Retaining shares following litigation did not trigger DBA payment

Zacaroli: Shares were not a benefit of the proceedings

A client who retained shares as part of a settlement but did not recover anything from the other party was not liable to pay his solicitors anything under a damages-based agreement (DBA), the High Court has ruled.

Mr Justice Zacaroli said London firm Candey was only entitled to payment from Edward Wojakovski if he actually recovered something in or as a consequence of the proceedings.

The litigation concerned Tonstate Group, a property investment business, half owned by Mr Wojakovski, and half by a Mr and Mrs Matyas.

It was common ground that both Mr Matyas and Mr Wojakovski had extracted funds from the group without lawful authorisation. In the main derivative action, Zacaroli J granted judgment of £13m against Mr Wojakovski.

There were other related actions, including one where Mr and Mrs Matyas sought the rescission of shares they had transferred to Mr Wojakovski. These settled, with Mr Wojakovski retaining a quarter of his shares.

In the latest hearing, Candey sought an equitable charge over the shares as security for fees it said were due under the DBA, which covered all the various proceedings.

The DBA defined ‘proceeds’ as recovering “damages, monies, costs incurred by your previous lawyers, other sums and/or derive any benefits… in or arising out of all of the current court proceedings”.

Candey would then be entitled to 29% of the proceeds + VAT, “net of any historic tax liabilities due to HMRC by Tonstate Group Companies, and any tax related to these companies should HMRC pursue you”.

Candey contended that the retention of the shares was a benefit derived in or arising out of the proceedings within the meaning of the DBA, given that Mr and Mrs Matyas had sought all of them.

But Zacaroli J found that the DBA was drafted so that proceeds only included benefits Mr Wojakovski recovered from another party.

“Mr Wojakovski’s ownership of the shares pre-dated the proceedings and is not aptly characterised as a benefit derived from the proceedings.

“At most, what he derived from the proceedings was the avoidance of a detriment to the extent that he retained the shares. This reading is supported by the fact that the agreement is entitled a ‘Damages Based Agreement’, since the essential feature of damages is that they are recovered from another party in the proceedings.

“The reference in paragraph 5 to the fact that Candey would be entitled to no payment at all if Mr Wojakovski did not recover any monies is important as an indication of the parties’ intentions as to the scope of the DBA.”

Another indicator was the provision that the payment to Candey would be net of tax, the judge went on.

“Since the value of the shares could not be determined until the tax position of the companies had been resolved, potentially for many years, that meant that any amount due to Candey under the DBA similarly could not be identified for the same length of time, if the proceeds included the shares…

“That is so whether or not actual monies were recovered by Mr Wojakovski as well, because the payment is defined as 29% of (all of) the proceeds.

“The absence of any mechanism to address that issue, for example as to when and as at what date any shares retained by Mr Wojakovski would be valued, and how any disputes over valuation would be resolved, suggests it is unlikely the parties envisaged that proceeds would include any shares retained by Mr Wojakovski.”

Zacaroli J added that, even if he were wrong, the DBA would not be enforceable (on this issue at least) because the DBA Regulations 2013 required that any payment from the client to the solicitor was calculated as a proportion of the sum “recovered”.

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