Damages-based agreement doesn’t exclude costs on early termination in retainer: DBA A-OK!

Robert Steele

In Zuberi v Lexlaw, the Court of Appeal held that “damages-based agreement” should be construed narrowly, comprising only the particular provisions of a retainer dealing with payments out of recoveries, not the retainer as a whole. It also held that the Damages-Based Agreements Regulations 2013 do not regulate fees payable to lawyers in the event of early termination.

Retainers under which a lawyer is entitled to a share in the client’s recoveries are prohibited at common law on grounds of public policy on the ground that they are “champertous”. Terms of a contract that are contrary to public policy are unenforceable.

A damages-based agreement is a type of “no win, no fee” agreement under which the lawyer can recover an agreed percentage of a client’s damages if the case is won, but will receive nothing if the case is lost. It is a specific legislative exception to the common law rule. The concern behind this litigation was that if the lawyer was technically outside the specific exception, the whole retainer may be unenforceable.

Zuberi had retained Lexlaw in relation to a dispute with a bank. Their retainer entitled Lexlaw to 12% of any sum recovered plus expenses. The retainer also provided that, on early termination, Zuberi would be liable for Lexlaw’s costs incurred to date. Zuberi and the bank settled their dispute. Regulation 4 of the 2013 Regulations prohibits payment of “an amount other” than that described: taken literally, a payment on early termination was prohibited. Did the existence of this provision invalidate the whole retainer?

The Court of Appeal held that it did not. The 2013 Regulations did not regulate fees payable to lawyers on early termination. They only regulated the provisions dealing with payment out of recoveries. Regardless, any offending provision could be severed at common law.

The court held that the 2013 Regulations must be interpreted as internally consistent. Regulation 4 was only concerned with “payment”, in circumstances where recoveries were achieved. This could not be interpreted so literally as to mean there would never be circumstances in which only a lawyer’s “costs”, as opposed to “payment”, would be payable (such as where no recoveries were achieved). This was also consistent with the those parts of the 2013 Regulations applicable to employment matters: Regulation 7 prohibits a lawyer’s “payment” exceeding 35% of recoveries; whereas Regulation 8 expressly permits a lawyer to charge costs in the event of termination. Outside the employment context, the 2013 Regulations did not regulate such fees, leaving them instead to lawyers’ professional regulators.

[Ed: For those who like derivations, according to Oxford Languages, the word champerty—which in law describes where a person that has no legitimate concern in the outcome of litigation agrees to support the action financially in consideration of a promise to receive a share in the proceeds of the action—comes from the late Middle English: from Anglo-Norman French champartie, from Old French champart ‘feudal lord’s share of produce’, from Latin campus ‘field’ + pars ‘part’.]

Update: the Court of Appeal is currently hearing arguments about whether certain funding agreements in the UK Trucks litigation are caught by the 2013 Regulations.  The Competition Appeal Tribunal said they were not.