Be careful when preparing your CFA agreement – mistakes can be costly!

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Follow the link for another tale of woe and warning for solicitors when drawing up agreements.

(1) DIAG HUMAN SE (2) MR JOSEF STAVA v VOLTERRA FIETTA (A FIRM) Neutral Citation Number: [2022] EWHC 2054 (QB)

This was an appeal against the decision of Master Rowley made on 17 December 2020 and a consequential decision on 19 March 2021. The matter arose from proceedings under the Solicitors Act 1974 and issues which arose at the start of proceedings in respect of a bill of costs dated 3 December 2019 regarding costs incurred from 6 September 2017.

The Defendants were retained as solicitors in relation to a previous arbitration award that had been made in favour of the First Claimant (“Diag”) which remained unsatisfied as against the Czech Republic. The amount claimed in the arbitration was about $2.4 billion, made up of the sum in question, interest and additional losses.

A retainer in respect of the work had been entered providing for payment by reference to hourly rates and the terms were set out in a letter from Defendant to the Second Claimant, Josef Stava (“Mr Stava”) dated 23 February 2017.

The Engagement Letter indicated that the contract was between Diag and Volterra. In late 2018 or early 2019, the Claimants were in substantial fees arrears to Volterra, and the Firm found it difficult to continue acting, accordingly, on 29 May 2019, Mr Stava emailed Mr Volterra to terminate the Firm’s retainer on behalf of the Claimants, with immediate effect.

On 6 September 2017 a Side Letter had been written stating that a new retainer was created which incorporated the terms of the Engagement Letter insofar as not inconsistent, and Mr Stava was expressly made a party to this new retainer. The Side Letter was signed by both Mr Volterra, the senior partner of the Firm, and Mr Stava.

Included within the side letter were the following:

The fees payable by Diag to Volterra Fietta in the first instance, to be invoiced and paid as set out in the Engagement Letter, shall be subject to a discount of 30%. This discount shall apply only to fees for work done by Volterra Fietta. It shall not apply to disbursements paid by Volterra Fietta on behalf of Diag which are re-invoiced to Diag. Nor shall it apply to fees charged by third parties for work done for Diag, whether or not this work is requested, mandated or supervised by Volterra Fietta

In consideration of the discount referred to in paragraph 2, Diag shall, in the event (the “relevant event”) of an award or settlement of its investment treaty arbitration claim against the Czech Republic, or enforcement or settlement of the Final Award (the “commercial arbitration award”) issued in an ad hoc arbitration between Diag and the Czech Republic – Ministry of Health (Case No. RSP 06/2003) on 4 August 2008, or a combination of both, pay Volterra Fietta within 30 days of the relevant event additional fees as set out in paragraphs 5 to 7 (all of these paragraphs being cumulative).”

Numbered paragraph 4 of the letter deals with exchange-rate issues arising from payment in any currency other than US dollars. Paragraphs 5 to 7, as stated in paragraph 3, set out sums which would be payable depending upon the outcome of the BIT arbitration. There are then paragraphsregarding payment and the effect of an early termination of the agreement. The last 10 paragraphs deal with how the sums payable in the event of a termination were to be calculated depending upon whether the issues of jurisdiction and merits were bifurcated.

“14. Since the terms in paragraph 5 onwards set out terms which were contingent upon the outcome of the arbitration, the agreement was subject to sections 58 and 58A of the Courts and Legal Services Act 1990 (“CLSA 1990”). It is common ground between the parties that the agreement did not comply with the terms of those provisions because the secondary legislation to them requires any success fee to be no more than 100% of the base fees (which in this case amount to the profit costs based on an hourly rate). Under the terms of the side letter, there was undoubtedly the prospect of more than 100% being claimed by way of a success fee. Indeed, the Judgment Approved by the court for handing down. Diag v Volterra Page 5 worked example produced to show the workings of the agreement apparently produced a figure of 280%.”

There were four preliminary issues that needed to be decided by Master Rowley:

  1. Was there an enforceable retainer between the Defendant and the Claimants (and/or either Claimant)?
  2. If not, could any offending provisions be severed so as to leave an enforceable retainer between the Defendant and the Claimants (and/or either Claimant)?
  3. If not, was there any other basis on which the Defendant was entitled to be paid for the professional services rendered to the Claimants (and/or either Claimant)?
  4. If not, should the Defendant be ordered to return the sums paid to date by the Claimants (and/or either Claimant) in respect of the work covered by the Final Statute Bill?

The amount at stake was significant. Fees under the original agreement totalled $106,639.39 up to 6 September 2017, whereas under the Conditional Fee Agreement (“CFA”) contained in the Side Letter, the Firm has charged $2,929,928.38 for work after that date.

The master concluded:

  1. No
  2. No
  3. No
  4. Yes

By notice of appeal dated 8 April 2021 the Appellant/Defendant sought permission to appeal arguing:

a. That the Master was wrong in law to hold that severance was not available to the Defendant and an enforceable retainer for work from 6 September 2017 could not be established.

b. That the Master was wrong in law to hold that remuneration on a quantum meruit basis was unavailable to the Defendant for its work from 6 September 2017 on the basis Judgment Approved by the court for handing down. Diag v Volterra Page 6 that any enrichment was not just.

c. That the Master was wrong in law to hold that the consequence of his findings was that any sums paid to the Defendant in relation to work from 6 September 2017 should be re-paid to the Claimants.

The Master granted permission to appeal in respect of his conclusions on the issue of return of monies paid but refused it in respect of his conclusions on severance and quantum meruit.

Permission in respect of the remaining grounds was later given by Bourne J on 28 May 2021.

The Appeal came before Mrs Justice Foster DBE sitting with Master Simon Brown as an Assessor with judgment given 29 July 2022.

The detailed judgement sets out the lengthy considered arguments advanced as would be expected with Mr Jamie Carpenter QC (instructed by Mishcon de Reya LLP) for the Respondents/Claimants and Mr Nicholas Bacon QC and Mr Simon Teasdale (instructed by Saunders Law) for the Appellant/Defendant.

The Appeal was framed as two broad questions set out in the detailed skeleton argument of Mr Bacon QC thus:

First Question “1. Where a solicitors’ retainer provides for part of their fees to be paid on a conditional (CFA) basis, and part of their fees to be paid on a conventional and unconditional basis, win-or-lose, are the solicitors able to claim their unconditional fees (or a sum to reflect that unconditional element) where the conditional part is unenforceable.”

Second Question “2. Where a retainer is found to be unenforceable as a whole (and no entitlement to remuneration can be saved by severance or the award of a quantum meruit), does Garland J’s decision in Aratra Potato Co Ltd v Taylor Joynson Garrett (a firm) [1995] 4 All ER 695 remain good law, to the effect that in those situations the client is not entitled to an automatic return of sums paid to date unless they can make good a case for restitution?”

Having heard the submissions Mrs Justice Foster said – I have reached the clear conclusion that the Master was correct in the conclusions that he reached. Save for one aspect, by reference to the Solicitors Act 1974, I also agree entirely with the process of reasoning that led to them. She then went on to set out the reasons that supported her conclusions including her finding that the agreement was unenforceable including her view that The fundamental point must be that where the contract is unenforceable nothing can be said to be due on a Bill so as to found assessment other than an assessment at zero. Accordingly, if sums have been paid under the purported retainer, they fall to be repaid and the Master may so order.

Mrs Justice Foster concluded:

Accordingly, for the reasons given I agree with the Master who gave judgment below on the conclusions that he reached in this case, and indeed, the reasoning by which he reached them. This appeal is dismissed.

Master Simon Brown was in full agreement with the reasoning and conclusions contained in this judgment.

The judgment was full of praise for the approach of Master Rowley and the detailed judgment he gave.

In short, the effect of the CFA was the same as providing for a success fee in excess of 100%!

The effect of getting the CFA wrong in this case cost solicitors $2.9m.

My eyes can only water.

Gary Knight, Partner and Costs Lawyer