The Court of Appeal (composed of Lord Justice Lewison, Lord Justice Newey and Lord Justice Coulson) ruled unanimously that the Commission`s regulations do not preclude early severance pay for lawyers` fees. In addition, the majority of the Court of Appeal (Lewison LJ and Coulson LJ) lowered the threshold of applicability of hybrid DTAs through a narrow interpretation of the meaning of the term « DTA ». Since 1 April 2013, contingency fees or damages-based agreements (DTAs) for disputed work (i.e. litigation or arbitration) are permitted in England and Wales. This means that lawyers in this jurisdiction can engage in disputes and arbitrations against any party of the damages. DISCLAIMER: Due to the generality of this update, the information contained in this document may not be applicable in all situations and should not be implemented without specific legal advice based on certain situations. Indemnification agreements (DTAs), in which a law firm assumes part of the damage to pay its legal fees, have not been widely taken up by the legal community. The Damages-Based Agreements Regulations 2013 (SI 2013/609) (2013 Regulations), which were published to regulate such agreements, are considered poorly worded. When it comes to including termination provisions in DBAs, law firms have been left with a trap of 22: they risk either being left out if the client terminates the mandate prematurely, or invalidating an agreement by including provisions to protect against it.
This undermined the rationale for introducing the 2013 Regulations; that is to say, to provide the parties to the proceedings with as many financing methods as possible in order to promote access to justice (see box « Introduction of DTAs »). On February 7, 2019, the government released the results of its review following the implementation of Part 2 of LASPO, the legislation implementing the introduction of DTAs (as well as other aspects of the Jackson reforms). The review notes that almost all respondents from all walks of life agreed that DPAs are rarely used and that the Commission`s rules should be reformulated to ensure that ODA is a more sustainable method of financing for a larger number of cases. Specific concerns about the rules include: failure to pay a reasonable amount for work performed at the time of dismissal; uncertainty regarding early termination and the principle of compensation; uncertainty as to whether « sequential » hybrid database administrators are allowed; and payment of attorneys` fees. Most respondents would have supported the findings and recommendations of the Civil Justice Council Working Group. The court ruled that the 2013 regulations should be interpreted as consistent internally. Rule 4 concerned only « payment » in cases where recoveries were made. This could not be interpreted so literally that there would never be circumstances in which only a lawyer`s « fees » would have to be paid as opposed to « payment » (p.B. if no recovery was made). This was also in line with the parts of the 2013 regulations that apply to labour matters: Regulation 7 prohibits the « payment » of a lawyer that exceeds 35% of recoveries; while Regulation 8 expressly allows a lawyer to charge a fee in the event of termination.
Outside of the employment context, the 2013 regulations did not regulate these fees and instead left them to lawyers` professional regulatory bodies. What is probably less clear to practitioners are the additional effects of the court`s decision. It follows from the narrow approach of the majority when interpreting a DTA that hybrid financing agreements with DTAs should be allowed. This means that a client and his lawyer may agree that a DTA applies to an agreed division of the client`s collections, but additionally make a separate arrangement for the payment of time charges. For example, a lawyer might accept a lower percentage of compensation from damages in exchange for partial payment of fees throughout the litigation. Lord Justice Newey noted that this was the consequence of the majority decision, noting that if such « competing hybrid DTAs » had been allowed, additional legislative safeguards would certainly have been introduced; for example, by determining a reduced hourly rate or limiting the total amount that can be claimed. A DTA is a type of conditional fee agreement under which a lawyer and a client can agree to share the risk of litigation. Under this model, introduced after Sir Rupert Jackson`s review of civil litigation funding in 2009, the lawyer receives a percentage of the damages awarded to a successful client. If the client fails, the lawyer may be reimbursed for the payments and other costs incurred, but not for his own fees under the DTA`s rules. DBAs are a type of financing contract between a lawyer and a client, where payment to the lawyer depends on the success of the claim and not on an hourly rate – the lawyer usually takes a percentage of the damage awarded.
The use of DTAs in civil proceedings is strictly regulated by the Damages Agreements Regulations 2013 (the Regulations). The Court of Appeal ruled that this was not the case. The 2013 regulations did not regulate the fees to be paid to lawyers in the event of early termination. They regulated only the provisions relating to payment from recoveries. In any event, any offensive provision of the common law could be removed. Law firms that enter into agreements based on damages face a trap 22: they risk either being released out of pocket if the client terminates the mandate prematurely, or invalidate an agreement by including termination provisions to protect against it. A recent decision of the Court of Appeal is a welcome island of clarity in a sea of uncertainty. While law firms can now have confidence in protection against early termination by a client, important broader issues remain. The Court of Appeal ruled unanimously that the regulation allows for the payment of termination fees. A clause obliging a client to bear the costs and expenses incurred by lawyers in the event of premature termination of a DTA therefore did not render the DTA inapplicable. In this context, the majority of the Court of Appeal (Lewison LJ [33-34], with which Coulson LJ agreed with the narrow interpretation of the meaning of the DTA [74-77]), concluded that a DTA does not cover the entire agreement between the client and the lawyer, but that only those parts of the agreement that allow the lawyer to obtain a percentage of the damages, the Commission.
With respect to sequential DBAs, the Panel recommended that the Government clarify whether the lawyer may withhold the fees payable under the non-DBA funding agreement or whether this amount should be deducted from the success fees under the DTA. Ms Zuberi received a £1 million settlement offer, which she accepted. Upon receipt of that offer, Ms. Zuberi attempted to terminate the DTA, arguing that it was unenforceable because it contained an early termination clause requiring her to pay Lexlaw`s fees. Counsel for lawyers, who intervened in the case to seek clarification on the law, said the decision had also paved the way for « hybrid » agreements consisting of a combination of a DTA and another form of advance. It noted that, in the Court`s view, the Rules of the Commission applied only to the part of the agreement that provided for payment under the Commission. To illustrate, suppose a plaintiff has agreed to a 30% contingency compensation with his lawyer and receives £1 million in damages. The plaintiff owes £300,000 to his lawyer.
Although the Court agreed on these points, there was disagreement on the extent to which a DTA should be interpreted under the 2013 rules. The majority adopted a narrow interpretation of a DTA and concluded that only the provisions relating to the apportionment of a settlement or damages correspond to a DTA. Any provisions of a client`s reserve relating to other time charges or expenses are not covered by the 2013 rules and are enforceable only between the lawyer and the client; They were not part of the Commission. On the other hand, Lord Newey J. ruled in a widely divergent decision that preference should be given to a broader definition of a DTA that would include the entire advance and not just the provisions on the payment of recoveries. A lawyer has the right to reimburse reasonable costs to a client who terminates a damages agreement (DTA) before the case closes, the Court of Appeal for England and Wales has confirmed. Given the Court`s divided approach in Zuberi, it is clear that the 2013 regulations need to be revised. In October 2019, proposals for revisions to the 2013 Regulations were published for consultation (www.qmul.ac.uk/law/research/impact/dbarp/). One of the proposed changes is to give explicit authorization for the use of a hybrid agreement where, if a client does not receive a « financial benefit » (a term that goes beyond the scope as damages), the law firm would be able to receive reimbursable costs plus up to 30% of all non-recoverable costs. The proposals have been well received at the time of publication, although there have been no further developments so far.
Lord Justice Jackson recommended the introduction of contingency fees in part because he felt it was desirable that as many funding methods as possible be available to litigants, particularly where CFA contingency fees and ATE insurance premiums could no longer be recovered from the losing party (see « Contingency Fee Agreements (CFA s)/Post-Event Insurance (ATE) »). The defendant does not necessarily have to pay the full amount of the contingency fee if the claim is accepted. The cost is reimbursable under the so-called « Ontario model » because it is based on the system operated in Ontario, Canada. .