Recent case law has opened up the possibility for solicitors and law firms to operate Damages Based Agreements (DBAs) with greater flexibility which may lead to more availability of these arrangements for businesses involved in litigation proceedings.
What are Damages Based Agreements?
A DBA is a contingency fee agreement between a solicitor/law firm and a client where they both agree to share the risk of litigation proceedings.
The payments in respect of legal fees (law firm and/or counsel fees) and expenses from the client under this type of agreement are based upon achieving an agreed outcome between the law firm and client when the DBA is entered into. The payments are based on a percentage of the sum (up to 50%) recovered from the opponent in the proceedings.
Until the above case, it was assumed that DBAs had to be all or nothing – e.g.:
- If the claim is successful, the law firm receives a percentage of the settlement/damages received by the client; or
- Alternatively, if the claim fails or, more importantly for the law firm, the arrangement is terminated early, the law firm receives no payment.
This meant that DBAs which provided for payments of varying cost amounts if litigation proved ultimately to be unsuccessful (known as hybrid DBAs) were assumed to be prohibited.
Since the introduction of The Damages-Based Agreements Regulations 2013, these types of agreements have been fairly unpopular with law firms, due to the fact that the Regulations didn’t seem to allow for legal fees to be charged where a case is unsuccessful or where the DBA is terminated early. As a result, DBAs haven’t widely been available to clients.
However, the following case suggests that this may no longer be the case, as the Court of Appeal ruled that the Regulations do allow for payments of time costs and expenses to a law firm or solicitor if an agreement is terminated early.
Zuberi v Lexlaw
The Client in this case (Mrs Zuberi) entered into a DBA with law firm, Lexlaw, whereby the agreement permitted the law firm to receive 12% of the monies received by the Client should her case prove to be successful.
Within the arrangement, there was a clause which stated that if the Client terminated the DBA early then she would have to pay the law firm’s time costs and expenses for the work they had carried out.
Mrs Zuberi settled her claim, so under the terms of the DBA, Lexlaw deemed that they should be paid the agreed percentage. However, the Client did not agree and argued that the agreement was not enforceable due to the early termination clause, despite the fact that the agreement had not been terminated. The Client argued that this clause breached regulation 4(1) of the Regulations.
Whilst the Regulations allow for law firms to charge time costs and other expenses in employment matters should a client terminate a DBA, they do not address this point in respect of terminating a DBA during litigation proceedings. Consequently, it has been unknown as to whether the Regulations allow for payments to law firms in non-employment matters where an agreement is terminated early.
Both the High Court and Court of Appeal ruled in favour of Lexlaw. The Court of Appeal, which adopted a slightly different reasoning to that of the High Court, found that DBAs can provide for payment of a law firm’s time costs and expenses should the agreement be terminated early.
Nicholas Bacon QC, who acted for the Bar Council as an intervener in the case, commented on the ruling:
“Any solicitor doing DBA work should certainly include provision now in the agreement that allows them to be paid something for the case if the client terminates the agreement, or the client breaches it. That is solid, sound, safe territory now… But those who are more adventurous, who might well be doing a whole basket of DBA cases, may well want to put in a clause that says, “if we lose, we’re going to be paid, say, half an hourly rate or a discounted fee”, on the back of that judgment.”
This ruling has opened the door to the use of DBAs and hybrid DBAs going forward, which is good news for law firms who may this see as more of an option to make available to clients. It is also good news for clients as a DBA is another alternative fee arrangement available for them when pursuing a litigation claim.
How can Nelsons help?
Daniel Brumpton is a Partner in our Dispute Resolution team, specialising in professional negligence claims and business disputes. Daniel heads our Commercial Litigation and is recognised by the independently researched legal directory, The Legal 500.
For more information on the subjects discussed in this article, please contact Daniel or another member of the team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online form.
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