Costs judge strikes down CFAs worth millions

Newberry: Significant case

A costs judge has struck down three conditional fee agreements (CFAs) in a big-money commercial case for having the potential to lead to a claim for a success fee exceeding 100%.

Master James also accused Rosenblatt Solicitors (RS) of overreaching itself, and leaving its client’s “best interests in their rear-view mirror” by trying to recoup the money lost on the first of the CFAs by backdating the second.

She said RS tried “to have their cake and eat it too” by aligning the costs risk on the client’s side.

Global Energy Horizons Corporation (GEHC), a venture capital corporation involved in the oil and gas industry, praised the work of RS in bringing a successful claim against a GEHC partner for wrongfully appropriating the company’s technology.

But the relationship began to splinter over the valuation of the technology or the profit derived from it. Expert evidence obtained by RS valued it at a fraction of the (minimum) hundreds of millions that GEHC asserted it was worth; instead it was said to be worth only around $15m.

GEHC then brought in fellow City law firm Bird & Bird to assist as the focus of the litigation at the quantum stage shifted to patents law – RS accused the company of trying to replace it and terminated its retainer.

RS put the costs at stake at £12m; GEHC asserted that it has paid approximately £7.3m in respect of RS’s fees to date, as against approximate base costs incurred during the retainer of £5.6m.

In Global Energy Horizons Corporation v The Winros Partnership (formerly known as Rosenblatt Solicitors), Master James was asked to deal with the preliminary issues of whether the three CFAs were valid and whether RS (as the defendant was described throughout) was entitled to terminate CFA2.

The Winros Partnership is a law firm based at RS’s offices in London whose partners are founder Ian Rosenblatt and head of dispute resolution Tania MacLeod.

Master James, who eventually found for GEHC on every point, noted: “If GEHC prevails on either of the preliminary issues, any fees as yet unpaid to RS will remain unpaid, and any already paid will have to be disgorged back to GEHC.

“As such, this is clearly a case in which the costs of the costs could rival the costs of the underlying litigation.”

She also observed that there were a number of occasions where “a very important event, involving a large sum of money, has allegedly happened but in respect of which there is no paper trail to verify it, in spite of the fact that RS is a commercial law firm and well-versed in the importance of reducing important agreements to writing”.

CFA1 was designed to cover the costs of preparing a letter of claim and attending a mediation, CFA2 covered the claim and CFA3 was signed to cover the quantum phase.

Each agreement included payment an advance fee – of CAN$315,000, £1m and £300,000 respectively – which RS would retain win or lose but which would be credited against the fees due under the CFA in the event of winning.

On validity, Master James said: “The simple fact is that the CFAs were poorly drafted insofar as they said two conflicting things. They stated that the Advance Fee would be credited against future billing, but they also stated that the Advance Fee would belong to RS, win or lose.

“The latter is in my – reluctant, because I think it is an old-style technical point going right back to the early days of satellite litigation under CFAs– opinion, fatal to CFAs 1, 2 and 3…

“All of RS’s carefully-phrased arguments about how the Advance Fee would operate in case of an early win, miss the point; the Advance Fee would indeed have been credited against any billing greater than the amount thereof and GEHC do not dispute it.

“However as a question of fact, the Advance Fee… meant that RS would never have rendered a final bill lower than the amount of the Advance Fee, even if the matter had settled at an early point where time spent/work done, plus success fee, plus disbursements, came to less than the Advance Fee at that time.”

This meant that the CFAs as drawn could potentially lead to a claim that (in effect) was in excess of a 100% success fee and so were invalid.

RS did not achieve a ‘win’ under CFA1 but gave CFA2 retrospective effect to cover the same period as CFA1. The master said RS purported to claim a success fee on the mediation costs under CFA2 and asserted that it was in GEHC’s best interests.

She said: “RS have overreached themselves, and certainly left GEHC’s best interests in their rear-view mirror, in redefining a ‘loss’ under CFA1 as a ‘win’ under CFA2.

“I disagree with GEHC’s view that the only advice that GEHC could properly have been given about the handover from CFA1 to CFA2 was that the costs under the former should be written-off for good, but certainly the advice that should properly have been given was that, pursuant to the ‘loss’ under CFA1, RS was only entitled to its fees up to the limit of the CAN$315,000 Advance Fee; in not giving this advice, I agree with GEHC that RS favoured its own interests over its client’s.”

Master James went on to find that GEHC was advised that CFA2 had come to an end when it had not, and entered into CFA3 as a result. Thus, if CFA2 was terminated, it was terminated wrongfully and/or CFA3 was entered into as a result of that misrepresentation that CFA2 had ended, and so was “tainted”.

Further, RS wrongly and unclearly invoiced GEHC for monies it said were owed under CFA2.

She ruled too that RS had wrongly advised GEHC that a win had been achieved under CFA3 and that additional fees of £7m were due, while CFA3 was wrongfully terminated because RS “invoked a repudiatory breach that did not (based upon the evidence) constitute its reason for ceasing to act”.

Glenn Newberry, head of costs and litigation funding at Eversheds Sutherland, which acted for GEHC, said: “This is a significant case, being one of the first to find a post-2005 CFA to be unenforceable following the abolition of the 2000 CFA Regulations in 2005.”

RS has sought permission to appeal.

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