Court of Appeal finds that damages-based agreements are not available to defendants
The Court of Appeal has found that damages-based agreements (DBAs) are not available to non-counterclaiming defendants (Candey Ltd v Tonstate Group Ltd & Ors).(1) In reaching this conclusion, the court held that agreements between legal representatives and defendant clients, which provide for payment to the legal representative of a percentage of sums that the client has resisted paying to its opponent (and where the client received no financial benefit from its opponent), were unlawful and unenforceable.
The appeal arose in the context of several underlying disputes concerning shareholdings in, and the extraction of money from, Tonstate Group Limited (TGL), a property investment company.
Mr Wojakovski held 50% of the shares in TGL at the time the disputes arose, with Mr and Mrs Matyas (his parents-in-law) holding the remaining 50%. Mr Wojakovski's shares were originally transferred to him by Mr and Mrs Matyas. In one of the actions, TGL (and other group companies) alleged that Mr Wojakovski had been wrongfully extracting money from those companies for years. Judgment was granted against Mr Wojakovski for approximately £13 million when he admitted extracting such funds without authorisation for the purposes of defrauding HMRC.
In another of the actions, Mr and Mrs Matyas sought rescission of their transfer of shares to Mr Wojakovski on the basis that they would not have transferred the shares had they known Mr Wojakovski had been extracting monies from TGL and other group companies. This claim was settled in May 2020 with an agreement that Mr Wojakovski would transfer 75% of his shares in TGL to Mr and Mrs Matyas, and his estranged wife. Mr Wojakovski retained 25% of his TGL shareholding.
Candey Limited (the Solicitors) acted for Mr Wojakovski in these disputes pursuant to a single-page agreement which was said on its face to be a DBA.
DBAs – a form of 'no win, no fee' agreement, which allow legal representatives to receive a percentage of the sums recovered from an opponent – were legalised for all forms of civil litigation in April 2013, through an amendment to section 58AA of the Courts and Legal Services Act 1990 (the 1990 Act) and the introduction of the Damages-Based Agreements Regulations 2013 (the 2013 Regulations), which set out the required terms and conditions of DBAs. Section 58AA(3) of the 1990 Act provides that a legal representative and their client can agree that the client will make a payment to the legal representative if the recipient obtains "a specified financial benefit" in connection with the litigation, with the payment determined by reference to the financial benefit obtained.
Mr Wojakovski was declared bankrupt in October 2020, following which the Solicitors claimed that they were entitled to a percentage of the value of Mr Wojakovski's retained shareholding in TGL pursuant to its DBA. The judge at first instance concluded that the DBA did not entitle the Solicitors to payment if Mr Wojakovski retained some or all of the shares claimed from him, but only if he recovered something from an opponent "in or as a consequence of the proceedings", which he did not. The Solicitors were therefore not entitled to any payment under the DBA. The Solicitors appealed this decision.
The Court of Appeal dismissed the appeal, holding that an agreement between a defendant and their legal representative which provides for a payment to the legal representative of a percentage of the sum the defendant successfully resists having to pay to their opponent is not a DBA as defined by section 58AA(3) of the 1990 Act. Accordingly, the court held that any such agreement is "unlawful and unenforceable." As Mr Wojakovski recovered nothing else in the proceedings, the Solicitors were not entitled to any payment under the DBA.
In reaching this conclusion, the court considered the history of the introduction of DBAs and noted that there was nothing in the 2009 Jackson Report on civil litigation costs, which brought about the widespread legalisation of DBAs, the Parliamentary debates concerning the introduction of the 2013 Regulations, or the Explanatory Memorandum to those 2013 Regulations, which supported the concept of a DBA being entered into by a defendant who did not have a counterclaim. Given the longstanding prohibition of contingency fee agreements at common law, the court observed that the lack of reference to the availability of defendant DBAs was a "powerful indication" that it was not Parliament's intention to introduce such DBAs. It would not be possible to expand the exceptions to the common law prohibition unless there was clear legislative intent to do so.
However, it was the wording of s58AA(3) of the 1990 Act – that a client is to make a payment to its legal representative if the client "obtains a specified financial benefit" from the litigation – which the court found most persuasive in reaching its judgment, putting the matter "beyond doubt". The court held that the word "obtains" envisages the client acquiring something that they do not already have (from the opponent) and not merely retaining something which they already have.
The court also held that, on the construction of Mr Wojakovski's DBA, the Solicitors would not be entitled to any payment in any event, as the DBA was dependent on a recovery from Mr Wojakovski's opponents. The court observed that Mr Wojakovski had "gained nothing" and was in fact "substantially worse off", having parted with 75% of his TGL shareholding. The court observed that to allow such a form of a DBA would be a case of "heads I win, tails you lose"; with a losing client having to pay the ordered sums to an opponent and a winning client still having to pay a percentage of the sum claimed by an opponent to its legal representatives.
This decision has, for now, put to bed the question as to whether DBAs for defendants are permissible. The court was clear that when a defendant does not obtain a defined financial benefit from their opponent, any DBA will be unlawful and unenforceable.
The debate as to whether defendant DBAs should be permissible will rumble on. There have been several recommendations over the years to make DBAs available to defendants, but changes are yet to be introduced. One of the judges in the Court of Appeal's decision left us in no doubt about their views; when, win or lose, a defendant "faces financial disaster" under a DBA, it is "not surprising that legislation aimed at promoting access to justice should not permit such agreements."
Solicitors risk not getting paid for their work if they are relying on a DBA with a defendant client. Therefore, defendants and their solicitors should carefully consider the funding arrangements they have in place for litigation and consider if alternative arrangements need to be made. These might include seeking third party litigation funding, agreeing a conditional fee arrangement (where the level of fees payable depends on the case outcome) or the client obtaining after the event insurance.
(1)  EWCA Civ 936