VALIDITY OF A DAMAGES BASED AGREEMENT BETWEEN SOLICITOR AND CLIENT UPHELD: HIGH COURT DECISION
I am grateful to Lexlaw ltd for bringing my attention to the judgment of HHJ Parfitt (sitting as a High Court Judge in Lexlaw Ltd v Zuberi  EWHC 1855 (Ch) (10 July 2020). They have sent me their Note on the judgment which, with with permission, I have reproduced in part below. The full Note can be found here.
DAMAGES BASED AGREEMENTS: HIGH COURT CONFIRMS ENFORCEABILITY OF CIVIL LITIGATION DBAS THAT PERMIT REPRESENTATIVES FEES TO BE PAID ON EARLY TERMINATION
LONDON, UK – In a landmark judgment in the High Court case of Lexlaw Ltd v Zuberi  EWHC 1855 (Ch) (10 July 2020), His Honour Judge Parfitt, sitting as a judge of the High Court, has determined that Damages Based Agreements (DBAs) in general civil litigation may allow legal representatives to be fairly remunerated on early termination. The judgment in this trial of a preliminary issue provides much needed judicial clarity on the use of DBAs by legal representatives and will be welcomed by both litigants and the legal profession given the case precedent promotes access to justice which was the very intention of the DBA Regulations 2013.
Lexlaw Solicitors & Barristers, a Middle Temple based litigation law firm, brought the claim against Ms Shaista Zuberi in respect of her non-payment of fees due pursuant to a DBA. The fees sought amounted to 10% plus VAT of the damages she received in an underlying Financial Services dispute with two major UK banks. Ms Zuberi had been mis-sold a speculative and complex financial swap instrument with a peak notional value of £2,321,800.00 by National Westminster Bank Plc (NWBD) and the Royal Bank of Scotland Plc (RBS.L) which had caused her to suffer a massive financial loss made up of past, ongoing and future swap payments. The Claimant law firm worked on the matter for several years, both in the format of High Court litigation and in an FCA-agreed interest rate hedging product review scheme. Representation in the review was initially by Ms Zuberi’s accountant who failed to get her acceptable compensation. Eventually, after considerable legal pressure both in the litigation and in the review scheme, the Banks indicated they would provide a significantly improved redress offer to Ms Zuberi giving her a financial benefit in excess of £1 million. Shortly after that indication, Ms Zuberi purported to terminate the DBA. She argued that no money was due under the DBA (or at all) as the DBA was void and unenforceable under section 58AA of the Courts and Legal Services Act 1990 as it included within it an obligation for her to pay legal costs and expenses in the event of early termination. Such an early termination payment clause was expressly permitted in the regulations in respect of employment matters but the regulations were silent in respect of contentious litigation matters that could only be conducted by regulated solicitors and barristers. HHJ Parfitt found that the DBA between Lexlaw and the Defendant was neither void nor unenforceable on the basis alleged:
“62. … The suggested construction by the Defendant is inconsistent with the purpose of the legislation and the structure of the CLSA and the 2013 Regulations. It produces a result which, in context, would be irrational and without apparent justification. In a similar way, if the legislature considered it necessary that damages-based agreements should prevent the solicitor recovering time costs in any circumstances other than when the agreement continued to apply at the conclusion of successful litigation then it would have said so in terms and not as a side consequence of addressing a different subject – how sharing the spoils should work.”
This issue is of paramount importance because DBAs were intended to promote access to justice for litigants but in practice have not yet achieved that aim. Many legal practitioners and their representative bodies such as the Chancery Bar Association have commented that the regulations were inadequately drafted permitting technical arguments over enforceability leading to costly satellite litigation. The ChBA have stated “that DBAs are used very infrequently by members of the Association [and] we continue to recommend caution before entering into a DBA.” As a result of the precedent created by this landmark judgment, legal practitioners’ views may now change given they can now enter into a DBA knowing that they will be entitled to be fairly remunerated in the event of early termination.
HHJ Parfitt determined at paragraph 59 of his judgment:
“a. There would be an inexplicable difference between employment matter representatives and general civil representatives. The Defendant has suggested no positive reason why the legislature would want to allow employment representatives to recover work done costs on a client termination (regardless of the ultimate outcome of the dispute) but disallow such recovery by non-employment representatives.
- A choice by the legislature to prevent a non-employment representative to get incurred costs on such termination would be inconsistent with the expressed purpose of not needing to regulate as between legal representatives and clients, in contrast with needing to do so in the employment sphere where clients might deal with unregulated service providers.
- It would be inconsistent with the enabling legislation which provided for regulations to address separately (a) the sharing of recoveries between client and representative and (b) other terms and conditions that might be prescribed. The posited bar on work done costs in a termination situation has nothing to do with (a) but was considered by the legislature to be well within (b) when it prescribed the termination terms for employment matters. It would be curious to achieve by a side wind that which would most obviously be done using the power to make T&C Conditions, if that was what Parliament wanted to do.
- It would restrict a general civil representative’s time costs recovery in a situation which is not to do with enabling the sharing of the spoils of litigation – i.e. it would impose a limitation on freedom of contract without any justification arising from the express purpose of legalising damages-based agreements.
- It is an obvious consequence of preventing representatives getting their time costs on a client termination that those representatives would be reluctant to enter into damages-based agreements and that would be contrary to the purpose of making such agreements lawful so as to facilitate access to justice.
- This would have the knock-on consequence of creating less choice (within regulated representatives) for clients wanting to bring general civil litigation claims than in employment claims, again contrary to the purpose of the expansion of damages-based agreements into general civil litigation.
- It is no answer to posit client agreements in general civil disputes that would prevent a client from terminating the agreement because that would be an unreasonable fetter on a client’s right not to continue with the representative they want and again why regulate in the employment area but not the general civil area if the intention was to be more restrictive of a representative’s cost recovery in the civil litigation arena. The legislature did provide regulations for employment matters that recognised but restricted the parties’ contractual rights to terminate to protect market participants (regulation 8(3), client termination; regulation 8(4) representative termination).”…
- The Defendant sought to terminate the DBA with her Claimant solicitors to avoid paying her percentage fees in spite of having obtained a compensatory financial benefit of £1 million.
- The Defendant argued the DBA was unenforceable under section 58AA of the Courts and Legal Services Act 1990 because the DBA included an obligation to pay costs and expenses in the event of early termination.
- The High Court found that what the Defendant was claiming was an irrational statutory interpretation that was contrary to what Parliament was trying to achieve in respect of DBAs.
- DBAs are of paramount importance to society as a whole, because they give impecunious Claimants a chance at obtaining redress.
- HHJ Parfitt’s judgment provides welcome guidance as there had previously been no judicial clarity as to whether on termination a client would be liable to pay a legal representative’s expenses and charges on an hourly rate basis.
- The judgment will encourage a greater number of legal professionals to offer DBAs to prospective clients who lack the financial resources to pursue meritorious litigation, which is especially important during these unprecedented times of economic uncertainty.