Court of Appeal settles damages-based agreement 'uncertainties'

The decision will be welcomed by the legal profession, as it "resolves key uncertainties" around the operation and enforceability of DBAs, according to experts at Pinsent Masons, the law firm behind Out-Law.

Litigation expert Michael Fenn said: "A lawyer working under a DBA in civil proceedings can now be confident that they can recover their reasonable costs in the event that a DBA is terminated, and can have confidence that a DBA including such termination provisions will not be rendered unenforceable – including if the client makes a recovery triggering the DBA".

"After a long-running false start for DBAs, the judgment, in our view, marks a turning point towards the achievement of the objective of increasing access to justice which underpinned the recommendations of the Jackson Review, and the intent of parliament in regulating on the subject," he said.

A DBA is a type of conditional fee agreement under which a lawyer and client can agree to share the risk of litigation. Under this model, which was introduced following Sir Rupert Jackson's 2009 review of civil litigation funding, the lawyer receives a percentage of damages awarded to a successful client. If the client is unsuccessful, the lawyer may be reimbursed for disbursements and other expenses incurred but not, under the DBA regulations, its own fees.

DBAs are governed by the 2012 Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) and related regulations. The regulations prescribe the basis and limits of the sums that may be recovered by a lawyer under a DBA should the claim be successful. They also contain provisions expressly allowing a lawyer to charge costs and expenses where the client terminates the DBA, but these express provisions only apply in employment law cases, and not in civil litigation.

Shaista Zuberi entered into a DBA with Lexlaw in relation to a claim against a bank, in which she alleged that she had been mis-sold certain financial products. Under the agreement, Lexlaw was entitled to 12% of any sum recovered plus expenses if successful, or expenses only if the claim failed. The agreement also provided that Lexlaw could claim its costs and expenses if the client terminated the agreement.

Eventually the bank made an offer to settle the claim, which Zuberi accepted. Lexlaw sought to enforce the agreement and sought the sums it considered were owed under the DBA. Zuberi argued that the regulations did not permit the inclusion of a termination clause in the agreement. Though not triggered, the inclusion of the clause offended the common law rule against 'champerty' and rendered the entire DBA unenforceable, which would mean that Lexlaw were not able to recover any sums

However, Court of Appeal judge Lord Justice Lewison described Zuberi's reading of the DBA regulations as "absurd" and "self-contradictory".

"[LASPO] allows regulations to be made prohibiting payments 'above' a prescribed amount or 'above' an amount calculated in a prescribed manner," he said. "It is thus concerned only with capping fees; and the particular target at which the cap was aimed was the sharing of recoveries."

"A reading of the policy documents underlying the [DBA regulations] also supports the view that the payment of a lawyer's time costs and expenses on early termination of the retainer was not the intended target of [the provision relied on by Zuberi]," he said.

Lord Justice Coulson added that the termination provisions in the agreement were "unobjectionable … clear and comprehensive".

"[The termination provisions] are neither unlawful nor champertous," he said, referring to common law doctrine preventing a lawyer from funding legal proceedings in return for a share of the recovery.

Michael Fenn said: "The extent of the uncertainty previously surrounding these issues was summed up by the fact that two leading regulatory bodies had taken opposing views on whether the inclusion of these termination provisions would so render an agreement unenforceable".

"This lack of clarity had severely limited the uptake of DBAs, as an inability to recover costs in the event of termination would, in the words of one of the judges hearing the appeal, be 'commercial suicide' to the lawyer. Going forward, we can expect lawyers to be much more willing to take on matters on a DBA basis – which is good news for litigants, as DBAs allow them to quantify and mitigate litigation risk," he said.

The Bar Council, which intervened in the case in order to seek clarification of the law, said that the ruling also paved the way for "hybrid" agreements, consisting of a combination of a DBA and another form of retainer. It noted that, in the majority view of the court, the DBA regulations only apply to the part of the agreement which provides for the payment under the DBA.

Legal costs expert Paul Abbott of Pinsent Masons said: "Whilst the judges commented on the potential application of the regulations in regard to hybrid DBAs, this still remains unclear".

"However, the Bar Council Remuneration Committee has commented that this decision may have implications on hybrid DBAs, and further guidance is pending. We could see the emergence of hybrid litigation funding models in the future," he said.