Following a successful outcome in the probate proceedings, where the court declared a 2014 will invalid and upheld an earlier 2012 will, the defendants sought to recover about £1.5 million in costs. however, the paying party/claimant challenged the validity of the defendants' DBAs, arguing that they did not comply with the statutory requirements under the Courts and Legal Services Act 1990 (CLSA) and the Damages-Based Agreements Regulations 2013 (the 2013 Regulations).
Key Issues
- Compliance with DBA Rules: Whether the DBAs complied with the statutory requirements, particularly regarding the payment of solicitors' fees out of sums recovered, the treatment of counsel's fees, and the netting off of inter partes costs recovery.
- Materiality of Breaches: Whether any breaches of the DBA rules were material, rendering the DBAs unenforceable.
- Severance: Whether offending clauses in the DBAs could be severed to preserve the enforceability of the remaining terms.
- Repudiation of DBAs: Whether LLP Solicitors wrongfully repudiated the DBAs by asserting that the agreements no longer covered post-judgment work.
- Private Retainers: Whether new private retainers were validly formed for work post-judgment and whether they gave rise to recoverable costs.
Findings
Compliance with DBA Rules
The court found that the DBAs did not comply with the 2013 Regulations. There were a number of failures:
- Payment Out of Sums Recovered: The DBAs failed to specify that payment to the solicitors must come from sums recovered by the client. The court held that the 2013 Regulations require a clear link between the payment and the financial benefit obtained by the client, which was absent in this case.
- Counsel’s Fees: The DBAs improperly treated counsel’s fees as expenses payable by the client, contrary to the 2013 Regulations, which require such fees to be included in the payment to the solicitors.
- Netting Off Inter Partes Costs: The DBAs did not explicitly provide for the netting off of inter partes costs recovery, as required by Regulation 4(1).
Materiality of Breaches
The court followed Hollins v Russell [2003] and Garrett v Halton BC [2006], holding that breaches of the DBA rules must be material to render the agreement unenforceable. In this case, the breaches were material because they adversely affected client protection and the proper administration of justice. The failure to comply with the statutory requirements created uncertainty and potential conflicts of interest, undermining the purpose of the DBA regime.
Severance
The court rejected the Defendants’ argument that offending clauses could be severed to preserve the enforceability of the DBAs. Applying the Beckett test (Beckett Investment Management Group Ltd v Hall [2007]), the court found that severance was not possible because:
- The removal of the offending clauses would fundamentally alter the nature of the agreement.
- Public policy considerations precluded severance, as it would allow solicitors to benefit from unlawful arrangements.
Repudiation of DBAs
The court held that LLP Solicitors did not repudiate the DBAs by asserting that the agreements no longer covered post-judgment work. While the solicitors were mistaken in their interpretation of the DBAs, their actions did not amount to a repudiation. The DBAs covered all work up to and including the consequential hearings, and the solicitors’ error did not invalidate the agreements.
Private Retainers
The court found that no valid private retainers were formed for work post-judgment. The Defendants failed to prove that the representations made by LLP Solicitors in February 2022 gave rise to new retainers. Even if such retainers had been formed, they would have been void or voidable due to misrepresentation or mistake. The court concluded that the Defendants could not recover costs under these alleged private retainers.
Conclusion
The court held that the DBAs were unenforceable due to material breaches of the 2013 Regulations. The Defendants’ claims for costs under the DBAs and alleged private retainers were dismissed. The court reserved judgment on whether the relevant parts of the Defendants’ bills should be assessed at nil, pending further argument.
This case highlights the importance of compliance with the 2013 Regulations. DBAs must clearly specify the payment terms, particularly in relation to sums recovered, counsel’s fees, and inter partes costs recovery. The decision also reaffirms the principle that material breaches of statutory requirements will render DBAs unenforceable, and that public policy considerations may preclude severance of offending clauses. More than ten years after they came into being, difficulties with the DBA regulations endure.
