Edge of the envelope

From time to time, I am asked to draft bespoke funding agreements, which are tinged with exotic possibility. The usual scenario is that a client and a solicitor, or even a solicitor and a barrister agree terms of trade, and need to have those terms transformed into a written agreement. These can be challenging assignments, where there is a contingency fee structure involved.

This is because contingency fee arrangements in England and Wales, anathema to the common law in contentious work for 700 years are in consequence heavily regulated by statute. In particular despite the potential for careful drafting, the constraints of the Courts and Legal Services Act 1990, the Conditional Fee Agreement Order 2013 and the Damages Based Agreements Order 2013, can constitute a heavy statutory hand precluding or constraining the form an agreement may take. 

The type of contingency fee agreement that falls within the scope of the Damages Based Agreements Regulations 2013, has been explored in number of decisions in the Court of Appeal and has been further considered at length in various publications by the Civil Justice Council which led to proposals in 2015 and again in 2019/2020, for fairly substantial reforms to the 2013 Regulations. Indeed they would have been repealed and replaced. 

Complicating the mix is the position that many years after these statutory provisions were put in force, there remains uncertainty about some key statutory concepts. One such point is whether it is permissible to have a so called “hybrid” damages based agreement.  A “hybrid” damages based agreement, would provide that if a case is won and compensation is recovered, then a percentage of the compensation would be payable to the solicitor, net of costs, and inclusive of counsels’s fees. If the case is lost, then the agreement would provide for payment of the solicitor and/or counsel on a conventional basis, perhaps with rates reduced from what might be the commercial rate for that particular case.

Such an agreement would be extremely attractive to a solicitor, as it would enable them to share fully in the upside of a case but limit their exposure on the downside: by taking a discount on their hourly rates, they can both attract the client, and also cover their overheads, effectively betting only the potential profit element of a case. But is this sort of agreement permitted by law? Well the effect of the majority judgment of the Court of Appeal in the case of Zuberi v Lexlaw Limited [2021] EWCA Civ 16 indicated that such an agreement was possible. Lewison LJ observed:

33. There are two possible views of what the DBA consists of. One view 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. In other words, a DBA is a contract which includes a provision for sharing recoveries. But another 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.

34. In my judgment, there are good reasons for preferring the latter view. First, the object of the legislation was to permit the remuneration of lawyers by means of a share of recoveries. Second, the only part of the common law that needed to be changed to achieve that purpose was the rule against champerty. As I have said, at common law the contract of retainer, shorn of clause 9.1, would have been enforceable. There was no particular reason for Parliament to modify the other statutory and regulatory controls over lawyers’ fees. Third, 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). Fourth, the legislation cannot be said to be undermined by the co-existence of the common law. Fifth, the legislative scheme is far from comprehensive.

And in conclusion:

44. I recognise that this conclusion means that the current Regulations do not deal with a lawyer’s remuneration in the event that the client pursues a case to trial and loses. But that, in my judgment, is a matter that could be provided for in Regulations under section 58AA (4)(c). In other words, it could be a requirement of a DBA that it was part of an overall contract of retainer which either precluded (or limited) a lawyer from charging fees if the claim were lost. 

On the other hand Newey LJ had this to say:

66. In the first place, “damages-based agreement” is defined in section 58AA of the 1990 Act as “an agreement … which provides that (i) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and (ii) the amount of that payment is to be determined by reference to the amount of the financial benefit obtained”. On the face of it, that description extends to any agreement under which a solicitor can become entitled to a share of recoveries and, in particular, encompasses an agreement which also provides for the solicitor to be paid on a different basis. An agreement under which a solicitor was to take a percentage of recoveries in the event of success and be remunerated on a time basis if the claim were lost would thus, on the face of it, be a “damages-based agreement” in its entirety.

67. Secondly, there are multiple indications that section 58AA and the successive versions of the Damages-Based Agreements Regulations were intended to provide for a regime under which payment would depend on success. When, for example, Lord Bach spoke to the 2010 Regulations on 25 March 2010, he described a “damages-based agreement” as “a type of contingency or ‘no win, no fee” agreement” under which “If damages are not awarded, the representative is not paid”. Again, the amendments to section 58AA which were effected by the Legal Aid, Sentencing and Punishment of Offenders Act 2012 were intended “to implement reforms … as recommended by Lord Justice Jackson” and what Sir Rupert Jackson had proposed was that lawyers should be able to enter into “contingency fee agreements”, i.e. agreements under which (as Sir Rupert explained) “the client’s lawyer is only paid if his or her client’s claim is successful” and “no fee is payable if the client loses”. That was the aim as confirmed by the explanatory note stating that DBAs “are a type of ‘no win, no fee’ agreement under which a representative … can recover an agreed percentage of a client’s damages if the case is won (‘the payment’), but will receive nothing if the case is lost”. If “damages-based agreement” is interpreted as outlined in the previous paragraph, the legislation will have achieved the objective: having regard to regulations 4 and 7 of the 2013 Regulations, a solicitor or other representative who has opted for a DBA will not in general be entitled to any payment absent recoveries. In contrast, Lewison LJ’s construction of “damagesbased agreement” would leave a solicitor or other representative free to stipulate for payment even where the claim had failed. 68.

68. Thirdly, the successive versions of the legislation were plainly intended to cap the share of recoveries that a representative could take in fees. Sir Rupert Jackson’s Final Report noted that what became the 2010 Regulations would introduce requirements in respect of the “maximum percentage of the damages that can be recovered in fees from the award” and proposed that, if lawyers were permitted to use contingency fees, regulations should “provide a maximum percentage of the damages that can be recovered in fees from the award”. Yet, as I have said, Lewison LJ’s approach would appear to me to leave a representative free to require a “payment” equal to a share of recoveries under the DBA on top of time costs pursuant to a separate agreement, and that would be so even though the DBA and the “separate agreement” were contained in a single document.

69. A fourth, and related, point relates to “concurrent hybrid DBAs”, to which, on the basis of Lewison LJ’s approach, there can be no objection. While “concurrent hybrid DBAs” certainly have supporters, it would be surprising if the legislation had been meant to authorise them without additional safeguards. It might, for instance, have been thought appropriate to insist that time should be charged at a reduced hourly rate or otherwise to impose limits on the extent to which a representative could become entitled to time costs as well as a share of recoveries.

Coulson LJ agreed with Lewison LJ’s approach to construction of the Regulations:

77. Clause 6 of the agreement comprises an unobjectionable series of provisions relating to termination. The provisions themselves are clear and comprehensive. They are neither unlawful nor champertous. Accordingly, the burden is on the appellant to explain how and why these clear provisions, into which she freely entered, should be set aside. It is not, as Mr Davies sought to persuade us, for the respondent to demonstrate the contrary. The appellant seeks to rely on section 58AA of the Act and Regulation 4. In my view, for three separate reasons, neither avail the appellant. First, I agree with my Lord, Lord Justice Lewison, that the term “damages-based agreement” should be given a narrow meaning. It is the agreement between the parties relating to the payment as defined in the Regulations, namely that “part of the sum recovered in respect of the claim or damages awarded that the client agrees to pay the representative”. Other elements of the agreement between the solicitor and the client, such as at which of the solicitors’ offices the work will be done, or the level of expenses incurred (which is expressly excluded from the payment as defined) or, as in this case, the termination provisions, have nothing to do with the payment as defined in the Regulations, and are therefore not part of the DBA itself.

And there you have it. A majority of the Court of Appeal and their approach would permit “hybrid” damages based agreements, but a powerful dissenting judgment is to the contrary. How likely is it that a different divsion of the Court of Appeal would find the majority’s decision wrong? Or that a subsequent and different case to the Supreme Court might overrule Zuberi?

Before the Paccar decision I would have thought that the prospect was slim, given the premium that legal certainty usually attracts in the field of costs and litigation funding, but these days, I think nothing can be taken for granted. The question is: how do you weigh the question of bad luck, in your funding choices? And what premium do you attach to a berth in the comforting safe harbour of a conditional fee agreement instead?

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