Hybrid funding model an appetising option

Last month the Court of Appeal finally had an opportunity to examine the topic of damages-based agreements (DBAs) – and it did not disappoint.

DBAs – or contingency fees as they are also known – were intended to be a tasty addition to the menu of funding options set out by Sir Rupert Jackson in his 2009 costs review. But in practice, they have proved a dish for which lawyers have had virtually no appetite. That is because Jackson’s original recipe, which would have included an appetising ‘hybrid DBA’ option allowing lawyers to combine a slice of the damages pie with reduced hourly rates, was badly messed up by government chefs.

By the time the draftsmen had finished with the 2013 DBA regulations, Jackson’s original dish had been mashed into a watered-down mush worthy of Ramsay’s Kitchen Nightmares. No hybrid DBA option. No clear provision for litigators to be paid anything on early termination. No good reason for lawyers to risk taking a bite, when there was a very real prospect of being left with a nasty aftertaste.

So the Court of Appeal’s ruling last month in Zuberi v Lexlaw Ltd [2021] EWCA Civ 16 will be very welcome news for the legal profession. It centred on what was surely the most egregious aspect of the 2013 DBA regulations: the confusion over whether lawyers were allowed to charge their client for costs and expenses incurred thus far, if the client terminated the DBA early. The lack of a proper provision to deal with this issue meant that lawyers feared they could work for months or even years on a case, only to find themselves entitled to no cash at all if their client turned around and sacked them right before settling a claim directly with the defendant.

As Lord Justice Coulson put it in Zuberi, such a situation would amount to ‘commercial suicide’ for lawyers.

In Zuberi, the Court of Appeal finally had the chance to tackle this issue head-on. Lexlaw had entered into a DBA with Ms Zuberi in relation to her claims against certain banks alleging that she had been mis-sold derivative products. The DBA spelled out that if Ms Zuberi terminated the agreement, she would have to pay the law firm’s time-costs and expenses up to the date of the termination.

After a meeting at which the banks in question indicated that they would be making a substantial offer, Ms Zuberi did terminate the retainer and she accepted an offer from the banks. When Lexlaw then asserted that she owed them £125,000 for work and expenses, she argued that the DBA breached the 2013 regulations.

She based this on the fact that the regulations say a valid DBA cannot require a client to pay anything other than a percentage of damages. So that meant that the termination clause, which sought to entitle the law firm to time-costs and expenses, must render the DBA unenforceable – or so she argued.

In a 26-page judgment that went into considerable depth about the history of DBAs, the Court of Appeal finally plugged the gaping hole left by the inadequate rules of 2013

In a 26-page judgment that went into considerable depth about the history of DBAs (perhaps suggesting that the appeal judges had been eager to sink their teeth into this question for a while) the Court of Appeal finally plugged the gaping hole left by the inadequate rules of 2013. All three judges (Lords Justices Lewison, Coulson and Newey) concluded that the DBA regulations do not stop lawyers from being entitled to a payment on early termination of a DBA –and, in doing so, they smashed down one of the biggest barriers to the more widespread use of DBAs.

But it does not end there. While Newey LJ applied different logic, Lewison and Coulson LLJ (in the majority) adopted a line of thinking that is hugely exciting for the profession – because it seems to open the door to the ‘hybrid DBA’ option that lawyers have been longing for.

The majority view was that the whole of Lexlaw’s contract of retainer was not in fact a DBA. The DBA was simply the provisions within the contract that related to a ‘share in recoveries’: that is, a percentage of the damages. So the terms in Lexlaw’s retainer that provided for the client to pay time-costs and expenses in the event of early termination did not fall foul of the DBA regulations, because they were never part of the DBA.

This interpretation is great news for hybrid DBAs, where alternative payment methods such as hourly rates would run alongside an agreement to share in the damages.

At this stage, it remains to be seen whether this issue will end up at the doors of the Supreme Court. But if hybrid models are indeed now viable, then it looks like the DBA is finally set to become a much more tantalising choice on the menu of funding options.

 Rachel Rothwell is editor of Gazette sister magazine Litigation Funding, the essential guide to finance and costs. For subscription details, tel: 020 8049 3890, or click here.