Damages based agreements reconsidered

Damages based agreements are one of the damp squibs of the package of reforms introduced by LASPO 2012 on 1st April 2013.  They were intended to provide a means of increasing access to justice by providing an another funding option which would provide an alternative to the well established funding arrangement of a conditional fee agreement.

Damages based agreements have not flourished as a funding arrangement. There has been a great reluctance on the part of many solicitors (and barristers) to make these agreements. The reasons for not doing so are legion.

First the innate conservatism of the legal profession: if conditional fee agreements work and work well, with a success fee, why move to a novel form of funding arrangement?

Secondly, the very concept of the arrangement, the so called Ontario model, where a percentage of recoveries is charged, but netted off from the percentage are the costs recovered from the other side is flawed and unattractive.

Thirdly, the application of the indemnity principle means that whilst a damages based agreement may be an attractive idea for high value claims, damages in England and Wales are low, and so the agreements simply do not work for low value claims.

More dangerously, where a solicitor enters into such an agreement in a case believed to be worth £2 million but which actually proves to be worth £200,000, it is very easy for the solicitor to end up “under water” in relation to the time that he has expended upon the case. 

It should also be noted that what a solicitor (or barrister) actually wants is a very different type of funding arrangement: the hybrid conditional fee agreement, which allows them to claim costs from their client and also charge a percentage based fee, derived from the amount of damages recovered. This of course, is an arrangement that was stoutly resisted by the government in 2012, and there is no sign that the Ministry of Justice is in a mind to be more munificent in 2020.

From my perspective a particular problem with drafting damages based agreements, has been to ensure that any draft agreement complies with the Damages Based Agreements Regulations 2013. The regulations are notoriously opaque, and there are a number of potential problems which could arise from their application.

As the sanction for non compliance with the Regulations is that any damages based agreement that infringes their requirements will be unenforceable, this has been a further disincentive inhibiting any wider take up of damages based agreements.

One particular problem has been the vexed question as to whether a damages based agreement made in civil litigation can lawfully contain terms and conditions requiring a client who prematurely terminates the agreement to pay the solicitor for their time on the clock and disbursements incurred.

A number of years ago, I saw with interest that this very question had been directed in a case in the High Court to be tried as a preliminary issue in the context of a dispute between the client and the solicitors over fees.

The case in question was Lexlaw v Zuberi [2017] EWHC 1350 (Ch). Keen eyed readers will spot that the decision was made some three years ago. As the years went past I saw nothing further about the case, and assumed that like so many cases, it had been settled in some shape or fashion, without a ruling on the point.

However on Friday of last week, a judgment was handed down. The case had gone the distance after all and can be found here: Lexlaw v Zuberi [2020] EWHC 1855 (Ch). It is a significant decision: it is a decision of HH Judge Parfitt sitting as a High Court judge, so it is binding upon the lower courts and in that case the Learned Judge has decided that there is no bar on a damages based agreement containing terms permitting for payment upon termination.

The context of the case was put as follows:

1. The Claimant solicitors sue their former client for payment under a damages-based agreement dated 15 April 2014 (“the Agreement”). On 26 June 2018, Master Clark ordered a preliminary issue trial of the Defendant’s allegation that clause 6.2 of the Agreement made it unenforceable because it obliged the Defendant to pay sums to the Claimant other than the payments allowed by regulations 4(1) and/or 4(3) of the Damages-Based Agreements Regulations 2013 (“the 2013 Regulations”). This is my judgment on that preliminary issue.

2. Clause 6.2 of the Agreement states: …you may terminate this Agreement at any time. However, you are then liable to pay the Costs and Expenses incurred up to the date of termination…

3. Regulation 4(1) of the 2013 Regulations says: …a damages based agreement must not require an amount to be paid by the client other than (a) the payment, net of (i) any costs…and (ii)…counsel’s fees, that have been paid or are payable by another party…; and (b) any expenses…net of any amount…paid or payable by another party…

The case is interesting because it shows a classical approach to arguing a point of statutory construction which is to be commended, and is reflected in the judgment. Statutory construction is applied on a daily basis by all lawyers, as they go about their daily tasks of advising upon the law, but it comes in to its own when there is real doubt about what a particular statutory provision means. At that point the lid of the juridical toolbox must be opened, and the correct tools applied to whittle down a provision and reveal its one, true meaning.

So the starting point will always be to consider the canons of construction which are applied by the court:

29. The relevant principles of construction were not in dispute and can be found in Bennion, On Statutory Interpretation, 7th edition, at section 3.13 (the intention of the legislature as indicated in the enabling Act is the prime guide to the meaning of delegated legislation but the process of construction is the same); section 11.1 (the presumption in favour of purposive construction); section 24.1 (in interpreting an Act consideration should be given to the state of the law before the Act and any report or materials that indicate the Act’s purpose (including official reports, proceedings on a Bill and explanatory notes) at least so as to identify the background and mischief intended to be addressed); and, section 24.11 (it would only be when the Pepper v Hart criteria were met that regard to Hansard could be had for the purpose of determining the meaning of a provision).

Regard on a borderline or obscure provision should always be had to the trauvaux preparatoire which precede the finished statutory provision, including the former law,  reports, consultations, notes, explanatory memoranda and also the passage of the provisions through Parliament, as derived from Hansard. Not all of this material will be admissible to show or argue against a particular meaning, not all of this material will exist and most of it will be irrelevant, but occasionally a nugget of gold can be extracted.

Thus the Jackson report:

33. The Jackson Report is also relevant because it identifies, at chapter 12, paragraph 4.6, regulatory concerns that the Ministry of Justice had expressed in its consultation paper CP 10/9 arising from the introduction of contingency fees in the tribunal context. These included wanting to provide a maximum percentage of the recoveries that would be payable to representatives and controlling the use of unfair terms and conditions. Mr Snell rightly identifies these regulatory concerns as informing the material law.

And the predecessor regulations:

34. The first damages-based agreements introduced by amendment to the CLSA related to employment tribunals. The amendment came into effect on 19 November 2009 and the relevant regulations were the Damages Based Agreement Regulations 2010. For present purposes what is of particular relevance is that these reflected the regulatory concerns identified by the Ministry of Justice and referred to in the Jackson report: including in particular, prescribing a maximum % of an award which would be payable to the representative, and providing other prescribed terms and conditions which dealt with termination (it is not necessary to recite all of those but they included that if the agreement was terminated the representative may not charge the client more than the representative’s costs and expenses for work undertaken…).

And the proceedings in Parliament:

35. On 26 February 2013, the House of Lords considered what was to become the 2013 Regulations. Lord McNally moved that the Grand Committee report to the House that it had considered the 2013 Regulations. Lord McNally explained that damages-based agreements had been allowed in employment matters and the intent, as recommended by the Jackson Report, was to extend them to all areas of civil litigation. Lord McNally explained that regulations 5 to 8 replicated the detailed provisions applicable to employment matters from the existing regulations because “employment matters may be undertaken by non-lawyers…on the other hand, civil litigation can be undertaken only by qualified legal representatives, who are subject to regulation by their professional bodies…It is therefore considered that further regulation at this stage is not required”.

36. Later during the same Grand Committee consideration and in answer to questions asked by their Lordships, Lord McNally explained that the government did not consider too much regulation was appropriate for civil litigation because of the oversight given by professional regulators (especially since a failure to meet a provision in the instrument would make an agreement unenforceable) and so in particular it was not necessary in the general civil litigation area for the regulations to address termination requirements [my emphasis]. These detailed safeguards were to protect clients potentially dealing with non-lawyers in the employment context but not necessary for those dealing with lawyers who were subject to professional regulation.

And the explanatory notes to the 2013 Regulations:

45. The explanatory notes state that regulation 4 deals with amounts payable from a client’s damages, including that those amounts shall be net of recoverable costs and expenses, and that the total amount is subject to a percentage cap (25% of particular heads of loss in PI litigation and 50% otherwise). Mr Snell points out that this description of regulation 4 is limited to the sharing of the proceeds after a successful result. It only describes the Payment Condition.

46. The explanatory notes describe those regulations which apply only to employment matters which includes regulation 8 which sets out those terms and conditions dealing with termination which must be included in an agreement which relates to employment matters.
47. There is no suggestion in the explanatory notes of any intention to exercise the power to make regulations under the T&C Condition regarding termination other than in the employment context. This is consistent with what Lord McNally told the House of Lords on 26 February 2013.

And in context:

58. The Defendant’s construction of Regulation 4(1) requires it to perform an additional purpose which is to prevent an agreement between the client and the representative that gave the representative their time costs if the client terminated the agreement before a right to share in the proceeds had arisen.

59. The analysis that I have set out above demonstrates that this would be an unlikely result for a number of inter-locking reasons: –

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 representatives2.

b. 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.

c. 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

d. 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.

e. 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.

f. 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.

g. 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).

With the result:

60. Against these factors is the wording of Regulation 4(1) and in particular “a damages-based agreement must not require an amount to be paid by the client other than – (a) the payment…and (b) any expenses…”. [My underlining]. Mr Davies says, simply, clause 6.2 of the Agreement requires the Defendant to pay time costs to the Claimant if she terminates and consequently the Agreement contains a requirement which is not allowed under the 2013 Regulations. Clear wording of that kind trumps the context driven construction urged on the court by the Claimant.

61. I disagree.

62. Primarily, I disagree for the contextual reasons I have summarised above. 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.

63. For all those reasons the expression “an amount to be paid by the client” should be construed to be limited so that its subject matter is premised on there being dispute recoveries available for sharing. There is no positive part of the long single sentence that makes up regulation 4(1) which does not contain that assumption: e.g. “payment” has a definition which assumes a “sum recovered”; “costs…including fixed costs…counsel’s fees…paid or payable by another party” refers to normal costs shifting; and the reference to “expenses” paid or payable by the other party is the same. All of those regulatory controls over what will be payable by the client to the representative assume a successful outcome.

64. It was well put by Mr Snell in his skeleton: “the concept of the “cap” on payment is considered to be a distinct concept from that of fees contractually due on termination”. I agree. One is dealt with in regulation 4(1), the other falls outside of that which Parliament wanted to regulate other than for employment matters.

I regard this decision (subject to any possible appeal to the Court of Appeal) as a useful decision, which clarifies and removes from contention one of the most significant issues inhibiting the wider use of damages based agreements.

I am not sure that it will prompt a sudden surge in the numbers of damages based agreements which lawyers enter into: there remain other problems arising from the 2013 Regulations, and more fundamentally although those in turn might be clarified by further court decisions the Ontario model remains a fundamentally flawed one, and no amount of judicial gloss can alter that basic starting point.

3 thoughts on “Damages based agreements reconsidered

  1. The trial of a preliminary issue has now taken place and the High Court judgment (Lexlaw Ltd v Zuberi [2020] EWHC 1855 (Ch) (10 July 2020)) provides much needed confirmation that payment provisions on early termination in DBAs are perfectly lawful. The clarity given by HHJ Parfitt in relation to the DBA Regulations will widen access to justice as impecunious litigants will be more able to pursue civil and commercial litigation via damages-based agreements.

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