Tough but not irrational: law firm deprived of fees under a CFA

Work undertaken under a CFA

The law firm, Volterra Fietta, entered into a retainer with Diag to represent it in an investment treaty case against the Czech Republic. The arbitration concerned a significant claim, worth about USD 2.4 billion to Diag. The retainer contained a CFA.

The legal fees under the retainer operated as follows: Volterra would receive a discounted base fee on an hourly rate basis (30% discount), with an additional success fee to be paid should Diag prevail in the arbitration. The success fee was potentially very substantial (the worked example in the retainer itself resulted in a 280% success fee). 

Diag fell into substantial fee arrears to Volterra and terminated the retainer. When all was said and done, Diag (seemingly) owed Volterra approximately USD 3 million in legal fees, which led to the litigation decided in this judgment. Diag was ultimately successful in the arbitration.

The retainer was unlawful and the fees under it were not payable

Under English common law, the general rule is that CFAs are unlawful because they fall foul of long-standing prohibitions of maintenance and champerty. However, the common law position has been modified by various statutes, including the Courts and Legal Services Act 1990, which set out some strictly limited exceptions where CFAs may be lawful. One such limit is that a success fee should never be greater than the base fee agreed in the retainer. Where a solicitor acts under an unlawful retainer, the Act provides that this is an unlawful act.

There was no dispute in this case that the CFA in the retainer was unlawful because it allowed for a success fee far in excess of the base fee element. However, Volterra argued that it was entitled to payment at its discounted rate as, absent the success fee, the retainer was lawful. The arguments before the court centred on whether the unlawful CFA could be severed from the retainer.

The court held that removing the CFA element of the contract altered the very nature of the agreement between the parties. Mr Volterra had stated in evidence that he would not have agreed to the 30% discount on fees without the success fee. It was evident that both parties understood the CFA provisions to fundamentally change the agreement. The success fee could not, therefore, be severed.

Given the strict statutory language, the court held that where any part of a retainer was in breach of the Act the whole arrangement must be struck down. Volterra therefore had to return all of the fees it had received under the retainer. It was also not entitled to benefit from a claim for unjust enrichment, as the work done was unlawful and perpetrators of unlawful acts cannot claim compensation.

Commentary

The outcome in this case looks harsh on Volterra: it helped its client to secure a victory in a significant arbitration and invested many hours doing so. Diag did not suffer any loss from the unlawful arrangement that it too entered into. However, the court was clear that the statute produces an outcome that is “tough but not irrational”. It said that if defective fee arrangements could be put right late in the day, it would undermine consumer protection and the administration of justice. As the court explained in Garret v Halton BC, while the statutory scheme can produce harsh results in certain circumstances, it is designed to protect clients and encourage solicitors to comply with statutory requirements.  

Even though the outcome in this case may look attractive to the users of English legal services (who wouldn’t enjoy free legal representation?), the preference for clients must be to enter into legally enforceable agreements and to avoid disputes with their service providers. This dispute took years to come to court, will have involved significant time and costs, and was presumably the final nail in the coffin of the relationship between the two parties.

Judgment: Diag Human v Volterra Fietta