Litigation Trending: Will 2021 be the year of the damages based agreement
26 October 2023
DBAs are a radical departure from the ancient common law position that, as a matter of policy, a lawyer who agrees to a share of her client's damages cannot enforce her agreement because it is champertous, and therefore illegal and unenforceable.
But public policy can and does change. The extension of DBAs to contentious civil litigation formed a key part of the Jackson reforms back in April 2013. Their use is governed by Regulations which came into force at the same time.
However, take-up of DBAs has been slow. This is largely due to a lack of clarity in the Regulations. The Regulations are not an easy read but, in essence, they prescribe what a solicitor acting on a DBA can and cannot recover from her client. Several problems have been identified with the drafting, a key one being the lacuna in the Regulations concerning the recovery of costs and expenses in cases of early termination. Lawyers acting on a DBA in employment matters have an express right to charge for costs and expenses if the retainer is terminated early. Lawyers acting on DBAs which are concerned with other types of claim do not. On one view of the Regulations, clients might therefore be free lawfully to walk away from the engagement before the solicitor has earned a penny.
Thankfully the Court of Appeal has now confirmed that this is not the case.
Decision of the Court of Appeal
In Zuberi v Lexlaw Ltd, Mrs Zuberi (the client) had a claim against a bank and entered into a DBA with LexLaw Limited. The DBA included a provision which entitled the firm to their costs and expenses if the client terminated the DBA before the conclusion of the matter (clause 6.2).
In due course the client terminated the retainer. LexLaw claimed its costs and expenses. The client resisted on the basis that the claim was not permitted under the Regulations. The DBA was itself a champertous/illegal and therefore unenforceable contract.
The client lost in the High Court and appealed.
The Judges unanimously rejected the appeal, but for different reasons.
Lewison LJ and Coulson LJ interpreted the Regulations and the definition of a DBA narrowly. In their view, a DBA constitutes those provisions of a retainer which relate to the sharing of recoveries. As such, other incidental provisions in the retainer (including any provisions on payment in the event of early termination), are not part of the DBA itself and therefore not caught by the Regulations.
"I consider that clause 6.2 of the contract of retainer was outside the scope of the Regulations, and that its presence in the contract of retainer did not invalidate the contract" [Lewison LJ, paragraph 45] "…the term "damages-based agreement" should be given a narrow meaning. It is the agreement between the parties relating to the payment as defined in the Regulations, namely that "part of the sum recovered in respect of the claim or damages awarded that the client agrees to pay the representative." Other elements of the agreement between the solicitor and the client, such as at which of the solicitor's offices the work will be done, or the level of expenses incurred (which is expressly excluded from the payment as defined) or, as in this case, the termination provisions, have nothing to do with the payment as defined in the Regulations , and are therefore not part of the DBA itself." [Coulson LJ, paragraph 77]] |
Having commented that this narrow approach would mean that there was nothing to prevent the use of hybrid DBAs (which he considered to be inconsistent with the history of their development), Newey LJ preferred a broader view of DBAs. But he agreed that the appeal should be dismissed on the basis that the Regulation in question (Regulation 4) "did not bite on termination" (paragraph 71).
Will we now see an increase in the use of DBAs?
We noted in our top ten predictions for 2021 that the litigation funding landscape has changed dramatically over the last 5 years, with third party funders and ATE insurance providers seeing increased demand from parties looking at alternative ways to finance claims. One month into the new year and arguably this decision paves the way for a so-far-under-used (lawyers') funding method to take proper hold and begin to change the funding landscape further.
We do not expect, however, uptake to increase significantly until the Regulations are revised. The fact that the Judges differed in their analysis further highlights the problems with them and, as remarked by Coulson LJ, "nobody can pretend that these Regulations represent the draftsman's finest hour". There's also the possibility of an appeal to the Supreme Court.
Let's hope the MoJ take note and escalate consideration of the revised Regulations that Nicholas Bacon QC and Professor Rachael Mulheron are currently working on following the consultation in 2019.
Could 2021 be the year of the DBA?
Case referred to: Zuberi v Lexlaw Ltd [2021] EWCA Civ 16.
For more information on the DBA reform project, see the QMUL website.
Read our previous Litigation Trending Update here.
