Good faith, CFAs & settlement: whose interests matter?

Articles
10 Sep 2022

In summer 2021 a firm of solicitors (‘Candey’) sent their clients (the ‘Boshehs’) a settlement agreement for signature.  It was a ‘drop hands’ settlement with no costs order which meant Candey would be paid nothing under their CFA.  The same day, Candey terminated the retainer and issued proceedings.  They complained that the Boshehs had turned down a different settlement proposal that might have led to Candey’s costs being paid, effectively by the Boshehs’ co-defendant.  Candey felt that the Boshehs ought to have taken Candey’s interests into account, relying on implying a duty of good faith into the solicitor/client relationship.  This posed useful questions about the implication and meaning of good faith, the nature of the solicitor/client relationship, and the practicalities of acting under a CFA.

Facts

The Boshehs were father and son. They and a co-defendant faced a fraud claim from a Sheikh Mohamed.  They advanced a counterclaim.  Success under Candey’s CFA was defined as “recover[ing] any damages, profits, money, and/or deriving] any other benefits … or an award of … costs … whether by court order, tribunal award, settlement, agreement or otherwise.”  If the Boshehs succeeded Candey would be paid double their standard rates.  Otherwise they would be paid nothing.

Sheikh Mohamed offered a settlement under which he would discontinue against the Boshehs, they would not give evidence, and they would receive 50 percent of anything recovered from their co-defendant, capped at £1m.  Candey’s costs at the time were £1.2m.  They maintained that any money the Boshehs received would be applied towards their costs.  There was no assertion that the Boshehs would be liable for the balance of Candey’s costs, although it is not clear whether recovery was capped by the CFA or Candey conceded this point.

Ultimately, the Boshehs rejected the offer and negotiated a global drop hands settlement with Sheikh Mohamed and their co-defendant, leaving Candey entitled to nothing.  Candey sued, asserting breach of good faith and various other grounds that are not dealt with here.

Duty of good faith

The deputy high court judge struck the claim out, finding there was no real prospect that Candey was owed a duty of good faith.  This was upheld on appeal, Coulson LJ giving the main judgment with Arnold and Philips LLJ agreeing.

First, the judgment makes unhelpful reading for a solicitor seeking to argue that they are owed a duty of good faith by their clients.  There was no support for the proposition prior to the judgment.  There is now authority to the contrary.  It was described as a “startling concept”, and said that the duty, if anything, would be owed from solicitor to client – the other way round.  A solicitor is a fiduciary, supposed to subordinate their own interests to their client’s.

Secondly, Coulson LJ made clear, the only difference between a traditional retainer and a CFA is payment.  A CFA is just a “vehicle by which a party obtains legal services for minimal initial financial outlay” but the solicitor/client relationship is otherwise unchanged.  The solicitor’s interest in success does not change the essential nature of the retainer.

Thirdly, the judgment reminds us of the basis for implying a duty of good faith.  It was neither obvious nor necessary – the usual grounds for implication – because the CFA worked coherently without it.  The question was whether the CFA was a ‘relational contract’.  Properly analysed, good faith ran against the nature of the CFA; if the Boshehs were telling the truth about the fraud alleged against them, they would win and the CFA would respond.  If they were lying, they would be in breach of the duty of good faith.  Good faith would convert conditional fees into guaranteed fees.  Even if the CFA could have accommodated good faith, there was still no reason that the CFA was a relational contract, applying the Bates v Post Office[i] ‘sense check’ factors.  This was not a typical open-ended, collaborative, commercial joint enterprise.  It was a garden variety CFA: Candey would act with reasonable care and skill and be entitled to payment, or not, under the CFA.

Breach

The Court of Appeal also considered the question of breach.  The Boshehs, said Candey, had rejected a settlement that was better for both clients and solicitor and had failed to keep Candey’s interest in mind.  Coulson LJ disagreed.  He found that a client is entitled to prefer any settlement they perceive as more favourable.  He also found that the ‘drop hands’ was in fact favourable for the Boshehs.  Although it gave no monetary benefits, it meant no risk of adverse findings at trial, no risk of contribution proceedings, and no continuing negative effect of the health of the elder Bosheh.

Lessons

There are three valuable lessons from this case.  First, claims based on implied duties of good faith may be trending, but these duties are not easy to establish, particularly outside established categories of relational contract.  It remains essential to focus at an early stage on the terms and effect of the contract and the nature of the parties’ relationship.  Secondly, claimants need to consider the nature of the duty of good faith.  What is the bargain to which the defendant must be loyal?  Was the aim of the retainer to reach an outcome in the litigation that suited the Boshehs, to generate fees for Candey, or both?  Thirdly, solicitors should assess the risk they are prepared to take, especially with a defendant CFA.  There is always a risk that a defendant, even if there is a counterclaim, will settle on a drop hands basis, leaving the solicitor out of pocket. The tone of Candey’s emails appended to the judgment show how anxious a solicitor can be avoid this situation.

[i] [2019] EWHC 606.


Article by Jack Dillon and Amy Held

Author

Jack Dillon

Call: 2012

Disclaimer

This content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.

Contact

Please note that we do not give legal advice on individual cases which may relate to this content other than by way of formal instruction of a member of Gatehouse Chambers. However, if you have any other queries about this content please contact: