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16 July 2020

Litigation funding: welcome High Court clarification for damages-based agreements

Much has been written in the press recently about litigation funding in the context of third party funders and the part they may play in disputes arising during the COVID-19 pandemic. This is an important area of litigation funding but not the only one. The other key area is funding provided by law firms themselves and the recent case of Lexlaw Ltd v Zuberi [2020] EWHC 1855 (Ch), with its welcome clarification of what has been an uncertain area, provides a timely boost to the use of one particular aspect of funding firms may offer their clients: damages-based agreements (DBAs).

DBAs are straightforward in principle. The law firm receives payment by way of a share of the damages awarded. The difficulty for solicitors is that the rules governing DBAs lack clarity, potentially risking the funding agreement being unenforceable.

The case

In Lexlaw, the court was required to rule on whether a DBA entered into between the claimant law firm and the defendant, being the former client, was enforceable or not. The claimant law firm represented the former client in a dispute involving The Royal Bank of Scotland PLC. This concluded on positive terms to the former client. Notwithstanding a successful outcome, the former client sought to challenge the law firm’s entitlement to payment.

The issue turned on the fact that the agreement’s termination provisions permitted the former client to terminate the agreement at any time, but specified that they would be liable to pay the firm’s costs and expenses incurred up to that point. This, the former client argued, rendered the DBA unenforceable.

The law

The DBA Regulations 2013 expressly state that a DBA must not require an amount to be paid by the client other than the DBA payment (up to a cap) and any expenses incurred by the legal representative.

The court’s decision

The court rejected the former client’s argument. This was on the following bases:

  • Such costs were recoverable on termination in employment cases and there was no reason to differentiate them.
  • Such a construction would make lawyers reluctant to enter into DBAs which in turn would mean less choice for clients and be contrary to the purpose of making such agreements lawful so as to facilitate access to justice.
  • Looking at the statutory context, the former client’s construction would produce a result that was irrational and without apparent justification.
  • If the legislature had considered it necessary that DBAs should prevent such a scenario, this could have been said so in terms. The cap, noted above, was to do with sharing the spoils, which was distinct from that of fees contractually due on termination.
Comment

Since 2013, DBAs have been permitted for contentious work in England and Wales. Their introduction came about since it was considered desirable that as many funding methods as possible should be available to litigants, particularly once success fees under conditional fee agreements (CFAs) and the premiums for after-the-event (ATE) insurance were no longer recoverable from the losing party. This is a view we have shared in and DBAs form an important part of our flexible funding solution for clients, Feesible, alongside the option of CFAs and access to both a panel of approved third party funders and brokerage services for the ATE insurance market.

From a client’s perspective, a DBA means that they do not have to fund the litigation, beyond expenses incurred by their legal representative. Instead, they agree a division of the winnings, should their case succeed. This can take pressure off legal budgets and potentially allow claimants to pursue worthwhile claims that would otherwise have been too expensive to fund or otherwise commercially not viable. From the legal representative’s viewpoint, the DBA carries a greater share of the risk, but it offers the potential to share in a greater portion of the upside on successful cases.

However, the legislation governing DBAs has hindered their use. The DBA Regulations have been much criticised, with a number of drafting issues that have led to a lack of clarity for lawyers and clients alike as to what precisely would fall the right side of the line. To address these issues, a redraft of the Regulations was announced towards the end of last year. The changes represent an improvement on the existing regime and allow, for example, greater flexibility on terms as to payment where the DBA is terminated.

It was hoped that the redrafted Regulations might be enacted by the end of the year, but whether that is likely in the current climate is unknown. In the meantime, the judgment in Lexlaw is a helpful judicial endorsement of what has long been regarded as a difficult area and perhaps will offer some confidence to firms that have previously hesitated at the use of DBAs. The judgment was a victory for common sense. If clients could readily challenge DBAs despite achieving a successful outcome, firms will not offer them to clients, potentially hampering access to justice.

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