Damages Based Agreements: Zuberi v Lexlaw Press Release

STATEMENT BY LEXLAW

14th JANUARY 2021

DAMAGES BASED AGREEMENTS (DBAs): LANDMARK COURT OF APPEAL JUDGMENT UPHOLDS ENFORCEABILITY OF DBAS IN THE EVENT OF TERMINATION LONDON, UK – In Shaista Zuberi v Lexlaw Limited [2021] EWCA Civ 16, the Court of Appeal (before Lord Justice Lewison, Lord Justice Newey and Lord Justice Coulson) has today handed down a landmark judgment on appeal from HHJ’s Parfitt’s High Court ruling in the trial of a preliminary issue and unanimously agreed with Lexlaw dismissing the appeal. The judgment (and the reasoning of the Lordships) will be of interest to the legal profession as it has been concerned that DBAs are not working effectively for either litigants or their representatives and in particular the inconsistency in the legislation has caused considerable uncertainty and a fear that should a client terminate a retainer, the lawyer will end up not being paid anything for months or years of work.

This is the first material case dealing with the Damages Based Agreements Regulations 2013 to reach the Court of Appeal since the scope of DBAs was extended to civil litigation in April 2013. The Court of Appeal judgment makes clear that termination fees are not caught by the DBA Regulations and any DBA including termination clauses is enforceable. The ruling provides much needed clarity to the legal profession on one of the key uncertainties preventing the wider use of DBAs and the unanimous judgment paves the way for DBAs to flourish and enhance access to justice as intended.

The litigation was brought by Lexlaw Ltd (“Lexlaw”) based in Middle Temple, London against a former client, Shaista Zuberi in respect of payment legal fees pursuant to a DBA made in April 2014. The Defendant sought to terminate the DBA with her solicitors after Lexlaw, through its extensive work, had obtained a significant financial benefit of over £1 million for her in respect of litigation against two major banks for the mis-selling of a complex interest rate hedging product. The Defendant argued that the DBA with Lexlaw was unenforceable under section 58AA of the Courts and Legal Services Act 1990 because the DBA included within it an obligation on the Defendant to pay legal costs and expenses to Lexlaw on its hourly rates in the event of termination (and thus argued that Lexlaw was not entitled to any payment whatsoever).

This question is of paramount importance to the legal profession as a whole, because the effectiveness of the arrangements by which litigants and their lawyers are able to fund litigation are an important component of securing access to justice on terms that are fair to litigants and to practitioners. Should a DBA be unenforceable for reasons that it includes an obligation on a client to pay a solicitor’s time costs and expenses on termination it would effectively end the use of DBAs. As a consequence, cunning and commercially savvy clients would be granted a judicial imprimatur to exploit the defects of the DBA Regulations by terminating the retainer with their legal representatives on the eve of successful litigation or settlement. For example, if the opposing party offers to settle a case, there would be nothing to stop the client disinstructing their legal professionals, representing themselves and terminating the DBA just before accepting the settlement offer in order to avoid liability to pay for work that the solicitor had carried out on the client’s behalf. This is clearly not what was envisaged or intended by Parliament.

Background In 2008, the Defendant borrowed over £2 million from Natwest/RBS, and as part of the transaction she entered into a 10-year interest hedging product. By Spring 2012, receivers were appointed against the Defendant. In May 2012, the Defendant appointed Lexlaw to act for her in respect of claims against the banks. In April 2014, the parties agreed to a DBA at the Defendant’s own request, as the Defendant could not otherwise afford to pursue her claim against the banks. Lexlaw carried out a substantial amount of work on the claim and challenged the outcome of a redress review on behalf of the Defendant.

In April 2015, a meeting was held with the banks and they indicated to the Claimant and Defendants that an improved redress offer would be provided. In July 2015, the banks made an improved final offer

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which was acceptable to the Defendant which involved a less costly alternative derivative product and meant the Defendant received £389,168.39 in cash redress from the banks plus avoided significant break costs of £640,000, resulting in a financial benefit to the Defendant of well over £1 million.

Lexlaw sought payment under the DBA from the Defendant in the sum of £125,123.14. However, despite Lexlaw having achieved a successful resolution of the claim against the banks, the Defendant refused to pay any sums and argued that the DBA was unenforceable under section 58AA of the Courts and Legal Services Act 1990 as the DBA included within it an obligation on the Defendant to pay Lexlaw’s costs and expenses on termination.

The High Court Judgment At first instance, HHJ Parfitt sitting in the High Court ruled that the existence of such a termination clause did not invalidate the whole contract. HHJ Parfitt found that in effect what the Defendant was trying to do was contrary to what Parliament was trying to achieve in respect of DBAs and therefore contrived to create a satellite litigation cost war in order to seek to avoid her payment liability to the Lexlaw.

HHJ Parfitt held that the DBA between the Lexlaw and the Defendant was not unenforceable as as it would be wholly inconsistent with Parliament’s intent, the structure of the CLSA and the 2013 Regulations and would produce a result that would be “irrational and unjustifiable” - that is, such a construction would prevent a solicitor recovering time costs in respect of work that it reasonably carried out in the event of termination.

The judge gave a number of “interlocking” reasons for his view, including an interference with freedom of contract; the lack of justification for a stark difference between the position of a lawyer in an employment matter and a lawyer in any other case; and the deterrent effect on the adoption of DBAs with the consequence that there would be fewer choices of funding methods for litigants.

The Court of Appeal Judgment This appeal raises a short, yet important, point of statutory interpretation concerning s5AA of the Courts and Legal Services Act 1990 (“CLSA”) and the delegated legislation made pursuant to the powers conferred by ss58AA(4) and (5) CLSA, namely the Damages Based Agreements Regulations 2013 SI 2013/609.

Lord Justice Lewison considered that at common law the contract as a whole is enforceable as the inconsistent clause fulfilled the criteria justifying severance from the remainder of the contract. His Lordship, in line with his previous jurisprudence, took a purposive approach to the interpretation of the 2013 Regulations and gave the term “damages based agreement” 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” that are part of the DBA: “if a contract of retainer contains a provision which entitles a lawyer to a charge 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” 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. As a result of this interpretation, LJ Lewison dismissed the appeal on the basis therefore that “clause 6.2 of the contract

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of retainer was outside the scope of the Regulations, and that its presence in the contract of the retainer did not invalidate the contract”.

Lord Justice Newey agreed that the appeal should be dismissed, but reached the conclusion by a different route. His Lordship parted company from LJ Lewison’s purposive interpretation of what a DBA is and instead reached his conclusion by finding that section 58AA of the Act and Regulation 4 do not affect the operation of an early termination provision and in fact do not address termination (or were to intended to regulate fees payable to legal representatives in the event of early termination of the DBA) at all: “i) As I read the 2010 Regulations, regulation 6 shows that regulation 5 was not intended to apply where a DBA was terminated early. It is apparent from regulation 6(2), limiting the amount that a representative could charge on termination to “costs and expenses for the work undertaken”, that, regulation 5 notwithstanding, it was proper for a DBA to provide for a representative to charge time costs on termination regardless of what, if anything, the client might ultimately recover from the claim; ii) Regulations 5 and 6 of the 2010 Regulations have now been replaced by regulations 7 and 8 of the 2013 Regulations, but the latter provisions must operate in the same way as the former formerly did. Just as regulation 5 of the 2010 Regulations cannot have been meant to extend to early termination, nor can regulation 7 of the 2013 Regulations have been intended so to extend; iii) Regulations 4 and 7 of the 2013 Regulations perform similar functions in relation to, respectively, “employment matters” and “claims or proceedings other than an employment matter”. In particular, regulation 4(3), capping payment at an amount equal to 50% of recoveries, mirrors regulation 7, save that regulation 7 fixes the cap at 35% of recoveries rather than 50%. That suggests that, like regulation 7, regulation 4 should be seen as having no application to termination provisions; iv) That that is the correct interpretation is confirmed by what was said about the 2013 Regulations. Lord McNally explained to the House of Lords on 26 February 2013 that the detailed provisions found in, among others, regulation 8 of the 2013 Regulations were “necessary because employment matters may be undertaken by non-lawyers”, whereas “civil litigation can be undertaken only by qualified legal representatives, who are subject to regulation by their professional bodies and whose conduct may be subject to challenge through those bodies” so that it “was considered that further regulation at this stage is not required”.

Lord McNally said, too, that “DBA regulations do not contain requirements on termination for civil litigation, as in employment cases” because “employment cases … can be taken forward by non-lawyers”, while “Civil litigation can be conducted only by lawyers, who are subject to their own professional regulations”.....”

Lord Justice Coulson concurred and dismissed the appeal. His Lordship agreed with LJ Lewison that the term “damages-based agreement” should be given a narrow meaning and further agreed with LJ Newey that even if this were too narrow an interpretation that “neither section 58AA of the Act, nor Regulation 4, affect the operation of an early termination provision such as clause 6.” Further: “The fact that the Regulations do not prohibit or limit termination provisions for general civil litigation is not an inadvertent omission. On the contrary, as can be seen from the Explanatory Memorandum, it is the result of a deliberate decision. Parliament shied away from imposing any restrictions on termination provisions generally because it acknowledged that, in such cases, lawyers would be involved and therefore would be subjected to the regulatory provisions of their own professional bodies.”

STATEMENT BY LEXLAW

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Mr M. Ali Akram, a dual qualified barrister and solicitor practising at City of London law firm LEXLAW Solicitors & Barristers, stated: “The client in this case sought a DBA and pressed us to fund her claim. The client had previously instructed us on a mis-selling claim for a complex derivative however the client was low on funds and her own attempts to seek compensation through the regulator’s review scheme were unsuccessful. Although the DBA Regulations entitled us to ask for a contingency fee of up to 50%, we agreed to conduct this multimillion litigation at a low DBA percentage level of only 10% plus VAT (so 12% in total). Our case against the Bank lasted 2 years and after a considerable amount of work from us resulted in a financial benefit to the client of over £1 million. The Court of Appeal’s judgment- reached by three different routes- provides welcome guidance to practitioners because of the lacuna in DBA Regulations as it relates to termination in litigation proceedings and whether on termination a client would be liable for solicitor fees on an hourly rate basis. This is a major problem because the DBA Regulations do not provide protection for legal professionals who use DBAs to promote access to justice.”

Mr M. Ali Akram further stated: “The DBA enabled the Defendant to access litigation services without having to pay for them until the conclusion of her claim. She was enabled to do this on terms where her liability was always a known percentage of whatever financial benefit she obtained. She had the benefit of those terms and the Court of Appeal has determined that it is unjust to argue that an entire agreement can be voided without payment at all. This is a welcome and important judgment for lawyers and clients equally as it provides some much needed judicial clarity on the effect of termination in respect of DBAs in litigation matters.”

Mr Karim Oualnan, a solicitor and partner at City of London law firm LEXLAW Solicitors & Barristers with conduct of the proceedings stated: “It is common knowledge within the profession that the DBA regs put in place by the Ministry of Justice have a number of gaps and are not user friendly. However, it is wholly disingenuous for a client to terminate a funding agreement with a solicitor (after that solicitor has taken the risk of funding the claim to conclusion and obtained a successful outcome) and expect no liability to the solicitor; that is clearly not Parliament's intention when it enacted the DBA regs. The Court of Appeal has clarified some of these uncertainties and provides the opportunity for DBAs to flourish and enhance access to justice as intended. I hope that this judgment will go some way in putting DBAs (and the amendments of the DBA regs) back on the agenda and provide a means of promoting and furthering access to justice particularly during these unprecedented economic times”.

Summary: I.

II.

III.

The Defendant sought to terminate the DBA with her solicitors after Lexlaw, through its extensive work, had obtained a significant financial benefit of over £1 million. The Defendant argued that the DBA with Lexlaw was unenforceable under section 58AA of the Courts and Legal Services Act 1990 because the DBA included within it an obligation on the Defendant to pay costs and expenses to Lexlaw in the event of termination (and thus argued that Lexlaw was not entitled to any payment whatsoever).

The High Court found that in effect what the Defendant was trying to do was contrary to what Parliament was trying to achieve in respect of DBAs and thus has created a satellite litigation cost war in order to seek to avoid her payment liability to the Lexlaw.

HHJ Parfitt found that the DBA was not unenforceable given that such an interpretation would be wholly inconsistent with Parliamentary intent, the structure of the CLSA and the 2013 Regulations and would produce a result that would be “irrational and unjustifiable”.

STATEMENT BY LEXLAW IV. V.

VI.

VII.

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The Court of Appeal unanimously dismissed the appeal and reached the same conclusion by different routes.

Lord Justice Lewison held that termination provisions, have nothing to do with the payment as defined in the Regulations, and are therefore not part of the DBA itself. As a result of this interpretation, LJ Lewison dismissed the appeal on the basis therefore that “clause 6.2 of the contract of retainer was outside the scope of the Regulations, and that its presence in the contract of the retainer did not invalidate the contract”.

Lord Justice Newey agreed that the appeal should be dismissed, but reached the conclusion by a different route. His Lordship parted company from LJ Lewison’s purposive interpretation of what a DBA is and instead reached his conclusion by finding that section 58AA of the Act and Regulation 4 do not affect the operation of an early termination provision and in fact do not address termination (or were to intended to regulate fees payable to legal representatives in the event of early termination of the DBA) at all.

The Court of Appeal judgment provides welcome guidance to practitioners because the lacuna in DBA Regs as it relates to termination in litigation proceedings: there had previously been no judicial clarity as to whether on termination a client would be liable solicitor fees on an hourly rate basis.

It is anticipated that this Court of Appeal judgment will more readily encourage legal professionals to offer prospective clients who lack the necessary funds to pursue contentious litigation damagesbased agreements and as such will provide a means of promoting and furthering access to justice particularly during these unprecedented times.

Contact details for editors: LEXLAW Solicitors & Barristers is a unique law firm that partners solicitors and barristers and is the only law firm based in the Middle Temple (an Inn of Court). The City of London Law Firm specialises in Financial Services Litigation and is regularly instructed in high-profile high-value litigation disputes.

The senior partner, Mr M. Ali Akram, can be contacted via email on maa@lexlaw.co.uk or by telephone on 020 7183 0529.

Christopher Snell, Barrister of New Square Chambers, acts as counsel for LEXLAW. Chris has a broad practice encompassing, primarily, commercial litigation, banking and financial services, excise and taxation, property and trusts.

Counsel can be contacted via email on chris.snell@newsquarechambers.co.uk or by telephone on 020 7419 8000.

ENDS