Groundbreaking Court Ruling on Damages Based Agreements will help to Open up the Law

Greg Cox and Ed Stansfield acted for the Bar Council in the recent Court of Appeal decision in Zuberi v Lexlaw Ltd.

Greg and Ed explain why the case is important below.

1. Let’s start at the beginning. What is a damages based agreement?

In simple terms, a Damages Based Agreement (“DBA”) is an agreement between a client and a legal representative which provides that the lawyer agrees to take on the case (and the risks of winning and losing) in return for a share of the proceeds if the case is won.

There were extensive reforms to the way civil litigation could be funded in 2013 (you may have heard of the ‘Jackson’ reforms led by Sir Rupert Jackson).

DBAs were intended to be an important part of that package of reforms, to allow litigants to access legal representation.

DBAs are similar (but not identical) to the contingency agreements used in the USA for much civil litigation there. In fact, DBAs in England and Wales were based on a model used in Ontario, Canada.

We have written this article as clearly as we can. Because the Court’s judgment deals with some technical legal issues, not all of the words or phrases used in this article are in everyday use. We have explained some of the words and phrases we have used in more detail at the end of this article. We also set out how further advice can be obtained.

2. Where can a DBA be used?

Damages Based Agreements (“DBA”) are (in theory if not in practice before today) available to be used in all Civil Litigation in England and Wales from in 2013. They are also used in employment tribunals. DBAs aren’t permitted in other areas of law (for example in family or criminal proceedings).

3. What was the problem?

Virtually no-one would use DBAs for Civil Litigation. This was because of flaws in the Regulations that were introduced in 2013. There was a risk that agreements entered into wouldn’t be enforceable. If the agreement wasn’t enforceable then there was a significant risk that no fees would be recovered by the lawyer despite the fact that often large amounts of legal work would have been undertaken.

The Court of Appeal said that “nobody can pretend that these Regulations represent the draftsman’s finest hour”.

4. Why didn’t the problem get fixed before 2020?

There were several attempts since 2013 to persuade respective governments to find time to cure the flaws in the Regulations. The Civil Justice Council and the Damages Based Agreements Reform Project (an independent review arranged by the Ministry of Justice and led by Professor Rachel Mulheron and Nicholas Bacon QC) both produced detailed recommendations. Governments of the day have many priorities (even before Covid-19 and Brexit) and changing the Regulations does not appear to have made the cut.

The Courts couldn’t help without an actual case coming before them. Courts can’t give guidance in the abstract.

Because so few DBAs were entered into for cases before the Civil Courts, no cases about DBAs reached the higher courts for a decision (one case came close a few years ago but the main point was settled before the hearing). Zuberi v Lexlaw Ltd [2021] EWCA Civ 16 is the first case on these issues to reach the Court of Appeal since the 2013 reforms took place.

5. Termination clauses – what was the issue?

Most agreements (not just agreements between clients and lawyers) contain provisions setting out what happens if one of the parties wishes to bring the agreement to an end before its terms have been fulfilled. Without clear provisions about termination there is uncertainty and a possibility of mischief.

In an agreement between a client and legal representatives it’s important for everyone to know where they stand if the legal case is brought to an end early. Both clients and legal representatives have to play their part, and lots of different things can happen to bring a case to an end earlier than intended.

So far, so straightforward. This is pretty basic contract law.

The problem arises in a DBA because one interpretation of the Regulations was that they prevented these very common clauses from being included. It was argued that if a DBA included termination clause which triggered a payment, the whole agreement was unenforceable.

In fact, the flaw went so far that it was thought that any clause requiring any additional payment (even, say, an archiving retrieval clause) might render the agreement unenforceable.

6. Termination clauses – how did the Court resolve the issue?

The Court of Appeal unanimously held that the inclusion of a termination clause was perfectly sensible and permissible and didn’t render a DBA unenforceable. The respective judges got there by different reasoning.

However, there can be no longer be any doubt (unless of course permission is granted for a further appeal – we cover this below) that, as a matter of principle, termination clauses are permitted in a DBA.

7. What else is important about the Judgment?

We think there are two other important points of principle which can be derived from the judgment.

(a) What is the likely approach the Court will take to other challenges to DBAs?

We believe that Courts are likely to take the sort of pragmatic approach now to DBA challenges and strive to make agreements work. We set out brief reasons at question 8 below.

(b) Does the approach the Court has taken permit a more creative approach to Damages based agreements including permitting ‘hybrid agreements’?
This is a very interesting point which arises from the judgment. We cover this at questions 9 and 10 below.

8. How might the Courts approach to future challenges to DBAs?

The background here is that that there is a long and unfortunate history of technical challenges to agreements between lawyers and clients where one party (usually the opponent in civil litigation but sometimes the client or the lawyer) seeks a ‘lottery win’ by having the agreement between the client and lawyer declared to be unenforceable. Because of old provisions called the indemnity principle (a subject for a different day which goes back at least to the 1600s) if the retainer is unenforceable the losing opponent in litigation gets a windfall.

Although there are questions left open by the Court (and no doubt many other challenges that might be dreamed up by creative lawyers), the approach of the Court sends, in our view, a clear message that DBAs are there to be used and that the courts will strive to make them work. There is an explicit acknowledgement that the relevant legislation was designed to encourage the use of DBAs, not to make them “commercial suicide for the lawyer” (Coulson LJ at para 84).

This judgment, especially as it is the first case about a DBA to go to the Court of Appeal, feels, at least to us, like a watershed moment. It feels very much like a similar case (Hollins v Russell [2003] EWCA Civ 718) which ended many of the technical challenges about another type of funding arrangement (the Conditional Fee Agreement) in 2003. Since 2003 Conditional Fee Agreements have gone on to be a mainstream part of civil litigation with very few successful challenges compared to the number of agreements entered into.

Of course, if there is a serious or material breach that offends against the Regulations then agreements can be struck down. However, we believe that the sorts of opportunistic technical challenges that have been seen previously are unlikely to be sustained.

9. So why might the judgment permit a more creative approach to Damages Based Agreements?

This comes down to another question: is the whole of a retainer subject to the Regulations (the view that has caused so much uncertainty) or do the Regulations only apply to part of the retainer?

If, as was the conservative view, the whole retainer is subject to the Regulations then issues like ‘does a termination clause make the whole agreement unenforceable’ come into play.

If, however, a narrower view is taken, and the Regulations only govern certain relevant parts of the retainer, then it is possible to have free standing elements (for example, a termination clause) which aren’t subject to the Regulations.

So how did the Court approach this issue? Two of the judges (Lord Justice Lewison and Lord Justice Coulson) took the approach that the Regulations were only concerned with part of the retainer. Lord Justice Newey dissented on this point (he found that termination clauses were permitted for different reasons).

We believe that by confining the scope of the Regulations to parts of the retainer only, the court has given clients and legal representatives much more scope to be creative and to find arrangements which give access to justice in civil cases.

Of course, this is not a free for all to create agreements which fundamentally breach the Regulations or otherwise offend against client protection elsewhere. Care is needed when drafting and when entering into DBAs, and specialist advice is desirable.

10. What about ‘hybrid agreements’ – are they allowed after this judgment?

Hybrid agreements were the subject of much consternation in and after 2013.

There isn’t a one size fits all approach to what a ‘hybrid’ DBA might be. In simple terms, for the purpose of this article, we use the phrase to mean a damages based agreement which allows a client and a legal representative to agree that the legal representative will take on a case where the representative is entitled to a share of the final award but is also allowed to charge something (a lower amount) during the course of the case. To put it another way, that a DBA does not have to be simply on an ‘all or nothing’ agreement.

Similar arrangements have been used with a different type of retainer (the discounted conditional fee agreement) for many years.

We believe, subject to being carefully drafted, that certain hybrid agreements are now permitted.

11. How are clients protected and other abuses avoided?

This is a fundamental and important point. Whilst the wider use of DBAs is intended to enhance access to justice and to bring benefits to the system there is always a need for consumer protection and to avoid abuse of the system. This isn’t unique to DBAs.

The short answer to the question is: by regulatory supervision and the use of the existing tools of the Court to control costs.

The Court in Zuberi reminds us that the government’s stated approach on implementation was that ‘civil litigation can be undertaken only by qualified legal representatives, who are subject to regulation by their professional bodies and whose conduct may be subject to challenge through those bodies” so that it “was considered that further regulation at this stage is not required’.

This is not something that can be taken lightly. The relevant regulators (and for consumers and certain microbusinesses, the Ombudsman) can ensure clients are protected and other abuses avoided.

The fees charged by solicitors, barristers and other legal representatives in Civil Litigation are also capable of detailed challenge and scrutiny by the Courts in a way which goes far beyond that in most other professions.

Primary or secondary legislation is a blunt instrument and cannot cover every eventuality. In fact, the more legislation seeks to cover every eventuality the greater the risk of confusion and uncertainty.

We would suggest that regulatory supervision and the oversight of the Courts on individual bills provide a much better tool to protect clients and avoiding abuses whilst not stifling innovation which enables access to justice.

12. What about a further appeal?

It is open to the losing party (Mrs Zuberi) to apply for permission to appeal to the UK Supreme Court. The Supreme Court (and its predecessor the judicial committee of the House of Lords) have usually been slow to grant permission to appeal in cases about costs or civil procedure, preferring to leave those matters to the Court of Appeal.

Of course, if permission is granted, the Supreme Court might reach a different result or differ with some of the reasoning commented on above. There may be a period of uncertainty until it is known whether permission will be granted.

13. Does this herald the opening of floodgates to ‘American style’ litigation?

This is a regularly heard criticism about contingency agreements and DBAs. The criticism implies that there is something wrong with the American justice system. To be fair to our colleagues across the Atlantic it is not at all obvious that there is something wrong with the USA justice system or whether this is just some sort of cheap shot. All justice systems, particularly when it comes to funding, involve careful choices. It is not for us to say whether there is anything wrong with the legal system in the USA or not. We would prefer to concentrate on our own.

Most importantly though, the debate about whether or not to introduce DBAs was settled in 2013 following a thorough and detailed process led by Sir Rupert Jackson. This included consideration of funding arrangements in other parts of the world.

DBAs were accepted as an important part of the holistic package of reforms to civil litigation. The fact that they have been largely unused since then does not affect the recommendations (adopted by the government of the time) which led to their introduction for civil litigation.

We believe that DBAs and this judgment of the Court of Appeal should be viewed positively: in the right case they are an enabler which allows litigants to bring cases they might otherwise be closed out of bringing, or, alternatively, to obtain equality of arms against opponents with deeper pockets.

Facing into the ‘American floodgates’ criticism we would suggest that there are three reasons to be positive that prophecies of a tidal wave of unmeritorious litigation will not be borne out:

First, the same prophecies were made about the introduction of conditional fee agreements 20 years ago. That regime, modified in 2013, has helped many hundreds of thousands of clients pursue or defend cases and is now established as mainstream.

Second, the legal representatives who can offer the agreements are subject to strong and mature regulatory regimes.

Third, whilst not professing competency to speak about the American judicial system we are steadfastly of the view that the Courts of England and Wales have world class judges with tools at their disposal under the Civil Procedure Rules to stop abuses and to prevent unmeritorious cases from running. Applications for summary judgment can be made, costs can be kept under control by budgets and the Courts have significant case management powers.

Finally, and distinct from the American system, a litigant in England and Wales who runs an unmeritorious case is likely to be ordered to pay substantial costs to their opponent.

14. What does the ruling mean for Conditional Fee Agreements?

Conditional fee agreements (“CFA”) and DBAs are just different. The fundamental difference is that in a conditional fee agreement the ‘success’ element is based on the ordinary charges (usually the hours worked multiplied by the hourly rate). In a DBA this link is broken.

Conditional fee agreements will remain an important part of the funding arrangements open to clients and lawyers. This judgment simply brings into play another funding option for lawyers and clients in the right cases.

15. What about costs orders made by the Court?

This is a specialist subject in its own right and out of scope for this article. Before entering into a DBA the lawyer and client should consider carefully the effect of the particular agreement entered into in the light of the cap in Rule 44.18 of the Civil Procedure Rules. This is particularly so when the litigation is complex and the potential award is modest.

16. What are Simpson Millar doing about this?

We think that DBAs are one important tool to open up access for justice. We are prepared, in the right case, to consider a damages based agreement arrangement in our dispute resolution team (we act for people with civil disputes more generally but particularly in professional negligence, data breach and disputed probate cases) and in our personal injury teams (for injured people).

Our costs experts also provide advice to other law firms and deal with challenges brought to DBAs and other funding arrangements.

17. Where can I get more advice or help about DBAs?

• If you are a client: For Personal Injury or Civil Litigation cases contact 0800 260 5010
• If you are a legal representative (solicitor, law firm or barrister) and want advice about Damages Based Agreements or have a challenge to a damages based agreement contact Ed Stansfield on 0345 357 9812 or at [email protected]

18. This is an article not legal advice

This piece is an article which includes opinion and comment. It is not intended to be legal advice and is not to be relied upon as legal advice. It is up to date as at 15th January 2021. The law about damages based agreements (and retainers more generally) is complex and fact sensitive. You should always seek specific legal advice.

19. Explanation of some words and phrases used:

The regulations considered by the Court are technical. We have had to use some words or phrases which might not be everyday plain language. We set out a little more detail below: