The recent case of Volterra Fietta v Diag Human serves as a stark reminder that contingency fee agreements (“CFAs”) remain strictly regulated under English law, with potentially significant consequences if a CFA does not comply with the statutory requirements.

A CFA is, in general terms, a fee arrangement between a lawyer and their client under which payment of some or all of the lawyers’ fees is contingent upon the outcome of the case (such as a “no win, no fee” agreement). CFAs typically provide that, in the event of a successful outcome, the lawyer will be entitled not only to payment of their standard fees but also a “success fee” or “uplift”, calculated as a percentage of their base fees.

Despite having become a common feature of the legal landscape in England in recent years, CFAs remain by default unenforceable under English common law (historically, champerty was a criminal offence). Section 58 of the Courts and Legal Services Act 1990 (the “Act”) confirms the general unenforceability of a CFA, but establishes a limited statutory exception whereby, if a CFA meets certain specified conditions (as elaborated in the Conditional Fee Agreements Order 2013), it will be treated as enforceable. There are three basic conditions (described by the Court of Appeal in a prior case as “clear and uncompromising”):

        1. the agreement must be in writing;
        2. it must state the percentage amount of the success fee uplift; and
        3. that percentage must not exceed 100% of the firm’s base fees.

In Volterra, the law firm had entered into an agreement with a client to represent it in an investor-state arbitration against the Czech Republic. The firm agreed to take a 30% discount on its base fees, on the condition that if the client won or settled the case, it would pay the firm a success fee. Under one potential outcome, the client would be liable for a success fee of 280% over the firm’s base fees.

In the course of the representation, the client fell into substantial arrears and ultimately terminated the engagement. The client subsequently initiated proceedings before the English courts challenging the CFA and asking the court to determine if it was liable for the firm’s outstanding invoices (or if, instead, the fees it had already paid to the firm should be returned).

The law firm accepted that the CFA was unenforceable, given that the success fee was capable of exceeding 100% of its base fees. However, it argued that the contingent element of the agreement (i.e. the success fee) was severable, so that the firm should be entitled to payment of its fees for work already incurred at its discounted rates (or, at the very least, to retain the fees already paid by the client). The High Court rejected this argument, holding that the agreement as a whole was a CFA and therefore unenforceable. The Court therefore ordered the firm to pay back all of the fees it had received from the client, describing this outcome as “tough but not irrational”.

The Court of Appeal, in its recent October 2023 decision, upheld the High Court’s judgment, affirming that the agreement “as a whole is unenforceable because it is a non-compliant CFA”. Severing the contingent element of the agreement, the Court held, 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”. While the Court noted the “seriousness” of the financial consequences for the law firm, it referred to a previous judgment in which the Court held that:

“The fact that [the Act] may produce harsh or surprising results in individual cases is not necessarily a good reason for construing the statutory provisions in such a way as will avoid such results. […] There would be little incentive for 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 […] [T]his is an approach of punishing solicitors pour encourager les autres.”

The courts have already had a chance to elaborate on the scope of the Volterra decision. The High Court, in a judgment in Therium v Bugsby released just two weeks after the Volterra decision, suggested that litigation funding agreements (“LFAs”) – i.e. agreements entered into with a litigation funder – might not be subject to the same strict limitations on the severance of unenforceable provisions as CFAs, given that LFAs (unlike CFAs) are not unenforceable by default under English law. However, the Court was not required to resolve the point, as that decision arose in the context of an application for an interim order (with the main dispute to be heard in arbitration). Litigation funders, however, have their own challenges to contend with following the UK Supreme Court’s decision in the R (PACCAR) v CAT case. In that case, the Supreme Court held that LFAs by which the litigation funder takes a percentage of any damages awarded constitute a damages-based agreement (a “DBA”) and must therefore comply with the requirements of the Damages-Based Agreements Regulations 2013 (which limit the amount recoverable, in most cases, to 50% of the total damages awarded).

In short, it has a been a busy year for the English courts in scrutinising the enforceability of alternative fee arrangements. The Volterra decision in particular should serve as a wake-up call for the legal profession that any engagement containing a contingent element must comply strictly with the statutory requirements to be enforceable. Failure to do so jeopardises not only the enforceability of any success fee, but the validity of the engagement as a whole.

The decisions are: (i) Volterra Fietta (a Firm) v Diag Human SE & Josef Stava [2023] EWCA Civ 1107 (access here) (on appeal from [2022] EWHC 2054 (QB) (access here)); (ii) Therium Litigation Funding A IC v Bugsby Property LLC [2023] EWHC 2627 (Comm) (access here); and (iii) R (PACCAR ) v CAT [2023] UKSC 28 (access here).

This article was prepared with the assistance of Verity Thomson, legal intern at Baker Botts in London.

 

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