A lifeline for damages-based agreements?

In Lexlaw Ltd v Zuberi [2021] EWCA Civ 16, the Court of Appeal unanimously ruled that Damages Based Agreement (DBA) regulations do not prevent early termination payments being made to solicitors.

The certainty provided to legal practitioners by this important ruling may open the door for the more widespread use of DBAs, which have seen limited use to date.

What are Damages Based Agreements?

DBAs are a type of funding agreement entered into between a solicitor and a client under which the payment made to the solicitor depends on the success of the claim rather than an hourly rate – the solicitor will usually take a percentage of the damages awarded. The use of DBAs in civil litigation is tightly regulated by the Damages-Based Agreements Regulations 2013 (the Regulations).

DBAs have seen limited use to date due to a lack of clarity in the Regulations, as acknowledged by Lord Justice Coulson in Zuberi who commented that they were not the “draftsman’s finest hour.”

In particular, many legal professionals had expressed concerns that a DBA would be rendered invalid and unenforceable by:

• any clause in the DBA which required the client to pay fees on termination of the agreement; and / or
• hybrid arrangements which allowed for payments of hourly fees or other fees in addition to the success fee percentage.

Court of Appeal Decision

Background

Mrs Zuberi instructed Lexlaw to act as her solicitors in a misselling claim against a bank and she subsequently signed a DBA entitling Lexlaw to 12 per cent (plus expenses) of any sum successfully recovered. If the claim was unsuccessful, Mrs Zuberi would only be liable for expenses. Mrs Zuberi attempted to terminate the DBA before accepting an offer to settle from the bank.

The DBA contained a clause which provided that if the DBA was terminated early Mrs Zuberi was “liable to pay the Costs and the Expenses incurred up to the date of termination” of the Agreement.

Mrs Zuberi argued that the clause was not permitted under regulation 4(1) of the Regulations and the requirement to pay the 12 per cent success fee was therefore invalid and unenforceable. The High Court rejected this argument and Mrs Zuberi appealed to the Court of Appeal.

The Judgment

The Court of Appeal unanimously held that the Regulations do permit payment of termination fees. A clause requiring a client to pay the costs and expenses incurred by the solicitors in the event of early termination of a DBA therefore did not make the DBA unenforceable.

Additionally, Lewison and Coulson LLJ both took a narrow approach to the meaning of DBA under the Regulations and held that the DBA comprises only the parts of the agreement which cover the percentage share of the damages which the solicitor can recover and does not cover the entire agreement between the solicitor and the client. This suggests that hybrid arrangements may be permissible which would allow solicitors to agree to charge the client for their time on an hourly basis even if the claim is unsuccessful or as an addition to the percentage fee in certain circumstances, rather than on an all-or-nothing basis. Lord Justice Newey dissented on this point but agreed that the termination provisions were valid.

What impact will this have on DBAs?

DBAs have so far proved unpopular due to uncertainty over the interpretation of the Regulations and the risk of recovering nothing if the DBA is held unenforceable. It is unclear whether Mrs Zuberi will apply to the Supreme Court for permission to appeal however the Court of Appeal’s judgment is likely to encourage the use of DBAs and create more flexibility in litigation funding arrangements.

The majority decision on hybrid arrangements may push the Government to provide clarification through further regulation but at present the judgment provides greater certainty on the potential enforceability of more creative hybrid DBAs and will be welcome news for clients wanting to explore alternative fee arrangements.

With thanks to Sophy Lelliott for her assistance with this post.