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DBA’s and the case of Zuberi v Lexlaw

The Court of Appeal Judgment on Zuberi v Lexlaw Ltd [2021] EWCA Civ 16 (15 January 2021) has a particular relevance to Solicitors’ fee recovered on damages-based agreements (DBAs).

Litigation was brought by Lexlaw against Mrs Shaista Zuberi, in respect of the unpaid legal fees pursuant to the DBA made in April 2014. Mrs Shaista Zuberi sought to terminate the DBA with Lexlaw, after extensive work had been carried out and after a significant financial benefit of over £1 million had been obtained, achieved by Lexlaw.

Mrs Zuberi alleged that the DBA with Lexlaw was unenforceable under section 58AA of the Court and Legal Services Act 1990, and contravened the Damages Based Agreement Regulations 2013, because it included an obligation on the client to pay legal costs and expenses to Lexlaw on its hourly rates in the event of termination. Mrs Zuberi argued that Lexlaw was not entitled to any payment whatsoever.

1. Under clause 9.1 of the written agreement Lexlaw were entitled to 12% of any sum recovered plus expenses (such as disbursements). Lexlaw says that the sum due is just under £130,000. Clause 10 provided that if the claim was lost, the client was liable to pay expenses only. But clause 6.2 of the agreement provided:

“With the exception of the circumstances set out in clause 6.3 … you may terminate this Agreement at any time. However, you are liable to pay the Costs and the Expenses incurred up to the date of termination of this Agreement within one month of delivery of our bill to you.”

1. The expression “Costs” was defined as time charges at an hourly rate for time spent working on the claim; and the expression “Expenses” was defined as the cost of instructing third parties plus disbursements.

The key issue was that the DBA Regulations 2013 were poorly drafted. As a result, there was considerable uncertainty among the legal profession as to whether a termination clause triggering payment in the event of termination would be unlawful and/or would render the whole agreement unenforceable.

The need for clarity was of such importance that the Bar Council intervened in support of Lexlaw’s claim.

Having heard submissions from Nicholas Bacon QC on behalf of the Bar Council, the Court unanimously found that the DBA Regulations do not prevent termination payments being made to the solicitors.

However, in reaching this decision the majority of the Court of Appeal (Lewsion and Coulson LLJ) adopted a narrow interpretation of the meaning of “DBA”. The Court of Appeal found that the “DBA” does not compromise the entire retainer bur only those parts concerning the sharing of recoveries.

The problem as seen by Lord Justice Lewison is set out in Paragraphs 20 – 23 of the Court of Appeal Judgment.

Lord Justice Lewison set out in paragraphs 32 -34 the meaning of a DBA. (set out below)

What is a DBA?

1. For convenience, I repeat the relevant part of the statutory definition of a DBA:

“(a) a damages-based agreement is an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services 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.”

1. 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.

1. 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.

Lord Justice Lewison then considered whether this view was reflected in the Regulations as set out in Paragraphs 35 – 42.

On consideration of the same Lord Justice Lewison gave his ruling as set out in Paragraphs 43 – 46 set out below:

1. I would hold, therefore, that time costs as such are outside the scope of the Regulations, except where they are brought in as an additional requirement of a DBA in exercise of the power under section 58AA (4) (c).

1. 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.

1. In the light of my conclusion, I consider that clause 6.2 of the contract of retainer was outside the scope of the Regulations, and that its presence in the contract of retainer did not invalidate the contract.

1. I would therefore dismiss the appeal.

Post-script

1. I have, since writing the above, had the benefit of reading the judgment of Newey LJ in draft. I agree with him that the underlying policy was to arrive at the result that he has reached. The difficulty for me is to find that result in the words of the Regulations as drafted. Regulation 4 (1) prohibits the payment of “an amount to be paid by the client other than” those specified in that regulation. The interpretation that Newey LJ prefers is that that prohibition prohibits the payment of “an amount” other than expenses if the claim is lost; but permits payment of “an amount” other than expenses if the retainer is terminated early. Try as I might, I cannot find that reflected in the text of regulation 4. If, however, I am wrong, then I would agree with Newey LJ that, for the reasons he gives, the appeal should be dismissed.

Lord Justice Newey agreed with Lewison LJ that the appeal should be dismissed but that the conclusion had been reached by a different route as set out in Paragraphs 53 – 73 of the Judgment.

Lord Justice Coulson also agreed that the appeal in this case should be dismissed and the reasoning for this can be found in paragraphs 74 -85 of the Judgment.

What can be learnt from the ruling?

The inclusion of a termination is permissible and does not render a DBA unenforceable.

Hybrid DBAs are also permissible and do not fall foul of the 2013 Regulation. This mean a DBA can be agreed which allows the solicitor to take on a case permitting a percentage of the recoveries in the event of a success, but also to charge a lower amount during the course of the case.

The Judiciary supported the view that there is nothing unlawful in a DBA which allows a solicitor to charge time-cost fees in the event of a loss, and a percentage of the recoveries should there be success. The court added assurance that should an agreement be entered into which might offend the DBA Regulations 2013, that term could be severed so that the remainder of the retainer would remain enforceable in any event.

What does this mean for Practitioners?

You should check the terms of the retainer, in particular whether the agreement contains a termination clause allowing your firm to charge hourly rates in the event of termination and a severance clause.

If your retainer does not provide for your firm to be paid on an hourly rate, you should seek to amend the DBA to allow you to do so in the event of termination.

Explain clearly to the client any amendments which you wish to make (supported by file note) to ensure that an informed consent is given.

25.02.21

SM