Solicitors’ fees protected despite unenforceable CFA.

In FPH Law (a firm) v Martyn Robert Brown (t/a Integrum Law) [2018] EWCA Civ 1629, the defendant agreed to act for his client under the terms of a conditional fee agreement in respect of a personal injury claim that was brought against Jarvis PLC, the client’s employer in 2006.

In 2009, Mr Brown left FPH Law and set up his own firm. He entered into a new CFA with the client and agreed to preserve a lien on the case files for the purpose of recovering FPH Law’s fees and disbursements under the former CFA.  He also gave various undertakings to FPH Law, which included providing regular updates on the matter and advising of any significant developments e.g. settlement offers, etc.

The case settled in 2011 including terms that Jarvis would pay the Claimant his costs subject to detailed assessment if not agreed. Mr Brown prepared a bill of costs for £84,000, £60,000 of which related to FPH Law’s fees and disbursements. Jarvis’s solicitors made an offer to pay £55,000 but also made a technical challenge to the validity of FPH Law’s CFA. Thereafter, Jarvis increased its offer to £64,000 but did not withdraw the technical challenge.

Mr Brown notified FPH Law that he had rejected the offers made and would make a counter-offer of £77,000 but he made no reference to the technical challenge to the CFA. FPH Law was in agreement with this approach. Mr Brown then made an offer of £78,000 and Jarvis increased its offer to £70,000.

FPH Law had no further involvement. No settlement was reached and the matter proceeded to a detailed assessment at which District Judge Smedley ruled that the CFA was unenforceable because of its non-compliance with regulations 4(2)(c) and 4(2)(e)(ii) of the Conditional Fee Agreements Regulations (the two breaches were failures to provide the client with certain information at the time that the CFA was entered into). He disallowed all of the Claimant’s profit costs and made an adverse costs order in the sum of £5,000.

FPH Law brought proceedings against Mr Brown for damages for breach of his undertaking to keep them informed claiming that, had they known that a point was being taken about the validity of the CFA, they would have instructed Mr Brown to accept the £70,000 offer. Mr Brown argued that the invalidity of the CFA was a complete defence to the claim because FPH Law could not have recovered any costs from the client under the terms of an invalid CFA. Therefore, there were no damages to recover.

On a preliminary issues hearing, Mrs Justice Slade, in finding for FPH Law, said: “On the basis that the defendant was negotiating with the solicitors for Jarvis PLC in good faith and that there was a dispute over the enforceability of the CFA, a compromise of the claim for costs would be enforceable.” Slade J concluded: “Whether the failure to comply with regulation 4 rendered the CFA unenforceable, as found by DJ Smedley, was also illegal… does not affect the claim for breach of contract which is to be determined on the facts of the date of the alleged breach.”

Slade J also went on to explain that the assessment of damages in respect of the  claim for the loss of chance of a compromise of the claim for costs might be affected by the decision that the CFA was unenforceable, but this is something to be determined at a trial.

On appeal, Coulson LJ agreed with Slade J’s decision and said:

“Since this is a claim for breach of contract, the focus must be on putting the claimant in the position they would have been in if the contract (more specifically, the undertakings) had been performed.

“The breach occurred at a time (April/May 2011) when a challenge had been indicated as to the enforceability of the CFA, but that argument had not yet been formalised, let alone finally determined. If the defendant had complied with its contractual obligations, it might be said that there would never have been a determination of the enforceability or otherwise of the CFA in any event…

“Whether or not there was force in the argument [that the CFA was unenforceable] was a matter to be carefully considered (in this case by both the claimant and the defendant) so that it could be given the appropriate value in the negotiations.

“That did not happen here because the claimant did not know that the point was being taken. It is that, therefore, that lies at the heart of the claim for a loss of a chance. But it does not affect the validity or the bona fides of any compromise that might have been reached.”

Mr Brown attempted to distinguish the case from the Court of Appeal decision in Binder v Alachouzos [1972] 2 QB 151, which held that a compromise of claims made under contracts which were said to be illegal was still an enforceable compromise. The Mr Brown argued that, if the Binder principle applied to CFAs, it would be an incentive for solicitors not to keep records of advice given and other such matters so as to enable them to argue, at a later date, that a particular CFA was enforceable.

In response to this point Coulson LJ said “It is in every solicitor’s interest to ensure that each CFA into which it enters has been properly drafted and has been agreed after the correct advice has been given (and recorded in writing).

“It is, with respect, nonsense to suggest that a solicitor would knowingly fail to keep the necessary records, in order to have a better chance later of arguing that a particular CFA was legal or enforceable. And to what possible end could such a strategy go, other than to demonstrate his or her own bad faith?”