The last few years have seen law firms seek to offer more flexible and creative fee structures to cater to the requirements of their clients. This can result in quite interesting arrangements, especially in a litigation context. However, a claimant or a defendant with a viable counterclaim will often find that there are more options available to them than a litigant who finds itself having to defend a claim. In a recent case, an interesting question arose around whether damages-based agreements (“DBAs”) could possibly be applied in a situation involving a defendant who is partially successful in defending a claim.
What is a DBA?
DBAs offer an alternative way to fund a litigation case so that clients who would not otherwise pursue a case if on the traditional hourly rate model have another option in situations where a case has good prospects of success. The standard DBA operates by making the legal team’s fees contingent upon their client’s success in a case and determined as a percentage of the compensation received by the client. DBAs are, therefore, usually used by Claimants.
Candey Limited v Tonstate Group Limited & Ors
In the recent case of Candey Limited v Tonstate Group Limited & Ors [2022] EWCA Civ 936, the Court of Appeal was asked to consider the enforceability of a DBA entered into by a defendant.
The Appellant, Candey Limited, is a law firm specialising in litigation matters. They acted for a client under a DBA in a complex dispute which involved three separate but related actions. In two of those actions, Candey’s client was the claimant. However, the client was the defendant in the third action where the claimant in those proceedings sought his shares in the company, Tonstate Group Limited (“TGL”). This third action was settled with Candey’s client retaining 25% of his shares in TGL. Candey’s client was therefore partially successful in his defence of the third action.
Candey’s client then went bankrupt. Candey sought to claim their fees by virtue of the DBA from TGL and the other defendants arguing that, as their client was partially successful in defending the claim regarding TGL’s shares, Candey were entitled to recover a percentage of the value of the client’s remaining shares in TGL.
Candey lost at first instance. Mr Justice Zacaroli held that the DBA only entitled Candey to payment if their client actually recovered something from an opposing party in or as a consequence of proceedings. The DBA did not entitle Candey to payment if their client retained some or all of his shares in TGL. In addition, and in any event, the Judge considered that the DBA relied upon by Candey was not an agreement permitted by the Damages-Based Agreements Regulations 2013, SI 2013 No. 609 ("the 2013 Regulations") and was therefore unenforceable to that extent.
On appeal, the Court of Appeal disagreed with Candey’s position on the construction of the DBA concluding that Mr Justice Zacaroli’s construction of the DBA as depending upon a recovery from the opponent(s) to the litigation was correct.
The Court of Appeal also considered the wording of the 2013 Regulations noting that the legislation makes clear that, in order to qualify as a DBA, the agreement must provide for payment by the recipient of the services if he or she “obtains a specified financial benefit” from the litigation.
The Court of Appeal accepted that “recipient of the services” could refer to a defendant and “specified financial benefit” is not confined to damages. However, it considered that the word “obtains” used in the 2013 Regulations requires the litigant to acquire something that they do not already possess from the opposing party. On this basis, a litigant who only retains money or other assets (or is not required to make a payment or transfer assets) cannot be said to have obtained a financial benefit for the purposes of the 2013 Regulations.
Conclusion
In light of the above, it remains the position that a defendant to litigation cannot currently enter into an enforceable DBA with their lawyers where they agree to pay a percentage of such part of the sums or assets that they have successfully resisted having to pay to the claimant.
