Damages-Based Agreements: not so damaging after all?

Legal background to DBAs

Damages Based Agreements, or “DBAs”, were historically unlawful on the grounds that they were champertous. In 2009, however, Sir Rupert Jackson recommended that legislation be enacted to enable solicitors to enter into contingency fee arrangements for civil litigation (contingency fee arrangements already being lawful in employment tribunal proceedings). The basis on which Sir Rupert recommended this reform was to facilitate access to justice by litigants.

In 2013, the Courts and Legal Services Act 1990 was amended to give effect to Sir Rupert’s recommendation, section 58AA enabling the entry into DBAs between solicitors and their clients for civil litigation. The Damages-Based Agreement Regulations 2013 (the DBA Regulations) were subsequently introduced which permitted, for the first time, solicitors to enter into DBAs under which they could recover a percentage of any recoveries in the litigation.

Fostering uncertainty by reason of their confusing and at times contradictory drafting, the DBA Regulations did not inspire confidence amongst solicitors to enter into DBAs, lest the agreements be rendered unenforceable, and the time and cost invested in proceedings became unrecoverable.

There are two primary, practical difficulties with the DBA Regulations:

  1. The first is that it was considered likely that a DBA would be unenforceable should the solicitor insert a clause in the DBA entitling them to payment in the event of termination by the client. The solicitor would be left to bear the cost of their own time and would only be able to recover disbursements. This was thought to arise by virtue of DBA Regulation 4, which was understood to prohibit remuneration other than based on a percentage of damages recovered.
  2. The second is in relation to hybrid DBAs. A hybrid DBA is one where a solicitor is paid for their time as the matter progresses and is also entitled to receive a percentage of damages in the event of success. Whilst not expressly provided for in the DBA Regulations, they were thought to be permitted by virtue of DBA Regulation 3, which states that DBAs may apply to “parts” of a proceeding. There was, however, residual uncertainty about whether this was the case.

The Court of Appeal has now provided welcome certainty as to DBA arrangements in a case handed down last week – Zuberi v Lexlaw Limited [2021] EWCA Civ 16.

The Facts of Zuberi v Lexlaw Limited

Lexlaw entered into a DBA with their client, Ms Zuberi, the key terms of which were as follows:

  • Lexlaw would be paid 12% of the damages Ms Zuberi would receive in the event of success plus any disbursements;
  • If the claim was unsuccessful, Ms Zuberi would only be liable to pay disbursements; and
  • In the event the DBA was terminated early, Ms Zuberi would be liable to pay both Lexlaw’s fees and disbursements.

Ms Zuberi was made an offer of settlement of £1 million, which she accepted. Following receipt of that offer, Ms Zuberi attempted to terminate the DBA, arguing it was unenforceable as it included an early termination clause in which she would be liable to pay Lexlaw’s fees.

The Court of Appeal’s findings

The Court of Appeal (comprising Lord Justice Lewison, Lord Justice Newey and Lord Justice Coulson) held unanimously that the DBA Regulations do not prevent early termination payments of solicitors’ fees. Further, thanks to a narrow interpretation of the meaning of the term “DBA”, the majority of the Court of Appeal (Lewison LJ and Coulson LJ) has lowered the threshold for the enforceability of hybrid DBAs.

In this regard, the majority of the Court of Appeal (Lewison LJ [33-34], with whom Coulson LJ agreed as to the narrow interpretation of the meaning of DBA [74-77]) found that a DBA does not encompass the entire agreement between the client and the solicitor, but instead that only the parts of the agreement enabling the solicitor to obtain a percentage of damages comprise the DBA.

The implication of this narrow interpretation of the term means that hybrid DBAs are now much more likely to be held to be enforceable. As such, a solicitor can now feel more comfortable entering into a hybrid DBA agreement with a client and the solicitor can charge for their time as the matter progresses whilst also sharing in a portion of any recoveries at the conclusion of the proceedings.

What next?

Pending any application for permission to appeal to the Supreme Court, it appears that the uncertainty in relation to DBAs is finally over.

As noted in our previous Perspectives article on the subject, the benefit of increased access to justice that prompted the introduction of DBAs in Sir Rupert Jackson’s reforms has been somewhat stymied by the uncertainty and consequential reluctance among those in the profession in taking up DBAs. It is expected that with the clarity provided by the Court of Appeal’s judgment, DBAs will now be used more frequently so as to enable more claimants to seek justice.

Other Perspectives