Welcome to the latest edition of our Lawyers Liability & Regulatory Update, in which we look back over the last month at key developments affecting lawyers and the professional risks they face.

Severe consequences: severance of success fee provisions in a CFA not allowed

In Diag Human v Volterra Fietta [2023] EWCA Civ 1107 the Court of Appeal has held that a firm of solicitors that had entered into an unenforceable conditional fee agreement (CFA) could not obtain payment by severing the offending terms of the agreement and nor was payment on a quantum meruit basis permitted for public policy reasons. The consequence of this was that their clients were entitled to the return of sums paid on account.

This decision comes soon after the Supreme Court's decision in R (on the application of PACCAR) v Competition Appeal Tribunal [2023] UKSC 28. In that case the court held that most litigation funding agreements were Damages Based Agreements (DBAs) and therefore where such agreements do not comply with the DBA Regulations of 2013 they would not be enforceable. Since PACCAR, funders may have been considering whether it is possible to sever the offending clauses or to seek payment on a quantum meruit basis. The decision in Diag Human casts doubt on those considerations.

For our more detailed analysis of this decision, click here for our recent article.

Arbitration lawyers lambasted by High Court

In The Federal Republic of Nigeria v Process & Industrial Developments Limited [2023] EWHC 2638 Mr Justice Knowles made criticisms of the conduct of a solicitor and a barrister involved in the underlying arbitration and has indicated that he will be referring the matter to the Solicitors Regulatory Authority and Bar Standards Board.

The case concerned the challenge of an arbitration award made against the Federal Republic of Nigeria ("Nigeria"). Nigeria entered into a "Gas Supply and Processing Agreement for Accelerated Gas Development" ("GSPA") with Process & Industrial Developments Limited ("P&ID") in January 2010. Following a dispute between the parties, arbitration proceedings were commenced by P&ID. The arbitration tribunal found in favour of P&ID and held Nigeria liable in damages for a repudiatory breach of the GSPA. Nigeria challenged the arbitration awards in the High Court and made allegations of bribery, corruption and perjury extending to the GSPA and arbitral process. Mr Justice Knowles found in favour of Nigeria and held that the arbitration awards had been obtained by fraud and were contrary to public policy.

In the lengthy judgment, Mr Justice Knowles made criticisms P&ID's solicitor (Seamus Andrew) and instructed counsel (Trevor Burke KC) in the underlying arbitration. The judge's criticisms focussed on both individuals' involvement in the improper retention of a number of Nigeria's internal legal documents. It was said that "as legal professionals Mr Andrew and Mr Burke KC appreciated that these at least included documents that were privileged". Trevor Burke KC gave oral evidence that he conducted an enquiry into where these documents had come from and said that he did not give much importance to them. The Court found this evidence to be false. Seamus Andrew gave oral evidence that the documents were shared as part of settlement discussions and that he did not give particular attention to them. This was also found to be false. It was held that "their decision not to put a stop to it, at least by informing Nigeria or immediately returning the documents they knew were received, was indefensible". The retention of the documents "enabled P&ID to track Nigeria's internal consideration of merits, strategy and settlement during the Arbitration" and "monitor whether Nigeria had become aware of the fact that the Tribunal and Nigeria were being deceived".

Both individuals were said to have "very significant personal interests in this matter" with a potential claim to large sums of money contingent on the success of P&ID (up to £850 million for Trevor Burke KC and up to £3 billion for Seamus Andrew). The Court found that the improper retention of the internal legal documents was because of the money they hoped to make.

Mr Justice Knowles indicated that he would be referring his judgment to the Bar Standards Board in the case of Trevor Burke KC and both the Solicitors Regulatory Authority and Bar Standards Board in the case of Seamus Andrew.

The judgment serves as a warning to solicitors and barristers to take proper action if in receipt of privileged documents, including immediately informing the other party and returning the documents. The High Court did not comment on the acceptability of the remuneration arrangements referred to in the case but has indicated that it will be "a central point" for the regulator.

Legal Services Board Review of Regulators' Enforcement Tools

The Legal Services Board (LSB) has announced plans to conduct a review of the enforcement and investigative tools currently available to legal service regulators, including the SRA and BSB. This is in addition to the LSB's ongoing in-depth review of regulators' disciplinary and enforcement processes, after its annual performance assessments identified weaknesses across the regulators.

The review will be carried out in accordance with the LSB's powers under section 69 of the Legal Service Act 2007, which permits recommendations to be made to the Lord Chancellor for changes to the functions of legal service regulators, including increases to the level of financial penalties that can be applied by the regulator. Other proposals to be considered in the review include enabling regulators to gather information and share intelligence to help them detect and address misconduct.

The LSB has long considered that the existing financial penalties are insufficient to tackle cases of serious and wilful misconduct. However, this does not appear to be a view shared by The Law Society of England and Wales. Former President, Lubna Shuja, has said that there is "no evidence that the SRA's current fining powers are insufficient" and highlights the recent increase in the SRA's powers to discipline and fine solicitors who commit misconduct. The outcome of the LSB's review and their subsequent recommendations are therefore awaited with interest.

Size (and area of law) does matter after all

It may be a stretch to describe as interesting the findings of a recently commissioned report examining the trends of professional indemnity insurance (PII) costs among law firms. What merits, at least, some surprise, is that from the sample size of ca. 300 firms, there is no conclusive evidence of a link between premium rates and an individual law firm's claims history.

Principal determinative factors instead included a firm's size and the type of work they typically undertake, with smaller firms' premiums making up a proportionately higher amount of their annual turnover and firms carrying out more property work attracting higher premium rates.

A common perception that smaller firms are more inherently risky than larger firms was found to have no factual basis across the dataset of all SRA-regulated firms, with smaller law firms making a similar number of claims in the past two years, per £1m turnover, as their larger counterparts. The relative difference in premium could then be attributable to other factors, such as larger firms having more clout to negotiate renewals, although smaller firms (of a similar risk portfolio) could potentially mitigate this by banding together before approaching brokers to try to negotiate a more attractive rate.

With no immediate sign of the PII market softening, premium prices are expected to continue to rise, although at a lower rate than recently seen.

Hong Kong – High standards expected of Tribunal Members, including Arbitrators

In our September 2023 update, we reported on Song v Lee, which held that arbitrators are entitled to the same immunity available to judges in respect of their decision-making in an arbitration (absent fraud or bad faith). The issue arose in the context of the respondent's challenge to an arbitral award.

The respondent's application to set aside enforcement of the award does not appear to have been prejudiced by his inability to compel one of the arbitral tribunal members to give evidence. The respondent's lawyers obtained a video recording of parts of the arbitral hearing and presented this as evidence to the court. The tribunal member had attended the hearing remotely and appears to have spent much of the time on manoeuvres (indoors and outdoors) – for example, going from place to place, on foot and by car, while at one point being on or proceeding to a high-speed railway.

After reviewing the video recording, the court refused to enforce the award (Song v Lee [2023] HKCFI 2540). The court concluded that the tribunal member's participation had fallen short of the high standards expected for a fair hearing, such that it would be contrary to public policy to enforce the award. A passage from court's decision reads:

"It is the duty of an arbitrator to decide the dispute submitted to him, after giving to the parties the reasonable opportunity to present their case, and after hearing the parties. In fact, it can be said that the first role of the judge and the arbitrator is to preside and hear the case."

The court's decision serves as a warning to tribunal bodies that a failure by one or more of their presiding members to participate meaningfully during a physical or remote hearing could provide an aggrieved party with a right of redress in the courts. The lawyers are watching.

Disclaimer: The information in this publication is for guidance purposes only and does not constitute legal advice. We attempt to ensure that the content is current as at the date of publication, but we do not guarantee that it remains up to date. You should seek legal or other professional advice before acting or relying on any of the content.