Damages Based Agreements - at last a workable arrangement for SMEs and individuals
The Court of Appeal has opened the door for lots of people and small businesses who felt that pursuing their legal rights was just too risky, given the legal costs involved.
In the landmark case of Lexlaw Ltd v Zuberi it has been decided that solicitors can recover costs incurred under damages based agreements if their client terminates the agreement prematurely.
There was a fundamental change in the costs regime in 2013. Personal injury claimants could rely on “qualified one way costs shifting” (QOCS) so that they could pursue a claim for damages without (generally) running the risk of adverse costs if the claim failed. It was intended that another form of assistance to justice would be provided for people who wished to pursue claims for non personal injury matters such as consumer and small business disputes, in the form of damages based agreements (DBAs). However, in most cases it never got off the ground. The practical problem was that clients could terminate such agreements, even at the point of a judgment being delivered, and the result was that the solicitors acting for them would be left high and dry, with no recovery of costs. As a result, solicitors were understandably extremely reluctant to accept instructions on this basis.
The problem was well demonstrated in the case of Shaista Zuberi. She borrowed money from a bank and later brought a claim alleging that she had been been mis-sold financial products, an issue sadly well-known to many SMEs. She entered into a DBA with her solicitors which provided that her solicitors would be entitled to a share of any money that she was awarded (such agreements provide for up to 50%). The contract also included a clause which provided that if she terminated the agreement early, the solicitors would be entitled to their costs for the work done.
The claim was settled with the bank but then Ms Zuberi sought to terminate the agreement without paying the solicitors the £125,000 they claimed that they were owed. In doing so she contended that the payment on early termination was unenforceable because that wasn’t what was intended when Parliament published the regulations in 2013.
Dominic Regan, a well-known commentator on such matters, described what he called a “pathological aversion” on the part of lawyers to DBAs, which ministers thought might encourage unmeritorious claims, arguing that “Solicitors will not take on a claim that has no chance of success”.
As reported in The Times (behind paywall) the Appeal judges have now decided that the agreements can provide for the lawyers’ costs if the agreement is terminated. Otherwise, according to Lord Coulson, it would make them “commercial suicide for the lawyer”.
As reported in The Times, Steve Din, founder of Doorway Capital, said that DBAs “have the potential to ignite an explosive growth in earnings and partners’ drawings”, adding that “commercial firms have the potential to generate fees…at least double what they would have been paid at their traditional rate or under a CFA”.
From our clients’ perspective, it opens up the possibility of individuals and SMEs pursuing claims that would, otherwise, have carried with them an unacceptable financial risk. I can’t tell you how often small business owners have told me that they have nailed on claims but couldn’t fund them. This decision opens the door for proper redress for these businesses, when they have decent claims which they were otherwise priced out from pursuing.
Ms Zuberi was refused permission to appeal to the Supreme Court.
We will always consider potential claims which have a sound basis. I’m sure that you will understand that we will not accept dubious claims with an uncertain outcome but if you have a strong claim which you just couldn’t pursue on financial grounds, we will be pleased to provide you with a no obligation assessment.