Damages-based agreements: unsuitable for defendants

Insight

22.09.2022

The range of ways in which parties to litigation can fund their legal expenses has expanded hugely in recent years. The litigation funding and insurance market, therefore, is ever more sophisticated. In some cases, parties can also instruct lawyers on the basis of contingent agreements as to fees (often misleadingly called “no win, no fee” agreements). But there are limits.
The Court of Appeal has determined that Damages-Based Agreements (“DBAs”) cannot be used by Defendants, in the case of Candey Limited v (1) Tonstate Group Limited; (2) Tonstate Edinburgh Limited; (3) Dan-Ton Investments Limited; and (4) Arthur Matyas [2022] EWCA Civ 936, view here.
The judgment limits the funding options that would-be defendants have access to when compared with would-be claimants, for whom DBAs remain a valid option. It highlights the importance for all businesses of having an adequate fighting fund or legal expenses insurance in place in case they end up defending a legal action.

What is a DBA?

A DBA is a costs agreement made between a party to litigation and its legal representatives. Under a DBA, the level of fees paid to the legal representatives is calculated by reference to (often as a percentage of) the damages awarded to the client in that particular case. There is a difference between DBAs and contingency fee arrangements (CFAs). Under a CFA, the amount of fees the client pays varies depending on the outcome of the matter – it is not a straight percentage tethered to the damages awarded to the client.
The precise construction of a DBA in civil litigation will be subject to agreement between a party and its legal representatives, and must comply with the provisions of the Courts and Legal Services Act 1990 (as amended) (“the 1990 Act”) and the Damages-based Agreements Regulations 2013 (SI 2013/609) (“the 2013 Regulations”).
It is no secret that litigation costs can be very substantial indeed. In Lord Justice Jackson’s 2010 review of civil litigation costs, he recommended that legal representatives ought to be generally permitted to enter conditional fee arrangements (including DBAs) with clients to increase access to justice.
This latest development in the Candey judgment confirms the extent of the permitted use of DBAs. Candey raised the novel question of whether it is permissible for a defendant to enter into a DBA under the 1990 Act and the 2013 Regulations.

The Facts: Candey Limited v Tonstate Group Limited and ors

The appellant, law firm Candey Limited (Candey), acted for Edward Wojakovski in litigation. There was a DBA in place to cover that work. The work itself comprised three separate and related actions involving Mr Wojakovski. These were (1) a claim brought against Mr Wojakovski to rescind various transfers of shares to him (“the Shares Claim”); (2) a derivative action seeking, amongst other things, the return of monies extracted from the companies by Mr Wojakovski and a substantial counterclaim by Mr Wojakovski (together, “the Main Action”); and (3) an unfair prejudice petition issued by Mr Wojakovski (“the Petition”).
Mr Wojakovski originally instructed Mishcon de Reya LLP but was unable to continue paying them. He acted in person for a period of time before entering into a DBA with law firm Candey, who then represented him.
The outcome for Mr Wojakovski in the three claims was not a happy one. Although one of the claims was settled, and Mr Wojakovski retained some of the shares that were in dispute, Mr Wojakovski “resoundingly lost most of the litigation… is subject to a judgment to pay at least £13 million, and… failed to recover anything at all from [the Respondents] or any other party”, as was put by Mr Justice Zacaroli in his first instance judgment (April 2021) regarding the DBA. That judgment was the subject of the present appeal.
At first instance, the judge decided that the fact that Mr Wojakovski had retained his shares did not entitle Candey to any payment under the DBA. Mr Wojakovski had not gained any financial benefit in the litigation, so there were no proceeds from the litigation from which Candey could be paid.
Candey appealed. The Court of Appeal agreed with the first instance decision. In Mr Wojakovski’s litigation, as there was no recovery of sums (or additional benefit to Mr Wojakovski gained in the litigation), it would not be possible for Candey to receive a payment from Mr Wojakovski based on the sums he recovered. The Court of Appeal determined that it is not possible for a (non-counterclaiming) defendant to enter into a DBA with its legal representatives stipulating that it will pay them a percentage of whatever sums/assets claimed that it has resisted paying or transferring to its opponent.

Implications

The implications of the Candey judgment for prospective defendants are that there are fewer litigation funding options available. This may make defending litigation a less attractive option for prospective defendants, particularly those without deep pockets themselves.
It is worth noting that a counterclaim by a defendant is not covered by the prohibition on DBA usage by defendants. In some circumstances it may be possible for a defendant to agree a DBA with its legal representatives in respect of its counterclaim only, depending on the circumstances of the case.
In addition to funding its own legal costs, an unsuccessful party in litigation is generally ordered to pay the costs of their opponents. This point must be considered carefully with legal representatives when considering the commerciality of pursuing / continuing litigation, and when considering whether to and at what level to make a without prejudice settlement offer to seek to conclude the matter. Connected with this, there are specific types of settlement offer which attract particular costs protection for litigants (both claimants and defendants) when used correctly (known as Part 36 offers). Use of those offers should be considered carefully by parties with the benefit of advice from their legal representatives.

If you require further information about anything covered in this briefing, please contact Ben Longworth, Sally Mantell or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.