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Conditional fee agreements: fallout with the client and count the cost: a warning from history

It is well known that one of our most famous judges, Lord Denning, stood up firmly against anything that might sully the “purity of justice”. Thus the concept of a lawyer sharing the spoils of victory with their client was complete anathema to him, since such an arrangement had the potential to put the professional in a position of being in conflict with the interests of his client. In the context of champerty, he said in his well-known judgment in Re Trepica Mines in 1963:

“The reason why the common law condemns champerty is because of the abuses to which it may give rise. The common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence and even to suborn witnesses…”

Indeed, it was Lord Denning’s view that the doctrine of champerty extended to:

“… any contentious proceedings where property is in dispute which becomes the subject of an agreement to share the proceeds”.

One wonders what Lord Denning would have thought of the dispute in Stevensdrake v Hunt, in which there was a major falling out between a solicitor and his insolvency practitioner (IP) client about how costs to be recovered in an action against administrators were to be shared, if at all, under the terms of a conditional fee agreement (CFA) they had both signed.

The early history of the dealings between the solicitor and IP had been harmonious. Both had worked together on numerous insolvency matters since 1993, according to Hamblin LJ who gave the lead judgment. It had been common ground that, in respect of a number of these matters, the arrangements between them had been that the solicitor would be paid on a recoveries basis, including instances where there had been a CFA in place in respect of the firm’s fees.

All had been well in this case too at the start. A CFA had been signed in relation to the liquidation of Sunbow Ltd and proceedings were taken against its former administrators. Against one administrator, an agreement had been reached on the basis of payment of £125,000 which was then “divvied up” between the solicitor, the IP and counsel (with a bit left over for HMRC). So far, so good.

The direction of the litigation had then turned to the other administrator and a settlement was reached with him on terms that he would pay £1.9 million.

It appears that this was the high point for the firm and for the IP. Unfortunately the administrator then declared bankruptcy and his accountancy practice collapsed, with the result that none of the solicitor’s bill of £938,838.71 (including counsel’s fees of £140,607.19), which the settlement sum had been expected to cover, was ever paid.

It was at that point that the solicitor looked to his client for payment. As Hamblin LJ recorded:

“… This led to an angry telephone conversation between [the IP] and [the solicitor] in which [the IP] accused [the solicitor] of dishonesty [the IP’s recollection] or fraud [the solicitor’s recollection]”.

The reason for this was that the IP considered that the deal between them was as it had always been: that payment would be made only out of recoveries and realisations. Since nothing had been recovered, not a penny was due. The legal Rubicon had thus been crossed. Proceedings to recover the sums said to be due under the bill were issued.

The litigation did not take a straightforward procedural path. Before the Chief Chancery Master and on appeal to Purle QC HHJ, the solicitor obtained summary judgment for counsel’s fees on the basis of what the body of the schedules to the CFA had said:

“You [the IP] are personally responsible for any payments that you may have to make under this agreement. Those payments are not limited by reference to the funds available in the liquidation”.

With regard to the solicitor’s fees, however, summary judgment was refused and the court ordered that the claim for these should proceed to trial, which it did over four days in December 2015 before Simon Barker QC HHJ. Both the solicitor and the IP gave evidence at the trial, each giving their opinions orally about why (or why not) the terms of the retainer were that payment was (or was not) dependent on recoveries.

In so far as the retainer had been committed into writing in the CFA, the judge held that the full terms could not be ascertained from the CFA alone and that the agreement incorporated an implied term that the solicitor’s fees would only be paid out of realisations. As there had been none, the IP had no personal liability for them. As to what had or had not been agreed orally, he found on the evidence that the solicitor and IP had worked on a convention agreed between them: in legalese, there was an estoppel by convention that payment would be made (if at all) only out of recoveries and that it would be unconscionable were the solicitor to be permitted to go back on that arrangement. Action dismissed.

On appeal, the implied term argument was given short shrift by both Hamblin LJ and Briggs LJ on basic contractual principles. Where, as was the case, a contract such as a CFA is a comprehensive and coherent agreement which works perfectly well, there is no need to imply a term unless one is required to give it business efficacy. Here, none was needed, they said, so it was round one of the appeal to the solicitor.

As to the second part of the appeal, this might have given rise to the interesting prospect of a draw, this being a two judge appellate court. For his part, Briggs LJ:

“… found the question whether [the IP] has the benefit of a convention by estoppel more difficult than my Lord [Hamblin]…”

Nonetheless, he concurred in the result that there had been a shared common understanding that the basis upon which the case had been taken on was the same as it had always been, namely that payment would be made if, and only if, there were recoveries. Had that not been the agreed arrangement, the IP would have dis-instructed the solicitor and gone elsewhere, as the solicitor well knew. That was sufficient to dispose of the whole appeal in favour of the IP since it would have been unjust to permit the solicitor to depart from the shared understanding, they said. Thus the action remained dismissed.

Back to Lord Denning. How would matters have proceeded in his day? Not in the way that they did here, because at the time that he retired as Master of the Rolls in 1982, the Courts and Legal Services Act, which was to permit the use of a limited form of CFA without breaching the law against champerty, was still eight years away. Thus the issue about how the spoils of victory were to be divided (alternatively how the bath should be taken if there were none) would not have arisen and the proceeds sharing arrangement which had so perplexed him in Trepica Mines, would not have troubled the Court of Appeal, over which Lord Denning had presided for 20 years.

What is to be learned from this? The answer is that as it is the solicitor who will create the retainer in the sense of writing it, it is for the solicitor to get it right in the first place. In so far as he or she relies on any part of the retainer said to have been agreed orally, he or she does so at their peril. Here it took two first instance judgments and two appeals, plus at least eight court days, to decide that, with regard to much of what he thought he had agreed, the solicitor had simply got it wrong. Where that happens, it is appropriate to leave the last words to Lord Denning. Giving judgment in 1953 in Griffiths v Evans, he said:

“On this question of retainer, I would observe that where there is a difference between a solicitor and his client on it, the courts have said for the last hundred years or more, that the word of the client is to be preferred to the word of the solicitor, or, at any rate, more weight is to be given to it… The reason is plain. It is because the client is ignorant and the solicitor is, or should be, learned. If the solicitor does not take precaution of getting a written retainer, he has only himself to thank for being at variance with his client over it, and must take the consequences.”

A salutary warning indeed, which has stood the test of time, as the decision in Stevensdrake has shown to the solicitor’s cost.

Kain Knight Colin Campbell

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