UK: When A CFA Says One Thing And Means Another

Last Updated: 20 October 2017
Article by Shail Patel

In a nutshell

In Stevensdrake v Stephen Hunt [2017] EWCA Civ 1173 (31 July 2017) the Court of Appeal considered the application of contractual principles to a Conditional Fee Agreement ("CFA") between a Solicitor and his liquidator Client.

The CFA expressly provided that the Solicitor's costs and disbursements were payable if the claim succeeded. The claim succeeded by settlement and the Solicitor sued for his fees. The Client argued that in reality he was only liable to pay the Solicitor's fees out of recoveries. To use costs parlance, he argued that the CFA was in reality a "CFA light", and as there were no further recoveries, there was no further liability. The Court of Appeal agreed, upholding the first instance decision, but for different reasons.

There are important lessons for a legal representative acting under a CFA, in how to minimise the risk of losing rights he had believed he had bargained for.

Why is the Case Interesting?

Firstly, costs lawyers and commercial lawyers alike sometimes forget that while a CFA operates in an area regulated by statute and rules, they are at their heart, agreements. They are therefore subject to many of the same common law principles, for example in relation to construction, implied terms, misrepresentation and so on.

The Stevensdrake decision analyses the application of the law of implied terms and estoppel by convention to CFAs. The effect was dramatic; to re-write the express terms of the CFA in favour of the Client.

Secondly, it is not uncommon that a vanilla CFA is treated by the Solicitor as a CFA light. As a matter of good business and good client relations, the solicitor may not seek to enforce his right to costs beyond recoveries. That is conceptually different from the Solicitor foregoing his contractual entitlement – but as Stevensdrake shows, the Solicitor's conduct could have that very effect.

Background

Pre CFA

The Solicitor and Client had a longstanding relationship. In respect of a number of claims run by the Solicitor on behalf of the Client, the Solicitor had been content to limit its fees to a proportion of the recoveries (which is of course the norm for nil-asset claims for officeholders).

In 2005 the Solicitor was engaged generally by the Client as liquidator of Sunbow Limited under a private retainer providing for its fees to be deferred until there were recoveries.

In 2006 there was an exchange of emails. The Client stated.

"In the event that there are no realisations I, as Liquidator, will not be in a position to pay your fees, nor will I accept personal liability for those fees. Notwithstanding anything which may be stated in your terms of business, which may have been, or will be, signed by me, your instructions are given on the basis stated here. If you are not willing to act in this matter on this basis, please return to me all papers currently held by you. Should you wish to discuss this matter, please do not hesitate to contact either myself or Linda Golding."

The Solicitor accepted that at the time, stating that he would however require disbursements to be paid.

The CFA

Subsequently CFAs were entered with the Solicitors and Counsel in respect of a particular piece of litigation arising from the liquidation. These were in 'vanilla' form, imposing a liability upon success irrespective of recoveries, success being a judgment or settlement.

Post CFA

One of the two defendants settled for £125,000. The recoveries were used to pay counsel and then split between the Client and Solicitor.

The second defendant settled for £1.9m but defaulted on his obligations and was made bankrupt with no recoveries. In negotiating that settlement the Solicitor had observed that lower figures were inadequate to satisfy its outlay. These events (among others) suggested that the parties understood there was a recoveries based entitlement only.

Implied Terms in CFAs

Decision Below

The Judge concluded that in the circumstances, (a) the full terms of the CFA were not to be found in the CFA and (b) there was in fact a term that the Solicitor's fees would be paid from recoveries only. This was derived predominantly from the 2006 exchange of emails.

Decision of CA

The Court of Appeal disagreed. The proper (or modern) approach to the implication of terms is set out in Marks and Spencer v BNP Paribas [2016] AC 742 (SC), confirming the continued relevance of the BP v Shire of Hastings (1977) 180 CLR 266 conditions:-

"[F]or a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression;(5) it must not contradict any express term of the contract."(my emphasis)

The implied term unarguably contradicted the express terms of the CFA. The Judge appeared to accept this in his judgment but stated that "the volume, quality and sheer weight of the contemporaneous evidence does not admit of any other conclusion".

The CA held that this was wrong in principle. The 'non contradiction' principle was a "cardinal rule" (per Lord Neuberger in the Marks and Spencer case). It could not simply be ignored on the grounds of evidential weight. Nor did principles (2) and (3) point to the implication of a recoveries based liability.

Comment

While the CA's conclusion cannot be faulted, it might be thought unfair on the Judge. It does seem that he was (at [100]) expressing a conclusion about a contradictory expressterm in the 2006 emails, and not an implied term, leading to two contradictory payment obligations which the Court resolved on the evidence in favour of the earlier in time.

The Solicitor did renew the argument in that way to the CA, adding that the 2006 exchanges constituted an 'umbrella agreement' which would prevail over later conflicting terms. That was rejected on the basis inter alia that the CFA purports to be a complete and self-contained contract (albeit no entire agreement clause is cited), and was essentially too contradictory with the umbrella for that to have been what the parties intended (see [56]).

While therefore there remains an argument open in principle that a CFA incorporates extraneous terms, it would seem that compelling facts pointing to such incorporation would be needed.

Estoppel by Convention

Decision Below

The Judge concluded that in any event there was an estoppel by convention operating so as to prevent the Solicitor from relying on the wording of the CFA. There had been a shared understanding, clear from the emails and other evidence, which it was unconscionable for the Solicitor to resile from.

Decision of CA

The CA Upheld that conclusion, although only just; Briggs LJ was much less certain than Hamblen LJ, and it may be that the outcome turned on the absence of a third panel member!

The Court approved the summary in Chitty (32nd ed. at 4-108):-

"Estoppel by convention may arise where both parties to a transaction "act on assumed state of facts or law, the assumption being either shared by both or made by one and acquiesced in by the other." The parties are then precluded from denying the truth of that assumption, if it would be unjust or unconscionable (typically because the party claiming the benefit has been "materially influenced" by the common assumption) to allow them (or one of them) to go back on it."

The CA accepted only post-CFA exchanges which crossed the line between the parties were relevant. Strictly speaking therefore the 2006 exchanges were not.

The Solicitor's argument was that the later exchanges were equally consistent with both parties being confident that there would be substantial recoveries, and that the Solicitor's conduct reflected no more than a willingness to await recoveries in the interest of good client relations. As noted above, this is not at all uncommon and has some ring of truth to it.

The Solicitor's problem however, was that the Judge had heard the partner cross examined and had rejected that account of the written exchanges and events post-CFA (including those summarised above). The CA could not conclude that he had been wrong to do so.

The key finding in relation to reliance and unconscionability was that the Solicitor knewall along (including from the 2006 emails) that the Client would never have instructed him, other than on a recoveries basis. There was therefore clear reliance by the Client on the understanding, and it was unconscionable for the Solicitor to later seek to rely on the literal terms of the CFA.

Comment

There is a salutary warning here for any solicitor conducting a claim on a CFA. While it may be good business to be flexible about payment, it is important not to lose contractual rights. There are at least three obvious solutions; (1) to ensure the client understands the terms of the CFA in the first place, (2) to be clear in client communications regarding fee forbearance that they are without prejudice to your rights under the CFA, and (3) to include suitable entire agreement and anti-waiver provisions in the CFA.

Undue Influence and Breach of Duty

For good measure the Judge upheld the Client's argument that in failing expressly to draw the changed nature of the Client's liability under the CFA to his attention, given the different terms to those agreed in 2006 for the general retainer, the CFA had been entered pursuant to presumed undue influence (and presumably was therefore voidable), and/or any additional liability of the Client arose from an actionable breach of common law or fiduciary duty by the Client.

The CA did not deal with these points as it was unnecessary. However Briggs LJ had "considerable reservations about them". It would therefore seem unwise to place too much weight on these additional conclusions, which probably turn largely on the facts in any event.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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