The recent Court of Appeal judgment in Zuberi v Lexlaw Ltd [2021] EWCA Civ 16 has gone some way to clarifying the rules relating to Damages Based Agreements (DBAs).

It is fair to say that there has been an extremely limited uptake of DBAs as a litigation funding option since the current rules were introduced in 2013. The biggest obstacle is still the application of the indemnity principle which limits costs recoverable from the other side to the sum recoverable under the DBA. So, if your DBA allows a charge of say 30%, then you can charge £3k on a recovery of £10k. If your inter partes costs are say £8k so are stuck with the £3k as that is the limit of the client’s liability.

But that is not the only problem with DBAs. A major issue is highlighted by the Zuberi v Lexlaw case. The case itself was about a dispute with a bank. The Solicitors acted on a 12% DBA which included this clause –

“With the exception of the circumstances set out in clause 6.3 … you may terminate this Agreement at any time. However, you are 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”

Mrs Zuberi succeeded but tried to avoid any payment under the DBA on the ground that this clause breached Regulation 4 of the 2013 DBA Regulations which bars the recovery of any charges over and above ‘the payment’ i.e. the agreed percentage. The cancellation charge was caught by this. She argued that the inclusion of this cancellation clause meant that the entire agreement was unenforceable. This had alarming implications for practitioners. A client could terminate the agreement and argue that there was no entitlement to any charges!

This argument has been firmly rejected by the Court of Appeal. Coulson LJ Observed – “nobody can pretend that these Regulations represent the draftsman’s finest hour”. It is hard to disagree. In relation to this particular argument the appeal judges held that Regulation 4 had no impact on cancellation provisions. It regulated the sharing of the proceeds of success but did not in any way bar an unrelated provision about what would happen in the case of cancellation.

This is a significant judgment and will be a comfort to many firms.

However, DBAs in general are likely to remain unpopular under the rules as they stand.

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