July 6
The applicant, Candey Ltd (“the solicitors”) acted for an individual (“the client”) in a complex legal dispute, pursuant to a damages-based agreement (“DBA”). There were three separate and related actions. One was a claim brought against the client for the rescission of transfers to him by the other shareholders of shares in a property investment company. At the time the dispute arose, the client owned 50% of the shares in the investment company, and the other shareholders, his parents-in-law, the remaining 50%. In consequence of a settlement of that claim, which was embodied in a consent order, the client transferred 75% of the shares he held in the company to his parents-in-law and to his estranged wife. He retained 25% of his previous 50% shareholding (22,500 shares). Thus he was partially successful in resisting the claim against him in that action, which was for the return of all the shares. The client was subsequently declared bankrupt and the solicitors claimed that by virtue of the DBA they were entitled to be paid a percentage of the value of the 22,500 shares that he had retained in the company. They brought an application seeking a charge over the shares under section 73 of the Solicitors Act 1974, and claimed that their charge took priority over a final charging order which had been made by consent in favour of the respondents to the application, which included the investment company and the client’s father-in-law. The judge refused the application and held that the DBA only entitled the solicitors to payment from the client if he recovered something from an opposing party in or as a consequence of the proceedings. It did not entitle them to payment if the client retained some or all of the shares that were claimed from him. Moreover, even if (contrary to that conclusion) the DBA did entitle the solicitors to payment of a percentage of the value of the retained shares, it was not an agreement permitted by the Damages-Based Agreements Regulations 2013, and therefore would be unenforceable to that extent. The solicitors appealed, contending inter alia that (i) the 1990 Act permitted (non-counterclaiming) defendants, as well as claimants, to enter into DBAs, (ii) the primary legislation was neutral and could be interpreted as permitting defendants to enter into DBAs since, In particular, the definition in section 58AA(3) of the 1990 Act referred to “the recipient” of the advocacy services, litigation services or claims management services and was therefore not limited to the provision of services to claimants and (iii) the judge was wrong to find that the DBA was unenforceable because a necessary prerequisite under the Regulations was recovery from the other side.
On the solicitors’ appeals—
Held, appeals dismissed. In order to qualify as a DBA in section 58AA(3) of the Courts and Legal Services Act 1990, the agreement had to provide for payment by the recipient of the services if he or she “obtain[ed] a specified financial benefit” from the litigation. The word “obtains” envisaged the litigant acquiring something that they did not already possess—by necessary implication, from the opposing party. That language was not apposite to describe a situation in which the defendant retained money or other assets of value, or was not required to make a payment or transfer of assets to the opposing party, even if this was the consequence of successfully resisting a claim for debt or damages, or a claim to those assets. Since a successful defendant was financially no better off than he was at the start of the litigation, indeed he might be considerably worse off because he might have had to pay something to the claimant, even if the claim did not succeed in full, it followed that an agreement between a defendant and his solicitors which made provision for payment to the latter of a percentage of any sum (or of the value of any asset) which was claimed from him, and which in consequence of the outcome of the litigation he did not have to pay or transfer to the opposing party, was not a “damages-based agreement” as defined by section 58AA(3). Since it was not permitted by the statute such an arrangement was unlawful and unenforceable. The language of the Damages-Based Agreements Regulations 2013 was entirely consistent with that interpretation of section 58AA. “Payment” was defined in Regulation 1(2) as “that part of the sum recovered in respect of the claim or damages awarded” that the client agreed to pay the representative (emphasis added). Regulation 4(1) prohibited a DBA from requiring an amount to be paid by the client other than the payment (as so defined) net of costs, disbursements or expenses recoverable from another party to the proceedings. Regulation 4(3) put the matter beyond doubt by restricting the payment to a percentage of “the sums ultimately recovered by the client”. That meant it was a necessary prerequisite to the entitlement of a representative to payment under a DBA that the client had made a recovery from the other side to the litigation. Accordingly, the solicitors had no entitlement to be paid a percentage of the value of the shares retained under the settlement agreement (paras 52, 54–55, 57–59, 62, 65, 66, 84, 85, 86).
Benjamin Williams QC and Stephen Ryan (instructed by Candey Ltd) for the solicitors.
Andrew Fulton QC and Sam Goodman (instructed by Rechtschaffen Law) for the respondents.