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The impact that the terms of a DBA has on the recovery of legal costs

The impact that the terms of a DBA has on the recovery of legal costs

Damage Based Agreements have been under scrutiny over the years, with numerous amendments having been made to the rules since their introduction in 2012.  To ensure that legal costs can be recovered, the terms of the DBA are of paramount importance.

In the case of Tonstate Group Ltd & Ors v Wojakovski & Ors [2021] EWHC 1122 (Ch) (30 April 2021), the court found that any entitlement to payment of legal costs under the terms of the Damages Based Agreement (DBA) that had been agreed between the solicitor and client arose only when “something was recovered as a consequence of the proceedings”, and that the retention of shares could not be interpreted as “being recovered”.

In this case Mr Justice Zacaroli was asked to consider the issue of whether any right to payment under a Damages Based Agreement (“DBA”) had arisen by reason of preservation of ownership of shares in proceedings, but where damages were not otherwise recovered. The claim for costs arose out of an action which sought an order for the grant of a legal charge under s. 73 of the Solicitors Act 1973 over shares in the Claimant company, which the Defendant owned.

The claim was dismissed, with Mr Justice Zacaroli holding that the solicitors were only entitled to payment under the DBA, as drafted, if some quantifiable benefit was recovered from an opponent in the proceedings. In this case, the benefit to the Defendant arising out of the proceedings was that he retained his ownership of shares in the Claimant company. Mr Justice Zacaroli found that avoiding the detriment of being deprived of the share, which the Defendant owned prior to the proceedings, was not the same as recovering them in the proceedings. In any event, Mr Justice Zacaroli concluded that even if retention of ownership of the shares could be construed as a ‘recovery’, the DBA would be unenforceable due to non-compliance with s. 58AA of the Courts and Legal Services Act 1990 and Regulation 4(1) of the Damages-Based Agreements Regulations 2013.

Section 58AA of the Courts and Legal Services Act 1990 provides, so far as relevant, as follows:

“(1) A damages-based agreement which satisfies the conditions in subsection (4) is not unenforceable by reason only of its being a damages-based agreement.

(2) But… a damages-based agreement which does not satisfy those conditions is unenforceable.

(3) For the purposes of this section—

(a) a damages-based agreement is an agreement between a person providing advocacy services, litigation services or claims management services and the recipient of those services which provides that—

(i) the recipient is to make a payment to the person providing the services if the recipient obtains a specified financial benefit in connection with the matter in relation to which the services are provided, and

(ii) the amount of that payment is to be determined by reference to the amount of the financial benefit obtained

(4) The agreement—

(a) must be in writing;

(aa) …

(b) if regulations so provide, must not provide for a payment above a prescribed amount or for a payment above an amount calculated in a prescribed manner;

(c) must comply with such other requirements as to its terms and conditions as are prescribed; and

(d) …

(7) In this section—

“payment” includes a transfer of assets and any other transfer of money’s worth (and the reference in subsection (4)(b) to a payment above a prescribed amount, or above an amount calculated in a prescribed manner, is to be construed accordingly); …”

Mr Justice Zacaroli concluded that the retention of shares could not be interpreted as an amount that is calculated in a “prescribed manner” and summarised that, in essence, a DBA is not enforceable unless it complies with the requirements of ss. (4) of the 1990 Act and that the purpose of a DBA was to enable a representative to obtain payment from its client as a proportion of damages of compensation received.

It is helpful to bear in mind that DBA’s can apply to a wider range of remedies than only damages, however, any such remedy must be recovered from an opponent in the proceedings to give rise to an entitlement to be paid.

Ensuring that retainers are properly prepared is essential in terms of the recovery of legal costs from the other party. We have previously prepared a blog regarding DBA drafting which can be found here (“the Court of Appeal decision in Zuveri v Lexlaw Limited – going back to DBA basics”).

Cindy Treble-Breame is a Costs Lawyer at A & M Bacon. You can contact her on 01733 359 021, or by email to Cindy.Treble-Breame@aandmbacon.co.uk.

Published 04.05.21



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