4 August 2022

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High Court upholds ruling that unlawful success fee could not be severed from CFA

Judge also agrees that law firm has to return fees paid under agreement where nearly $3m had been billed

It was not possible to sever part of a retainer that provided for an unlawful success fee so that the hourly charging element could survive, the High Court has ruled.

Mrs Justice Foster upheld the decision of Costs Judge Rowley that a law firm which had nearly $3m in fees tied up in the conditional fee agreement (CFA) has to return whatever it had been paid.

London law firm Volterra Fietta acted for Luxembourg company Diag Human in an arbitration under a bilateral investment treaty against the Czech Republic. The original retainer in February 2017, based on hourly rates, was terminated in May 2019 with Diag “in substantial fees arrears”.

However, on 7 September 2017 – by which time the law firm had billed $107,000 – Diag and its founder Josef Stava signed a side letter creating a new retainer that incorporated the terms of the original retainer so far as they were consistent with it.

Under this, Volterra agreed to discount the fees it invoiced by 30% in return for a success fee far exceeding the legally permitted 100% – an example produced to show the workings of the agreement produced a figure of 280%.

It was common ground that, as a result, the agreement did not comply with the requirements for CFAs and was not enforceable.

Volterra sought to sever the success fee provisions so that it could charge hourly rates at a 30% discount but Master Rowley rejected the proposition.

Doing so would remove “all of the conditionality in the agreement”, he explained. “Whilst Mr Volterra said that he was quite happy to remain with the original hourly rates contract, his price for agreeing to reduce the upfront fees was the possibility of a considerable upside in the event of success.

“Now it has become clear that the agreement has fallen foul of the legislation, it cannot be an appropriate driver for Volterra Fietta to seek to forego that potential upside at this point simply in order to prevent a worse outcome.”

He also rejected the severance contention on public policy grounds, holding that, contrary to the law firm’s submissions, there had been no shift in the public policy position concerning contingency fee agreements and the legal professions.

Master Rowley acknowledged that 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, but said the wording needed to be clear to achieve this. Here it was not.

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.

The law firm challenged the findings on multiple grounds, arguing that the judge had misapplied the case law. But Foster J upheld Master Rowley’s findings and “the process of reasoning that led to them”.

She said the side letter was a new agreement, rather than a variation of the original retainer, and the clauses which Volterra sought to sever “formed the very essence of the contract”.

As well as agreeing with Master Rowley’s interpretation of the relevant case law, Foster J held public policy had not developed as submitted such that it would permit severance in this case. To do so would “allow virtually all defective CFAs or [damages-based agreements] to be put right late in the day”. This would also undermine consumer protection and the administration of justice.

“That there may be hybrid agreements where an element survives is clear from both Zuberi and from Garnat but in neither was it a case of a ‘mere’ split between two forms of payment. The public policy proscription is against ‘continuing to act for a client under a conditional fee arrangement’ (see Schiemann LJ in Awwad) i.e. what policy seeks to prevent is working under a retainer that is champertous.

“That policy holding is untouched by Zuberi. The underlying work is here common to both ‘parts’ of the agreement and ‘the work’ would still be undertaken under a champertous agreement. In Garnat, by contrast it would not: ‘the work’ there was of two separate types. Again, in my judgement the master was correct to reject Mr Bacon QC’s arguments on behalf of Volterra.”

Foster J also agreed that the sums paid had to be returned: “The agreement in issue here, is unenforceable; it cannot therefore found a claim which allows for payment received under part of it, to be retained. In my judgement no claim for restitution is necessary as a precursor to recovery of sums paid under the unenforceable agreement.”

Master Simon Brown, who sat with her as an assessor, agreed with her conclusions.

Jamie Carpenter QC (instructed by Mishcon de Reya) for the respondents/claimants. Nicholas Bacon QC and Simon Teasdale (instructed by Saunders Law) for the appellant/defendant.