Kerry Underwood


with 2 comments

The issues and methods of funding referred to in this post are dealt with in my book – Personal Injury Small Claims, Portals and Fixed Costs – available from me here or from Amazon here.


It is in three volumes and runs to over 1,300 pages and costs £80.00.


I also deal with this subject in detail in my Personal Injury Reforms course which can be booked here.


In Lexlaw Ltd v Shaista Zuberi [2017] EWHC 1350 (Ch)


the High Court has ordered a trial of a preliminary issue in a case concerning the enforceability of a Damages-Based Agreement (DBA).


The Claimant law firm entered into the agreement in April 2014 with the Defendant client in relation to claims against two banks for alleged mis-selling of interest rate hedging products.


The Defendant alleges that the DBA was procured through undue influence and that she was induced to sign the DBA by misrepresentation.


She alleges that the firm failed to advise her of the true nature and consequences of the agreement and that the agreement is thus unenforceable because it fails to comply with the requirements of the Courts and Legal Services Act 1990, which is the statute governing DBAs.


The Defendant admits that she is liable to pay the firm’s reasonable costs on the hourly rate for the period from April 2014 to May 2015 but disputes her liability under the agreement. It is unclear as to why the Defendant has made that admission, unless it is a tactical ploy to increase the chance of having the DBA set aside.


Master Clark, in the Senior Courts Cost Office, considered the warnings of the Court of Appeal over the risks of delay and increased costs in trials of preliminary issues, but accepted that in this case the determination of the enforceability of the DBA was likely to save costs and time as compared with examining the other defences raised.


The Master ordered a trial on the following preliminary issue:


“Whether the DBA is unenforceable by virtue of section 58AA(2) of the CLSA 1990, by reason of failing to satisfy the conditions in section 58AA(4) CLSA 1990, as pleaded in paragraph 64 to 71 of the Amended Defence dated 22 June 2016.”


Essentially the dispute to be tried as a preliminary issue is whether the provision in the DBA allowing the solicitor to charge costs on an hourly rate, together with disbursements, in the event of termination by the client causes there to be a breach of regulation 4(1) and/or regulation 4(3) of the Damages-Based Agreements Regulations 2013, which regulations were made under section 58AA of the Courts and Legal Services Act 1990.


As the Master said here at paragraph 9  “the drafting in both is not user-friendly.”


Here the parties agree that the meaning and effect of clause 6.2 of the DBA would require the payment of a sum greater than the agreed percentage provided for in the DBA and both parties agreed that the clause did not, in fact, come into effect in this particular case.


The client’s argument is that the very existence of the clause invalidates the Damages-Based Agreement.


The clause read:


“With the exception of the circumstances set out in clause 6.3 (in which you agree not to terminate this Agreement), you may terminate this Agreement at any time. However, you are then liable to pay the Costs and the Expenses incurred up to the date of termination of this Agreement within one month of delivery of our bill to you.”


At paragraphs 10 and 11 of the judgment the Master set out, so far as relevant, the relevant parts of Section 58AA and the Damages-Based Regulations:




“10.        Section 58AA(2) of the CLSA 1990 provides, so far as relevant:


“(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—



(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.”


  1. The Regulations provide, so far as relevant:



“(2) In these Regulations—


“the Act” means the Courts and Legal Services Act 1990;



“client” means the person who has instructed the representative to provide advocacy services, litigation services (within section 119 of the Act) or claims management services (within the meaning of section 4(2)(b) of the Compensation Act 2006) and is liable to make a payment for those services;


“costs” means the total of the representative’s time reasonably spent, in respect of the claim or proceedings, multiplied by the reasonable hourly rate of remuneration of the representative;



“expenses” means disbursements incurred by the representative, including the expense of obtaining an expert’s report and, in an employment matter only, counsel’s fees;


“payment” means that part of the sum recovered in respect of the claim or damages awarded that the client agrees to pay the representative, and excludes expenses but includes, in respect of any claim or proceedings to which these regulations apply other than an employment matter, any disbursements incurred by the representative in respect of counsel’s fees;


“representative” means the person providing the advocacy services, litigation services or claims management services to which the damages-based agreement relates.


  1. — Payment in respect of claims or proceedings other than an employment matter


(1) In respect of any claim or proceedings, other than an employment matter, to which these Regulations apply, a damages-based agreement must not require an amount to be paid by the client other than—


(a) the payment, net of—


(i) any costs (including fixed costs under Part 45 of the Civil Procedure Rules 1998); and


(ii) where relevant, any sum in respect of disbursements incurred by the representative in respect of counsel’s fees,


that have been paid or are payable by another party to the proceedings by agreement or order; and


(b) any expenses incurred by the representative, net of any amount which has been paid or is payable by another party to the proceedings by agreement or order.



(3) … in any other claim or proceedings to which this regulation applies, a damages-based agreement must not provide for a payment above an amount which, including VAT, is equal to 50% of the sums ultimately recovered by the client.””




In paragraphs 69 to 71 of the Defendant’s defence she asserts that that clause in the DBA, in providing for payment of “the Costs and Expenses” requires her to make a payment other than “the Payment” as defined in regulation 1(2) and that requirement contravenes regulations 4(1) and/or 4(3).


The Claimant denies that that contravenes the regulations and in the alternative states that these sums only became payable by the Defendant upon termination of the DBA and thus cannot be caught by the regulations.


In the further alternative the Claimant maintained that in so far as the clause is unenforceable it should be severed from the DBA so as to leave the remaining provisions of the DBA enforceable.


The rest of the decision is concerned with the rights and wrongs of ordering a trial of a preliminary issue and I do not consider that issue here.




A clause making provision for payment by the client on an hourly rate basis is standard in virtually all Damages-Based Agreements if it is the client who has terminated the agreement or indeed the solicitor has terminated the agreement on the basis of the client’s unreasonableness.


The issue here is whether that clause offends against the requirement  

that in a DBA covering a claim other than a personal injury claim or an Employment Tribunal claim, the DBA must not provide for payment of a sum, including VAT, of over 50% of the sums ultimately recovered by the client.


If this is held to render the DBA unenforceable then non employment tribunal DBAs are dead, not that they are very much alive anyway.


It would enable a client to terminate the agreement and discontinue the claim, which may be a very strong claim for a large sum where the solicitor has done an enormous amount of work, and leave the solicitor with the ability to recover a maximum of 50% “of the sums ultimately recovered by the client”, that is 50% of zero which equals zero.


In relation to personal injury claims the principle is the same, but the maximum percentage is 25% and that is achieved by identical wording in regulation 4(2)(b) of the regulations.


Regulation 7, dealing with just employment matters, has identical wording but the maximum percentage there is 35%.


However regulation 4, the one in dispute here, does not apply to employment matters and regulation 8 provides as follows:


Terms and Conditions of Termination in an Employment Matter.


“8.-         (1) In an employment matter, the additional requirements prescribed for the purposes of section 58AA(4)(c) of the Act are that the terms and conditions of a damages-based agreement must be in accordance with paragraphs (2), (3) and (4).


(2) If the agreement is terminated, the representatives may not charge the client more than the representative’s costs and expenses for the work undertaken in respect of the client’s claim or proceedings.


(3) The client may not terminate the agreement—


(a) after settlement has been agreed; or


(b) within seven days before the start of the tribunal hearing.


(4) The representative may not terminate the agreement and charge costs unless the client has behaved or is behaving unreasonably.


(5) Paragraphs (3) and (4) are without prejudice to any right of either party under general law of contract to terminate the agreement.”




Thus the regulations specifically provide for the basis of charging when an employment matter is terminated and there is a potential conflict between regulation 7 and regulation 8.


Regulation 8 appear to allow the solicitor to charge the full costs and expenses for the work undertaken, but it is not clear whether that is then capped by regulation 7 at 35% of the sums ultimately recovered by the client in the claim or proceedings.


It seems fairly obvious that regulation 7 is designed to govern matters where client and solicitor remain together and a result is achieved, whereas regulation 8 is designed to govern the situation where the agreement ends before a result has been achieved.


The Explanatory Notes throw no light on any of these matters.


My strong advice, along with virtually every other commentator, is that solicitors should never enter into a Damages-Based Agreement outside the field of employment.


This is because there is an alternative method available, which is a Section 57 Solicitors Act 1974 Contingency Fee Agreement, combined with a Bridging Agreement and a Conditional Fee Agreement, which achieves the desired arrangement, without the two main problems of DBAs which are:


  • the indemnity principle applies, restricting the liability of the other side to the relevant maximum figure under the DBA;


  • credit must be given for all costs received from the other side, where as in a Conditional Fee Agreement no credit need be given in respect of the success fee element charged to the client.


Outside the field of employment work there is now this third potential problem, although I emphasise that all that the court has done so far is to order a trial of the matter.


No decision has been made.


The problem in employment matters is that the use of a Damages-Based Agreement is compulsory if the matter is, or could, be before an Employment Tribunal and the fee is contingent upon the outcome.


Thus a Section 57 Solicitors Act 1974 Agreement cannot be used because regulation 1(6) says so.


As stated above regulation 4 does not apply to employment related Damages-Based Agreements, and consequently there may be no problem.


However, as set out above, there is a tension between regulation 7 and regulation 8.


As we have seen regulation 8 refers to “the representative’s costs and expenses for the work undertaken in respect of the client’s claim or proceedings.”


In relation 1(2) “costs is defined as “the total of the representative’s time reasonably spent, in respect of the claim or proceedings, multiplied by the reasonable hourly rate of remuneration for the representative.”


Note the word “total”.


There is no reference there to a cap of 35% of damages, which one would expect if regulation 7 applies to the circumstances set out in regulation 8.


Thus regulation 8 may seem to be a saving provision governing the position where there is termination of the agreement, but it is not then clear why there is no similar saving provision in relation to personal injury matters and all other civil work apart from personal injury and employment.


It may be that the drafters of the regulations assumed that in those circumstances, if the case was won, then the other side would be liable for costs and therefore there would be agreement or assessment on the hourly base in any event, whereas that does not happen in Employment Tribunal matters, as the general rule is that no costs are payable in that jurisdiction.


Thus there are four possible outcomes of this trial:


  1. That the agreement does not invalidate the DBA;


  1. that it invalidates DBAs in relation to personal injury and other civil work, but not in relation to Employment Tribunal work;


  1. that it invalidates all DBAs with a similar clause in, including Employment Tribunal DBAs regardless of regulation 8;


  1. that it invalidates personal injury and other civil DBAs but that any decision in relation to Employment Tribunal matters would be obiter, because of the different wording, and therefore we have no decision in relation to Employment Tribunal matters.




Yet another reason why you should never even think of using a DBA, other than in Employment Tribunal proceedings where they are compulsory if working on a contingent basis.


So what to do in Employment Tribunal matters?


One option is to leave the standard agreement as it is and work on the assumption that regulation 8 overrides the 35% cap in relation 7 if the agreement has been terminated.


The alternative is to keep the standard provision, but to provide that costs shall never exceed a 35% of the sum of the ultimately recovered by the Claimant.


The problem, as set out above, is that that may very well be 35% of nothing.


Written by kerryunderwood

June 22, 2017 at 8:21 am

Posted in Uncategorized

2 Responses

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  1. I feel like I’ve woken up in 2003 !

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