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Damages Based Agreements: Court of Appeal upholds enforceability of DBAs in the event of termination

The landmark Court of Appeal judgment in Shaista Zuberi v Lexlaw Limited [2021] EWCA Civ 16 makes clear that termination fees are not caught by the DBA Regulations and any DBA including termination clauses is enforceable. The judgment paves the way for DBAs to flourish and enhances access to justice.

The Court of Appeal (before Lord Justice Lewison, Lord Justice Newey and Lord Justice Coulson) has today handed down a landmark judgment on appeal from HHJ’s Parfitt’s High Court ruling in the trial of a preliminary issue and unanimously agreed with Lexlaw dismissing the appeal. The judgment (and the reasoning of the Lordships) will be of interest to the legal profession as it has been concerned that DBAs are not working effectively for either litigants or their representatives and in particular, the inconsistency in the legislation has caused considerable uncertainty and a fear that should a client terminate a retainer, the lawyer will end up not being paid anything for months or years of work.

This is the first material case dealing with the Damages Based Agreements Regulations 2013 to reach the Court of Appeal since the scope of DBAs was extended to civil litigation in April 2013. The ruling provides much-needed clarity to the legal profession on one of the key uncertainties preventing the wider use of DBAs and the unanimous judgment paves the way for DBAs to flourish and enhance access to justice as intended.

Summary

The litigation was brought by Lexlaw Ltd (“Lexlaw”) based in Middle Temple, London against a former client, Shaista Zuberi in respect of payment legal fees pursuant to a DBA made in April 2014. The Defendant sought to terminate the DBA with her solicitors after Lexlaw, through its extensive work, had obtained a significant financial benefit of over £1 million for her in respect of litigation against two major banks for the mis-selling of a complex interest rate hedging product. The Defendant argued that the DBA with Lexlaw was unenforceable under section 58AA of the Courts and Legal Services Act 1990 because the DBA included within it an obligation on the Defendant to pay legal costs and expenses to Lexlaw on its hourly rates in the event of termination (and thus argued that Lexlaw was not entitled to any payment whatsoever).

This question is of paramount importance to the legal profession as a whole, because the effectiveness of the arrangements by which litigants and their lawyers are able to fund litigation are an important component of securing access to justice on terms that are fair to litigants and to practitioners. Should a DBA be unenforceable for reasons that it includes an obligation on a client to pay a solicitor’s time costs and expenses on termination it would effectively end the use of DBAs. As a consequence, cunning and commercially savvy clients would be granted a judicial imprimatur to exploit the defects of the DBA Regulations by terminating the retainer with their legal representatives on the eve of successful litigation or settlement. For example, if the opposing party offers to settle a case, there would be nothing to stop the client disinstructing their legal professionals, representing themselves and terminating the DBA just before accepting the settlement offer in order to avoid liability to pay for work that the solicitor had carried out on the client’s behalf. This is clearly not what was envisaged or intended by Parliament.

The Background

In 2008, the Defendant borrowed over £2 million from Natwest/RBS, and as part of the transaction she entered into a 10-year interest hedging product. By Spring 2012, receivers were appointed against the Defendant. In May 2012, the Defendant appointed Lexlaw to act for her in respect of claims against the banks. In April 2014, the parties agreed to a DBA at the Defendant’s own request, as the Defendant could not otherwise afford to pursue her claim against the banks. Lexlaw carried out a substantial amount of work on the claim and challenged the outcome of a redress review on behalf of the Defendant. In April 2015, a meeting was held with the banks and they indicated to the Claimant and Defendants that an improved redress offer would be provided. In July 2015, the banks made an improved final offer which was acceptable to the Defendant which involved a less costly alternative derivative product and meant the Defendant received £389,168.39 in cash redress from the banks plus avoided significant break costs of £640,000, resulting in a financial benefit to the Defendant of well over £1 million.

Lexlaw sought payment under the DBA from the Defendant in the sum of £125,123.14. However, despite Lexlaw having achieved a successful resolution of the claim against the banks, the Defendant refused to pay any sums and argued that the DBA was unenforceable under section 58AA of the Courts and Legal Services Act 1990 as the DBA included within it an obligation on the Defendant to pay Lexlaw’s costs and expenses on termination.

What is a Damages Based Agreement (DBA)?

Damages-based agreements were first introduced as a form of funding for civil cases on 19 January 2013 when section 45 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”) came into force. The effect of s45 LASPO was to introduce an amendment to section 58AA of the Courts and Legal Services Act 1990(damages-based agreements).

The 2013 Regulations were made pursuant to an amended section 58AA of the Courts and Legal Services Act 1990 (“Section 58AA” and “the CLSA”). The relevant section is found in Section 58AA:

58AA Damages-based agreements

(1) A damages-based agreement which satisfies the conditions in subsection (4) is not unenforceable by reason only of its being a damages-based agreement.

(2) But (subject to subsection (9)) a damages-based agreement which does not satisfy those conditions is unenforceable.

(3) For the purposes of this section—

(a) 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 obtained;

(4) The agreement—

(a) must be in writing;

(aa) must not relate to proceedings which by virtue of section 58A(1) and (2) cannot be the subject of an enforceable conditional fee agreement or to proceedings of a description prescribed by the Lord Chancellor;

(b) if regulations so provide, must not provide for a payment above a prescribed amount or for a payment above an amount calculated in a prescribed manner;

(c) must comply with such other requirements as to its terms and conditions as are prescribed; and

(d) must be made only after the person providing services under the agreement has complied with such requirements (if any) as may be prescribed as to the provision of information.

section 58AA of the Courts and Legal Services Act 1990

Trial of a Preliminary Issue

In spite of obtaining compensation exceeding £1 million the Defendant refused to pay arguing instead that the DBA was unenforceable under section 58AA of the Courts and Legal Services Act 1990 as the DBA included within it an obligation on the Defendant to pay Lexlaw’s costs and expenses on termination.

By judgment dated 26 June 2018, Master Clark ordered the trial of a preliminary issue in the claim as follows: 

Whether the DBA is enforceable by virtue of section 58AA(2) of the CLSA 1990, by reason of failing to satisfy the conditions in section 58AA(4) CLSA 1990, as pleaded in paragraph 64 to 71 of the Amended Defence dated 22 June 2016”.

Lexlaw Ltd v Zuberi [2017] EWHC 1350 (Ch) (09 June 2017)

The High Court Judgment

At first instance, HHJ Parfitt sitting in the High Court ruled that the existence of such a termination clause did not invalidate the whole contract. HHJ Parfitt found that in effect what the Defendant was trying to do was contrary to what Parliament was trying to achieve in respect of DBAs and therefore contrived to create a satellite litigation cost war in order to seek to avoid her payment liability to the Lexlaw.

HHJ Parfitt held that the DBA between the Lexlaw and the Defendant was not unenforceable as as it would be wholly inconsistent with Parliament’s intent, the structure of the CLSA and the 2013 Regulations and would produce a result that would be “irrational and unjustifiable” – that is, such a construction would prevent a solicitor recovering time costs in respect of work that it reasonably carried out in the event of termination. 

The judge gave a number of “interlocking” reasons for his view, including an interference with freedom of contract; the lack of justification for a stark difference between the position of a lawyer in an employment matter and a lawyer in any other case; and the deterrent effect on the adoption of DBAs with the consequence that there would be fewer choices of funding methods for litigants.  

The Court of Appeal Judgment

This appeal raises a short, yet important, point of statutory interpretation concerning s5AA of the Courts and Legal Services Act 1990 (“CLSA”) and the delegated legislation made pursuant to the powers conferred by ss58AA(4) and (5) CLSA, namely the Damages Based Agreements Regulations 2013 SI 2013/609.

Lord Justice Lewison considered that at common law the contract as a whole is enforceable as the inconsistent clause fulfilled the criteria justifying severance from the remainder of the contract. His Lordship, in line with his previous jurisprudence, took a purposive approach to the interpretation of

the 2013 Regulations and gave the term “damages based agreement” 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” that are part of the DBA:

“if a contract of retainer contains a provision which entitles a lawyer to a charge 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”

Other elements of the agreement between the solicitor and the client, such as at which of the solicitors’ 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. As a result of this interpretation, LJ Lewison dismissed the appeal on the basis therefore that “clause 6.2 of the contract of retainer was outside the scope of the Regulations, and that its presence in the contract of the retainer did not invalidate the contract”.

Lord Justice Newey agreed that the appeal should be dismissed, but reached the conclusion by a different route. His Lordship parted company from LJ Lewison’s purposive interpretation of what a DBA is and instead reached his conclusion by finding that section 58AA of the Act and Regulation 4 do not affect the operation of an early termination provision and in fact do not address termination (or were to intended to regulate fees payable to legal representatives in the event of early termination of the DBA) at all:

“i) As I read the 2010 Regulations, regulation 6 shows that regulation 5 was not intended to apply where a DBA was terminated early. It is apparent from regulation 6(2), limiting the amount that a representative could charge on termination to “costs and expenses for the work undertaken”, that, regulation 5 notwithstanding, it was proper for a DBA to provide for a representative to charge time costs on termination regardless of what, if anything, the client might ultimately recover from the claim;

ii) Regulations 5 and 6 of the 2010 Regulations have now been replaced by regulations 7 and 8 of the 2013 Regulations, but the latter provisions must operate in the same way as the former formerly did. Just as regulation 5 of the 2010 Regulations cannot have been meant to extend to early termination, nor can regulation 7 of the 2013 Regulations have been intended so to extend;

iii) Regulations 4 and 7 of the 2013 Regulations perform similar functions in relation to, respectively, “employment matters” and “claims or proceedings other than an employment matter”. In particular, regulation 4(3), capping payment at an amount equal to 50% of recoveries, mirrors regulation 7, save that regulation 7 fixes the cap at 35% of recoveries rather than 50%. That suggests that, like regulation 7, regulation 4 should be seen as having no application to termination provisions;iv) That that is the correct interpretation is confirmed by what was said about the 2013 Regulations. Lord McNally explained to the House of Lords on 26 February 2013 that the detailed provisions found in, among others, regulation 8 of the 2013 Regulations were

“necessary because employment matters may 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” so that it “was considered that further regulation at this stage is not required”. Lord McNally said, too, that “DBA regulations do not contain requirements on termination for civil litigation, as in employment cases” because “employment cases … can be taken forward by non-lawyers”, while “Civil litigation can be conducted only by lawyers, who are subject to their own professional regulations”…..”

Lord Justice Coulson concurred and dismissed the appeal. His Lordship agreed with LJ Lewison that the term “damages-based agreement” should be given a narrow meaning and further agreed with LJ Newey that even if this were too narrow an interpretation that “neither section 58AA of the Act, nor Regulation 4, affect the operation of an early termination provision such as clause 6.” Further:

“The fact that the Regulations do not prohibit or limit termination provisions for general civil litigation is not an inadvertent omission. On the contrary, as can be seen from the Explanatory Memorandum, it is the result of a deliberate decision. Parliament shied away from imposing any restrictions on termination provisions generally because it acknowledged that, in such cases, lawyers would be involved and therefore would be subjected to the regulatory provisions of their own professional bodies.”

Comments

Mr M. Ali Akram, a dual qualified barrister and solicitor practising at City of London law firm LEXLAW Solicitors & Barristers, stated:

“The client in this case sought a DBA and pressed us to fund her claim. The client had previously instructed us on a mis-selling claim for a complex derivative however the client was low on funds and her own attempts to seek compensation through the regulator’s review scheme were unsuccessful. Although the DBA Regulations entitled us to ask for a contingency fee of up to 50%, we agreed to conduct this multimillion litigation at a low DBA percentage level of only 10% plus VAT (so 12% in total). Our case against the Bank lasted 2 years and after a considerable amount of work from us resulted in a financial benefit to the client of over £1 million. The Court of Appeal’s judgment- reached by three different routes- provides welcome guidance to practitioners because of the lacuna in DBA Regulations as it relates to termination in litigation proceedings and whether on termination a client would be liable for solicitor fees on an hourly rate basis. This is a major problem because the DBA Regulations do not provide protection for legal professionals who use DBAs to promote access to justice.”

Mr M. Ali Akram further stated:

“The DBA enabled the Defendant to access litigation services without having to pay for them until the conclusion of her claim. She was enabled to do this on terms where her liability was always a known percentage of whatever financial benefit she obtained. She had the benefit of those terms and the Court of Appeal has determined that it is unjust to argue that an entire agreement can be voided without payment at all. This is a welcome and important judgment for lawyers and clients equally as it provides some much needed judicial clarity on the effect of termination in respect of DBAs in litigation matters.”

M. Ali Akram, Senior Partner at LEXLAW

Mr Karim Oualnan, a solicitor and partner at City of London law firm LEXLAW Solicitors & Barristers with conduct of the proceedings stated:

“It is common knowledge within the profession that the DBA regs put in place by the Ministry of Justice have a number of gaps and are not user friendly. However, it is wholly disingenuous for a client to terminate a funding agreement with a solicitor (after that solicitor has taken the risk of funding the claim to conclusion and obtained a successful outcome) and expect no liability to the solicitor; that is clearly not Parliament’s intention when it enacted the DBA regs. The Court of Appeal has clarified some of these uncertainties and provides the opportunity for DBAs to flourish and enhance access to justice as intended. I hope that this judgment will go some way in putting DBAs (and the amendments of the DBA regs) back on the agenda and provide a means of promoting and furthering access to justice particularly during these unprecedented economic times”.

Karim Oualnan, Solicitor at LEXLAW

Statement by Lexlaw

Download the Court of Appeal Judgment

Contact Details

LEXLAW Solicitors & Barristers is a unique law firm that partners solicitors and barristers and is the only law firm based in the Middle Temple (an Inn of Court). The City of London Law Firm specialises in Financial Services Litigation and is regularly instructed in high-profile high-value litigation disputes. The senior partner, Mr M. Ali Akram, can be contacted via email on [email protected] or by telephone on 020 7183 0529.

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