Court of Appeal paves way for Damages Based Agreements

A recent judgment of the Court of Appeal of England and Wales in Zuberi v Lexlaw Limited has significantly clarified the law regulating Damages Based Agreements (DBAs), facilitating access to justice and bolstering London’s position as a global center for disputes post-Brexit.

Background

DBAs were introduced into English law in 2013 by Lord Justice Jackson as part of his sweeping reform of legal costs in civil litigation. A DBA is an agreement whereby a solicitor and a client can agree to share the risk of litigation or arbitration in return for a share of the proceeds should the case resolve successfully. Similarly structured contingency fee arrangements are already popular internationally—particularly on the other side of the Atlantic—but have remained largely out of favor in this jurisdiction.

A key impediment for the adoption of DBAs was the uncertainty about the terms and effects of the Damages Based Agreement Regulations 2013. In particular:

• Whether a lawyer could recover anything in the event that a DBA was terminated early
  
  
• Whether a hybrid arrangement which provided for payment in addition to a percentage of recoveries on success would render the arrangement unenforceable

The decision and its implications

The case provided the first opportunity for the Court of Appeal to consider these issues. The Court found that termination clauses providing for payment on a time basis are permissible and that hybrid fee arrangements (a mix of hourly and contingent fee) do not fall foul of the 2013 Regulations. This signals that courts will approach the interpretation of the Regulations in a way which seeks to give effect to the purpose of DBAs.

This significant development, widely applauded by leading practitioners, likely heralds a bright new era for contingency arrangements in England and Wales. With increased clarity on their scope and application, DBAs are now considerably more attractive for clients and their lawyers and should become more prevalent in coming years. Having more options available when it comes to legal fee structures is patently beneficial for law firms and their clients. Particularly in the face of continuing economic uncertainty, clients are increasingly pushing back against the traditional law firm hourly fee model and demanding firms be more competitive in winning their business: For instance, by offering alternative fee arrangements.

When law firms work on contingency, they are providing clients with access both to counsel and the courts while disregarding any economic impediments that would otherwise prevent meritorious claims from being brought. However, DBAs create an extraordinary financial obligation and risk of outright capital loss to a law firm whose clients, however meritorious the claims, may well lose. The financial risk that law firms assume in representing a client on a contingent basis will make legal finance an even more vital weapon in the arsenal.

As evidenced by the sheer number of contingency-fee matters that Burford has funded globally—often by partnering with law firms on a portfolio basis—even the most successful contingent fee law firm will need a partner in managing contingent risk. Especially given law firms are normally cash-in, cash-out partnerships without access to outside equity or long-term debt. Therefore, as DBAs will likely rise in popularity in the coming years, we anticipate an increased need for law firm and legal financier partnerships to share risk and manage related costs.

The decision in Zuberi v Lexlaw is a welcome development which makes commercial sense for litigants, promotes an improvement to the options available for litigants and advances access to justice.