Court of Appeal Affirms Unenforceability and Non-Severance of Non-Compliant Conditional Fee Agreements under the Solicitors Act 1974

Introduction

In the landmark case Diag Human SE & Anor v Volterra Fietta (Re Assessment Under Part III Solicitors Act 1974) ([2023] EWCA Civ 1107), the England and Wales Court of Appeal (Civil Division) addressed critical issues concerning the enforceability of conditional fee agreements (CFAs) under the Solicitors Act 1974. The appellants, a firm of solicitors, sought to recover fees under a CFA that was deemed unenforceable due to non-compliance with statutory requirements. The respondents, representing Diag Human SE, engaged the solicitors for legal advice regarding an investment treaty arbitration claim against the Czech Republic. This commentary delves into the intricacies of the judgment, exploring its implications for future legal practices surrounding CFAs.

Summary of the Judgment

The core of the dispute revolved around a CFA entered into in September 2017 between Volterra Fietta and Diag Human SE. The agreement stipulated that solicitors would be compensated at discounted hourly rates with additional success fees contingent upon the outcome of the arbitration. However, the CFA was found unenforceable because it allowed for success fees exceeding 100% and failed to specify the success fee percentage, contrary to Section 58 of the Courts and Legal Services Act 1990.

The solicitors appealed the initial judgment, contending that the offending success fee provisions could be severed, allowing for the recovery of fees at discounted rates or on a quantum meruit basis. Additionally, they sought to retain sums paid in advance. The Court of Appeal, however, dismissed the appeal, upholding the lower courts' decisions. The judges emphasized the rigid enforcement of statutory requirements for CFAs and guarded against any partial enforcement that could undermine public policy objectives.

Analysis

Precedents Cited

1. Wallersteiner v Moir (No 2) [1975] 1 QB 373

This case reaffirmed the common law prohibition against contingency fee agreements, emphasizing the potential conflicts of interest they pose. The Court held that such agreements were unenforceable as they conflicted with public policy by allowing solicitors to have a financial stake in litigation outcomes.

2. Awwad v Geraghty & Co [2001] QB 570

The Court of Appeal in Awwad reiterated the reluctance of courts to develop the common law in areas addressed by Parliament, particularly concerning CFAs. It underscored that changes in public policy, especially those codified in statutes like the Courts and Legal Services Act 1990, should be enacted by Parliament rather than courts.

3. Sibthorpe v Southwark LBC [2011] EWCA Civ 25

Reinforcing previous rulings, Sibthorpe upheld the stringent requirements for CFAs, maintaining that any deviation from statutory compliance renders the agreement unenforceable.

4. Garrett v Halton BC [2006] EWCA Civ 1017

In Garrett, Dyson LJ emphasized that the statutory scheme under Section 58 of the Courts and Legal Services Act 1990 was designed to protect clients, and non-compliance by solicitors should lead to complete unenforceability of the CFA without partial enforcement.

5. Garnat Trading & Shipping (Singapore) Pte Ltd v Thomas Cooper (a Firm) [2016] EWHC 18 (Ch)

The solicitors attempted to draw parallels with Garnat, where a CFA was varied to exclude specific provisions, allowing for partial enforcement. However, the Court distinguished this case from Diag Human SE, emphasizing that in Garnat, the original retainer still governed work outside the scope of the CFA variation.

Legal Reasoning

The judgment underscored the paramount importance of adhering to the statutory requirements set forth in Section 58 of the Courts and Legal Services Act 1990. The court articulated that:

• CFAs must be in writing, state the success fee percentage, and ensure that success fees do not exceed 100% of the base costs.
• The statutory provisions create a strict regime where non-compliance renders the CFA entirely unenforceable.
• Attempts to sever offending clauses to enforce compliant parts of the CFA are precluded to maintain public policy integrity.

The judges emphasized that public policy considerations are robustly against the partial enforcement of CFAs. Allowing severance or claims under quantum meruit would undermine the protective framework established to prevent conflicts of interest and ensure fair treatment of clients.

Impact

This judgment reinforces the non-negotiable nature of statutory compliance for CFAs. Solicitors must ensure that their fee agreements meticulously adhere to the conditions stipulated in Section 58 to avoid complete unenforceability. The court's stance discourages any attempts to circumvent the rules through partial enforcement, thereby bolstering client protection mechanisms.

Future cases involving CFAs will reference this judgment to affirm the necessity of complete compliance. Solicitors may need to reassess their fee structures and agreement templates to align with statutory requirements, potentially reducing flexibility in structuring contingent fees.

Complex Concepts Simplified

Conditional Fee Agreement (CFA)

A CFA is a contract between a solicitor and a client where the solicitor's fees are contingent upon the outcome of the legal matter. Typically, if the client wins the case, the solicitor receives a success fee in addition to the standard fees.

Quantum Meruit

Quantum meruit is a legal principle allowing a party to recover the reasonable value of services provided, even in the absence of a formal contract, based on the benefit received by the other party.

Severance

Severance refers to the legal process of removing or altering an unenforceable portion of a contract while preserving the remainder of the agreement. The purpose is to enforce parts of the contract that comply with the law.

Public Policy

Public policy consists of principles and standards recognized by the judiciary as fundamental to societal welfare and justice. Contracts or provisions contrary to public policy are deemed unenforceable.

Conclusion

The Court of Appeal's decision in Diag Human SE & Anor v Volterra Fietta serves as a stern reminder to solicitors about the uncompromising nature of statutory requirements governing CFAs. The dismissal of the appeal reaffirms that non-compliant CFAs cannot be partially enforced through severance or alternative claims like quantum meruit. This judgment not only upholds the protective intent of the Courts and Legal Services Act 1990 but also ensures that client interests remain paramount in the solicitor-client relationship. Moving forward, legal practitioners must rigorously ensure that their fee agreements fully comply with statutory mandates to avoid similar legal setbacks.