Judgment has been handed down today by the High Court in the case of LEXLAW Ltd v Shaista Zuberi  EWHC 1855 (Ch). The judgment provides much needed judicial clarity on the use of damages based agreements (DBAs) by lawyers.
The Damages Based Agreements Regulations 2013 allow legal representatives such as solicitors and barristers to share a percentage of the fruits of litigation with clients. The key question in this trial of a preliminary issue was whether a DBA was unenforceable if it included a payment provision other than the percentage share operable in the event of early termination. The High Court found that the Defendant’s attempt to escape payment under the DBA by asserting it was void and unenforceable for having a payment mechanism in the event of early termination was wrong and entirely contrary to what Parliament was trying to achieve in respect of DBAs.
HHJ Parfitt found that the DBA was not void nor unenforceable as such an interpretation would be wholly inconsistent with Parliamentary intent, the structure of the CLSA and the 2013 Regulations and would produce a result that would be “irrational” – that is, such a construction would prevent a solicitor recovering time costs in any circumstances other than when the agreement continued to apply at the conclusion of successful litigation.
Lexlaw Solicitors & Barristers, a Middle Temple based litigation law firm, brought the claim against Ms Shaista Zuberi in respect of her non-payment of fees due pursuant to a DBA. The fees sought amounted to 10% plus VAT of the damages she received in an underlying Financial Services dispute with two major UK banks.
Ms Zuberi had been mis-sold a speculative and complex financial swap instrument with a peak notional value of £2,321,800.00 by National Westminster Bank Plc (NWBD) and the Royal Bank of Scotland Plc (RBS.L) which had caused her to suffer a massive financial loss made up of past, ongoing and future swap payments.
The Claimant law firm worked on the matter for several years, both in the format of High Court litigation and in an FCA-agreed interest rate hedging product review scheme. Representation in the review was initially by Ms Zuberi’s accountant who failed to get her acceptable compensation. Eventually, after considerable legal pressure both in the litigation and in the review scheme, the Banks indicated they would provide a significantly improved redress offer to Ms Zuberi giving her a financial benefit in excess of £1 million.
Shortly after that indication, Ms Zuberi purported to terminate the DBA. She argued that no money was due under the DBA (or at all) as the DBA was void and unenforceable under section 58AA of the Courts and Legal Services Act 1990 as it included within it an obligation for her to pay legal costs and expenses in the event of early termination. Such an early termination payment clause was expressly permitted in the regulations in respect of employment matters but the regulations were silent in respect of contentious litigation matters that could only be conducted by regulated solicitors and barristers.
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  EWHC 1350 (Ch) (09 June 2017)
The High Court Judgment
HHJ Parfitt agreed with Lexlaw’s position. The statutory background and context is of particular relevance because section 58AA and the 2013 Regulations extended DBAs to litigation. The 2013 Regulations replaced the previous 2010 Regulations and in doing so made provision for DBAs to be used in both litigation and employment matters. In both restrictions are set out on the payments that can be made by clients from dispute recoveries but only in employment matters do the 2013 Regulations explicitly provide for provisions dealing with payment on termination.
The key provision in dispute between the Defendant and Lexlaw was the interpretation and meaning of Regulation 4(1) and in particular “a damages-based agreement must not require an amount to be paid by the client other than – (a) the payment…and (b) any expenses…”. The DBA between the parties required the Defendant to pay time costs to Lexlaw if she terminated and consequently the Defendant sought to argue that the DBA contained a requirement which is not allowed under the 2013 Regulations thus making it unenforceable. However, the Defendant’s submissions were rejected by HHJ Parfitt at paragraph 62 of the judgment:
“Primarily, I disagree for the contextual reasons I have summarised above. The suggested construction by the Defendant is inconsistent with the purpose of the legislation and the structure of the CLSA and the 2013 Regulations. It produces a result which, in context, would be irrational and without apparent justification. In a similar way, if the legislature considered it necessary that damages-based agreements should prevent the solicitor recovering time costs in any circumstances other than when the agreement continued to apply at the conclusion of successful litigation then it would have said so in terms and not as a side consequence of addressing a different subject – how sharing the spoils should work ”LEXLAW Ltd v Shasita Zuberi  EWHC 1855 (Ch) at paragraph 62
HHJ Parfitt agreed with Lexlaw’s submissions for a number of reasons:
a. There would be an inexplicable difference between employment matter representatives and general civil representatives. The Defendant has suggested no positive reason why the legislature would want to allow employment representatives to recover work done costs on a client termination (regardless of the ultimate outcome of the dispute) but disallow such recovery by non-employment representatives.
b. A choice by the legislature to prevent a non-employment representative to get incurred costs on such termination would be inconsistent with the expressed purpose of not needing to regulate as between legal representatives and clients, in contrast with needing to do so in the employment sphere where clients might deal with unregulated service providers.
c. It would be inconsistent with the enabling legislation which provided for regulations to address separately (a) the sharing of recoveries between client and representative and (b) other terms and conditions that might be prescribed. The posited bar on work done costs in a termination situation has nothing to do with (a) but was considered by the legislature to be well within (b) when it prescribed the termination terms for employment matters. It would be curious to achieve by a side wind that which would most obviously be done using the power to make T&C Conditions, if that was what Parliament wanted to do.
d. It would restrict a general civil representative’s time costs recovery in a situation which is not to do with enabling the sharing of the spoils of litigation – i.e. it would impose a limitation on freedom of contract without any justification arising from the express purpose of legalising damages-based agreements.
e. It is an obvious consequence of preventing representatives getting their time costs on a client termination that those representatives would be reluctant to enter into damages-based agreements and that would be contrary to the purpose of making such agreements lawful so as to facilitate access to justice.
f. This would have the knock-on consequence of creating less choice (within regulated representatives) for clients wanting to bring general civil litigation claims than in employment claims, again contrary to the purpose of the expansion of damages-based agreements into general civil litigation.
g. It is no answer to posit client agreements in general civil disputes that would prevent a client from terminating the agreement because that would be an unreasonable fetter on a client’s right not to continue with the representative they want and again why regulate in the employment area but not the general civil area if the intention was to be more restrictive of a representative’s cost recovery in the civil litigation arena. The legislature did provide regulations for employment matters that recognised but restricted the parties’ contractual rights to terminate to protect market participants (regulation 8(3), client termination; regulation 8(4) representative termination).”LEXLAW Ltd v Shasita Zuberi  EWHC 1855 (Ch)
This question is of paramount importance to the legal profession and to all litigants as a whole. 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 early termination then DBAs would not be of any utility as a method of funding meritorious litigation claims and widening access to justice. Cunning and commercially savvy clients would be granted a judicial imprimatur to exploit the defects of the DBA Regulations 2013 by terminating the retainer with their legal representatives on the eve of successful litigation or settlement and evading all liability, even on a quantum meruit basis, to pay for work that the legal representative had carried out on the client’s behalf. This is clearly not what was envisaged or intended by Parliament.
“HHJ Parfitt’s landmark judgment provides welcome judicial clarity on the validity of early termination payment clauses in DBAs which in turn promotes access to justice as more legal professionals will now be willing to enter into such funding arrangements.”M. Ali Akram, Senior Partner at LEXLAW
“It is common knowledge that the DBA Regulations 2013 have a number of serious drafting gaps and thereby have to date failed to achieve their goals. Where a joint venture approach has been agreed and the risk of funding a claim to conclusion has been taken up by a legal professional and success has been achieved, it is clearly inequitable to seek to evade fair payment. Such an outcome could never have been Parliament’s intention yet the drafting of the regulations allowed such meritless argument. This is an important judgment for lawyers and clients equally as it provides much needed judicial clarity on the effect of termination in respect of DBAs in litigation matters but more needs to be done and the recommendations of the Civil Justice Council’s DBA Regulations Reform Project (An Independent Review of the DBA Regulations 2013) need to be progressed. I hope that this judgment will go some way in putting DBAs (and amendments of the DBA Regulations) back on the agenda as a means of promoting and furthering individual access to justice particularly during these unprecedented and uncertain economic times”.Karim Oualnan, Solicitor at LEXLAW
Statement by Lexlaw
Download the High Court Judgment
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.
Instructing our Litigation Lawyers
We ensure that we provide the best possible outcome for our clients by conducting in depth investigation and research into the realistic prospects of a case before selecting the appropriate course of action in order to reduce time and expense. Liability for costs is always an issue in litigation and based on our extensive litigation experience we provide our clients with as much strategic, practical as well as carefully considered legal advice in order to ensure minimum risk in respect of costs. Where appropriate we encourage the use of alternative dispute resolution (such as mediation and without prejudice negotiation) and our lawyer’s negotiation skills are first class. If early settlement at advantageous terms is not possible, we are extremely experienced and capable at navigating our clients through the litigation process.