The Court of Appeal has today saved damages-based agreements (DBAs) by ruling that they are not unenforceable if they provide that the client has to pay incurred costs and expenses on termination.
The decision – the first at this level on DBAs – has been hailed as unblocking their use, including hybrid versions.
Uncertainty over the consequences of termination has been one of the reasons they have been little used since they were introduced in 2013.
Lord Justice Coulson said that, to allow an interpretation of the 2013 DBA Regulations that would prevent a lawyer from recovering any of their own costs after termination would not only be “a commercial nonsense”, but it also would be contrary to the purpose of the underlying statute, “which was designed to encourage the use of DBAs, not make them commercial suicide for the lawyer”.
Lords Justice Lewison, Newey and Coulson upheld the decision of His Honour Judge Parfitt on the 2013 DBA Regulations, but unusually each reached that conclusion in their own ways.
“Nobody can pretend that these regulations represent the draftsman’s finest hour,” Coulson LJ observed.
Lexlaw Ltd v Zuberi was a decision on a preliminary issue of whether the DBA under which the claimant acted for a defendant was unenforceable because it obliged the defendant to pay sums to the claimant other than the payments allowed by the regulations.
Clause 6.2 of the DBA allowed the defendant to terminate at any time, but said they would then be liable to pay the costs and expenses incurred up to the point.
But regulation 4(1) says a DBA must not require an amount to be paid by the client other than what has been paid by another party.
Lexlaw acted for the defendant on a dispute with her bank. Just over a year after the DBA was entered into, she sought to terminate the retainer the firm did not accept that termination as bringing the agreement to an end. The claim then settled and Lexlaw – which had agreed to take 10% plus VAT – sought payment under the DBA of £125,000.
The judges disagreed on exactly what constituted a DBA as well as on their interpretation of the regulations.
Lewison and Coulson LJJ argued for a narrow meaning of the term DBA, meaning that the elements of the agreement not concerning the contingent payment – including the termination provisions – were not captured by the regulations and not part of the DBA itself.
Newey LJ found this construction neither consistent with the legislation’s history “nor borne out by its terms”. Instead, he ruled that regulation 4 simply did not bite on termination provisions.
Coulson LJ said that, if he were wrong on the meaning, he still considered that regulation 4 did not affect termination and expressly agreed with Newey LJ.
In a statement, the Bar Council – which intervened in the case – said the majority ruling “now paves the way for various types of hybrid agreements”.
It went on: “More generally, litigants and legal representatives can, we believe, be significantly reassured that courts will now approach interpretation questions in a way which seeks to give effect to the purpose of DBAs (widening access to justice) and not in a way which undermines their use.”
Nicholas Bacon QC, who led the Bar Council team – which included leading costs solicitor-advocate Greg Cox – said: “The uncertainty surrounding the meaning and effect of regulation 4 of the DBA Regulations has resulted in a longstanding impediment to the use of DBAs in the legal market.
“A significant piece of unfinished business from the Jackson reforms has been to ensure that DBAs work and are an effective means of funding cases. I am delighted that the Court of Appeal has stepped in to grease the wheels of the legislation and removed so much of the uncertainty over their operation.
“DBAs can now be an effective alternative for funding cases.”
Mr Cox, chief executive of Simpson Millar, said: “Clients and the legal profession more generally will benefit from this ruling. DBAs should now become a mainstream part of civil litigation funding options considered by lawyers and clients. Simpson Millar will use them to further open up the law.”
Karim Oualnan, a partner at Lexlaw, said: “It is common knowledge within the profession that the DBA regulation put in place by the Ministry of Justice have a number of gaps and are not user friendly.
“However, it is wholly disingenuous for a client to terminate a funding agreement with a solicitor – after that solicitor has taken the risk of funding the claim to conclusion and obtained a successful outcome – and expect no liability to the solicitor; that is clearly not Parliament’s intention when it enacted the regulations.
“The Court of Appeal has clarified some of these uncertainties and provides the opportunity for DBAs to flourish and enhance access to justice as intended.”
Mr Oualnan said he hoped the ruling would put DBAs, and calls for the regulations to be amended, “back on the agenda”.