Damages Based Agreements – Court of Appeal gives the green light

The Court of Appeal in Lexlaw v Zuberi has ruled that a Damages Based Agreement (DBA) is not invalidated by provisions allowing solicitors to reclaim fees in the event of early termination. Perhaps counter-intuitively, this is good news for parties interested in using DBAs as it removes one of the barriers that has caused relatively few to be entered into.

The 2013 Regulations: not "the draftsman's finest hour"

Until Lexlaw, the Damages-Based Agreements Regulations 2013 (the 2013 Regulations) were widely interpreted as allowing no payments to lawyers under a DBA other than the damages-based payment. That interpretation, which the Court considered and decided against in Lexlaw, would mean that a lawyer could not recover anything from a client who terminated the agreement before resolution of the case. To give an extreme example, a client could negotiate a settlement after years of litigation and then, just before signing, dismiss its lawyers and pay them nothing. As the judge at first instance noted, and the Court of Appeal agreed, that would have the "obvious consequence" that "representatives would be reluctant to enter into" DBAs.

The judgment in Lexlaw clarifies that there is no problem in including a clause in a DBA entitling the solicitors to fees if the agreement is terminated early. It is perhaps indicative of how badly the 2013 Regulations are drafted, however, that the judges could not agree on why that is so.  Lewison LJ held that, if a contract of retainer contains a provision that entitles a lawyer to a share of recoveries; but also contains other provisions that provide for payment on a different basis, only those provisions in the contract of retainer that deal with payment out of recoveries amount to the DBA. The termination clause was therefore not part of the DBA at all.

Coulson LJ agreed with this approach, though he went on to explain why he would arrive at the same conclusion on termination provisions if that was wrong. Newey LJ disagreed, finding the whole retainer to be a DBA, but holding that the restrictions in the 2013 Regulations do not bite on termination provisions.

An appeal to the Supreme Court is possible, given the lack of consensus among the judges, and we will update you on any news we receive.

More DBAs?

In light of this judgment, we expect to see DBAs to be drafted to allow the solicitors to recover fees in the event of early termination, which is likely to fuel an increase in the use of DBAs more generally.

Lewison LJ's interpretation of the 2013 Regulations also offers the tantalising prospect of a wide range of possible contingent fee arrangements.  On his reading of them, it would be possible to enter hybrid arrangements where low fees would be payable regardless of the result of a case, with an uplift based on the damages. This is what many have been campaigning for, though it was widely felt this required the 2013 Regulations to be replaced.

While we expect more DBAs to be entered into as a result of Lexlaw, the disagreement between the panel and defective drafting of the 2013 Regulations means entering into a hybrid arrangement still presents some risk of it being unenforceable. However, it may give impetus to the drive for reform. The work of the Queen Mary University of London team on a new set of regulations (see here) continues and we expect them to use the Lexlaw judgment to try to regain momentum after COVID and Brexit pushed this down the Ministry of Justice's agenda.

Simmons solutions

While we are actively engaged in the reform project, Simmons has acted on the basis of DBAs already, having found ways to mitigate the difficulties presented by the 2013 Regulations. We have recently entered into our latest DBA with a major financial institution.

We welcome any enquiries about acting under a DBA or other forms of alternative fee arrangements and would be happy to talk through options and potential outcomes.