Zuberi v Lexlaw Limited – a fresh beginning for Damages-Based Agreements?

Damages-based agreements (“DBA”) have had a troubled start in life. They were introduced in 2013 and are similar to American-style contingency agreements whereby the solicitor is only paid at the end of the claim, if the claim is successful, out of the damages recovered. DBAs have been dogged by uncertainty thanks to the poor drafting of the Regulations, which govern them. Up until now, the widespread view was that DBAs which included early termination clauses that provided for the payment of anything other than expenses would render the entire DBA unenforceable. The Court of Appeal’s review of DBAs in Zuberi v Lexlaw Limited [2021] EWCA Civ 16 (Zuberi) has turned this mistaken belief on its head.

This blog will examine briefly how DBAs work and the impact of the Zuberi decision.

How do DBAs work?

A DBA is an agreement between a solicitor and a client which provides for payment to the solicitor upon successful resolution of a case. Payment is made out of the damages recovered by the client – the solicitor takes a percentage of the damages recovered. For this reason, it is important that the claim is meritorious and the value of the claim is sufficiently high.

Prior to 2013, DBAs were unlawful for use in contentious matters and were only permitted in employment matters. They were governed by the Damages-Based Agreements Regulations 2010 (“the 2010 Regulations”).

The Damages-Based Agreements Regulations 2013 (“the 2013 Regulations”) replaced the 2010 Regulations. With this arose certain difficulties, because regulation 4(1) of the 2013 Regulations did not address the recovery of costs and expenses in the event of early termination by the client, whereas regulation 8 (which applied to employment matters) did. Perhaps inevitably, this caused considerable concern within the legal profession that solicitors wouldn’t be remunerated for their work upon an early termination of the DBA by their client, other than in relation to expenses.

Another concern was that hybrid arrangements, which provided for payment in addition to a percentage of the client’s damages, would render the DBA unenforceable. This, coupled with other uncertainties, led to a considerable reluctance on behalf of solicitors to enter into DBAs, thereby depriving clients of one possible way in which to fund their claims. In an earlier blog, which can be found here, we have examined different ways of funding claims.

The decision in Zuberi

In Zuberi, it was held that an early termination clause in the DBA that required the client to pay solicitor’s costs and expenses was not unlawful.

The early termination clause was found to be outside the scope of the 2013 Regulations and its presence did not invalidate the DBA. In summary, the Court of Appeal concluded that the 2013 Regulations do not prevent early termination payments being made to solicitors. In dissecting this issue, the Court of Appeal emphasised that the 2013 Regulations could not be confined to a literal interpretation and had to be considered upon their true construction, so as to give effect to the meaning of each provision.

In considering this issue, it was determined that the term ‘damages-based agreement’ should be given a narrow meaning. Lord Justice Lewison’s view was that, if the DBA contained a provision that entitled the solicitor to a share of the recoveries and also contained provisions relating to other payments, or terms unrelated to payments, it was only those provisions relating to payment from the recoveries amount that constituted a DBA. In turn, the part of the DBA that dealt with costs and expenses was not controlled by regulation 4(1). This is because regulation 4(1) is only concerned with circumstances where a recovery is made and does not concern itself with costs.

The Court of Appeal’s view on the construction of DBAs means that the 2013 Regulations do not prohibit a solicitor from agreeing a DBA that will enable him/her to receive up to 50% of the damages in the event of success, and concurrently to agree that full time costs be paid if the claim fails. Equally, a solicitor could agree to a sequential fee arrangement that uses a DBA up to a particular stage of the proceedings, and thereafter adopts an hourly rate retainer for another part of the proceedings. This is welcome news for both clients and the profession.

Comment

The Court of Appeal’s decision provides much-needed clarity on DBAs, which will help make them a far more attractive arrangement for solicitors. The narrow interpretation of the 2013 Regulations means that a DBA is not confined to the entire retainer; rather it is limited only to those parts of the retainer which deal with the sharing of damages. The decision opens the doors to hybrid DBAs, which means that solicitors can charge for work done in the event of early termination and charge a client time-based charges: (a) even if the claim is unsuccessful; and (b) in addition to the DBA payment. The impact of this decision broadens the type of funding that is available to litigants and promotes access to justice.

If you are thinking of making a claim and wish to explore DBAs as a possible funding method for your claim, please contact Zahira Hussain, Rozeena Mahatay or another member of the Group and Commercial Litigation team.

If you aren’t receiving our legal updates directly to your mailbox, please sign up now