High Court confirms Damages-Based Agreements (DBAs) cannot be used by defendants

In a recent decision, the High Court has confirmed that a Damages-Based Agreement, or DBA, will not be enforceable if it purports to entitle the legal representative to be paid a percentage of a benefit retained by a defendant to litigation, as opposed to a sum recovered in respect of the claim: Tonstate Group Ltd v Wojakovski [2021] EWHC 1122 (Ch).

The decision leaves open the question of whether a DBA will be enforceable if the legal representative's percentage payment is calculated by reference to the value of some benefit other than money that has been recovered in the litigation.

The decision is not surprising, in that the Damages-Based Agreements Regulations 2013 have generally been understood to preclude the use of DBAs by defendants, and potentially also where the litigating party is to receive a benefit other than money. One of the proposals the Civil Justice Council was asked to consider in its 2015 government-mandated review of the DBA Regulations was to change the Regulations "so that defendants will be able to use DBAs, by widening the application of the regulations where the party receives a specified financial benefit (rather than restricting them to receiving a payment)", and the government put forward a draft revised set of regulations which included amendments to implement this change. The working group's recommendations included improvements to the drafting of this provision. However, these proposals were never taken forward.

A proposal to apply the DBA percentage payment to the “financial benefit” received by the client, rather than (necessarily) a sum recovered by the client, was also put forward in 2019 following an independent review of the DBA Regulations by Professor Rachael Mulheron and Nicholas Bacon QC. We understand that their supplemental report, prepared following a consultation on the proposals, will be submitted to the Ministry of Justice in the near future.

Background

The underlying litigation comprised a series of claims between the Tonstate group of companies and the beneficial owner of 50% of the group, Mr Wojakovski. Claims were brought against Mr Wojakovski for the return of money he had wrongfully extracted from the group (the "Main Action") and for the rescission of transfers of shares to him in one of the group companies (the "Shares Claim"). Mr Wojakovski in turn brought an unfair prejudice petition.

Judgment was granted against Mr Wojakovski in the Main Action for some £13 million. The Shares Claim was settled on terms that Mr Wojakovski's shares were transferred to the claimants, save for 22,500 ("the Shares") which he was entitled to keep. However, the claimants obtained a charging order over the Shares, in respect of the judgment debt obtained in the Main Action. Mr Wojakovski's unfair prejudice petition was stayed.

Candey Ltd are a firm of solicitors who were retained to act for Mr Wojakovski in the underlying litigation under a DBA. This provided that Candey was entitled (by paragraph 2 of the DBA) to recover 25% (later amended to 29%), plus VAT, of any "Proceeds" Mr Wojakovski recovered in the proceedings. The definition of Proceeds was that: "…you recover damages, monies, costs incurred by your previous lawyers, other sums and/or derive any benefits (excluding our hourly rate costs and Counsel's fees) in or arising out of all of the current Court proceedings…", net of certain tax liabilities.

Candey applied for an equitable charge over the Shares as security for fees said to be due from Mr Wojakovski pursuant the DBA. It contended that the Shares represented assets recovered and/or preserved for Mr Wojakovski as a consequence of its work representing Mr Wojakovski in those proceedings.

The claimants cross-applied for a declaration that the DBA was unenforceable, or that no payment had accrued under it, or that Candey was in any event not entitled to a charging order over the Shares in priority to the claimants.

Decision

The High Court (Mr Justice Zacaroli) held that, as a matter of construction, the fact that Mr Wojakovski had retained the Shares did not entitle Candey to any payment under the DBA. If, contrary to that conclusion, the Shares did constitute "Proceeds" under the DBA, the DBA would not be enforceable – at least to that extent.

Construction of the DBA

Candey contended that, despite Mr Wojakovski having lost most of the litigation and being subject to a judgment to pay at least £13 million, the retention of the Shares was a benefit derived in or arising out of the proceedings within the meaning of paragraph 2 of the DBA. The basis for this contention was that the claimants had sought to deprive Mr Wojakovski of all of the shares he held, but by the settlement agreement Mr Wojakovski had successfully resisted that claim as to one-quarter of his shares. Candey submitted that the DBA, as applied to the Shares Claim, made no commercial sense unless retention of the Shares was construed as a benefit for these purposes.

The judge rejected these arguments, concluding that the phrase "derive any benefits from the litigation" in paragraph 2, when read in the context of the DBA as a whole, was limited to such benefits as Mr Wojakovski recovered from another party in or as a consequence of the litigation. As Mr Wojakovski's ownership of the Shares pre-dated the proceedings, it was not aptly characterised as a benefit derived from the proceedings. That view was reinforced by other provisions of the DBA, including a provision that Candey would not be entitled to any payment if Mr Wojakovski did not recover any monies.

Enforceability

The judge accepted the claimants' submissions that, if the DBA was to be construed so as to entitle Candey to payment because Mr Wojakovski retained the Shares, it was unenforceable because it fell foul of the DBA Regulations.

By Regulation 4(1), a DBA must not require an amount to be paid by the client other than "the payment" (net of certain amounts) and expenses incurred by the representative. "Payment" is defined as "that part of the sum recovered in respect of the claim or damages awarded that the client agrees to pay the representative".

The judge held that, since the DBA Regulations provide that any payment under the DBA is to be calculated as a proportion of the sum that is "recovered" in respect of the claim, it is a necessary prerequisite to the representative's entitlement to payment under a DBA that the client has made a recovery from the other side to the litigation. That was clear from Regulation 4 itself, and was consistent with the explanatory notes and memorandum to the Regulations, as well as certain government statements relating to the Regulations which expressed the view that the Regulations did not enable defendants to use DBAs, as a DBA was enforceable only "where the agreement makes provision for the payment of the fee from damages awarded".

Accordingly, if the Shares did constitute "Proceeds", the DBA would not be enforceable to that extent. The judge noted that he did not need to consider the question whether, if some other recovery had been made, the DBA would be enforceable to the extent of those other recoveries.