Success fee payments agreed by Scots law firm with client and advocate ‘illegal and unenforceable’

It is understood that the firm will be seeking leave to appeal.

The success fee provisions of an agreement between a Scottish law firm and its clients in a multi-million pound commercial action and the terms agreed by the firm when it instructed an advocate to act in the case were “illegal and unenforceable”.

A judge in the Court of Session upheld a claim that the success fee arrangements upon which Levy & McRae LLP accepted instructions to act on behalf of a businessman suing another legal firm, and upon which it instructed junior counsel Jonathan Brown in the case, were “contra bonos mores”.

Lord Doherty ruled that the terms breached the “pacta de quota litis” principle, which aims to prevent the “conflict of interest” which arises if a lawyer has a financial stake in the amount the client may recover in a litigation.

‘Success fee’

The court heard that in 2015 the second pursuer Robert Kidd raised a commercial action in the Court of Session against Paull & Williamson LLP – which was later taken over Burness to become Burness Paull LLP – seeking $210 million over losses he claimed to have sustained following the sale of part of his interest in the company

He averred that as a result of “negligence, breach of contract, breach of fiduciary duty and fraudulent misrepresentation” on the part of P&W, he had suffered substantial losses following the sale in 2009 of part of his interest in a company called ITS Tubular Services (Holdings) Limited.

In mid-2015 the first pursuer A & E Investments Inc. instructed Levy & McRae to take over agency in respect of the Kidd action and to provide it with certain further advice.

By a letter to the first pursuer dated 1 July 2015 Levy & McRae set out the terms upon which it proposed to accept instructions, and the following day the first pursuer accepted those terms, which in addition to a basic fee included provision for a success fee threshold of £10m, with the success fee calculated as a percentage of the basic fee.

On the same day the firm also wrote to junior counsel’s clerk, setting out the proposed terms of instructing the advocate, which also included provision for a success fee.

The clerk having previously consulted the Dean of Faculty, who advised that he was “content” with the terms of the proposed agreement, Mr Brown was instructed to act in the case.

The court was told that the action was settled with P&W agreeing to pay Mr Kidd a global sum of £19m, in addition to £1m which had already been paid as interim expenses.

The pursuers averred that the global settlement sum was paid to Levy & McRae who remitted it to Mr Kidd under deduction of £5.6 million; that the firm claimed that £5.6m was the unpaid balance remaining due in respect of its basic fee of £2.1m and success fee of £1.89m (being 90% of that basic fee), and junior counsel’s basic fee of £1.1m and success fee of £0.99m (being 90% of the basic fee).

‘Pacta de quota litis’

However, the pursuers claimed that the success fee elements of the agreements were “pacta de quota litis”, being agreements entered into with a client in contemplation of litigation by the firm of solicitors having conduct of the cause and the advocate instructed in the cause, whereby the quantum of payment due to the solicitors and advocate was “tied to and depends upon” the quantum of the sum recovered by way of the action.

It was argued that such an arrangement was “contra bonos mores” and as such “illegal and unenforceable.”

The first and second conclusions of the summons sought declarators that the success fee elements of each agreement were illegal and unenforceable, while the first part of the third conclusion sought payment by the first defender to the first pursuer of the sum of £2,925,000, which the pursuers claimed that the first defender wrongly withheld from the first pursuer on the erroneous basis that the success fee arrangements were not pacta.

The second part of the third conclusion sought interim remedies for decree ordaining (a) the first defender to restore the sum of £940,384 to its client account in name of the first pursuer; (b) the second defender to make repetition to the first defender of the sum of £1,752,375; and (c) the first defender to restore the said sum of £1,752,375 to its client account in name of the first pursuer – on the basis that the defenders had “breached their fiduciary duties”.

But the defenders denied that the success elements of the agreements were pacta de quota litis, which were restricted to arrangements whereby lawyers receive a share of, or commission on, the “fruits of the litigation”.

Levy & McRae averred that it had reached agreement with A & E as to the level of the firm’s fees, including the success fee, and the pursuers were therefore “personally barred” from challenging the amounts.

The firm also claimed that it was entitled to make the payments of £940,384 and £1,752,375 and that it was not in breach of any of its fiduciary duties in doing so, standing it general terms of business.

Mr Brown’s position was that prior to accepting instruction he had checked the propriety of the success fee with the Faculty of Advocates, and that the Dean of Faculty advised that he was “content” that he could properly accept payment in the circumstances, explaining that: “It is of the essence of a speculative fee that the amount of the fee will be linked to the outcome. We crossed that rubicon (sic) long ago. The key point is that the percentage uplift is applied to the base fee and not to the sum awarded.”

He further argued that that the firm was not in breach of its fiduciary duty in paying his fees; that it had been obliged to do so because they were “reasonable” and had been charged at the “agreed rates”; and that the second defender’s plea that Mr Kidd had “no title or interest to sue” him.

The defenders argued that the success fee elements of the agreements were not contingency fees, but a “species of speculative or conditional fees” – the product of the application of a multiplier to a multiplicand, but only the multiplier was tied to and depended upon the sum recovered in the action.

It was also submitted that the Civil Litigation (Expenses and Group Proceedings) (Scotland) Act 2018, which followed the recommendations of Sheriff Principal Taylor’s Review of Expenses and Civil Funding in Litigation in Scotland, will permit solicitors to enter into a success fee agreement even if at common law it would have been a pactum de quota litis.

‘Conflict of interest’

However, the judge ruled that the success fee gave the defenders a “clear pecuniary interest” which “contravened the pactum principle”.

In a written opinion, Lord Doherty said: “The mischief which the pactum principle is intended to prohibit is the conflict of interest which arises when a lawyer has a pecuniary interest in the amount which the client may recover.

“The conflict is between, on the one hand, the lawyer’s pecuniary interest; and, on the other hand, his duties to the client and to the court. The rationale of the pactum principle is that such conflict gives rise to an unacceptable risk that the proper administration of justice may be obstructed.

“In my opinion the success fee elements of the agreements are pacta de quota litis. The substance of what was agreed was that the defenders’ remuneration would increase in proportion to the sum recovered. That gave them a clear pecuniary interest – a stake – in the amount recovered.

“In my view that pecuniary interest contravened the pactum principle. It created a conflict of interest which gave rise to an unacceptable risk that the proper administration of justice might be obstructed.

“I do not consider that in reaching that conclusion I am extending the principle’s scope… However if, contrary to my view, my conclusion represents a development of the pactum principle, in my opinion it would be an appropriate incremental development of the common law. Without it, the prohibition could easily be elided.

“It follows that I respectfully disagree with the Dean of Faculty’s advice of 23 March 2015. In my opinion neither fee agreement was a speculative fee agreement. In a speculative case it is the payment of a fee rather than the amount of the fee which is linked to the outcome; and, in certain circumstances, a lawyer may agree that in the event of the action succeeding his fee may be increased by a percentage.

“That is quite a different thing from a lawyer agreeing prospectively that his remuneration will be increased in proportion to the sum recovered. Whatever the position may be in the future if and when the reforms envisaged in the 2018 Act are given effect to, in my view as at July 2015 such agreements were pacta de quota litis.”

The court held the further inquiry would be required to determine the other issues raised of personal bar, title to sue, breach of fiduciary duty, and repetition.