Damages-Based Agreements can offer flexibility – Zuberi v Lexlaw

Summary

A recent Court of Appeal decision has paved the way for more flexibility in agreeing Damages-Based Agreements (“DBAs”). This should lead to greater availability of these arrangements which will be welcome to commercial clients that wish to share risk with law firms.

DBAs are a form of contingency fee agreement whereby a law firm can be paid up to 50% of the damages recovered by a client, whether in settlement or at trial. Until recently, it was understood that DBAs had to be all or nothing – agreements providing for payment of different sums if the claim fails, such as by reference to hourly rates (referred to as ‘hybrid’ DBAs) were thought to be prohibited.

To date, DBAs have proved relatively unpopular. This is largely because of the inflexibility of the regulatory framework – the Damages-Based Agreements Regulations 2013 ("DBA Regulations") – including the inability to charge anything if the case is unsuccessful or where the arrangement is terminated early.

On 15 January 2021 the Court of Appeal handed down judgment in Zuberi v Lexlaw Limited [2021] EWCA Civ 16 (link) where it unanimously ruled that the DBA Regulations permit payment of time costs and expenses to solicitors if the DBA is terminated early. The reasoning of the majority of the Court is significant because it means that the DBA Regulations do not prohibit the use of hybrid DBAs. This will likely make these agreements more popular, giving clients more flexibility to agree contingency fees.

Background

Mrs Zuberi entered into a DBA with her solicitors Lexlaw. The DBA entitled Lexlaw to 12% of Mrs Zuberi’s recoveries (plus expenses) if her case was successful. The DBA also contained a clause which provided that if Mrs Zuberi terminated the agreement she had to pay Lexlaw’s time costs and expenses for the work that they had undertaken.

Mrs Zuberi settled her claim but argued that the DBA with her solicitors was unenforceable because of the termination clause, even though the DBA had not been terminated. Mrs Zuberi argued that the termination clause breached regulation 4(1) of the DBA Regulations, which requires that solicitors are paid a percentage share of the recoveries.

Although the DBA Regulations expressly permit solicitors to charge time costs and expenses in employment matters if the client terminates the agreement, the regulations are silent as to the position on terminating DBAs in civil litigation. It has therefore been unclear in the market whether the DBA regulations permit termination payments to solicitors in non-employment matters. As observed by Lewison, LJ (at paragraph 21 of his judgment) this ambiguity “has caused considerable uncertainty in the legal profession; and a widespread fear that if a client terminates a retainer, the lawyer will end up not being paid anything for what might have been months or even years of work”.

The High Court ruled in favour of Lexlaw at first instance. Mrs Zuberi appealed but the Court of Appeal also found for Lexlaw albeit its reasoning differed to that of the High Court.

The Court of Appeal Judgment

The Court of Appeal unanimously agreed that DBAs can provide for payment of the law firm’s time costs if the agreement is terminated. However, the judges adopted different approaches to the meaning of the term “DBA” and it was the majority approach of Lewison and Coulson LLJ which has opened the door to the use of hybrid DBAs.

As Lord Justice Lewison explained:

“There are two possible views of what the DBA consists of. One view is that if a contract of retainer contains any provision which entitles the lawyer to a share of recoveries, then the whole contract of retainer is a DBA. In other words, a DBA is a contract which includes a provision for sharing recoveries. But another view is that if a contract of retainer contains a provision which entitles a lawyer to a share of recoveries; but also contains other provisions which provide for payment on a different basis, or other terms which do not deal with payment at all, only those provisions in the contract of retainer which deal with payment out of recoveries amount to the DBA.”

Lewison and Coulson LLJ agreed that the term “DBA” should be given a narrow meaning. On the basis of the narrower interpretation, the clauses in a contract of retainer that do not deal with the percentage payment to the law firm are not formally a DBA and so do not need to comply with regulation 4(1). The termination clause which required Mrs Zuberi to pay Lexlaw’s time costs and expenses if the DBA was terminated was therefore permissible.

On the question of taking a narrow or broad approach to DBAs, Lord Justice Newey disagreed with Lewison and Coulson, LJJ. In his opinion, inclusion of a clause whereby the law firm is paid a percentage of any recovery makes an agreement a DBA, and the DBA Regulations apply to all clauses in such an agreement. That said, he concurred that Mrs Zuberi’s appeal should be dismissed. After reviewing the development and context of the legislative framework he found that the termination clause in Lexlaw’s agreement did not fall foul of the DBA Regulations because regulation 4 did “not bite on termination provisions”.

Comment

The more surprising aspect of the ruling is Lewison and Coulson LJJ’s finding that provisions of a DBA agreement that do not address the law firm’s percentage payment of the recovered sum are not part of a DBA per se. On this basis, hybrid DBAs are permissible. This is a welcome development for businesses and law firms, allowing much more flexible arrangements for contingency fee structures. For example, businesses may now be able to agree that, as well as being entitled to a share of any damages recovered if the claim succeeds, their appointed law firm should be paid time costs if the claim fails.

More controversially, the majority judgment also logically permits the parties to agree payment of an additional figure beyond the agreed percentage of damages if the claim succeeds. Such additional figure could be a fixed sum or calculated by reference to time costs. That said, such arrangements may still be susceptible to challenge, so parties should proceed with caution. Indeed, it is questionable whether the DBA Regulations intended to allow law firms to receive time costs from the client in addition to the agreed percentage share of damages if the case is won. Permitting those types of arrangements could cut across the 50% cap on recoverable damages. Also, it is presently uncertain whether Mrs Zuberi will appeal to the Supreme Court or whether the Government will choose to further regulate in this area.

Nonetheless, the judgment makes enforceability of DBAs more predictable and therefore will encourage their use. This is good news for commercial clients that wish to have a range of alternative fee arrangements available for their contentious matters.

Co-authored by Charlotte Lakin.