The Court of Appeal’s judgment in Diag Human SE v Volterra Fietta  EWCA Civ 1107, upheld the Senior Courts Costs Office and High Court rulings that solicitors who had entered into an unenforceable discounted CFA could not obtain any payment under the CFA. The unenforceable provisions could not be severed from the CFA, there was no quantum meruit basis on which the solicitors were entitled to be paid for their services, and sums paid to the solicitors on account had to be returned.
From 2017-2019, Volterra Fietta (“Volterra”) represented Diag Human SE (“Diag”), a Liechtenstein based company, in a London-seated arbitration against the Czech Republic.
Diag instructed Volterra and entered into a standard retainer with hourly rates. After some months, the retainer was changed by a “side letter” to a discounted CFA (also entered into with Diag’s controlling mind, Dr Josef Šťáva). The terms of the discounted CFA provided for Volterra’s fees to be subject to an initial discount of 30%. In the event of success, various additional sums were payable to Volterra, the effect of which could have been to amount to a success fee of over 100%.
Diag fell out with Volterra and terminated the retainer. Volterra was subsequently replaced by Mishcon de Reya in the underlying arbitration. In May 2022, the arbitral tribunal issued its award, finding against the Czech Republic and ordering compensation in the sum of US $650m.
Following the falling out, Diag argued that the CFA was unenforceable because it did not comply with the Courts and Legal Services Act 1990 s.58 and s.58A. Volterra put in a bill seeking only the discounted fees (70% of the normal fees) and the clients commenced detailed assessment under s. 70 Solicitors Act 1974.
The Volterra CFA entered into by Diag and Dr Šťáva was deemed by the Court to be unenforceable by the SCCO. A ruling by Mrs Justice Foster DBE in in the High Court upheld the decision, confirming that Diag had no liability for costs under the unenforceable retainer. The ruling found that Volterra were not therefore entitled to any payment under its CFA and the US $1.6m they had already paid was to be refunded.
In this appeal it was accepted by Volterra that the CFA was unenforceable, but they argued that all of the parts of the side letter other than the 30% discount could be severed, alternatively that they were entitled to a quantum meruit in the amount of the discounted fees. They also argued that they were in any event entitled to retain the sums paid on account, which the clients sought the return of.
All of Volterra’s arguments were rejected. The main judgment was given by Stuart-Smith LJ, with a short concurring judgment from Andrews LJ. Newey LJ agreed with both judgments.
The Court took as its starting point that the CFA as a whole was rendered unenforceable and reiterated Dyson LJ’s dicta from Garrett v Halton BC  EWCA Civ 1017 to the effect that the CFA legislative regime is deliberately draconian.
Severance: to implement the severance proposed would fundamentally change the nature of the contract so that it would cease to be the sort of contract that the parties had originally entered into. Andrews LJ rejected Volterra’s submission that the discounted fees would always be payable. She noted that, if that was right:
“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.”
Quantum Meruit: Having dismissed the possibility of severance, quantum meruit was also dismissed:
“The clients cannot be said to have been ‘unjustly’ enriched by the receipt of services for which solicitors cannot claim to be paid under a contract which failed to comply with the specific requirements that would have made it a lawful and enforceable CFA. Equity will not step in to relieve the solicitors from the consequences of providing services pursuant to an unlawful agreement which they are precluded from enforcing”.
Repayment: The Court held that s. 70 Solicitors Act 1974 gave rise to a self-contained regime, under which repayment of sums paid on account of a bill being assessed would automatically be ordered if the bill was assessed at less than what had been paid.
The case highlights the importance of complying with all relevant CFA regulations. Law firms must ensure that their CFAs are clear and concise, and that they contain all the information that clients need to make an informed decision about whether to enter into the agreement. It is also a reminder to law firms that they must always act in the best interests of their clients. This includes ensuring that CFAs are fair and reasonable, and that they do not contain any terms that are disadvantageous to the client. The case has once again emphasised the serious implications for solicitors.
This matter also has implications for litigation funders. The Supreme Court’s decision in R (PACCAR) v Competition Appeal Tribunal  UKSC 28 (handed down between argument and judgment in Diag) gives the case significance. See also the Clarion post on Paccar.
The judgment 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. Since PACCAR it was thought that funders would be able to sever the offending clauses as a matter of principle or, at least they would be entitled to be paid on a quantum meruit basis. The decision in Diag does not determine either point but demonstrates the potential difficulties that lie ahead for funders in making either argument. Courts 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.
It remains to be seen how much further this case will go as the Court of Appeal refused permission to appeal to the Supreme Court.