Law firm loses out on $3m after CA rejects bid to sever part of CFA

Parliament: It is for legislators to change public policy, not the courts

A law firm which charged its client nearly $3m under an unenforceable conditional fee agreement (CFA) has to repay the money, the Court of Appeal has ruled.

It upheld last year’s decision by Mrs Justice Foster, which in turn agreed with Costs Judge Rowley’s ruling that it was not possible to sever the offending parts of the retainer.

The court said neither the law of severance nor public policy allowed such a step.

Lady Justice Andrews described the case as “an attempt to carve out a special regulatory regime for discounted CFAs, with potentially far-reaching consequences”.

Volterra Fietta is a London law firm that says it is the only dedicated public international law firm in the world. It acted for blood plasma trading company Diag Human in an arbitration under a bilateral investment treaty against the Czech Republic.

Diag initially entered into a retainer based on hourly rates in February 2017. It was terminated in May 2019 with Diag in substantial arrears. Then, on 7 September, Diag and its founder signed a side letter creating a new retainer that incorporated the terms of the original retainer.

Under this, Volterra agreed to discount the fees it invoiced by 30% in return for a success fee far exceeding the legally permitted 100%. It was common ground that, as a result, the agreement did not comply with the requirements for CFAs and was not enforceable.

At first instance, Master Rowley held that the success fee provisions could not be severed so as to leave an enforceable retainer allowing for Volterra to charge hourly rates at a 30% discount.

While it would be possible to create a CFA which specified a proportion of the work would be paid win or lose and the remainder only in the event of a win, the wording needed to be clear, he said – and it was not here.

He concluded, as a result, the client had no liability for the costs under that retainer and the solicitors had to repay anything received since 7 September 2017.

Foster J agreed with Master Rowley’s findings and “the process of reasoning that led to them”, a decision that the Court of Appeal upheld yesterday.

Giving the main ruling, Lord Justice Stuart-Smith said the courts below were correct to find that the change failed the legal test for severance because, by converting the retainer from a CFA into an agreement for payment on a conventional, if discounted, hourly basis, the character of the contract was fundamentally changed.

In any case, the judge said, severance here was 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 [Courts and Legal Services Act] Act is concerned with conflicts of interest giving rise to potential harm to clients.”

Stuart-Smith J went on to reject the alternative argument based on quantum meruit: “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.”

Concurring, Lady Justice Andrews described the appeal as “an attempt to carve out a special regulatory regime for discounted CFAs, with potentially far-reaching consequences”.

It was for Parliament, not the courts, to make “any further inroads into the established public policy prohibition on champertous agreements”, she went on.

“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.”

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