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UK Ruling Bolsters Contingency Fee Arrangements

January 21, 2021 | Posted in : Contingency Fees / POF, Expenses / Costs, Fee Agreement, Fee Issues on Appeal, Fee Jurisprudence, Hourly Rates, Legal Bills / Legal Costs, Litigation Financing / Funding, UK / International

A recent Law 360 story by Richard Crump, “Contingency Fee Ruling Paves Way For Hybrid Arrangements,” reports that a recent appellate ruling has made damages-based agreements in the U.K. more attractive and could herald a new era for litigation funding by permitting a wide array of hybrid arrangements that lawyers say would make it easier to take advantage of the contingency fee structure.  In a Jan. 15 ruling, three Court of Appeal judges unanimously found that a damages-based agreement — a form of retainer in which a lawyer working on the case can charge a share of the recoveries if the claim succeeds — can be enforced if it is terminated by the client.

"There can be little doubt that this is a seminal moment in litigation funding and that the road has now been paved for DBAs to be used more widely in appropriate cases," said Matthew Waszak, a barrister at Temple Garden Chambers.  "Undoubtedly, there is likely to be an increased appetite to consider and use DBAs in appropriate cases."  Judges Peter Coulson, Kim Lewison and Guy Newey dismissed an attempt by a Lexlaw Ltd. client to withhold payment from the London law firm for its work on a misselling claim against Royal Bank of Scotland by seeking to terminate the DBA before the case concluded.

In doing so, the Court of Appeal removed a long-standing source of uncertainty that had prevented the more widespread use of DBAs since they were introduced in 2013 as part of a sweeping overhaul of the funding arrangements for civil litigation.  "One key obstacle preventing their wider use has been the fear among the legal profession that if a client terminates a retainer, the lawyer will end up being paid nothing for what might have been months or even years of work," Waszak said.  "The Court of Appeal has now put that concern to bed."

The uncertainty in relation to termination was one of the reasons the Bar Council the and Law Society have yet to offer a model form for DBAs.  The Bar Council, which intervened in the appeal, said it expects to publish further guidance on DBAs shortly.  DBAs were created to let would-be litigants hire counsel who would share the risks of litigation in return for a percentage of the proceeds.  But flaws in the drafting of the regulations created confusion over whether a DBA could allow for other kinds of fees if terminated early.

Lexlaw filed its suit against former client Shaista Zuberi in February 2016 after she failed to pay a £125,123 invoice the firm issued in July 2015 when she reached a settlement with Royal Bank of Scotland to end her claim over an interest rate hedging product sold at the height of the financial crisis.  On appeal, Zuberi argued that the DBA, which gave Lexlaw 12% of any sum recovered plus expenses, was unenforceable because it violated DBA regulations by including an obligation to pay legal costs and expenses to Lexlaw on its hourly rates up to the date of termination.

The Court of Appeal held that the inclusion of termination provisions is not a breach of the regulations — which Judge Coulson said were "designed to encourage the use of DBAs, not make them commercial suicide for the lawyer" — but arrived at the conclusion by different routes.  In a majority decision, Judges Lewison and Couslon adopted a narrow interpretation of the meaning of a DBA, so that other elements of the retainer, such as termination provisions or the responsibility for a law firm's expenses, are not connected to the sharing of recoveries and fall outside the regulation's scope.

Judge Lewison recognized that this conclusion meant that the current regulations do not deal with a lawyer's fees in the event the client takes a case to trial and loses.  That, the judge said, is a matter that could be legislated separately so that a DBA could prevent or limit a lawyer from charging fees if the claim were lost.  The regulations, which Judge Coulson dryly observed that "nobody can pretend ... represent the draftsman's finest hour," appeared to preclude so-called hybrid DBAs, which combine a share of recovered proceeds with another form of payment, such as hourly rates.

4 New Square's George McDonald said this narrow interpretation has "startling consequences," most notably that opens the possibility of hybrid fee arrangements.  "This means that a solicitor can still charge a client time-based charges even if the claim is unsuccessful and in addition to the DBA payment," McDonald said.  "This is contrary to the widely held beliefs that DBAs were pure contingency agreements which fell under the 'no win, no fee' banner."

While the ruling is significant and will go a long way to putting DBAs back on the table, Signature Litigation LLP's Johnny Shearman said the regulations would benefit from revisions proposed in 2019 that have not yet been adopted.

"Definitive wording on the use of hybrid DBAs would still be welcomed along with a number of other revisions," Shearman said.

Among other things, the proposed switch from paying costs out of the DBA fee rather than on top of it to a success fee model would be helpful, he said.

"Further reforms are needed to the regulations before we get to the watershed moment that this judgment is being referred to as," Shearman said.

The case is Lexlaw Ltd. v. Zuberi, case number A3/2020/1270, in the Court of Appeal of England and Wales.