Zuberi v Lexlaw Limited: Damages Based Agreements in England and Wales – a new dawn?

Tim Chelmick and George McDonald |

George McDonald and Tim Chelmick discuss the Court of Appeal decision in Zuberi v Lexlaw Limited which has made damages-based agreements in England and Wales far more attractive to solicitors and heralds a new era for contingency arrangements.

 

One of the key changes proposed by Lord Justice Jackson as part of his reform of legal costs was the introduction of Damages Based Agreements (“DBAs”) into English law. Similar contingency fee arrangements are popular internationally but yet DBAs have proved unpopular in this jurisdiction. They have suffered from numerous flaws, including:

  1. Significant enforceability risks given the poor drafting of the Damages-Based Agreement Regulations 2013. In particular:
    1. There was a widespread fear that a lawyer could not recover anything bar expenses upon an early termination by the client and any clause that provided for fees on termination would render the whole arrangement unenforceable; and
    2. It was thought that a hybrid arrangement which provided for payment in addition to a percentage of recoveries on success would render the whole arrangement unenforceable.
  2. Commercial issues arising from: the use of an Ontario-based model, such that recovery of costs was paid out of the DBA payment rather than on top. This made DBAs far less attractive than CFAs for solicitors in most cases, particularly low value personal injury cases where a base fee and an uplift are recoverable.

This issue about early termination was one of the reasons why both the Bar Council and Law Society refused to publish a precedent DBA, which in turn exacerbated concerns about enforceability.

It was thought that the flaws with the DBA Regulations 2013 would need to be corrected through primary legislation. Plans were afoot to do exactly that. A working group had been established and draft 2019 Regulations (prepared by Nicholas Bacon QC of 4 New Square and Professor Rachel Mulheron) had been circulated for consideration. The draft 2019 Regulations expressly permitted hybrid DBAs (on the premise that they were not allowed under the 2013 Regulations).

Such changes may no longer be required in light of a recent decision by the Court of Appeal in Zuberi v Lexlaw Limited [2021] EWCA Civ 16, which is summarised in more detail below. Having heard submissions from Nicholas Bacon QC on behalf of the Bar Council (who intervened at the Court of Appeal), the Court unanimously found that the DBA Regulations do not prevent termination payments being made to the solicitors. Of itself, this decision was not surprising and has put paid to one of the key concerns about the DBA highlighted above, namely that the solicitor would get nothing on early termination of a DBA.

However, in reaching this decision the majority of the Court of Appeal (Lewison and Coulson LLJ) adopted a narrow interpretation of the meaning of “DBA”. The Court of Appeal found that the “DBA” does not comprise the entire retainer but only those parts concerning the sharing of recoveries. Newey LJ dissented on this issue.

This narrow interpretation has startling consequences. The most obvious implication is that hybrid fee arrangements do not fall foul of the 2013 Regulations. This means that a solicitor can still charge a client time-based charges: (i) even if the claim is unsuccessful; and (ii) in addition to the DBA Payment. This is contrary to the widely-held beliefs that DBAs were pure contingency agreements which fell under the “no win, no fee” banner and that hybrid DBAs were not permitted under the Regulations.

The ramifications of this decision are far-reaching and should be welcomed by the profession. Unless overturned on appeal to the Supreme Court, many of the commercial barriers to DBAs have been extinguished and the risks of DBAs being found to be unlawful (and hence unenforceable) much reduced. DBAs could now be much more attractive for lawyers and clients alike and so should become far more prevalent as a result.

We understand that the Court of Appeal refused permission to appeal. It is not known at this stage whether an application will be made to the Supreme Court for permission. Given the unanimous conclusions on termination (which are far less controversial), permission may not be given even if sought. This may therefore be the last word on DBAs for some time. That is not to say that entering into a hybrid DBA is now without risk. The Court was split on this key question and the Supreme Court may well take a different approach. Further, DBAs in substantial cases can result in large payments where an opportunistic client may wish still to challenge the legality of the arrangement. Of course, the hurdles to overcome to render such an agreement unlawful have just been significantly raised.

For this reason alone, we suggest that new Regulations are still needed, not least because it is unlikely that all the consequences of the Court of Appeal’s interpretation were intended by the 2013 Regulations. However, even without changes to the Regulations, unless overturned on appeal, the Zuberi decision drastically alters the landscape for DBAs.

GEORGE McDONALD & TIM CHELMICK

4 New Square

THE JUDGMENT

The meaning of “DBA”

The first issue that required resolution was whether the DBA Regulations 2013 applied to: (i) the entirety of the solicitors’ retainer or (ii) only that part of the retainer that dealt with payment to the legal representative as a share of the proceeds.

The Court of Appeal favoured the latter interpretation. Lewison LJ held at [33] – [34]:

There are two possible views of what the DBA consists of. One view is that if a contract of retainer contains any provision which entitles the lawyer to a share of recoveries, then the whole contract of retainer is a DBA. In other words, a DBA is a contract which includes a provision for sharing recoveries. But another view is that if a contract of retainer contains a provision which entitles a lawyer to a share 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.

In my judgment, there are good reasons for preferring the latter view.”

He went on to find that the latter view was the correct interpretation of the Regulations. He concluded at [38] that: “I can see no objection to regarding that part of the overall agreement relating to recoveries, rather than the whole of the contract of retainer, as amounting to the DBA. In those circumstances, the effect of regulation 4 would control that part of the contract of retainer which dealt with the share of recoveries but not that part which dealt with time charges”.

He held that “time costs as such are outside the scope of the Regulations, except where they are brought in as an additional requirement of a DBA in exercise of the power under section 58AA(4)(c)”.

Coulson LJ agreed, holding at [77] that:

“I agree with…Lord Justice Lewison…that the term “damages-based agreement” should be given 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”. Other elements of the agreement between the solicitor and the client, such as at which of the solicitor’s 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”.

The consequences of this decision were expressly identified by Newey LJ in his dissenting view. He observed at [64] that:

The implication, as I understand it, is that neither “sequential hybrid DBAs” nor “concurrent hybrid DBAs” (in the language of the Civil Justice Council’s working group) are at present barred. There is nothing to prevent a solicitor agreeing with his client that he will receive up to 50% of the sums ultimately recovered if the claim succeeds and be paid his full time costs if the claim fails. In fact, it would seem to be the case that a retainer could provide for a solicitor to become entitled to both half of recoveries and full time costs in the event of the claim succeeding”.

Termination provisions

In light of the Court’s findings on the meaning of DBAs, it followed that termination clauses providing for payment on a time basis were permissible. They went on to hold that, even if the narrower interpretation was incorrect, the termination provisions were still permissible. Newey LJ agreed with this latter aspect of the judgment.

Severance

Although the court did not decide whether the termination provision could in any event be severed, it gave useful guidance for future cases dealing with the enforceability of DBAs. Lewinson LJ held at [7] – [8] that:

The criteria that must be fulfilled before severance is possible are that (a) the offending provision can be removed without modifying or adding to other terms of the agreement; (b) the remaining terms continue to be supported by adequate consideration and (c) the removal of the unenforceable part of the contract does not change the nature of the contract, such that it is not the sort of contract that the parties entered into at all…

In my judgment, these conditions are amply fulfilled in this case…At common law, therefore, I consider that clause 6.2 of the written agreement could have been severed from the remainder of the contract, thus leaving it (including clause 9.1) as enforceable”.

 

Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.

© Tim Chelmick and George McDonald of 4 New Square, January 2021.