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16 October 2020
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Getting Technical

Francis Kendall outlines a case that marks a return to technical challenges of CFAs

“The interests of justice require that the balance be struck between protection of the client's right to seek taxation and of the solicitor's right to recover not being defeated by opportunistic resort to technicality.” So said the then Lord Justice Ward LJ in Ralph Hume Garry v Gwillim [2002] EWCA Civ 1500.

Nonetheless, the early part of this century saw civil litigation blighted by the so-called costs war, when defendants dreamt up ever more obscure reasons as to why conditional fee agreements (CFAs) should be struck down for being in breach of the 2000 CFA Regulations amid a blizzard of satellite litigation. The government revoked the regulations in 2005, making the formalities involved in setting up a CFA far less of a trip hazard.

But we were unexpectedly thrown back to that unlamented world in August by Master James, a judge of the Senior Costs Costs Office in Global Energy Horizons Corporation v The Winros Partnership [2020] EWHC B27 (Costs), who found CFAs to be unenforceable for giving the potential of a success fee in excess of 100%. She did so with explicit reluctance, “because I think it is an old-style technical point going right back to the early days of satellite litigation under CFAs”.

The facts

Global Energy Horizons Corporation (GEHC) is a venture capital corporation involved in the oil and gas industry and instructed City law firm Rosenblatt Solicitors (RS) to bring a claim against a GEHC partner for wrongfully appropriating the company’s technology. The claim was successful and GEHC was happy with its solicitors.

But expert evidence obtained by RS valued the claim at a fraction of the (minimum) hundreds of millions that GEHC asserted it was worth; instead it was said to be worth only around $15m. “At that point, the views of GEHC and RS as to the merits of the case, were placed suddenly and greatly at odds,” observed Master James.

GEHC then brought in fellow City law firm Bird & Bird to assist as the focus of the litigation at the quantum stage shifted to patents law – RS said its position had been made untenable and purported to terminate the retainer. GEHC said its intention was for the firms to work side by side. RS put the costs at stake at £12m; GEHC asserted that it has paid approximately £7.3m in respect of RS’s fees to date, as against approximate base costs incurred during the retainer of £5.6m.

There were a lot of different and interesting issues discussed in her decision, but in this article I am just focusing on the CFAs. Master James was asked to deal with the preliminary issues of whether the three CFAs were valid and whether RS (as the defendant was described throughout) was entitled to terminate CFA2. The Winros Partnership is a law firm based at RS’s offices in London.

Master James, who eventually found for GEHC on every point, noted: “If GEHC prevails on either of the preliminary issues, any fees as yet unpaid to RS will remain unpaid, and any already paid will have to be disgorged back to GEHC. As such, this is clearly a case in which the costs of the costs could rival the costs of the underlying litigation.”

CFA1 was designed to cover the costs of preparing a letter of claim and attending a mediation, CFA2 covered the claim and CFA3 was signed to cover the quantum phase. Each agreement included payment of an ‘advance fee’ – of CAN$315,000, £1m and £300,000 respectively – which RS would retain win or lose but which would be credited against the fees due under the CFA in the event of winning.

GEHC argued that the advance fee created a situation whereby early settlement of the claim would lead to RS receiving and retaining fees which would exceed the sum of double the base costs incurred to that point. As such, the success fee, being the difference between the fees which would in fact be billed, and the time ‘on the clock’, would be in excess of 100%, in breach of section 58(4)(C) of Courts and Legal Services Act 1990.

In response, RS stated that, even were this not a CFA case, it would have required a payment on account on or at a sum approaching the level of the advance fees, and that the reality was that the success fee under these CFAs was never going to be more than 100% - the fact that costs for each CFA exceeded the level of the advance fee was evidence of this, it said.

The ruling

What actually happened was less important than what the CFAs said. Master James said: “The simple fact is that the CFAs were poorly drafted insofar as they said two conflicting things. They stated that the Advance Fee would be credited against future billing, but they also stated that the Advance Fee would belong to RS, win or lose. The latter is in my – reluctant, because I think it is an old-style technical point going right back to the early days of satellite litigation under CFAs– opinion, fatal to CFAs 1, 2 and 3.”

The fact the advance fee would have been credited against any billing greater than the amount thereof in the event of an early win missed the point, the judge continued. “As a question of fact, the Advance Fee… meant that RS would never have rendered a final bill lower than the amount of the Advance Fee, even if the matter had settled at an early point where time spent/work done, plus success fee, plus disbursements, came to less than the Advance Fee at that time.

“The assertion that RS would have kept £1m under CFA2 if they had lost at an early stage, but would not have claimed that sum if they had won (or secured a settlement) at an early stage is not only unlikely in the extreme, it is not what the CFAs themselves provide for and I do not accept that ex post facto justification (for such it is) for the flawed CFAs entered into in this matter.”

The key question was whether the CFAs as drawn “could potentially lead to a claim that (in effect) was in excess of 100% success fee, rather than upon a forensic dissection of whether, on a hypothetical end date, the claim was ever actually in excess of 100%”. Master James ruled that they could and so the CFAs were invalid due to breach of section 58(2)(b).

There was another interesting CFA-related ruling in the case. RS did not achieve a ‘win’ under CFA1 but gave CFA2 retrospective effect to cover the same period as CFA1. The master said RS purported to claim a success fee on the mediation costs under CFA2 and asserted that it was in GEHC’s best interests. She said: “RS have overreached themselves, and certainly left GEHC’s best interests in their rear-view mirror, in redefining a ‘loss’ under CFA1 as a ‘win’ under CFA2.

“I disagree with GEHC’s view that the only advice that GEHC could properly have been given about the handover from CFA1 to CFA2 was that the costs under the former should be written-off for good, but certainly the advice that should properly have been given was that, pursuant to the ‘loss’ under CFA1, RS was only entitled to its fees up to the limit of the CAN$315,000 Advance Fee; in not giving this advice, I agree with GEHC that RS favoured its own interests over its client’s.”

Master James went on to find that GEHC was advised that CFA2 had come to an end when it had not, and entered into CFA3 as a result. Thus, if CFA2 was terminated, it was terminated wrongfully and/or CFA3 was entered into as a result of that misrepresentation that CFA2 had ended, and so was “tainted”. She ruled too that CFA3 was wrongfully terminated because RS “invoked a repudiatory breach that did not (based upon the evidence) constitute its reason for ceasing to act”.

The consequences

CFAs attracting a right to recover success fees are, of course, almost a thing of the past – this is not an issue anyone to be concerned about if entering into a CFA at this point in time. Those in existence are what they are and we can see from this case that seeking to amend or replace them with a new version was part of the problem. The client, presumably, willingly entered into the retainer at the time but it is for the solicitors, probably correctly, to bear the brunt of its defects.

What might look like a robust decision by Master James was made in the knowledge that it had far less industry wide implications than those made in the original costs wars. It does, however, highlight the need for lawyers to ensure that retainers, of whatever nature, are robust and watertight. There is no reason why such principles should not apply to standard retainers, damages-based agreements and/or the position of litigation funding moving forward. If it is wrong, it is unenforceable and that burden is never going to be on the client.

Ends

This articles first appeared in Litigation Funding in October 2020.  Written by Francis Kendall, Vice-Chairman of the Association of Costs Lawyers.

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