In Zuberi v Lexlaw Ltd  EWCA Civ 16, the Court of Appeal has provided important guidance on the nature of damages-based agreements (DBAs). By way of reminder, a DBA is a funding arrangement between a lawyer and a client whereby the lawyer’s fees are dependent upon the success of the case and are determined as a percentage of the damages received by the client. Under a DBA, a lawyer may not recover costs more than the total amount chargeable to the client under the DBA, and will not receive anything in the event that the case is unsuccessful. It should be noted that regulation 4(1) of the Damages-Based Agreements Regulations 2013 does not permit legal representatives to charge costs and expenses if the client terminates the retainer, whereas regulation 8 (which applies only to employment matters) does. This apparent conflict was considered in Zuberi.
Issue and first instance decision
Z entered into a retainer with his solicitors, L, which included a DBA. The DBA entitled L to a share of any damages recovered if Z’s claim was successful. The retainer also included a clause that provided if the retainer was terminated by Z prematurely, Z would be liable to pay L their normal fees and disbursements. The matter settled. Did this mean that the clause concerning premature termination breached regulation 4(1), which meant that L could not recover a percentage of the settlement fee?
The court at first instance concluded that it did not invalidate the retainer because there was a lack of any justification for such a stark difference between the position of a lawyer in an employment matter (regulation 8) and a lawyer in any other kind of case; an interference with freedom of contract; and a deterrent effect on the adoption of DBAs, which that interpretation of regulation 4(1) would produce, with the consequence that there would be less choice of funding methods for litigants. The judge also analysed the text of regulation 4(1) and held that the ‘amount to be paid by the client’ took as its underlying premise that there were recoveries to be shared. Thus, the clause on premature termination comes into operation at a time when there are no recoveries to be shared; and therefore falls outside of regulation 4(1). Z appealed.
Court of Appeal decision
The Court of Appeal upheld the decision at first instance. Giving the leading judgment, Lewison LJ (pictured) explained that there are two possible views of what a DBA consists of. The first is that if a contract of retainer contains any provision which entitles the lawyer to a share of recoveries, then the whole contract of retainer is a DBA (that is to say, a DBA is a contract which includes a provision for sharing recoveries). The second view is that if a contract of retainer contains a provision which entitles a lawyer to a share of recoveries, but also contains other provisions which provide for payment on a different basis, or other terms which do not deal with payment at all, only those provisions in the contract of retainer
which deal with payment out of recoveries amount to the DBA. Lewison LJ preferred the second view because:
1. The object of the legislation was to permit the remuneration of lawyers by means of a share of recoveries.
2. The only part of the common law that needed to be changed to achieve that purpose was the rule against champerty. At common law the contract of retainer would have been enforceable. There was no particular reason for parliament to modify the other statutory and regulatory controls over lawyers’ fees.
3. There is a presumption that parliament does not intend to change the common law, except expressly or by necessary implication. There is no express provision which displaces the common law (except the rule against champerty).
4. The legislation cannot be said to be undermined by the co-existence of the common law.
5. The legislative scheme is far from comprehensive.
The decision in Zuberi means that hybrid forms of DBA (that is to say, ones which include a DBA as well as the lawyer’s normal fee rate) will not breach the provisions of the regulations and will, therefore, be valid. The decision also illustrates the uncertainty created by the conflict between regulation 4 and 8, an issue which was previously raised by the Civil Justice Council Working Party in its report The Damages-Based Agreements Reform Project: Drafting and Policy Issues (2015). Its recommendation was that the grounds and manner of termination of a DBA ‘and the consequences of termination on either side’ were best left to negotiations between lawyer and client. The Court of Appeal decision has now provided the profession with significant clarification and guidance on an important aspect of litigation funding.
Masood Ahmed is an associate professor at the University of Leicester and a member of the Civil Procedure Rule Committee