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Damages-based agreements: another pitfall to note

Damages-based agreements (DBAs) were first introduced in 2013 but the take up has been very limited. As a result, it is very rare to find mention of a DBA in a law report but, as a recent decision has considered one, it is time to highlight another possible problem with DBAs.

In Lexlaw Ltd v Zuberi, Master Clark had to consider whether to order a trial of a preliminary issue concerning the construction of a DBA made between the solicitors and the client in relation to a claim against a bank for mis-selling interest rate hedging products. Clause 6.2 of the DBA provided that the client could:

“… terminate this Agreement at any time. However, you are then liable to pay the Costs and Expenses incurred up to the date of termination of this agreement within one month of delivery of our bill to you.”

The client terminated the DBA after 13 months and the solicitors sent her a bill for £125,123.14 based on a time-costed basis for that period. When sued for that sum, part of her pleaded defence was that, by reason of section 58AA(2) of the Courts and Legal Services Act 1990, the DBA was unenforceable because it potentially provided “for a payment above a prescribed amount or for a payment above an amount calculated in a prescribed amount.” It was possible that the amount due would have been less than £125,123.14 if the claim had been successfully prosecuted under the DBA. Obviously, if it had not been successful, no sums other than expenses would have been payable. The master ordered the trial of a preliminary issue as to whether the DBA was unenforceable.

Perhaps surprisingly, the client accepted that, if the DBA was unenforceable, she would nevertheless be liable on a quantum meruit basis for the reasonable fees on a time-costed basis for the same period. Surely the sum of £125,123.14 was the sum claimed as the reasonable fees on a time-costed basis? Further, if the DBA was unenforceable, the client would not have owed anything to the solicitors and the solicitors may not have been entitled to any sum by way of quantum meruit. Whilst that would seem a harsh outcome, it is certainly the position where a conditional fee agreement (CFA) is unenforceable (see Awwad v Geraghty & Co).

In Howes Percival LLP v Page the client wrongfully terminated the CFA which was otherwise enforceable. In that situation the solicitors were entitled to damages for breach of the CFA, which were assessed by reference to the lost chance of achieving success in the claim and being entitled to fees including a success fee.

The main general learning point from the Lexlaw decision is to consider whether any DBAs that have been entered into could fall foul to the same argument. If the solicitor can only earn its fees if the claim continues to a conclusion, then consider not providing a right for the client to terminate. If the client does terminate, the remedy would be damages to be assessed on the basis of the loss of a chance, or, alternatively, reserving the right to claim the proportion of the damages if the client carries on with the claim but with other representatives.

It is interesting to note that the non-contentious business agreement between solicitor and client in respect of another claim against a bank for mis-selling in Bolt Burdon Solicitors v Tariq was held to be fair and reasonable. The judge regarded the agreement as a speculative joint venture in which the solicitors were taking all the risk and the client was exposed to no risk. The solicitors were entitled to 50% of the bank’s offer of £821,000 under the Financial Conduct Authority redress scheme in relation to the mis-sold financial product.

The existence of a DBA can raise issues in relation to the assessment of costs and payments on account at the end of a trial, although from the report it would appear that the point may have been overlooked in Harlequin Property (SVG) Ltd and Another v Wilkins Kennedy (a Firm). The claimant had entered into a DBA with its solicitors, but the judge held that the same was not relevant to quantifying an interim payment on account following the claimant’s success at trial, where it had recovered about £9 million. I would suggest that the DBA was potentially relevant because the claimant’s costs were said to be £5.1 million. The most a client can be liable for under a DBA is 50% of the recovered sum plus certain disbursements (not including counsel’s fees). The amount payable under the DBA was relevant in that the indemnity principle continues to apply (yet another criticism of the DBA regulations), so the claimant’s claim for costs could not exceed the amount payable under the DBA regardless of the amount that might otherwise have been claimed under a standard retainer. The indemnity principle was not mentioned in the judgment.

On a more encouraging note, there are now a number of third party funders who have products for large commercial claims whereby the funder and the lawyers in effect share the risks involved in the DBA funded claim. Also, the market has seen the launch of a DBA insurance product for commercial claims, where the risk is split between the insurer and the lawyers.

The DBA has had a long and not very satisfactory evolution in the world of commercial litigation. Perhaps with the launch of these various DBA-related products, the DBA will now be a much more attractive option for commercial litigators in large cases and the lure of a share of very substantial awards may yet prove irresistible.

Hardwicke PJ Kirby QC

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