Global Energy Horizons Corporation v The Winros Partnership  EWHC B27 (Costs):
Master James has found in favour of the Claimant (the client) in a recent solicitor/client Judgment. The Master concluded that three of a City firm’s retainer documents with its former client included ‘fatal flaws’ which were in breach of Section 58 of the Courts and Legal Services Act and are thereby unenforceable.
The underlying proceedings related to a venture capital corporation, GEHC (The Claimant), who had invested in new technology in the oil and gas industry only for that technology to have been taken by a former employee (Mr Gray). They sued said employee for the resulting profits due to them as its rightful owners. The Winros Partnership - formerly known as Rosenblatt Solicitors (the Defendant) represented the Claimant in those proceedings and as stated by the Claimant:
“did a sterling job on their behalf and achieved a famous victory in hard-fought litigation”
Problems between solicitor and client arose when when Mr Gray was found liable to the Claimant for having wrongfully appropriated the technology. At this point the technology, or the profit derived from it, was valued and that value was a fraction of the hundreds of millions of pounds that the Claimant had thought it was worth.
The claim was funded by three consecutive CFAs with the Claimant making payments for fees and disbursements throughout the course of the claim. These payments were made through funds raised by the Claimant’s investors, with the intention that these would be refunded from the damages recovered and still leave the Claimant with substantial damages.
The valuation of the claim at just $15m meant that this system would not be successful as there would be very little remaining once the legal fees had been settled
Despite the parties’ differing opinions with regards to the value of the claim the Defendant advised that it would be prepared to continue to act, albeit they were concerned that they would not recover their costs of doing so. However, the Claimant sought to instruct a new firm, Bird & Bird.
The Defendant asserted that this instruction made their position untenable, forcing the Defendant to terminate the retainer and consequently forfeiting their success fee. The Claimant maintained that they intended both sets of solicitors to work ‘in tandem’ until the conclusion of the quantum trial. Following the liability trial, costs in the sum of £2.6 million were awarded to the Claimant. The Defendant requested that a significant proportion (£1.5 million) be retained by them for costs incurred and the Claimant consented. Notwithstanding the above, the Defendant in fact retained the entire sum recovered under the order. The Claimant made demands for these sums to be returned and asserted that it was at this point that the Defendant terminated the retainer; rather than the termination being as a result of the instruction of Bird & Bird.
In light of the unpleasant end to their relationship the Claimant sought to instruct Eversheds Sutherland to issue proceedings under Section 70 of the Solicitors' Act 1974 seeking an assessment of invoices rendered. At a subsequent directions hearing the Court ordered that preliminary issues in relation to how the 3 CFAs were entered into and terminated be dealt with at the outset.
Notice of Funding
It is worth highlighting that the Defendant failed to serve a Notice of Funding upon Mr Gray at the requisite time during the underlying proceedings. As a consequence, during the period when he was not on notice that there was a CFA, Mr Gray was able to avoid payment of the success fee on the Defendant’s profit costs.
The Defendant had alleged that they had withheld the Notice of Funding on instruction from the Claimant so as to avoid divulging that there was a CFA in place and that therefore the Claimant could not fund the proceedings. However, on this issue the Master found in the Claimant’s favour. As a consequence, the Defendant was not permitted to recover the success fee lost by said delay in service of the Notice of Funding from the Claimant.
CFA 1 covered the costs of preparing a letter of claim and attending a mediation. This CFA appeared to be the Law Society's standard one, save that it (and in due course CFA2 and CFA3) provided for an upfront payment request which was to be kept by the Defendant regardless of the outcome of the claim but would, in the event of success, be credited against the fees due under the CFA. Master James noted that the effect of this was that, despite there being a ‘loss’ under these proceedings as attempts to settle pre-issue were unsuccessful, the Defendant was able to retain the upfront payment of CAN$315k. It was the Claimant’s case that they were not aware that they could demand that the Defendant claim no fee for this work.
CFA 2 was entered into to cover ‘the claim’ with an advance fee of £1million. CFA2 was given retrospective effect so as to cover the same period as CFA1 and therefore covered the period during which a loss had already been incurred under CFA1. Master James commented that the Defendant had not acted in the Claimant’s best interests here as they redefined a “loss” under CFA1 and a “win” under CFA2.
CFA3 provided for an additional Advance Fee of £300,000, once again to be "retained by Rosenblatt whether the claim is successful or not" and was meant to cover the quantum phase following success on liability. Master James was very critical of the Defendant’s approach to the funding of the claim and noted that, as a result of the Defendant having billed its base costs (c. 5.6m), the risk in the proceedings was borne entirely by the Claimant.
Validity of CFAs 1, 2 & 3
The Claimant considered that the request for advance payments would mean early settlement would lead to the Defendant retaining fees which would exceed the sum of double the base costs incurred to that point. Rather than limiting their charges to the maximum reward permitted by law for a CFA (a success fee of 100%) the Defendant instead created a hybrid of a CFA and a fixed fee arrangement. In doing so, they charged a substantial non-refundable fixed fee plus a 100% success fee. Therefore, the success fee, being the difference between the fees which would in fact be billed, and the time "on the clock", would be in excess of 100%. The Defendant was therefore in breach of Section 58(4)(C) of The Courts and Legal Services Act.
Master James found that the risk of a success fee of more than 100%, rendered the CFAs unenforceable as they were in breach of CLSA 58(2)(b).
Incorrect Termination of CFAs 2 & 3
The Master also considered the termination of CFAs 2 & 3. The Defendant had advised the Claimant that they had achieved a win under CFA 2, as they had been successful at Mr Grey’s liability trial and therefore a new arrangement was required. They went on to advise the Claimant that 'costs under the CFA now all become payable' and told it to expect an invoice. However, Master James found that the definition of “win” required a costs order to be made and this had not happened as yet.
As to CFA3, the Defendant would have been entitled to terminate the retainer by invoking the terms of CFA3 to cease to act and in doing so restricting themselves to base costs. They instead chose to invoke a repudiatory breach that did not (based upon the evidence) constitute its reason for ceasing to act, therefore it was indeed wrongful for that retainer to have been terminated.
For the reasons set out above, Master James concluded that CFAs 1, 2 and 3 were in breach of Section 58 of the Courts and Legal Services Act and are thereby unenforceable. She went on to add that CFA 2 and 3 were both wrongfully terminated. The Defendant has, not surprisingly, sought permission to appeal.
This multi-faceted Judgment exemplifies the importance of establishing clear funding arrangements with your client. If this Judgment is upheld the financial consequences for the Defendant will be substantial. A real lesson to all that the implications of failing to enter into sound funding arrangements and to ensure that you can present documentary evidence in support of advice given in respect of funding/costs are considerable.