In the recent case of Candey Ltd v Tonstate Group Ltd & Ors  EWCA Civ 936, the Court of Appeal clarified the scope of damages-based agreements (DBAs) by holding that such agreements could not be used between a solicitor and a defendant when the latter did not have a counterclaim. In essence, the Court laid bare the underlying premise of DBAs: a party must be able to obtain a financial benefit from the litigation to rely on the same.
The solicitors acting for the defendant had been engaged, on the basis of a ‘DBA’, regarding a complex share ownership dispute. Upon the defendant’s bankruptcy, the solicitor claimed that, under the DBA, they were entitled to a certain percentage of the contested shares that had been retained subsequent to the litigation. The issue before the court was to ascertain whether it was lawful for a DBA to essentially allow a solicitor to retain a percentage of contested assets that had been successfully retained on behalf of the defendant subsequent to litigation; in cases where the defendant did not have to transfer those assets to the other party.
On appeal, it was found that a defendant could not enter into a DBA on the premise of assets that they already held. Noting that there was nothing in the relevant reports or Parliamentary debates to suggest Parliament’s intention to permit such kinds of agreements, the Court of Appeal stressed that DBAs essentially operated in a recovery-centric realm, as opposed to one of retention.
For the Court, however, the pivotal line of reasoning was found in the definition of DBAs as found in Section 58AA(3) of Courts and Legal Services Act 1990: “the agreement must provide for payment by the recipient of the services if he or she ‘obtains a specified financial benefit’ from the litigation.” As the Court of Appeal stated, the implication of the word ‘obtains’ envisaged that the litigant acquired something they did not already have. In light of this, as well as the fact that a successful defendant who had purportedly contracted on such terms of a DBA would be “financially no better off than they were at the start of the litigation” and may indeed find themselves worse off, the Court of Appeal found that such an agreement between a defendant and a solicitor was not neither a case of ‘obtaining’ under the 1990 Act nor a case of ‘recovery’ under the Damages-Based Agreements Regulations 2013, SI 2013 No. 609 (“the 2013 Regulations”); such an agreement was not a DBA.
As to whether the solicitors were entitled to a percentage of the retained shares under such an agreement, the Court held that the solicitors had no entitlement to be paid such a percentage. The Court of Appeal stressed that references in the agreement to ‘proceeds’ to be paid to the solicitors did not cover retained assets and that, additionally, the defendant merely avoided an ‘additional detriment’ by not having to transfer all of their shares; retaining a fraction of their shares could not reasonably be construed as ‘deriving a benefit’ for the purposes of the solicitors and pursuant to the agreement.
Candey sets clear precedent for the grounds that it is not possible for a defendant to enter into an enforceable agreement with their legal representatives if it entails having to pay a percentage of any assets retained as opposed to being actively obtained or recovered. In such circumstances, the agreement is beyond the remit of a DBA.
The case also delineates the scope of DBAs as applicable to counterclaiming and non-counterclaiming defendants. As explained by Males LJ, whilst a non-counterclaiming defendant and his solicitors is not capable of executing a lawful DBA, a counterclaiming defendant may be able to do so where they obtain “a financial benefit by making a recovery from the claimant.”
Perhaps most importantly, Candey strikes down a case of what Males LJ aptly terms “heads I win, tails you lose.” Essentially, the case bars any circumstance that pins a client to a bad outcome regardless of the outcome of the case. If such a mechanism had been allowed, a defendant who had been successful in retaining assets would have to pay a portion to their solicitors, whereas a defendant who was unsuccessful in doing so would still have to pay, albeit to the claimants.
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