US-style contingency fee agreements now likely to be seen much more
Litigation has always come at a cost. However, following the Court of Appeal’s decision in Shaista Zuberi v Lexlaw Limited  EWCA), litigation may have become more affordable.
Until the recent ruling, most litigants had to pay their solicitors at an hourly rate on a ‘pay-as-you-go’ basis, or the lawyers might have taken their case on a ‘no win, no fee’ basis. Either way, the cost of pursuing a claim has always related to the amount of work carried out by the lawyer i.e the more hours spent on the case, the higher the bill.
However, in Lexlaw Ltd v Shaista Zuberi, the Court of Appeal approved a Contingency Fee Agreement in a way likely to encourage law firms to offer them more frequently. Wemay now see increasing use of those agreements as lawyers and the public become more confident with them.
Background to the Case
On 14 May 2008, Shaista Zuberi, a businesswoman, borrowed £2,321,800 from Natwest/Royal Bank of Scotland. Worried interest rates might go up, Shaista agreed to a 10 year hedge. The effect of that hedge was to fix her interest rate. Unfortunately, her business was not a success and the banks took action to sell her properties.
May 2008 was not a good time to fix interest rates. It was just before the financial crash and interest rates have been very low since then. When Shaista Zuberi took out a 10 year hedge she fixed the interest rate at a level much higher than what was to become the market rate.
In May 2012, she instructed Lexlaw to bring legal proceedings against the banks alleging that they had mis-sold her the hedge product. On 15 April 2014, she and the law firm entered a Damages Based Agreement which said that if she was successful the lawyers would receive a simple 12% of what she recovered. However, if she terminated the retainer before the end of the case then the lawyers would be paid on an hourly rate basis for the work they had done.
On 18 May 2015, she terminated the Damages Based Agreement. Not long after, on 7 July 2015, the banks made an offer to her which she accepted. On 31 July 2015, Lexlaw sent her an invoice for £145,123.14.
When she did not pay, Lexlaw brought proceedings against her. The Court decided to look at the validity of the Damages Based Agreement.
The Court of Appeal's Decision
On 10 July 2020, a Judge of the High Court looked at the Damages Based Agreement and considered Ms Zuberi’s arguments that the agreement was not valid since it provided both for the lawyers to receive a 12% share of her winnings but also for her to have to pay costs calculated on a time basis if she terminated the retainer. She said that the agreement fell foul of the law on such agreements and was therefore unenforceable.
The High Court found that the agreement was not unenforceable.
The Court of Appeal has now agreed.
The relevant regulations are the Damages Based Agreement Regulations 2013, which were made under Section 58AA of the Courts and Legal Services Act 1990. Those regulations did not seem to be clear about whether lawyers were allowed to make Damages Based Agreements that provided that their clients would have to pay the lawyers’ usual hourly rate in the event of early termination.
Having considered the regulations in their proper context including the purpose behind the regulations and the goals which the lawmakers were trying to achieve, the Court of Appeal has decided that such saving provisions can be put into Damages Based Agreements without the agreements then becoming unenforceable.
Impact of the Decision
The significance of the decision is that many more people may now be able to bring claims that would previously have been too expensive and risky to take to trial. Clients can now seek justice in the knowledge that their legal bill will not be any more than a percentage of anything that they manage to recover from the other side, regardless of how long the case takes and how much work their lawyers put into it. They will also know that their lawyers will not be paid anything if the case is lost.
The Court of Appeal's ruling may mean that Damages Based Agreements are now a lot more popular among lawyers. So far, there has not been very much take-up for them, apart from in the employment field where they have been fairly common where successful parties are not generally able to recover their legal fees from the other side. Increased uptake will lead to greater access to justice for clients.
One benefit to clients may be that solicitors conduct litigation more efficiently, getting cases settled sooner, and there is evidence that the use of Damages Based Agreements promote early settlement. The logic seems to be that lawyers work through such cases faster and less wastefully, so as to be paid sooner, after carrying out less work.
The decision opens the way to hybrid Damages Based Agreements as well, whereby the lawyer would be paid a low hourly rate if they lost but a percentage if they won.
American-style Damages Based Agreements, whereby lawyers receive a share of their client’s winnings, have not had much take-up in this country. Ministers have been concerned about some aspects of Damages Based Agreements after looking across the pond at what happens in America. This decision may though encourage lawyers to use them more widely and use of such agreements may be something which brings benefits to clients and lawyers alike.
Damages Based Agreements do have the ability to make litigation more affordable and to increase access to justice.