When a CFA is not a CBA

One of the more esoteric varietals of retainer that a solicitor may make with a client is a contentious business agreement (CBA). Many solicitors will be unfamiliar with this mode of retainer: if you can charge a client on a conventional privately paid retainer, with fees calculated on hourly rates, or if you have to charge a client on the basis of a conditional fee agreement (CFA), why would you need to worry about such things?

The element of worry, however, arises from the fact that for many years there has been a school of thought that all CFAs are CBAs, or potentially so. Given that the existence of a CBA goes a considerable way to ousting the detailed assessment regime that would otherwise apply to solicitor-own client costs disputes under section 70 of the Solicitors Act 1974, the point has some significance.

In a case decided last year, that of Acupay System LLC v Stephenson Harwood LLP SCCO 25th June 2021 Costs Judge Leonard one of the principal issues that the court had to consider was whether the retainer made in the form of a CFA, was in fact a CBA, despite a clause in the agreement stating that the parties agreed that it was not a CBA.

The factual context of the case was otherwise unremarkable.

1. These proceedings started as an application under Part 8 of the Civil Procedure Rules (CPR) for the detailed assessment of five bills rendered by the Defendant to the Claimant between 29 January 2020 and about 27 May 2020. The January 2020 invoice was part paid: the rest are wholly unpaid. The total unpaid balance of the bills is £339,613.75.

The Learned Judge faithfully directed himself on the appropriate law identifying the correct legal framework, derived from the Solicitors Act 1974:

58. The Solicitors Act 1974, at section 59(1), provides that:

“…a solicitor may make an agreement in writing with his client as to his remuneration in respect of any contentious business done, or to be done, by him (in this Act referred to as a “contentious business agreement” ) providing that he shall be remunerated by a gross sum or by reference to an hourly rate, or by a salary, or otherwise, and whether at a higher or lower rate than that at which he would otherwise have been entitled to be remunerated.”

59. Sections 60 and 61 of the 1974 Act make general provision for the effect and enforcement of contentious business agreements. Section 60(1) provides that the costs of a solicitor in any case where a CBA has been made shall not be subject to assessment.

60. This is subject to the provisions of other sections of the 1974 Act, including section 61. The pertinent provisions of section 61, for present purposes, give the court, if of the opinion that the CBA is in all respects fair and reasonable, the power to enforce it; or if the court is of the opinion that the CBA is in any respect unfair or unreasonable, the power to set it aside and order the costs covered by it to be assessed as if it had never been made.

61. I should mention (as it has some bearing on the issues I have to consider) that section 61 also provides that where the agreement provides for remuneration by reference to an hourly rate, and the client is not alleging that it is unfair or unreasonable, the court may enquire into the number of hours worked by the solicitor and make a finding as to whether those hours are excessive.

The contention put forward by the paying party, was that the CFA was a CBA: notwithstanding the term to the contrary, which if well founded would enable the court to set aside the CFA. Initially it had been the paying party’s belief that this would lead to the non payment of any costs: but that is not a scenario catered for under the Solicitors Act 1974, which instead imposing a sanction of unenforceability, simply gives the court the power to assess the costs. The paying party’s case was developed along these lines:

65. Solicitors cannot contract out of the 1974 Act, or thereby seek to deprive clients of the protection that the Act provides: Martin Boston & Co v Levy [1982] 1 WLR 1434, at (in particular) 1440 F.
66. In oral submissions Mr Marven referred me to two important authorities. The first is Street v Mountford [1985] A.C. 809 and the famous dictum of Lord Templeman concerning the distinction between a lease and a licence:
“Both parties enjoyed freedom to contract or not to contract and both parties exercised that freedom by contracting on the terms set forth in the written agreement and on no other terms. But the consequences in law of the agreement, once concluded, can only be determined by consideration of the effect of the agreement. If the agreement satisfied all the requirements of a tenancy, then the agreement produced a tenancy and the parties cannot alter the effect of the agreement by insisting that they only created a licence. The manufacture of a five-pronged implement for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make and has made a spade.”

Referring to further authority, the Learned judge noted:

67. The second is Wilson v The Specter Partnership [2007] EWHC (Ch), [2007] 6 Costs LR 802. In Wilson Mr Justice Mann considered whether an agreement between solicitor and client was a CBA. He concluded it was not, but only after rejecting the approach of a district judge who had decided that it was not, because it did not describe itself as such. He also made some observations that demonstrate just how wide is the ambit of section 59(1) of the 1974 Act:
“I turn therefore to the question of the district judge’s decision as to whether the relevant agreement was indeed a CBA… His main reason is that it was not referred to anywhere as being a CBA. With respect, I do not think that that is necessarily relevant, and it is certainly not determinative. What matters is substance, not form. If the agreement fulfilled the criteria for a CBA then it would be one whether or not the parties labelled it as such. So far as it is part of his reasoning that the agreement does not indicate that…” (the solicitor) “…could be remunerated at a greater rate than normal, then that is both wrong and irrelevant. The agreement does provide for remuneration at a greater rate than normal in a difficult or complex case, and in any event it is a misreading of the section to suggest that such a departure from the norm is of the essence of a CBA. In referring to the possibility of a higher or lower charging rate than normal, what the section is doing is extending its ambit to include those cases, not confining its ambit to those cases”.
68. As to whether the CFA was fair and reasonable, in Re Stuart ex p Cathcart [1893] 2 QB 201, 204-205 Lord Esher MR set out the appropriate test (applied in Bolt Burdon Solicitors v Tariq [2016] EWHC 811 (QB), [2016] 2 Cost LR 359):
“With regard to the fairness of such an agreement, it appears to me that this refers to the mode of obtaining the agreement, and that if a solicitor makes an agreement with a client who fully understands and appreciates that agreement that satisfies the requirement as to fairness. But the agreement must also be reasonable, and in determining whether it is so the matters covered by the expression “fair” cannot be re-introduced. As to this part of the requirements of the statute, I am of opinion that the meaning is that when an agreement is challenged the solicitor must not only satisfy the Court that the agreement was absolutely fair with regard to the way in which it was obtained, but must also satisfy the Court that the terms of that agreement are reasonable. If in the opinion of the Court they are not reasonable, having regard to the kind of work which the solicitor has to do under the agreement, the Court are bound to say that the solicitor, as an officer of the Court, has no right to an unreasonable payment for the work which he has done, and ought not to have made an agreement for remuneration in such a manner.”

The caselaw noted above, is longstanding and sets the parameters of how the tests of fairness and reasonableness are applied when the court considers whether to set aside a contentious business agreement, and also that they are not to be elided: fairness and reasonableness not only denote different tests, they also address different issues, including the formation and content of any contentious business agreement.

The paying party structured its argument accordingly:

69. Here, says the Claimant, the CFA was manifestly unfair in the mode in which it was obtained and unreasonable in its terms.

Breaking down the argument, the following points were noted about the way the agreement was made:

70. As to the mode of obtaining the agreement, at the time when the CFA was proposed, the Claimant was already a client of the Defendant. By the time it came into effect, the Claimant had paid to the Defendant over £500,000 and the Defendant had become the Claimant’s most highly paid, most important and most trusted legal adviser, whose recommendations were always followed.

The argument traverses the same territory as the case of Belsner, now due to be heard in the autumn of 2022, having been adjourned once, due to the concerns of the Master of the Rolls, and then adjourned again, when Covid struck down counsel in the case. Fiduciary duties and their deployment in costs disputes are likely to prove fertile ground for argument, both in Belsner and afterwards. In particular an issue that may prove important, is whether a solicitor is negotiating their fees with someone who is not a client, set against the solicitor who renegotiates their fees, during the middle of a retainer and to what extent the duties may be different: or even non existent in the first scenario. Paragraphs 71 to 81 of the judgment repay careful study, as they illustrate how such an argument can be developed. 

71. On well-established principles, there was, at the time the CFA was signed, a fiduciary relationship between the Claimant and the Defendant (Snell’s Equity, 34th edition, paragraph 7-004). Accordingly the Defendant was under a strict duty of loyalty to the Claimant. One aspect of that duty was that the Defendant was not permitted to put itself in a position where its duty to the Claimant and its own interest conflicted, (Snell paragraph 7-018). When the Defendant proposed the CFA, it did just that.

72. The requirement to avoid a conflict of interest, as imposed by fiduciary duty, can only cease to apply where the solicitor obtains the client’s fully informed consent (Snell paragraph 7-019; Surrey v Barnet and Chase Farm Hospitals NHS Trust [2018] EWCA Civ 451, [2018] 1 WLR 5831, at paragraph 61). Informed consent must include “a full and fair exposition of the factors relevant” to the decision to be made (MacDougall v Boote Edgar Esterkin [2001] 1 Costs LR 118, at paragraph 8).

73. Here, nothing close to fully informed consent was obtained. The requirement for fairness, including the requirement for informed consent, required at least adequate advice on the following matters.

74. A full explanation and analysis of the costs position was needed, including anticipated future costs. This was wholly lacking and that meant that the Claimant was not in a position to make an informed decision about any change in the costs arrangements between the parties. The Claimant complains in particular that at the time the CFA was signed, the Defendant had failed to provide adequate advice as to the desirability of a split trial arrangement that could have reduced costs payable by some £17 million.

75. Equally, a full explanation of all the alternatives available to the Claimant should have been given. If the retainer arrangements were to change, there were of course a whole range of options as to type and structure of future arrangements, and the level of charges to be applied, but none of this was discussed.

76. In circumstances where litigation was well under way and the Defendant had been operating on the terms set out in the retainer for a year, the Claimant should have been advised that the Defendant had no right, or alternatively that any asserted right was doubtful, to refuse to continue to act on those retainer terms. The Defendant had no ‘good reason’ to terminate the existing retainer (Richard Buxton Solicitors v Mills- Owens [2010] EWCA Civ 122, [2010] 1 WLR 1997 at paragraph 40), and if the Defendant had done so it would have been contrary to its professional obligations.

77. A full explanation of the effect of the CFA was needed, including the basis on which the so-called discounted and standard charges were set; the fact that the rates payable by the Claimant in any event actually increased immediately; the definition of success; and the justification for a definition which meant that a financial result ruinous to the Claimant would constitute success.

78. If the Claimant had been properly informed, it would obviously have been open to the Claimant to seek to negotiate both the structure and the level of charges under the CFA, as well as its other terms; or to contend that there should be no change at all to the pre- CFA arrangements.

79. Further, the Claimant submits, in at least one important respect the Defendant positively misrepresented the position when Ms Prince said that the effect of the CFA was that the Claimant would continue to pay the pre-CFA rates.

80. At the time the CFA was signed, the Claimant had been charged at pre-CFA rates for an entire year. Contrary to the suggestion in the original retainer letter there had been no attempt by the Defendant to change those rates after three months.

81. The CFA was, accordingly, wholly to the Defendant’s advantage with no value at all to the Claimant. The post-CFA “discounted” rates invoiced by the Defendant and paid by the Claimant were about 11% higher than the pre-CFA rates.

Ultimately this argument did not succeed, in particular because the Learned judge took a forensic approach to the question of informed consent. Informed consent, usually vitiates any charge that someone has acted in breach of a fiduciary duty cf the secret commission cases. Informed consent can be demonstrated by the taking of independent legal advice upon a point, but it is not the only way to demonstrate such consent. 

125. The Claimant’s complaint that the Defendant did not do enough to ensure that the Claimant had the opportunity to obtain independent legal advice seems to me to go to the question of whether the CFA was fair, meaning whether (Re Stuart ex p Cathcart) the “mode of obtaining” it was fair.

126. To be precise, the Claimant’s case as put in the Amended Particulars of Claim is that the Defendant obtained through the CFA a financial advantage over the Claimant, as a result of which the Defendant was under an obligation to advise the Claimant to seek independent legal advice, given the conflict of interest that arose or was likely to arise: and that Ms Prince’s two suggestions on 5 July 2019 fell short of a clear direction to seek independent legal advice.

127. Having heard submissions on fiduciary duty, before I address the facts of the case I should explain certain conclusions that I have reached on the applicable principles. The first is that I bear in mind Mr Carpenter’s warning that the tests to be applied are fairness and reasonableness, and we have the guidance of Re Stuart ex p Cathcart on how those tests are to be applied. One must avoid imposing a gloss on that guidance.

128. I have concluded that questions of informed consent or breach of fiduciary duty may well be relevant on reaching a conclusion as to whether a CBA is unfair. One must however not lose sight of the fact that the issues are fairness and reasonableness, or of the Re Stuart ex p Cathcart guidance on how those issues are to be determined. Informed consent and breach of fiduciary duty are distinct concepts. So, for example, in considering breach of fiduciary duty, the fairness or otherwise of a given transaction is generally not a relevant consideration (Snell, at 7-018). It follows that any breach of fiduciary duty cannot be determinative of the issue of fairness.

129. The second is this. It is common ground, in this case, that by August 2019, the Defendant as solicitor owed fiduciary duties to the Claimant as its client. I would, accordingly, accept Mr Marven’s argument to the effect that, insofar as negotiating and entering into the CFA at that point represented a potential conflict of interest between the Claimant and the Defendant, then any breach of fiduciary duty on the Defendant’s part could be avoided by ensuring the Claimant’s fully informed consent to the new retainer arrangements.

130. What I do not accept was that that, of necessity, required that the Defendant advise the Claimant to take independent advice, much less that the Defendant insist upon the Claimant doing so. That is the case notwithstanding that a fiduciary relationship did exist. In explaining that conclusion I will focus on those cases where a solicitor/client relationship already existed, although the fact that there was no suggestion of any need for independent advice in MacDougall v Boote Edgar Esterkin, and a positive finding in Bolt Burdon Solicitors v Tariq that there was no such requirement, does seem to me to be relevant.

An interesting diversion was made into Kai Surrey: although this was an inter partes case, with different dynamics, Lewison LJ had also drawn on equitable principles when formulating his conclusions in that case.

131. In Surrey v Barnet and Chase Farm Hospitals NHS Trust the Court of Appeal had to determine whether additional liabilities incurred by three claimants who had been persuaded by their solicitors to substitute a CFA for legal aid funding, had been reasonably incurred. The Court concluded that they had not, because the advice given to the claimants had exaggerated (and in two cases misrepresented) the disadvantages of remaining with legal aid funding, and had omitted entirely any mention of the disadvantages of entering into a CFA.

132. In addition, the solicitors benefited from the CFA in earning a success fee that would not have been earned had legal aid funding continued. Lewison LJ accepted (as had the District Judge at first instance) that where one of two or more options available to a client is more financially beneficial to the solicitor, there is a particular need for transparency. It was in that context that Lewison LJ referred (at paragraph 61) to the
“…fundamental principle of equity that where a person stands in a fiduciary relationship to another, the fiduciary is not permitted to retain a profit derived from that fiduciary relationship without the fully informed consent of the other…”

133. What Lewison LJ did not say, and what (to the best of my knowledge) has never been suggested in any of a clutch of similar cases concerning changes of funding from legal aid to CFAs, is that independent legal advice is a prerequisite to informed consent. The obligation upon the solicitor is rather to ensure that the client is fully and properly advised. Referring the client to an independent advisor may be one way of achieving that, but it does not follow that an absence of independent advice equates to an absence of informed consent.

The Learned judge moved onto consider the consequences of a CBA if one existed:

166. I start with the observation that the prescribed effect of a CBA is to limit a client’s statutory right to challenge a solicitor’s costs. Even where the CBA provides for payment by the hour, the client can challenge only the hours worked; an hourly rate that might otherwise be judged irrecoverable will be beyond challenge if the CBA is fair and reasonable.

167. This could have significant disadvantages for a client. For example, a perfectly fair and reasonable Non-Contentious Business Agreement, in Bolt Burdon Solicitors v Tariq, allowed a solicitor to be paid £821,045.06 for work to the value of £50,000. Mr Tariq, by virtue of entering into the agreement, had sacrificed the statutory right to a detailed assessment which would probably have limited the solicitor’s remuneration to the lower amount.

168. I do not suggest that a CBA will always be to a solicitor’s advantage. At the very least, however, one would hope that the parties to a contract of retainer would be free, as Mr Carpenter submits, to choose which of the two mutually exclusive statutory regimes offered by section 59(1) and section 70 of the 1974 Act will apply.

He also unpicked the argument that the parties had, effectively, on the paying party’s interpretation, a CBA  imposed upon them, come what may, by the provisions of the Solicitors Act 1974:

169. The logical conclusion to be drawn from the Claimant’s submissions is that any contract of retainer that is sufficiently certain and meets the very wide criteria provided for by section 59(1) will be a CBA, even if the agreement purports to choose the section 70 regime, and to preserve the client’s full rights to challenge bills, by saying that it is not. The client’s rights to challenge the solicitor’s costs will be at best limited and at worst non-existent unless the agreement is unfair or unreasonable. Whether the parties want that, or agree it, is irrelevant. That is not, on its face, an attractive proposition.

170. Mr Marven has attempted to meet that concern by suggesting that where an agreement says that it is not a CBA, a client could prevent a solicitor from executing a later U-turn and insisting that, by virtue of meeting the section 59 criteria, it is. He has also (in the course of other submissions) offered an example of how the CBA regime might benefit a client by arguing that if the CFA in this case were to be set aside, then the consequence would be that all costs rendered by the Defendant pursuant to the CFA would fall to be assessed, even if the time limits prescribed by section 70 have expired.

171. I tend to agree that a solicitor who enters into an agreement with a client that says it is not a CBA would be in some difficulty in subsequently attempting to gain an advantage over the client by saying that it is. Surely, however, the same must apply in reverse. Either the wording of the agreement binds both parties, or it binds neither of them. If anything, this argument militates against the Claimant’s attempt to gain an advantage in this particular case by characterising the CFA as a CBA, when it has agreed that it is not.

172. It would seem to follow that, on the Claimant’s case, in very many contentious retainers a solicitor and client could ensure that they choose the section 70 regime over the CBA regime only by avoiding a written retainer or making its terms sufficiently uncertain.

173. Again, that does not seem to me to be an attractive conclusion. As a matter of policy, to ensure that professional standards are met and in the interests of clients generally, it is plainly desirable to ensure first that retainers are in writing, and second that the terms of those retainers are as clear and certain as possible.

174. I appreciate, as Mr Marven says, that if that is the effect of section 59(1) then that is its effect, whether the consequences are attractive or not. I do not think, however, that it is.

175. I agree (in fact it is not in issue) that the terms of the CFA are consistent with its being a CBA, with the notable exception of an express provision to the effect that it is not. I have, accordingly, given much thought to whether I am bound, following Wilson v The Specter Partnership, to reach the conclusion that it is a CBA, because the fact that it incorporates a provision to the effect that it is not a CBA is not determinative, or even relevant.

176. I have concluded that I am not so bound. Mann J’s finding appears to me to have been that the mere fact that an agreement does not say that it is a CBA does not prevent it from being a CBA. He did not address the question of whether it is a CBA even if it says in express terms that it is not. (Nor, for that matter, did the Court of Appeal in Hollins v Russell). In Healys LLP v Partridge [2019] Costs LR 1515 Kelyn Bacon QC (as she then was) was clearly open to the conclusion that a specific provision to the effect that a CFA is not a CBA could be determinative, although she did not have to decide the point.

He decided that the Solicitors Act 1974 permits the two regimes of privately paid costs charged by hourly rates, or a CBA, which might provide for fees to be paid on a different basis, to subsist in parallel:

177. It seems to me that the provisions of section 59(1) of the 1974 Act are permissive, rather than prescriptive. A solicitor is at liberty to make an agreement in writing with a client which will qualify as a CBA. Section 59(1) provides that it may take many forms; in fact just about any renumeration arrangement seems to be covered, subject to certain exceptions of policy provided for in section 59(2) and elsewhere.

178. It does not seem to me necessarily to follow that any written agreement providing for remuneration within the wide range of options provided for by section 59(1) must be a CBA, even if the agreement says that it is not. Section 59(1) does not say that, and I see no basis for importing those words into it.

179. It is not in dispute that a party cannot contract out of the provisions of the 1974 Act. However, as Mr Carpenter says, that is not the issue. The issue is whether the parties have agreed to be bound by one or other of two mutually exclusive costs regimes provided for by the 1974 Act. To decide that, one must look to the terms of the agreement. A provision to the effect that the agreement is not a CFA will not merely be a matter of form. It will go to the substance of the agreement.

180. As for Street v Mountford, as I understand it the point addressed was that if an agreement for the occupation of property meets certain criteria then it must, in law, be a tenancy. Describing it as a licence will not change that. The same principle would apply if section 59(1) specified that every agreement that falls within the permitted arrangements for a CBA must be a CBA, but as I have observed the section does not say that.

181. As Mr Carpenter says, the characteristics that may make a solicitor’s contract of retainer a CBA can also be characteristics of a non-CBA retainer. A clear statement of the party’s intentions may be the only sensible basis on which one can distinguish one from the other.

182. For those reasons, my conclusion is that the CFA is not a CBA.

It may be that most CFAs, will contain an express clause that the agreement is not a CBA: that will likely prove decisive. Even where no such clause is present, as the case foreshadows, even if it can be argued that an agreement is a CBA, then the hurdles of fairness and reasonableness must be passed, before it will be set aside. And even then, the costs subject to the CBA will still be subject to assessment.

However, as there is no sign, of any rationalisation of the statutory regime governing how solicitors charge and bill for costs, imposed by the Solicitors Act 1974, clunking with history and laden down with baggage from the Dickensian era as it is, CBAs will be with us a while yet.

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