The Court of Appeal has confirmed that a term could not be implied into a conditional fee agreement between a liquidator and solicitors, and that the solicitors would only be paid out of recoveries made. However, the liquidator was not liable for the fees because of a common understanding between the parties. We cover this, and other issues affecting the insolvency and fraud industry, in our regular update:
Liquidator not liable for fees despite wording of CFA
The Court of Appeal in Stevensdrake Limited v Stephen Hunt and Stephen Hunt as Liquidator of Sunbow Limited  has held that a term could not be implied into a conditional fee agreement (CFA) between a liquidator (Hunt) and solicitors (Stevensdrake) acting on his behalf, and that the solicitors would only be paid out of recoveries made, as this contradicted an express term in the CFA to the contrary.
Despite that, Hunt was held not liable for those fees as there was clear evidence of a shared common understanding, acted on by both parties, that payment would only be made out of any recoveries.
The full details of the background to this case can be seen from our coverage of the first instance decision in which the court held that there was a necessary and implicit term in the agreement between Stevensdrake and Hunt that payment would be made on a recoveries basis only. Stevensdrake appealed.
The Court of Appeal, allowing the appeal in part, held there was no justification for going outside the terms of the CFA and making it subject to contrary terms founded on other agreements which may have been made. The CFA was a short, coherent and comprehensive agreement clearly imposing a responsibility for payment regardless of recoveries that worked perfectly well without the need for any implied term.
As per the Supreme Court decision in Marks and Spencer plc v BNP Paribas Securities Services Trust co (Jersey) Ltd , a term will only be implied into a contract if:
- It does not contradict any express term in the contract - the term sought to be implied did.
- It is necessary to give business efficacy to the contract - it was not as the CFA worked perfectly well without it.
- It is so obvious that it 'went without saying' - that was not the case here as it was contradicted by an express term of the contract.
The Court of Appeal concluded that it did not matter how strong the contemporaneous evidence was, it is a cardinal rule that no term can be implied into a contract if it contradicts an express term of that contract. Under the CFA, personal liability for payment by Hunt arose once "success", as defined, was achieved and so was an immediately enforceable liability, regardless of whether any recovery had been made.
However, the court went on to uphold the finding at first instance that there was a shared common understanding that the fees would be paid from recoveries and that Hunt would not be personally liable for any shortfall. An estoppel by convention arose. There was ample evidence in the correspondence between the parties of a shared common understanding and of it being communicated, shared and acted upon by both parties to the CFA. It would be unconscionable for Stevensdrake to resile from the parties' shared common understanding as Hunt would undoubtedly have withdrawn his instructions from Stevensdrake and found solicitors prepared to do the work on a recoveries only basis.
It is of course very common for professionals to be engaged in insolvency cases on the basis that payment of fees will be made from assets recovered into the insolvent estate. This decision is therefore a good overall result in that it recognises this principle, which is widely accepted in the industry.
Insolvency practitioners should, however, ensure that any arrangements re payment of fees and disbursements are clearly and accurately set out in the engagement terms or any CFA, rather than in an informal agreement. Unless the evidence is as clear cut as in this case - and each case will be fact specific on this point - arguing estoppel by convention will be difficult and costly and so is best avoided.