Engagement Letter, the terms of this side letter shall prevail. All terms of the Engagement Letter, to the extent not inconsistent with this side letter, shall continue in force. Terms defined in the Engagement Letter and not otherwise defined in the side letter shall bear the same meanings in this side letter as in the Engagement Letter.

1. The terms of the Engagement Letter and this side letter shall (notwithstanding anything else contained herein) apply to you personally, jointly and severally with Diag, to the extent that you are a claimant in a BIT claim brought on your behalf solely or  jointly with Diag against the Czech Republic. In the event that
we believe that there is a conflict of interest between you and Diag, we may be required to terminate our engagement with one of you.

2. The fees payable by Diag to Volterra Fietta in the first instance, to be invoiced and paid as set out in the Engagement Letter, shall be subject to a discount of 30%. This discount shall apply only to fees for work done by Volterra Fietta. It shall not apply to disbursements paid by Volterra Fietta on behalf of Diag which are re-invoiced to Diag. Nor shall it apply to fees charged by third parties for work done for Diag, whether or not this work is requested, mandated or supervised by Volterra Fietta.

3. In consideration of the discount referred to in paragraph 2, Diag shall, in the event (the “relevant event”) of an award or settlement of its investment treaty arbitration claim against the Czech Republic, or enforcement or settlement of the Final Award (the “commercial arbitration award”) issued in an ad hoc arbitration between Diag and the Czech Republic – Ministry of Health (Case No. RSP 06/2003) on 4 August 2008, or a combination of both, pay Volterra Fietta within 30 days of the relevant event additional fees as set out in paragraphs 5 to 7 (all of these paragraphs being cumulative).”

11. As foreshadowed in paragraph 3 of the side letter, paragraphs 5 to 7 set out the sums that would be payable depending on the outcome of the arbitration. Paragraphs 10 to 21 then set out how sums due were to be calculated in the event that the agreement was terminated, depending upon whether the issues of jurisdiction and merits were or were not bifurcated in the arbitration. The side letter concluded with a worked example of how the solicitors’ fees should be calculated on given assumptions including a successful outcome in the arbitration. Subsequent calculations show that the worked example produced an uplift of 280% over the solicitors’ base fees (i.e. their profit costs calculated on an hourly rate). The side letter was duly signed by Dr Stava, this time “for and on behalf of himself and [Diag]”.

12. There is therefore no doubt that, from 6 September 2017, Dr Stava and Diag were both clients of the solicitors under the agreement that was now set out in the original engagement letter of 23 February 2017 as varied by the side letter [“the September 2017 Agreement”]. Whether the September 2017 Agreement was a new agreement or a variation of the February 2017 Agreement seems to me to be irrelevant to its proper interpretation and the issues in this appeal. What is plain is that the September 2017 Agreement governed the question of fees for any and all work carried out by the solicitors from that date.

13. It was common ground before the Courts below and is common ground before us that, since the terms in paragraph 5 onwards of the side letter set out terms which were contingent on the outcome of the arbitration, the September 2017 Agreement was a CFA that was subject to section 58 of the Courts and Legal Services Act 1990 [“the 1990 Act”]. It was and is also common ground that, because the success fee was capable of exceeding 100% of base costs and because the percentage was not stated, the CFA failed to comply with the conditions required by section 58 and secondary legislation to those sections and was therefore unenforceable.

Various inventive arguments were put forward to counter this consequence of unenforceability including severance, quantum meruit etc but all failed in the teeth of a scheme of statutory unenforceability. The potentially interesting point of what unenforceability means, and whether as a term that can or should be read down to mitigate its apparent consequences, in accordance with the sort of arguments put forward during the litigation that led to Wilson v First County Trust (No 2) [2003] UKHL 40 were not in issue in this appeal, and may yet surface in another case.

But what is starkly apparent as the “take away” from this case, is to exercise extreme care, when drafting a retainer: whether that be a retainer to use in a case such as this, where millions in fees are riding on having a valid and enforceable retainer, or in the typical conditional fee agreement, used as a standard  form for hundreds or thousands of low value personal injury or other consumer disputes.

Already this year, the QOCS rules have changed for the latter type of case, and now a huge swathe of civil litigation has had fixed recoverable costs imposed on it: money claims up to £100,000 in value, with a limited number of exceptions from the scope of part 45 CPR.

An oddity is that although as far as a paying party is concerned, the presence of fixed recoverable costs will largely preclude a retainer enforceability challenge, as fixed costs can be viewed as a statutory disapplication of the indemnity principle, the focus will shift to solicitor-own client disputes, as clients are likely to have make increased provision for shortfalls in recovered costs, and therefore will have every reason to look for holes, in the retainer that they signed at the start of the case.

I predict an increase in litigation between solicitors and their former clients, as an inevitable consequence of the implementation of the fixed recoverable costs regime. Despite the case having been won for a client, gratitude is likely to be a currency in short supply.


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