Court of Appeal confirms that conditional fee arrangements do not give rise to an implied a duty of good faith
The Court of Appeal has upheld a High Court decision that conditional fee agreements (CFAs) do not imply a duty of good faith on the part of the client.
A firm of solicitors acting under a CFA who had been instructed by their client to settle proceedings on a "drop hands" basis, with no order for costs, was not entitled to recover costs from their client on the basis that the client had breached a duty of good faith. The ruling cautions solicitors who enter into CFAs about the risks of clients agreeing a settlement that deprives them of their entitlement to conditional fees.(1)
The appellant, Candey Limited, a firm of solicitors, had acted for the first respondent, Mr Bosheh, in a claim against Mr Bosheh and the second respondent, Mr Salfiti, in which fraud was alleged. The solicitors had acted for Mr Bosheh under a 100% conditional fee agreement (CFA). Mr Bosheh had rejected a settlement offer from the claimant in the underlying litigation to discontinue the claim against Mr Bosheh and pay him 50% of any recovery that the claimant made against Mr Salfiti, up to a cap of £1million, as long as Mr Bosheh would agree not to give evidence. Under the terms of the CFA, the solicitors would have received any money paid out pursuant to this arrangement. Mr Bosheh ultimately settled on a "drop hands" basis on terms that did not give rise to an entitlement for the solicitors to receive a payment under the CFA. The solicitors sought to recover their fees by bringing a number of claims against Mr Bosheh, including in fraudulent misrepresentation, deceit and for breach of the CFA. The solicitors' claim against Mr Salfiti was that he procured Mr Bosheh's breach of the CFA and/or was liable in unlawful means conspiracy.
At first instance ( EWHC 3409 (Comm)), the judge (Ms Clare Ambrose, sitting as a deputy High Court judge) dealt with a number of applications, including the solicitors' application to rely on privileged and confidential documents and Mr Bosheh and Mr Salfiti's application for an order striking out the claim in whole or in part. The judge ruled, among other things, that the claim based on the alleged implied terms, including that of good faith, had no prospect of success. She made similar findings in respect of the claims in deceit and fraudulent misrepresentation, conspiracy and inducing breach of contract. She found that the only claim made by the solicitors which had a real prospect of success (and which she therefore allowed to go on to trial) was the alleged breach of an express term of the CFA which provided that Mr Bosheh would "always seek to recover costs by order or agreement." The judge also held that the solicitors were not entitled to rely on either the client's privileged or some of the confidential material that they sought to deploy.
The solicitors appealed against the judge's finding that there was no implied duty of good faith owed by Mr Bosheh and the judge's refusal to allow them to rely on the confidential and privileged material.
The Court of Appeal (Coulson, Arnold and Phillips LJJ) dismissed the appeal.
The Implied Term as to Good Faith
Applying the usual test for implied terms (Marks and Spencer PLC v BNP Paribas Securities Services Trust Co (Jersey) Limited  UKSC 72; Europa Plus SCA SIF and Others v Anthracite Investments (Ireland) Plc  EWHC 437 (Comm)), the Court held that there was no real prospect of implying a duty of good faith in the CFA because such a term was not obvious and the retainer and the CFA worked coherently without it. The Court further explained that an implied duty of good faith towards the solicitors would be contrary to the CFA itself, which expressly contemplated the prospect that the claimant in the underlying litigation would succeed in proving the fraud allegations (in which case the solicitors would recover nothing).
The Court went on to consider the main characteristics of a relational contract set out in Bates v Post Office  EWHC 606 (QC). Among other things, there was no guarantee at the outset that the retainer would be a long-term contract, no commitment to collaborate, no high degree of communication and the spirits and objectives of the parties' venture were capable of being expressed exhaustively in a written contract. The Court therefore found that the retainer was not a relational contract, such that a duty of good faith would not be implied as a matter of law.
The Court concluded that the agreement was no more than an ordinary solicitor's retainer that happened to be on a CFA basis and there was no prospect of establishing an implied duty of good faith.
The Court further considered that, even if there were an implied duty of good faith, the solicitors had no real prospect of successfully establishing a breach of duty arising out of the "drop hands" settlement. The client was entitled to conclude that the "drop hands" settlement was not substantially less advantageous (and arguably better) than earlier proposals made in the proceedings, notwithstanding the fact that the terms of the "drop hands" settlement were disadvantageous from the solicitors' perspective.
The Use of Privileged and Confidential Material
The solicitors had sought to deploy privileged and confidential in their claim against the client for breach of an implied duty of good faith. Among other things, the solicitors alleged that the client had made misrepresentations as to the merits of his defence.
The Court upheld the first instance decision that, in putting forward their case, the solicitors were not entitled to rely on privileged material, nor were they entitled to rely on confidential documents which had been provided to them after the underlying proceedings had settled.
The privileged material in question comprised statements, answers to questions and other material provided by the client to the solicitors in order for the solicitors to prepare the defence and witness statements in the underlying litigation. The solicitors had sought to argue that the "iniquity exception" to privilege applied in respect of some of material.
The Court considered the leading authority on the iniquity exception (JSC BTA Bank v Ablyazov  EWHC 2788 (Comm)) which provides that, in order to rely on the exception, a solicitor must show that the communications in question fell outside the ordinary course of his or her professional engagement. The Court found that a solicitor acting under a CFA is in no different position as to privilege to a solicitor acting on an ordinary retainer and that the privileged material in question did not fall outside the ordinary course of the solicitors' professional engagement. Moreover, the alleged false statements related back to the original fraud in the original proceedings. There was not a new or different fraud relating to the proceedings which took the case out of the ordinary run.
With regard to the confidential material (principally bank statements that had been provided to the solicitors by the client's bank), the Court found that the first instance judge was entitled to find that the solicitors' action in opening and inspecting the client's bank statements was unlawful and unjustified, since the solicitors knew that the statements had been provided to them because the bank mistakenly assumed that the proceedings were still ongoing. Applying the test in Mustard v Flowers  EWHC 2623 (QB), the Court concluded that the public policy interest in excluding evidence improperly obtained was not trumped by the narrower objective of achieving justice in this particular case, particularly as the solicitors' claim was an attempt to avoid the terms of its own CFA.
The Court of Appeal clarified that a client owes no implied duty of good faith to his or her solicitor merely by entering into a CFA with them.
Delivering the leading judgment, Coulson LJ identified "the potential conflict of interest that can arise under a CFA between the client and the solicitor where the terms are drafted in such a way that the solicitor's costs recovery is itself dependant on the client recovering something – anything – from the proceedings." He went on to consider that "[s]uch conflicts cannot be resolved by an implied duty owed by the client to consider the solicitor’s financial interests rather than his own" and that it is instead "for the solicitor to ensure that such conflicts do not arise in the first place."
Solicitors who carry out work under CFAs should therefore carefully think about the terms of the retainer and consider the risk of their client agreeing a settlement that deprives them of their entitlement to conditional fees. For example, terms should be considered which make conditional fees payable in circumstances where a client settles on terms which an independent expert determines to be unreasonable.
The decision also confirmed that a client who makes false statements to its solicitors will not necessarily lose the protection of legal advice privilege. In order to trigger the iniquity principle, there must be an abuse of the solicitor-client relationship which is so severe as to put the communications outside the ordinary course of the professional engagement.
(1) (Candey Limited v Bosheh & Anor  EWCA Civ 1103)