In this recent decision HHJ Parfitt ruled that it was not inconsistent with reg. 4(1) of the Damages-Based Agreements Regulations 2013 that a Damages Based Agreement (DBA) could contain a provision requiring the client to pay their solicitors costs to date if the agreement is terminated.
A DBA is an agreement that the remuneration payable by a client engaged in civil litigation to his solicitors will take the form of a one off payment triggered by the client receiving a specified financial benefit. The that payment should be calculated by reference to the amount of the benefit obtained (i.e. a percentage of that amount).
The 2013 Regulations were made pursuant to an amended s.58AA of the Courts and Legal Services Act 1990 and were introduced on 19 January 2013 in respect of civil litigation claim (DBAs existing prior to this for employment matters). There has been very poor uptake of DBAs since their introduction to civil litigation which partly, although not exclusively, arises from the apparent prohibition in reg. 4(1) that DBAs must not require the payment of any amount by the client other than the payment triggered by achieving the specified benefit.
This left civil ligation practitioners in a precarious position as it appeared that a client could dis-instruct his representative at any time prior the defined financial benefit being achieved and pay no costs even if the benefit was thereafter achieved.
On the other hand there is specific provision in the regulations for employment matters allowing representative to charge their costs and expenses to date if their client terminated their instruction.
In this particular case the Defendant instructed the Claimant in May 2012 in respect of a claim against two banks by whom she had been mis-sold a 10 year interest hedging product/ financial swap instrument. As a result she suffered from substantial financial losses and receivers were appointed.
The claim was progressed under different arrangements until spring 2014 when a DBA was entered into which provided that the Defendant would be liable for the Claimant’s costs and expenses if the agreement was terminated. The Defendant alleged that she was not satisfied and in May 2015 sought to terminate her agreement at a time when the banks had indicated that they were due to make an increased offer. The matter thereafter settled in July 2015.
The Defendant sought to set aside the DBA agreement for a number of reasons including that agreement breached the DBA 2013 regulations. The Court at this Hearing was charged with deciding as a preliminary issue only whether the DBA was compliant with the Regulations.
In finding that the DBA was compliant with HHJ Parfitt considered that it would be irrational for separate rules to apply to civil ligation cases and employment cases where such a recovery was expressly permitted.
He held that the general intention of Parliament was to allow clients and representatives to share the proceeds of litigation but was not to prevent legal representatives from recovering their costs on termination by the client. He considered that the remuneration payable in the event of a success was distinct from the costs payable by the client on termination of a DBA and that the phrase in the regulations “an amount to be paid by the client” should be construed as applying only to the sum recovered from the opponent and available for sharing and not to any other amount/ cost.
In reaching this conclusion HHJ Parfitt also considered the language of section 58AA and Regulation 4(1) which he felt demonstrated that “the subject of Regulation 4(1) is limited to the sharing of the spoils payment and no other possible “amount to be paid” between representative and client”. In particular he noted that when section 58AA refers to other aspects of the contractual relationship between the client and the advisor, it does not use the phrase “damages-based agreement” but “The agreement” and this carried through in the 2013 regulations although it was less obvious.
Overall this decision reduces the risk of entering in DBAs for civil litigators and may result in further uptake of such agreements which were intended to promote access to justice. In all likelihood such agreements are however to be still most likely to be appropriate for high value matters with good prospects.
Uptake is unlikely to be increased in the personal injury sphere as it continues to be the case that the amount recoverable under a DBA in personal injury cases is likely to be less than the amount recoverable under a CFA where the success fee and base costs are both recoverable.