High Court considers Defendant-side Damages Based Agreement (DBA)

• United Kingdom

• Financial services disputes and investigations
• Litigation and dispute management

07-07-2021

Tonstate Group Ltd & Ors v Wojakovski & Ors [2021] EWHC 1122 (Ch)

Court rules against Defendant DBAs.

Background

• A Damages Based Agreement (DBA) is a full contingency fee agreement between a solicitor and its client which provides for payment to the solicitor of a percentage of the recoveries in a dispute.
• The Damages-Based Agreements Regulations 2013 provide, broadly, that to be enforceable a DBA “must not require an amount to be paid by the client [to their solicitor] other than… that part of the sum recovered in respect of the claim or damages awarded that the client agrees to pay the representative”.
• Although the legislation is not explicit, it has long been suspected that DBAs are not available to defendants absent a counterclaim as there is no “sum recovered” for a defendant.
• An invalid DBA cannot be enforced by a solicitor against its client, meaning that the client will not be required to pay the solicitor’s fees.

Facts of the Case

• C was a law firm which represented a defendant (D) in a series of claims between D and various companies partly owned by D (the Companies).
• C was retained by D under a one-page DBA, which provided that C was entitled to recover 29% of any Proceeds recovered by D, defined as:

“you recover damages, monies, costs incurred by your previous lawyers, other sums and/or derive any benefits (excluding our hourly rate costs and Counsel's fees) in or arising out of all of the current Court proceedings”

• The Companies sought both (i) the return of funds wrongfully extracted by D (the Main Action) and (ii) the rescission of transfers of shares in one of the Companies made to D (the Shares Claim).
• D lost the Main Action. However, the Shares Claim was settled on terms that D was entitled to keep one quarter / 22,500 of the underlying shares (the Shares). A charging order over the Shares was subsequently entered in favour of the Companies, as security for the judgement debt awarded in the Main Action.
• C applied for an equitable charge over the Shares as security for fees due from D under the DBA, arguing that the Shares represented Proceeds under the DBA (see definition above).
• The Companies, in order to protect their security over the Shares, made a cross-application for declarations inter alia that i. no payment was due under the DBA and/or that it was unenforceable, and ii. C was not entitled to a charging order over the Shares in priority to the Companies.

The Judgment

The High Court rejected C’s arguments on two grounds:

1. On a proper construction, the phrase “derive any benefits” from the Court proceedings, in the definition of Proceeds in the DBA, was solely intended to refer to a situation where D recovers benefits from another party in or as a consequence of the claims. D’s ownership of the Shares pre-dated the proceedings and was not a “benefit derived” from them: at best, “what he derived from the proceedings was the avoidance of a detriment to the extent that he retained the Shares”. This approach was supported by the fact that the DBA was titled a “Damages Based Agreement” (and the “essential feature of damages is that they are recovered from another party”), and a further paragraph of the DBA which stated that C would not be entitled to any payment at all if D did not recover any funds in the proceedings (along with other supporting paragraphs of the DBA).

2. The DBA was unenforceable, as it did not comply with the requirement of the DBA Regulations 2013 that any payment from D to C would be made from “sums recovered in respect of the claim or damages awarded”. The Judge held that “to be enforceable under the Act, a DBA must provide that payment to the representative is a proportion of the amount recovered by the client in the proceedings”.

Where this leaves us

• The DBA Regulations as currently drafted are clear that, under a DBA, a solicitor’s fees must be paid from sums recovered from a counterparty. For a defendant, unless there is a successful counterclaim at a level which not only extinguishes the original claim but puts the defendant in an overall positive position, their solicitor’s fees will not be recoverable under a DBA.
• There are however options for defendants to mitigate risk and legal fees, and align their and their solicitor’s interests, through the use of a combination of Conditional Fee Agreements, which do not require a recovery to be made to trigger a liability for fees, and After the Event Insurance, which can insulate a defendant against their own and adverse costs.

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