A damages-based agreement (DBA) was not unenforceable because it obliged the client to pay incurred costs and expenses when she exercised her contractual right of termination, the High Court has ruled.
His Honour Judge Parfitt, sitting as a High Court judge in the Rolls Building, said Parliament would have been explicit had it intended lawyers not to be able to recover any fees on termination.
Lexlaw Ltd v Zuberi  EWHC 1855 (Ch) 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 Damages-Based Agreements Regulations 2013.
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 sought payment under the DBA of £125,000. Other issues remain in contention but were not addressed in this decision.
HHJ Parfitt rejected the defendant’s construction of regulation 4(1), which he said required it “to perform an additional purpose which is to prevent an agreement between the client and the representative that gave the representative their time costs if the client terminated the agreement before a right to share in the proceeds had arisen”.
This was for several reasons, including that such costs were recoverable on termination in employment cases, and there was no reason to differentiate them.
Such a construction would also make lawyers reluctant to enter into DBAs, “and that would be contrary to the purpose of making such agreements lawful so as to facilitate access to justice”. This would mean less choice for clients.
The judge went on to disagree that the wording of regulation 4(1), that a DBA “must not require an amount to be paid by the client” other than a payment from another party trumped this.
He said this having considered the context in which the 2013 regulations were made. “The suggested construction by the defendant is inconsistent with the purpose of the legislation and the structure of the CLSA [the Courts and Legal Services Act 1990] and the 2013 regulations. It produces a result which, in context, would be irrational and without apparent justification.
“In a similar way, if the legislature considered it necessary that damages-based agreements should prevent the solicitor recovering time costs in any circumstances other than when the agreement continued to apply at the conclusion of successful litigation, then it would have said so in terms and not as a side consequence of addressing a different subject – how sharing the spoils should work.”
“For all those reasons the expression ‘an amount to be paid by the client’ should be construed to be limited so that its subject matter is premised on there being dispute recoveries available for sharing.”
He said the concept of the ‘cap’ on payment was a distinct concept from that of fees contractually due on termination.
“One is dealt with in regulation 4(1), the other falls outside of that which Parliament wanted to regulate other than for employment matters.”
It was the only construction that achieved “the clear purpose of the legislature”.
The judge found an alternative route to the same result. “I consider that a close analysis of the language of section 58AA [of the CLSA] and regulation 4(1) also demonstrates that the subject of regulation 4(1) is limited to the sharing of the spoils payment and no other possible ‘amount to be paid’ between representative and client.”
HHJ Parfitt said that, if he was wrong on both of these approaches, “and it was the intention of the 2013 regulations to make unenforceable an agreement in general civil litigation which would otherwise be champertous because it included an obligation on the client to pay incurred costs and expenses on the client exercising a contractual right of termination, then the agreement would be in material default of this requirement”.
He determined the preliminary issue in favour of the claimant.