The Court of Appeal has confirmed that Damages-Based Agreements (or DBAs) cannot be used by defendants as, under s.58AA of the Courts and Legal Services Act 1990, the agreement must provide for payment to the lawyer if the client "obtains a specified financial benefit" from the litigation: Candey Ltd v Tonstate Group Ltd [2022] EWCA Civ 936.

The appeal raised what the court described as the "apparently novel question" of whether a defendant can lawfully agree with its lawyers that, if it succeeds in defending the claim (or counterclaim) in whole or in part, it will pay a percentage of the money (or the value of the assets) that it has resisted having to pay to the opponent.

The court rejected the submission that a defendant can be said to receive a "financial benefit" in such circumstances because it gets to keep its money or other property. As the court put it, the successful defendant is financially no better off than at the start of the litigation, and may be considerably worse off (if the claim has succeeded in part).

The Court of Appeal agreed with the High Court's decision (outlined here) that the use of DBAs by defendants is precluded by the wording of the Damages-Based Agreements Regulation 2013. However, the decision goes further in finding that s.58AA, the underlying statutory provision which permits DBAs, precludes their use by defendants. There have on two occasions been proposals to amend the 2013 Regulations to allow DBAs to be used by the defendant (put forward by the Civil Justice Council in 2015 and following an independent review by Professor Rachael Mulheron and Nicholas Bacon QC in 2019). However, in the light of this Court of Appeal decision, it seems any change to allow DBAs to be used by defendants would require amendments to the primary legislation.

The Court of Appeal's decision does confirm that a "specified financial benefit" for the purposes of a DBA is not confined to damages, but also includes "debts or other forms of financial recovery". It does not directly address the question of whether a DBA will be enforceable if the lawyer's percentage payment is calculated by reference to some other valuable asset recovered in the litigation (such as shares, or land, or a painting). It appears therefore that this question remains open.

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