The futile hunt for good faith – Case Note: Candey Limited v Bosheh & Salfiti [2022] EWCA Civ 1103

14/10/2022

1. It was a case raising questions which Lord Justice Coulson stated it would be an understatement to describe as “novel”.[1] In solicitor and client proceedings, the question is normally “solicitor focused”. Has the solicitor complied with their fiduciary duties, and has the solicitor acted reasonably and proportionately in incurring costs? The novelty of this case was to seek to invert the question: what duties does the client owe to the solicitor?

2. This article will: (i) set out the background to the decision; (ii) briefly summarise the Court of Appeal’s judgment; and (iii) summarise some of the lessons that the decision provides and questions that it leaves for the future.

Facts

3. In 2018 Sheikh Mohamed (hereafter ‘SM’) had issued a claim against B and S for fraud, knowing receipt and conspiracy in inducing SM to enter into high interest loans. Candey (hereafter ‘the Solicitor’) agreed to act on the basis of a conditional fee agreement (hereafter ‘CFA’) for B and S in those proceedings. The Solicitor had to cease acting for S and so continued for acting for B only. The proceedings against B and S by SM were denied by B and B brought a counterclaim.

4. The basic terms of the CFA between B and the Solicitor were that in the event of “Success”, the Solicitor would be entitled to their fees based on a doubling of their hourly rates. If B recovered nothing, there would be no liability to the Solicitor. A settlement by B with their opponents on a ‘drop hands’ basis would involve the Solicitor recovering nothing.

5. The CFA included a provision which stated “You will always seek to recover costs by order or agreement”; the claim based on a breach of that express term remains the sole part of the Solicitor’s case which proceeds to trial.

6. There was an initial offer made by SM in early June 2021 which would see B settle against SM but potentially receive a payment of whatever SM would receive in his continued claim against S. Despite that offer B proceeded to settle the litigation later in June 2021 on a “drop hands” offer (with the “drop hands” operating against all parties including S). This meant that the Solicitor was not entitled to their costs.

7. Shortly after the settlement was reached, the Solicitor issued a claim against both B and S for the Solicitor’s costs. The claim brought by the Solicitor relied upon breach of the express term (referred to in this article at Para 5); that claim remains live. The Solicitor’s claim was also based on fraudulent misrepresentation, deceit and breach of an implied obligation of good faith. The Solicitor’s claim against was that S had procured a breach of contract by B of the underlying retainer and was part of an underlying conspiracy. The claims by the Solicitor relied upon privileged material, which the Solicitor claimed an entitlement to rely upon notwithstanding its allegedly privileged nature.

8. In a hearing in November 2021, Clare Ambrose QC (sitting as a judge of the High Court) had struck out a large part of the Solicitor’s claim. Firstly, the Solicitor was not entitled to rely upon the privileged or the confidential material on which the claim partially relied. Secondly, the Solicitor’s claim against B for a breach of an implied term of good faith had no prospects of success. Thirdly, there was no prospect of success in the claims against S and B for conspiracy, against S for inducing a breach of contract or against B for deceit and fraudulent misrepresentation. Only the claim for breach of an express term survived.

9. The Solicitor appealed to the Court of Appeal.

Court of Appeal judgment

10. Two of the key issues in the Court of Appeal will be addressed in turn. Firstly, was there an implied obligation of good faith owed by the client to the Solicitor (hereafter ‘the good faith issue’). Secondly, the entitlement of the Solicitor to rely upon privileged material (hereafter “privileged material issue”). Further issues dealt with by the Court of Appeal (including on the use of confidential material by the Solicitor and whether any implied term of good faith would have been breached) are not addressed here.

The good faith issue

11. The first issue was whether the Solicitor could rely upon an implied term of good faith, namely that the client (B) would act in good faith in his dealings with the Solicitor.

12. The Court of Appeal’s judgment can be summarised as follows:

12.1. The law on implied terms is that: (a) the term must be reasonable and equitable; (b) the term must be necessary to give business efficacy to the contract; (c) the term must be so obvious to go without saying; (d) the term must be capable of clear expression and be formulated with sufficient precision; and (e) the term must not be inconsistent with an express term.[2]

12.2. Attempts to imply terms of good faith (and an “avalanche of claims in recent years trying to show that the contract into which they seek to imply the term is a relational contract” (at [31])) can be traced to the decision of Leggatt J (as he then was) in Yam Seng Pte v International Trade Corp [2013] EWHC 111 (QB). A number of criteria for a “relational” contract were set out by Fraser J in the case of Bates v Post Office [2019] EWHC 606 at [725]).

12.3. Terms of good faith do not necessarily arise as a consequence of a finding that a relational contract exists. In any contract (including a relational contract) the normal test on the implication of terms applies. The Court of Appeal reiterated (at [32]) “…the elusive concept of good faith should not be used to avoid orthodox and clear principles of English Contract law.”

12.4. In Candey the Court of Appeal comprehensively rejected the idea that the solicitor’s CFA could be described as subject to an implied obligation of good faith (at [35-42]). Summarising those reasons:

(i) The retainer operated without the term. The retainer therefore did not “need” the term.

(ii) There was no authority for the general proposition that a client owed a duty of good faith to a solicitor. The proposition that a client would 
owe such a duty would be a “startling concept”. If a duty of good faith was owed it was by the solicitor to the client.

(iii)  The fact that the retainer was a CFA could not alter the conclusion. The CFA was merely a device for securing legal services with minimal 
financial outlay; it did not alter the obligations owed by the client (although this appears to have been made with the caveat “[B]eyond the
question of remuneration…”).

(iv) As SM had made allegations of fraud and dishonesty against B, it was possible that SM would prove that SM had acted dishonestly. In those circumstances “the possible truth of the fraud allegations was inherent in the CFA itself” (at [39]). Accordingly, a duty of good faith by B to the solicitor was contrary to the CFA. Implying a good faith obligation would mean a “win win” for the solicitor, in that if B was lying, the solicitor would recover under the good faith obligation and if B was not lying, then the client would win and the solicitor would recover his fees.

(v) On a run through of the Bates factors, the CFA was not a relational contract. In particular (at 41 (e)) the “trust and confidence” in a relational contract is different to a fiduciary relationship. This did not change the fact that a fiduciary relationship was the duty which the Solicitor owed to B. There was no commitment to (or expectation of) loyalty or a high degree of communication from B to the Solicitor. Indeed in the summarising paragraph Coulson LJ concluded (at [42]):

 “[I]n short, this was an ordinary solicitors’ retainer which happened to be on a CFA basis. There are thousands of those in operation at any one time in the UK. Nobody has ever suggested before that they are relational contracts, or that in every CFA, the client owed the solicitor a duty of good faith….that is not how they are sold to the public.”

13. This article does not provide an in-depth discussion of the Court of Appeal’s decision on whether the good faith term would have been breached if it had been implied (at [44-62]). But it is worth briefly noting that the Solicitor was eventually required to put their case on the basis that at some juncture, a good faith term would require B (the client) to not advance their own perception of their own economic interests ahead of that of the Solicitor. The Court of Appeal rejected that conclusion, with the Court of Appeal stating that this argument:

 “…demonstrates the potential conflict of interest that can arise under a CFA between the client and the solicitor where the terms are drafted in such a way that the solicitor’s costs recovery is itself dependent on the client recovering something…Such conflicts cannot be resolved by an implied duty owed by the client to consider the solicitor’s financial interests rather than his own; it is for the solicitor to ensure that such conflicts do not arise in the first place.”

The privileged material issue

14. The Solicitor had sought to rely upon privileged material provided by B to the Solicitor in order to prepare and progress the defence by B in the proceedings brought by SM.

15.   The Court of Appeal’s judgment (at [66-73]) can be summarised as follows:

15.1. Litigation privilege is a fundamental condition for the administration of justice. An individual must be able to consult their lawyer in confidence. Whilst it is generally held to be absolute there are some circumstances where exceptions operate or the privilege ceases to exist.

15.2. The first exception is the implied waiver when the client sues his solicitor. In those circumstances privilege is waived to the extent that it is necessary to enable the court to adjudicate the dispute fully and fairly, and should therefore be limited to the issues in the proceedings.

15.3. The second situation in which privilege will not apply is when the client, in a case “far from the ordinary run of cases” seeks to perpetrate a widespread conspiracy to deceive the court. Communications to further an iniquitous purpose negate the condition of confidentiality upon which privilege is normally based, provided that the scale of the iniquity removes the case from the ordinary course of a solicitor’s professional engagement in which privilege would arise. It will always be a case of fact and degree whether the iniquity is sufficiently severe and widespread to no longer attract privilege. This was referred to as the “iniquity exception”.

16. The Court of Appeal therefore rejected the privilege arguments (at [70-92]) for the following reasons:

16.1. The solicitor had not “unequivocally” put their case on the basis of an implied waiver. On the material before the court this could not arise. Further, the solicitor’s argument (in effect) was to say that if the client acted in a way so as to entitle the solicitor to bring a claim against them, this would amount to a waiver of privilege. That approach would fundamentally alter the solicitor/client relationship and was wrong.

16.2. The judge at first instance had carried out an analysis of whether the material demonstrated iniquity of a scale and degree to justify the “iniquity exception”. The judge’s conclusion that the material did not demonstrate this level of wrongdoing or that the iniquity fell outside the ordinary course of a professional relationship involving solicitors defending allegations of fraud could not be seriously challenged.

16.3. Policy arguments by the solicitor that privilege (and the iniquity exception) should be treated differently under a CFA were contrary to the absolute nature of the rule on solicitor/client privilege and lacked substance. The judge had emphasized that the solicitor could seek protection (in what was a sophisticated market) by reference to insurance or contractual terms, or an increase in fees. The nature of a CFA did not alter whether privilege applied.

17. In argument, the solicitor had raised a new ground (at [74]), namely whether if a solicitor had possession of the relevant documents (recording communications between the solicitor and the client), there would be no privilege because the solicitor owed no obligation of confidentiality in relation to those documents. Coulson LJ (at [79-81]) was reluctant to decide this point (and felt it was appropriate to focus on the exceptions to privilege). In contrast, Arnold LJ’s judgment (at [112-118]) dismissed the new argument as contrary to both principle and authority.

Analysis and points for the future

18. The decision in Candey is unequivocal in its rejection of any attempt to draw a distinction between CFAs and other retainers. The commercial implications within a firm for a CFA are not a basis for altering the duties owed by the firm to the client (on the privilege issue) or for implying greater obligations on the client to recognise the commercial exposure on fees to which a solicitor is exposed by taking a case on a CFA (on the good faith issue). If there are risks from a CFA for the solicitor, this does not mean that both parties (even if recognising that risk) have thereby impliedly chosen to alter the usual rules in the solicitor/client relationship. In short, if the solicitor acts on a CFA and becomes exposed on fees, that solicitor cannot expect the court to ride to the rescue by altering the usual rules in a solicitor/client relationship (on privilege) or by re-casting the meaning of a retainer through the implication of terms (on the good faith issue).

19. Undoubtedly, that will leave firms querying whether, in cases where either the nature of the allegations or the nature of the client leaves the firm nervous about whether to enter into a CFA,  it is worth the risk to conclude a CFA and thereby accept the possibility that a client will leave them with a large fee exposure by ruthlessly pursuing their own interests without regard to the solicitor’s interests.

20. However what the decision leaves largely unsaid, but what appears to be endorsed from the citation from the judge at first instance (at [91]) is that the court will not assist the solicitor in seeking to secure further protections from the client, but recognises that the solicitor may seek further protection (in terms) within the retainer itself. A term of good faith may not be implied, but the Court of Appeal did not attempt to say that if a term of good faith had been written into the retainer, it would have been unenforceable or contrary to public policy. If the solicitor wants the protection of a good faith term, the route in the future is to write such a term in.

21. The caveat to that approach (namely to include an express term relating to good faith if a solicitor wants to rely upon this concept) is that in describing terms of good faith as incorporating an “elusive concept”, the Court of Appeal were at best lukewarm about the role for good faith to play. The solicitors lost on the point that a term on good faith would have been breached even if it had been implied. As a consequence, if the solicitor wants to ensure that their fee exposure forms part of the contractual matrix which the client is bound to consider, it is best to agree this at the outset. Despite the rejection of many of the arguments by the solicitor in this case, the terms in the CFA that B was to seek to recover costs remains an issue which will proceed to trial.

22. Such an approach (i.e. including better and clearer terms to protect the solicitor) is unlikely to resolve the issue of privilege. The Court of Appeal’s robust defence of the absolute nature of the rule in Candey underscores the exceptional nature of the iniquity rule, which does not arise simply because the solicitor is defending the client against allegations of fraud and dishonesty. The client’s conduct has to be more pernicious to the underlying rationale of the privilege rule (namely the effective functioning of the administration of justice).

23. The Court of Appeal has been clear what the test is, and whilst evidently it is always possible to defend a failure to give examples on the basis that the operation of the iniquity rule will always be subject to fact and degree, it would perhaps have been useful to identify circumstances of when the court considered that the exception would operate.  

24. For the solicitor who is concerned about how a retainer may leave them exposed to dishonest conduct by a client which cannot be the basis of a claim if contained within privileged material, then one potential route forward is a discounted conditional fee agreement. That prevents the solicitor from being wholly exposed. Further, if the solicitor has to issue proceedings for the discounted fees, the dishonest client who seeks to defend those proceedings by making assertions about what is alleged to have been said to the solicitor enters into the potential territory of the implied waiver, where the Court of Appeal were quite clear that the absolute nature of solicitor/client privilege would fall to be re-assessed.

Conclusion

25. The decision in Candey may be a novel outing of some of the legal issues identified by the Court of Appeal into the appellate courts, but the commercial decisions which these issues pose for a solicitor asked to act on a CFA will arise frequently in their practice. The key lesson from Candey has to be that if a solicitor wants to obtain further protection against an exposure to fees on a CFA, they will have to look to provide that protection within their own terms.

 JOHN CHURCHILL

[1] In Candey Limited v Bosheh and Salfiti [2022] EWCA Civ 1103 at [1].

[2] Per Candey at [29] relying on Marks and Spencer Plc v BNP Paribas Securities Services Trust Co. (Jersey) Ltd [2015] 3 WLR 1843 and Europa Plus SCA SIF v Anthracite Investments Plc [2016] EWHC 437 (Ch).