A firm has failed with an appeal over payment of fees after its conditional fee agreement was found to be unenforceable.
In Diag Human SE & Anor v Volterra Fietta, the latter, a London firm of solicitors, was engaged to provide legal advice on an investment treaty arbitration claim against the Czech Republic.
The 22-page judgment said the CFA was ‘unenforceable because it included a success fee that could exceed 100% and because it did not state the success fee percentage’.
The solicitors argued they were entitled to sever the offending success fee provisions and recover fees at the discounted rate for their work and to retain sums that the clients had paid on account of their costs.
A costs judge said the CFA was unenforceable and the solicitors could recover nothing under their bill, which was assessed at nil, and they were required to pay the clients their money back.
The decision was upheld, and the firm appealed.
The sums were described as ‘considerable’. Lord Justice Stuart-Smith said the ‘precise figures do not matter’ but ‘the clients’ claim against the Czech Republic being measured in billions and the fees claimed by the solicitors being measured in millions’.
The three grounds of appeal – covering severance, quantum meruit, and that the judge was wrong to hold that the solicitors must repay their clients sums already paid on account – before Lord Justice Newey, Lord Justice Stuart-Smith and Lady Justice Andrew, were all dismissed.
Dismissing the issue of severance, Stuart-Smith LJ said: ‘I would hold that to implement the severance proposed by the solicitors would fundamentally change the nature of the contract so that, upon severance, it would cease to be the sort of contract into which the parties had originally entered.
‘There is no question of severing one part of the provisions for conditional fees and leaving the rest in place since that would be an exercise in futility: the character of the contract would remain that it was an unenforceable CFA.
‘It would…be contrary both to principle and to authority to allow partial enforcement of the unenforceable CFA in the present case, on grounds of public policy.’
In dismissing the third ground of appeal, the judgment said: ‘This detailed scheme [of costs assessment] leaves no room for the solicitors’ argument in the present case that sums paid on account by reference to an agreement that is held to be unenforceable shall only be repaid if the client justifies repayment on restitutionary principles.
‘The consequences that would follow if ground three were to succeed are startling to the point of absurdity.
‘Where a solicitor’s bill is reduced to below the sums already paid on account by his client because his fees are held to be unreasonable, the client would be entitled to repayment; but where a solicitor’s bill was reduced to nil because the agreement was unenforceable (on public policy grounds), the client would not.’
Lady Justice Andrews agreed with the judgment.
She added: ‘This was an attempt to carve out a special regulatory regime for discounted CFAs, with potentially far-reaching consequences.
‘It is for parliament, not the courts, to make any further inroads into the established public policy prohibition on champertous agreements. 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.
‘As for the alternative claim in quantum meruit, the short answer is that it is not open to the solicitors to claim by the back door any payment for their services which they cannot receive through the front. Equity will not step in to relieve the solicitors from the consequences of providing services pursuant to an unlawful agreement which they are precluded from enforcing.’
