Nine Hands Cutting

One of the more interesting (and potentially useful) arguments in the recent case of Diag Human SE v Volterra Fietta (a Firm) [2023] EWCA Civ 1107 concerned the doctrine of severance. When an issue of enforceability arises in respect of a conditional fee agreement, or other retainer subject to a statutory regulatory regime which prescribes a sanction of unenforceability for breach, the question arises as to whether it is possible to use severance to remove the offending clauses which create the issue of enforceability, and to continue with the remaining agreement.

The doctrine of severance at common law was described in the judgment of the Court of Appeal these terms:

28. It is not necessary to examine the origins and development of the three-stage test for severance. It is sufficient that in Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613, [2007] ICR 1539 at [40] Maurice Kay LJ (with whom Sir Anthony Clark MR and Carnwath LJ agreed) approved the test in the following terms:

“… a contract which contains an unenforceable provision nevertheless remains effective after the removal or severance of that provision if the following conditions are satisfied: 1 The unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains. 2 The remaining terms continue to be supported by adequate consideration. 3 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 should be noted that the doctrine of severance (and hence the above test) is usually applied where issues of enforceability arise at commonlaw: typically contracts in restraint of trade. Thus the next case that the Court of Appeal considered:

31. The Beckett three-stage test was approved in Egon Zehnder Ltd v Tillman [2019] UKSC 32, [2020] AC 154, which was another case involving covenants in restraint of trade in an employment contract after the employee’s employment had finished. The clause that was the subject of the appeal provided that she could not “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses” of the claimant for a six-month period after the termination of her contract. The Supreme Court, in a judgment given by Lord Wilson (with whom the other Justices agreed) held that, on the assumption that the word “interested” in the restrictive covenant purported to restrain the claimant from holding shares in the specified businesses, it was an unreasonable restraint of trade. The Court endorsed the Beckett three stage test and held that severing the words “or interested” would not generate any major change in the overall effect of the restraints. Accordingly, severance was ordered. In the course of his judgment, Lord Wilson made observations on all three stages of the test.

32. In addressing the first stage, Lord Wilson recognised that the requirement that it should be possible to take a “blue pencil” to the text without adding to or modifying the wording of what remains can act capriciously and arbitrarily. However, he regarded the requirement as settled law and inherent in the word “severance” itself. He regarded it as a significant but “appropriate brake on the ability of employers to secure severance of an unreasonable restraint customarily devised by themselves.”

The second consideration, explored in the judgment, provided some interesting comments on the question of consideration, often the overlooked requirement of a contract, in a post Williams v Roffey -world:

33. Turning to the second stage, Lord Wilson said at [86]:

“The second criterion is that “the remaining terms continue to be supported by adequate consideration”. It goes without saying that an employer who sues on a covenant made otherwise than under seal must show that he provided consideration for it. But why is it said to be a prerequisite of his ability to sever? The answer is surely to be found in the unusual circumstances of the Sadler and Marshall cases, which generated the criteria adopted in the Beckett case. In those two cases it was the claimant employee who secured severance of unreasonable obligations cast by the contract upon himself. In that situation the court needed to satisfy itself (and in each case it did so) that, were his unreasonable obligation to be removed, there would nevertheless remain consideration passing from him under the contract such as would support the obligation which he was seeking to enforce. In the usual post-employment situation, however, the need to do so does not arise. A claimant employer who asks the court to sever and remove part of a covenant made by the defendant employee is in no way proposing to diminish the consideration passing from himself under the contract such as is necessary to support the obligation which he seeks to enforce. In the usual situation the second requirement can be ignored.” [Emphasis added].

The principles explained above were then applied to defeat a claim of severance. But this could be viewed as taking the long way round, for reasons I shall explain in a moment:

40. Applying these principles, 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 originallyentered. The September 2017 Agreement, whether it was a new contract or a variationof 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   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. The present case cannot be moulded so as to be analogous to either Beckett or Tillman: there is no question of severing one part of the provisions for conditional fees and leaving the rest in place since that would be an exercise in futility: the character of the contract would remain that it was an unenforceable CFA.

But there is another simpler reason why severance does not work, a much shorter way to the same conclusion in the case of a retainer liable to a regime of statutory unenforceability. It just doesn’t work for reasons of public policy!

62. Even if I were wrong in this conclusion, I would hold that severance is precluded as contrary to public policy. 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. Nor is it any answer to submit that there is no disadvantage to the client in enforcing the discounted fee element in respect of work carried out for and at the client’s request. The regime imposed by the 1990 Act is concerned with conflicts of interest giving rise to potential harm to clients: see Garrett per Dyson LJ at [38]-[39].

The takeaway from this case, is that when dealing with big money litigation, it matters not how much time is spent, expertise deployed, or result achieved, if the retainer upon which the solicitor’s right to be paid for that time, expertise and performance is unenforceable.

Over the years, I have fought umpteen enforceability battles, at enormous expenditure of time and cost, most of which could have been avoided by spending a fraction of the sums at stake, in ensuring the retainer is properly drafted at the outset.

But human beings do not think that way: we are hard wired to discount risk in this context, and thus I predict the cases will continue to arrive on enforceability issues, for the foreseeable future.

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