Court of Appeal confirms regulations governing Damages-Based Agreements (DBAs) do not preclude terms providing for payment of time costs on termination, nor do they preclude hybrid arrangements

The Court of Appeal has confirmed that a Damages-Based Agreement, or DBA, can include a clause which entitles the legal representative to payment on a time cost basis if the DBA is terminated before the conclusion of the litigation: Zuberi v Lexlaw Ltd [2021] EWCA Civ 16.

DBAs, otherwise known as contingency fees, are a form of retainer in which the legal representative charges a percentage share of recoveries if the claim succeeds. They were introduced as part of the Jackson reforms in 2013 but have not been widely used, in large part due to a lack of clarity in the 2013 DBA Regulations which govern the regime.

One of the areas that has caused some confusion is whether a DBA can include a clause providing for payment on some basis other than a share of recoveries (for example, hourly rates) if the DBA is terminated, or whether including such a term will render the DBA invalid. The present decision helpfully (and unanimously) confirms that such a term is not objectionable and will not affect the validity of the DBA.

A further issue is that the DBA Regulations appear to preclude so-called hybrid DBAs, which combine a percentage share of recoveries on success with some other form of payment, eg reduced hourly rates as the case proceeds. This is because of Regulation 4(1), which provides that a DBA "must not require an amount to be paid by the client other than" the DBA “payment” (that is, the lawyer's percentage share of damages) and the expenses incurred by the lawyer, in each case net of sums recovered from the losing opponent.

The apparent prohibition on hybrid DBAs came as a surprise to the profession when the regime was introduced in 2013 and has been widely criticised over the years, including by members of the senior judiciary. The government subsequently clarified that its policy objection was to "concurrent hybrids", where the two forms of retainer exist at the same time; it did not object to “sequential hybrids”, where there are different types of retainer for different stages of a case. However, the DBA Regulations were never amended to clarify the position (despite the recommendations of a Civil Justice Council working group in 2015). A subsequent review of the DBA Regulations by Prof Rachael Mulheron and Nicholas Bacon QC in 2019 recommended that a form of hybrid DBA should be permitted, with the lawyer able to recover a reduced fee (up to 30% of irrecoverable costs) if the claim failed. The supplementary report in that review was expected in 2020 but has been delayed and is expected early this year.

Against that background, it is noteworthy that the reasoning of the majority of the Court of Appeal in the present case means that the DBA Regulations do not in fact preclude hybrid DBAs - whether "concurrent" or "sequential". On that basis, the DBA regime offers greater flexibility than previously thought for lawyers and sophisticated commercial clients to agree fee agreements which allow the lawyer to share in both the risk and reward of the litigation. This increased flexibility, together with the new clarity on termination provisions, seems likely to lead to a broader take-up of DBAs.

Background

Lexlaw entered into a DBA with its client, Mrs Zuberi, relating to the pursuit of her claims against certain banks alleging mis-selling of derivative products. The claim was settled by a payment to Mrs Zuberi. The DBA provided that Lexlaw were entitled to 12% of any sum recovered plus expenses. Lexlaw brought an action seeking payment of just under £130,000 which it said was due under the DBA.

However, the DBA also provided, at clause 6.2, that if Mrs Zuberi terminated the agreement, she would be liable to pay Lexlaw’s time costs, plus expenses, up to the date of termination. Mrs Zuberi argued that this clause rendered the DBA unenforceable, as it was in breach of Regulation 4(1) of the DBA Regulations.

This question was tried as a preliminary issue. The court (HHJ Parfitt sitting as a High Court judge) found, in favour of Lexlaw, that Regulation 4(1) does not prevent a clause providing for payment of time costs if the DBA is terminated before a right to share in the proceeds of the litigation has arisen (as discussed in this post on Practical Law's Dispute Resolution blog). Mrs Zuberi appealed.

Decision

The Court of Appeal unanimously dismissed Mrs Zuberi's appeal, finding that regulation 4(1) does not preclude an agreement to pay time costs on termination. However, the Court of Appeal judges arrived at that conclusion by different routes.

The majority (Lewison and Coulson LJJ) based their decision on the statutory definition of a DBA, at section 58AA of the Courts and Legal Services Act 1990:

"a damages-based agreement is an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that—

(i) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and

(ii) the amount of that payment is to be determined by reference to the amount of the financial benefit."

As Lewison LJ pointed out, there are two possible views of what the "DBA" consists of: first, the whole contract of retainer, where that contains a provision which entitles the lawyer to a share of recoveries; or second, only those provisions in the contract of retainer which deal with payment out of recoveries.

Lewison and Coulson LJJ held that the latter view should be preferred, so that the term "DBA" is given a narrow meaning. Other elements of the agreement between the solicitor and the client, including the termination provision at clause 6.2 in the present case, have nothing to do with the payment of recoveries and are therefore not part of the DBA itself.

Accordingly, clause 6.2 was outside the scope of the DBA Regulations, and its presence in Lexlaw's retainer did not invalidate the contract.

Lewison LJ recognised that this conclusion meant the DBA Regulations, as currently drafted, do not deal with a lawyer's remuneration in the event that the client pursues a case to trial and loses. That is a matter that could be legislated for separately, ie to introduce a requirement that a DBA form part of an overall contract of retainer which either precluded (or limited) a lawyer from charging fees if the claim were lost. But, in his judgment, there is currently no such restriction on DBAs.

As Newey LJ pointed out, the implication of this view is that the DBA Regulations do not preclude hybrid DBAs. As he put it:

"There is nothing to prevent a solicitor agreeing with his client that he will receive up to 50% of the sums ultimately recovered if the claim succeeds and be paid his full time costs if the claim fails. In fact, it would seem to be the case that a retainer could provide for a solicitor to become entitled to both half of recoveries and full time costs in the event of the claim succeeding."

In Newey LJ's view, this construction was not justified; the broader definition of DBA should be preferred, so that the "DBA" encompasses the entire retainer, not just the provisions which deal with payment out of recoveries. On that construction, hybrid DBAs are not permitted as a result of Regulation 4(1). Newey LJ considered that this conclusion was supported by multiple indications (for example in the speeches in Parliament introducing the legislation and the explanatory note to the legislation) that section 58AA and the DBA Regulations were intended to provide for a regime under which payment would depend on success, ie a "no win, no fee" regime, and the legal representative's share of recoveries would be capped - neither of which would be the case under the alternative construction of the legislation. Newey LJ also thought it would be surprising if the legislation had intended to authorise hybrid DBAs (and in particular concurrent hybrids) without additional safeguards, eg to insist that time should be charged at a reduced hourly rate or to impose other limits on the legal representative's ability to charge time costs in addition to a share of recoveries.

In any event, despite disagreeing with the construction of the DBA Regulations favoured by Lewison and Coulson LJJ, Newey LJ nonetheless agreed that Regulation 4(1) does not bite on termination provisions and, accordingly, clause 6.2 did not fall foul of the DBA Regulations in the present case. He reached this conclusion for a number of reasons, including the fact that the DBA Regulations contain express controls on the fees that can be charged on termination in the case of DBAs in employment matters, whereas they are silent on the position for civil litigation. The explanation given for that distinction, during the passage of the legislation in Parliament, was that employment matters can be undertaken by non-lawyers, whereas "civil litigation can be undertaken only by qualified legal representatives, who are subject to regulation by their professional bodies and whose conduct may be subject to challenge through those bodies". That showed that there was no intention to regulate the fees payable on early termination of DBAs other than in employment matters.