There have been several recent decisions in the higher Courts of England and Wales on matters relating to litigation funding. In this article we consider the recent decision of the Court of Appeal (“COA”) in Diag Human SE and another v Volterra Fietta (a firm) [2023] EWCA Civ 1107.

The facts

A firm of solicitors (the appellants) were engaged by the respondent clients in respect of an investment treaty claim. A Conditional Fee Agreement (“CFA”) was entered into. To recap, a CFA is an agreement whereby the legal representative’s fees and expenses (or part of them) will be paid only in certain circumstances (for example, in the event that the client wins the case). A success fee mechanism operates to share risk and reward.

The agreement in question provided for the solicitors to be paid on an hourly basis, but at a discounted rate (70% of normal fees). In specified circumstances, the solicitors would be entitled to significant success fees. 

Before the COA, it was common ground that the CFA was unenforceable - it contravened s.58 of the Courts and Legal Services Act 1990, as it included a success fee that could have exceeded 100% of the solicitors’ normal fees and because it did not state the success fee percentage. A worked example in the paperwork produced an uplift of over 280% of the solicitors’ base fees.

The solicitors argued that they should be able to sever the non-compliant success fee provisions and recover their fees at the discounted 70% rate for the work they carried out. Alternatively, they argued that they should be compensated on the basis of the restitutionary remedy of quantum meruit, i.e. that they should be paid for the work they had done at the clients’ request. They also said they should not have to repay funds which the clients had paid on account of their costs.

These arguments fell to be considered by the Court of Appeal.

The decision

The COA dismissed the appeal on all grounds. First, it made an important finding at the outset: the agreement between the parties “as a whole” was a CFA and, accordingly, the starting point is that the agreement as a whole was unenforceable because it was a non-compliant CFA. This finding weakened the appellant’s concept of a “hybrid agreement”, whereby it was proposed that discounted “base fees” should be paid in any event because they had a special status.

Second, in respect of the solicitors’ arguments that the offending provisions should be severed from the agreement, the Court referred to the three-stage test for severance as set out in Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613:

“… a contract which contains an unenforceable provision nevertheless remains effective after the removal or severance of that provision if the following conditions are satisfied: 1 The unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains. 2 The remaining terms continue to be supported by adequate consideration. 3 The removal of the unenforceable provision does not so change the character of the contract that it becomes 'not the sort of contract that the parties entered into at all'.”

It was accepted by the parties in the present case that the first test (the “blue pencil” test) and the second test could be satisfied. However, the clients argued that the third stage could not be satisfied and that it would be contrary to public policy for the solicitors to recover fees upon severance of the offending provisions.

The COA found that the effect of the proposed severance would be to fundamentally change the nature of the contract between the parties. The contract was a CFA, with a substantial proportion of the proposed remuneration for the solicitor being conditional. If severance was to take place, it would become a conventional retainer, providing for the solicitors to charge at a discounted rate with no conditional element at all. Further, the stated consideration (the prospect of success fees) for the solicitors’ agreement to discount their fees would be removed by severance. The final test set out in Beckett Investment Management Group Ltd v Hall was not met.

Third, the Court was not convinced by the solicitors’ arguments as to public policy having moved on, and was cautious not to interfere with matters to be properly decided by Parliament, rather than the judiciary. 

Finally, in respect of the solicitors’ quantum meruit argument, the Court concluded that “It would be contrary to the public policy that forbids partial or total enforcement of the CFA and severance to permit the solicitors to recover on a quantum meruit basis”. It went on to conclude that it was correct that sums paid on account by the clients pursuant to the agreement should be repaid by the solicitors.

Commentary

This is an interesting case, particularly for litigation funders and others with an interest in funding agreements.

Several months ago, the Supreme Court in the PACCAR case ([2023] UKSC 28) decided that litigation funding agreements which entitle the funder to recover a percentage of damages awarded is a Damages Based Agreement (“DBA”) and is accordingly unenforceable unless compliant with the DBA Regulations 2013.

Therefore, any decision of the higher Courts on issues including severance and restitution in this context will be of interest to the parties mentioned above.

Interestingly, there is an apparent distinction between the CFA regime and the DBA regimes. In another COA decision in Lexlaw Ltd v Zuberi (Bar Council Intervening) [2021] EWCA Civ 16, it was concluded that if a contract of retainer contains any provision entitling a lawyer to a share of recoveries, it does not mean that the whole of the retainer is a DBA. In other words, the relevant DBA legislation does not apply to any other provision in a contract, including provisions which provide for payment on a different basis.   

The solicitors in the present case sought to rely on Zuberi and the approach taken in that case, arguing that only the parts which provide for payment of fees in specified conditional circumstances actually amount to a CFA for the purposes of the application of the 1990 Act. Accordingly, they said that severing the offending clauses would “remove all of the CFA”. 

This was rejected. The Court dismissed the severance argument in the context of CFAs, as explained, and distinguished Zuberi. One reason for so doing was that “the considerations of public policy which supported [a] narrow construction of the meaning of a DBA are absent in a case involving CFAs such as the present”. This would appear to suggest that the approach to severance in Diag Human SE might not be read across to severance in the context of DBAs. Indeed, this appears to have been accepted as arguable by the High Court on an interim basis in Therium Litigation Funding AIC v Bugsby Property LLC [2023] EWHC 2627 (Comm).

The COA in the Diag Human SE case refused permission to the solicitors to appeal to the Supreme Court. However, we anticipate that these topical issues will be considered again in the higher Courts before long.

LS Unlock

Lewis Silkin has committed to an initiative called LS Unlock. It is an alternative approach to fees which is designed to help individuals and businesses pursue or defend significant commercial claims by removing or reducing the cost risk of litigation.

LS Unlock comprises a free initial assessment of significant commercial disputes together with a menu of alternative fee arrangements which can reduce and, in certain cases, eliminate the upfront cost of pursuing or defending a claim.

Find out more here or get in touch with our team.