KA-2025-000017 - [2025] EWHC 2311 (KB)

If the expenses clauses were unlawful under the DBA rules and were material, the appellants submitted that the DBAs can be saved by severing the clauses. A minor objection to this argument can be cleared away immediately. The respondent submits that excising the expenses clauses is insufficient as there are references to expenses in the retainer letter (“As you are aware, we will expect you to pay sums for counsel's fees or other disbursements in advance of our incurring the disbursement”). I judge that these references can be readily removed, as can those in the checklists. This presents no insuperable objection. To bolster their argument, the appellants cite Zuberi at paras 5-7:

“The common law

5 Retainers under which a lawyer was entitled to a share in the client's recoveries were long prohibited at common law on grounds of public policy on the ground that they were “champertous”, although public policy is capable of changing: Kellar v Williams [2005] 4 Costs LR 559, para 21.

6 At common law, where all the terms of a contract are illegal or contrary to public policy, the contract is unenforceable. Where, however, only some of the terms are illegal or contrary to public policy, the court can in some circumstances enforce those parts that are not illegal or contrary to public policy. The general rule is that where you cannot sever the illegal from the legal parts of a contract, the contract is altogether void, but where you can sever them “you may reject the bad part and retain the good”: Chitty on Contracts, 33rd ed (2019), para 16-237.

7 The criteria that must be fulfilled before severance is possible are that

(a)

the offending provision can be removed without modifying or adding to other terms of the agreement; (b) the remaining terms continue to be supported by adequate consideration and (c) the removal of the unenforceable part of the contract does not change the nature of the contract, such that it is not the sort of contract that the parties entered into at all: Egon Zehnder Ltd v Tillman [2020] AC 154.”

The severance criteria, also known as the “Beckett test”, is also subject to public policy considerations. This was explained by Stuart-Smith LJ in Diag Human at paras 62-65:

“62.

Even if I were wrong in this conclusion, I would hold that severance is precluded as contrary to public policy. The principal effect of severance would be to permit partial enforcement of the unenforceable CFA. As was pointed out during submissions, if the client lost the arbitration, the effect of allowing severance would be that the solicitors would recover precisely the same amount of their fees as if the CFA had been held to be enforceable. That is not, in my view, a tolerable outcome. Nor is it any answer to submit that there is no disadvantage to the client in enforcing the discounted fee element in respect of work carried out for and at the client’s request. The regime imposed by the 1990 Act is concerned with conflicts of interest giving rise to potential harm to clients: see Garrett per Dyson LJ at [38]–[39].

63.

The effect of implementing public policy, as explained by Dyson LJ at [27]– [30] of Garrett, cited at [21] above, is that “if the applicable conditions are not satisfied, the CFA shall be unenforceable with the consequence that the solicitor will not be entitled to payment for his services”.

64.

Awwad, like the present case, involved a CFA of the type that has been described as a “discounted fee agreement”. The solicitor in Awwad agreed to charge the client at her normal rate if the client won the litigation and at a lower rate (£90 per hour) if he lost. The agreement was not sanctioned by the 1990 Act. After acceptance of the opponent’s Part 36 offer, the client declined to pay the solicitor’s bill of costs. The Court of Appeal held that it was contrary to public policy for the solicitor to have acted in pursuance of a fee agreement that was not sanctioned by statute and that the agreement would not be enforced. The solicitors in Awwad, as in this case, submitted that there could be no objection to enforcing the agreement in respect of the discounted element of their fees that were to be payable in any event: see 574F. That argument too was rejected on grounds of public policy: see 594C–E per Schiemann LJ.

65.

It would therefore be contrary both to principle and to authority to allow partial enforcement of the unenforceable CFA in the present case, on grounds of public policy. That precludes any residual arguments in favour of severance.”

I heard no submission that there was a lack of consideration, consistent with the respondent’s realistic approach taken before the Judge that there was consideration (para 118). Thus I examine the other factors. First, the “blue pencil test”. The “offending” clause states:

“expenses: the cost of instructing third parties, such as barristers and experts, any fees payable to the third parties, and our disbursements as set out in Paragraph 9, incurred in connection with the pursuit of your claim[s].”

The terms disbursements and expenses are used interchangeably in the Regulations. This follows the approach in comparable regulations (Jones v Wrexham [2007] EWCA Civ 1356, paras 28-29). As the Judge noted (para 86), this appears to reflect the historical position that counsel fees, albeit an expense of the solicitor, are often referred to as a disbursement. Thus, the Regulations define expenses as “disbursements incurred by the representatives including the expense of obtaining an expert’s report and, in an employment matter only, counsel’s fees.” The nature of this agreement means that it is not possible to forensically cut out the offending content. The difficulty is that counsel’s fees would still potentially be within the terms “third parties” and “our disbursements” and would come back in in that way. Thus, one would have to “modify or add” other terms to the agreement. That is impermissible.

Second, removing counsel's fees would effect a very substantial change to the bargain. As stated by Lord Wilson in Egon Zehnder Ltd v Tillman [2019] UKSC 32, [2020] AC 154 at para 87, the question may be posed as “whether removal of the provision would not generate any major change”. This was a high-value case (£100 million estate) Chancery case. It resulted in a fully contested three-week trial. The suggestion that removal of counsel's fees from the agreement does not “generate” change that is “major” is unconvincing.

Finally, I was directed by the respondent to the Court of Appeal’s judgment in Diag Human. Relying on the judgment of Stuart-Smith LJ at paras 64-66, the proposition is that it is contrary to public policy to use severance to save an agreement that is tainted with illegality. One must immediately make allowance for the fact that Diag Human concerned the enforceability of CFAs not DBAs. Nevertheless, the question of principle in respect of severance seems to me to be materially the same. At para 62, the Court of Appeal said that “severance is precluded as contrary to public policy. The principal effect of severance would be to permit partial enforcement of the unenforceable CFA.” The court continued at para 63:

“63.

The effect of implementing public policy, as explained by Dyson LJ at [27]–[30] of Garrett, cited at [21] above, is that “if the applicable conditions are not satisfied, the CFA shall be unenforceable with the consequence that the solicitor will not be entitled to payment for his services”.” (original emphasis)