There is lots of talk about Damages Based Agreements (DBAs) especially as the right to recover legal costs in many RTA cases is removed after the end of May 2021. One option is for firms to act on the basis that they will charge a percentage of the damages recovered. Anyone who has ever followed a US legal drama will be familiar with the idea of the lawyers talking part of the winning to cover their work. These contingency style agreements were, for many years, unlawful in litigated cases on this side of the pond.
In a straightforward case it is a simple idea, and everyone knows where they stand. Let’s say a claimant suffers a whiplash injury in a car accident and their claim is valued at £3100 under the tariff. Because the claim is valued at less than £5k there is no prospect of recovering legal costs. This means there is no point in running the case on a traditional CFA as there are no costs payable by the other side. Under a DBA, you charge say 25% of the award (with or without disbursements) – £775. Everyone is happy.
But it might not always be as simple as that. This was the case in Tonstate & others v Wojakovski and others [2021] EWHC 1122 (Ch). The solicitors were acting under a DBA which entitled them to 25% plus VAT of –
“…damages, monies, costs incurred by your previous lawyers, other sums and/or derive any benefits (excluding our hourly rate costs and Counsel’s fees) in or arising out of all of the current Court proceedings…”
It was a complex action, but one outcome was that Mr Wojakovski retained 25% of the shares he owned in Tonstate. The solicitors argued that this amounted to a benefit and therefore they were entitled to a charge over the shares as security for their fees. He was already the owner of the shares. His interest was preserved, not derived from the action, and so was excluded from the DBA as drafted. Zarcoli J. added that in any event the solicitors’ claim probably failed in any event as the DBA Regulations 2013 limit the entitlement to a percentage of ‘sums recovered.’ So even if the agreement had been drafted differently it would still not have been enforceable.
There are many problems with DBAs which explains why there has been a limited take up since the rules were relaxed in 2013. The effect of the indemnity principle is to limit recoverable costs to the amount of the agreed percentage in many cases. So if the DBA permits a 30% deduction from a client who recovers say £6000, that would entitle the lawyers to charge £1800. If the incurred costs were in fact £5000, the lawyers would be limited to the agreed percentage as against the third party.
Another difficulty surrounds hybrid agreements. These are agreements under which the lawyers receive an agreed percentage if they win but are paid a lower sum if the case fails rather than nothing at all. It has been assumed that these are not permitted. A similar hurdle faces those lawyers who include a termination clause. So, if a client breaches or terminates the DBA, it is cancelled and the lawyers can charge for the work done. The DBA Regulations 2013 appear to block this type of clause. Paragraph 4 limits the payment that can be charged to ‘the payment’ which is the amount recovered from the other side. On the face of it, no other charge at all is permissible.
These problems were addressed in the case of Zuberi v Lexlaw [2021] EWCA Civ 16. The Court of Appeal found in favour of the use of termination clauses. They did this on the basis that the regulations only governed parts of the agreement and that it was perfectly reasonable to have a freestanding termination clause. Any dispute in relation to the amount charged could be resolved via the lawyers’ regulatory regime –
“41 …. 7.5 Only qualified legal representatives, who are subject to regulation by their professional bodies and whose conduct may be subject to challenge through those bodies, will undertake civil litigation (i.e. contentious business). It is therefore considered that, at this stage, further regulation is not required. Moreover, the consequence of failing to comply with these Regulations is that the DBA will not be enforceable and, in those circumstances, the representative will receive no payment. There is a concern that this could lead to attempts to avoid payment, by suggesting that the legal representative had failed to comply with one or more of the additional regulations (as happened when CFAs were subject to greater regulation), leading to satellite litigation.
42. It is clear, then, from paragraph 7.5 that the regulation of the circumstances in which lawyers could recover their costs and expenses on termination of a DBA was not intended to be covered by the Regulations, and was to be left to their professional regulators. In addition, if there is a dispute about a solicitor’s “costs”, the client is entitled to have those costs assessed by the court under section 70 of the Solicitors Act 1974. There were, therefore, consumer protection measures already in place.” Lewison LJ
Although Zuberi was about terminating agreement there is no logical reason why the same principle cannot be applied in the case of hybrid agreements. It is certainly arguable that the Court of Appeal have opened the door to the flexibility that such agreements would bring.
The DBA rules themselves are a mess and are well overdue a full review. A draft set of rules was prepared in 2019 by Nick Bacon QC and Professor Rachael Mulheron. We certainly hope that new rules will appear once the world settles down again. DBAs can be an effective way of securing access to justice. The Zuberi case appears to open the door a bit, but a root and branch review is really what we need.