Severe consequences: severance of success fee provisions in a CFA not allowed

In Diag Human v Volterra Fietta [2023] EWCA Civ 1107, the Court of Appeal held that a firm of solicitors that had entered into an unenforceable conditional fee agreement (CFA) could not obtain payment by severing the offending terms of the agreement and nor was payment on a quantum meruit basis permitted for public policy reasons. The consequence of this was that their clients were entitled to the return of sums paid on account.

The respondent clients had engaged the appellant firm of solicitors to provide legal advice in relation to an investment treaty arbitrage claim against the Czech Republic. In 2017, the parties entered into a CFA which provided for the solicitors to be paid on an hourly basis but at a discounted rate for work done pursuant to the agreement, in consideration of which the solicitors would be entitled to success fees in specified circumstances. 

Under section 58 of the Legal Services Act 1990, in order to be enforceable a CFA must satisfy the following requirements: (i) the agreement must be in writing; (ii) it must state the percentage amount of the success fee uplift; and (iii) that percentage must not exceed 100%.

The CFA in this case was held at first instance and on appeal to the High Court to be unenforceable because it included a success fee that could exceed 100% and because it did not state the success fee percentage. The solicitors appealed to the Court of Appeal with the issues being: (i) was the Judge wrong to hold that severance is not available to the solicitors? (ii) was the Judge wrong to hold that quantum meruit is not available to the solicitors? (iii) in the absence of a claim founded on principles of restitution, was the Judge wrong to hold that the solicitors must repay to their clients sums that they have already been paid on account of costs?

The Court of Appeal dismissed the appeal on all grounds.

Severance was not available on the basis of the three-stage test in Beckett v Hall [2007] EWCA Civ 613. The original agreement was a CFA. Upon severance, it would have become a conventional retainer providing simply for the solicitors to charge at a discounted rate, with no conditional element at all. Therefore, 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.

In light of the court's findings on severance, it further held that it would be contrary to public policy to allow partial enforcement of an unenforceable CFA and to allow the solicitors to recover on a quantum meruit basis. In her concurring judgment, Lady Justice Andrews stated that "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." The court cited the decisions in Awwad v Geraghty & Co [2001] QB 570 and Garrett v Halton BC [2006] EWCA Civ 1017.

This decision comes soon after the Supreme Court's decision in R (on the application of PACCAR) v Competition Appeal Tribunal [2023] UKSC 28. In that case the court held that most litigation funding agreements were Damages Based Agreements (DBAs) and therefore where such agreements do not comply with the DBA Regulations of 2013 they would not be enforceable. Since PACCAR, funders may have been considering whether it is possible to sever the offending clauses or to seek payment on a quantum meruit basis. The decision in Diag Human casts doubt on those considerations.

For further information on the issues covered in this article, please contact Georgia Durham or Graham Reid.