Severance Denied: Diag Human v Volterra Fietta [2023] EWCA Civ 1107; A Potential Public Policy Warning For Litigation Funders

The Court of Appeal has held that the severance of terms rendering a CFA unenforceable was not available to solicitors on public policy grounds and that consequently their clients were entitled to the return of sums paid on account. The decision in Diag Human v Volterra Fietta will ring alarm bells for litigation funders who might be contemplating launching similar arguments as a consequence of the Supreme Court's decision in R (on the application of PACCAR) v Competition Appeal Tribunal.¹

The Facts

The facts can be outlined relatively straightforwardly: in September 2017 the solicitors entered into a CFA which provided for them to be paid on a discounted hourly rate basis if the underlying litigation was unsuccessful, in consideration of which there was a success fee payable. The CFA was unenforceable because it did not specify the percentage of the success fee and, in any event, the success fee could exceed 100 per cent.

The solicitors argued that they could sever the success fee so as to be entitled to be paid on the discounted hourly rate basis regardless of outcome. Alternatively, they argued that they were entitled to be paid on a quantum meruit basis.

At first instance and on appeal to the High Court the solicitors were unsuccessful.

The Decision

The Court of Appeal dismissed the appeal.

Severance was not available on the basis of the three-stage test set out in Beckett v Hall² because the agreement that would have resulted would have been of a different character to that which had been entered into by the parties. The September 2017 agreement was a discounted CFA; the severed version of the agreement would be a conventional retainer with discounted hourly rates.³

However, the Court of Appeal went further, also holding that severance was unavailable to the solicitors as a matter of public policy, even had it been permissible on the basis of the Beckett test.⁴ The starting point was that where a CFA fails to comply with the relevant legislative scheme the agreement as a whole is unenforceable.⁵

Against that background it would be offensive to public policy to permit partial enforcement of an unenforceable CFA.⁶ This could be seen from the decisions in Awwadv Geraghty⁷ and Garrett v Halton⁸. Notably, Awwad had also concerned a non-compliant discounted CFA, and the Court of Appeal had expressly rejected the argument that the solicitors could be paid the discounted fees in any event.⁹

Stuart-Smith LJ cited the judgment Dyson LJ in Garrett that:

...the [legislative] scheme is designed to protect clients and to encourage solicitors to comply with detailed statutory requirements which are clearly intended to achieve that purpose. The fact that it 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.

...

30 ... To use the words of Lord Nicholls, Parliament was painting with a broad brush. It must be taken to have deliberately decided not to distinguish between cases of non-compliance which are innocent and those which are negligent or committed in bad faith, nor between those which cause prejudice (in the sense of actual loss) and those which do not. It would have been open to Parliament to distinguish between such cases, but it chose not to do so.¹⁰

Stuart Smith LJ rejected the contention that public policy had moved on from those earlier decisions. In particular, he noted that the principles set out in those cases had been reaffirmed by the Court of Appeal in its decision last year in Farrar v CANDEY.¹¹

In her concurring judgment, Andrews LJ noted that:

There would be little incentive to 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. It makes no difference to the principle if that amount is based on a discount from the solicitors' usual hourly rate, or subject to a financial cap. If Parliament had wished to provide for the consequences of entry into a non-compliant CFA to be limited to loss of the success fee or other form of contingent remuneration, it would have done so.¹²

The same policy considerations also defeated the solicitors' argument that they should be entitled to be paid on a quantum meruit basis. As Andrews LJ pithily put it:

... the short answer is that it is not open to the solicitors to claim by the back door any payment for their services which they cannot receive through the front.¹³

In addition to referring to Awwad, Andrews LJ also cited noted that the same approach was taken in Orakpo v Manson Investments¹⁴and Dimond v Lovell¹⁵ which concerned agreements that did not comply with consumer protection legislation.

The Potential Consequences

On one level the Court of Appeal has once again emphasised the serious implications for solicitors of entering into champertous retainer agreements. This is in accordance with a long line of authority, culminating in Farrar.

However, the case has further implications when looked at through the prism of the Supreme Court's decision in PACCAR, where the Court held that most litigation funding agreements were DBAs. The implication of that decision is that many (if not most) litigation funding agreements will not be enforceable as they were not drafted with the DBA regulations in mind.¹⁶ Since PACCAR there has been considerable speculation as to whether funders would be able to sever the offending clauses as a matter of principle or whether they would be entitled to be paid on a quantum meruit basis. This decision does not determine either point but demonstrates the potential difficulties that lie ahead for a funder in making either argument.

Clients will likely argue that if parliament intended funding agreements to be caught by the DBA regulations, it must also have intended for the funders to face the full implications of non-compliance. Therefore, they will argue that the same policy considerations should apply to funders as would apply to solicitors, each of whom are acting in a commercial capacity. They will also note the breadth of the authorities referred to in the context of quantum meruit by Andrews LJ.

One would anticipate funders arguing that the position is distinguishable by the fact that a funder will have made loan payments out rather than being in the position of not being paid for the service that they have provided. They will further argue that solicitors are held to a stricter standard than third parties where champerty is concerned because they are officers of the court and because they are conducting the litigation in question. This is reflected in the comments of Lord Neuberger MR in Sibthorpe v Southwark LBC¹⁷ and more recently of Snowden J in Davey v Money.¹⁸

Where litigation funders with pre-PACCAR agreements are concerned, the court will have to consider whether the funder should face the full consequences of the unenforceability of their agreement or whether to allow those consequences to be ameliorated or avoided by permitting severance or the payment of a quantum meruit.

Footnotes

1. [2023] UKSC 28

2. [2007] EWCA Civ 613 as approved by the Supreme Court in Egon Zehnder v Tillman [2019] UKSC 32.

3. Judgment, para.40.

4. Judgment, para.62.

5. Judgment, para.6.

6. Judgment, para.62.

7. [2001] QB 570

8. [2006] EWCA Civ 1017

9. Judgment, para.64.

10. Judgment, para.21.

11. [2022] EWCA Civ 295. For further commentary on Farrar, see my article here.

12. Judgment, para.81.

13. Judgment, para.83.

14. [1978] AC 95

15. [2002] 1 AC 384

16. See PJ Kirby KC and Charlotte Wilk's article here.

17. [2011] EWCA Civ 25, at paras.35-37.

18. [2019] EWHC 997 (Ch), at para.76.

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.

Mr Martyn Griffiths
Gatehouse Chambers
1 Lady Hale Gate
Gray's Inn
London
WC1X 8BS
UK
Fax: [phone]
E-mail: [e-mail]
URL: gatehouselaw.co.uk/

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