Damages Based Agreements cannot be used by Defendants who do not bring a counterclaim

In Tonstate Group Limited v Wojakovski and others [2021] EWHC 1122 (Ch) the Defendant’s solicitors (the Solicitors) applied for a charge over the Defendant’s 12.5% shareholding in the Claimant company (the Company). The charge was sought as security for sums said to be owed under a Damages Based Agreement (DBA). The DBA was a one-page agreement comprising 9 short paragraphs, the second said that, in the event that the Defendant recovers any “Proceeds” (i.e. “you recover damages, monies, costs incurred by your previous lawyers, other sums and /or derive any benefits… in or arising out of … the current Court proceedings”), the Solicitors would receive “Payment” defined as “25% of the Proceeds + VAT”.

The Court rejected the Solicitor’s claim.

The Defendant had previously held 50% of the shares in the Company prior to the settlement of proceedings in which he relinquished 75% of his shareholding, leaving him with only 12.5%.

The Judge considered the phrasederive any benefits [from the litigation]” and found that the Defendant’s ownership of the shares, which pre-dated the litigation, could not be characterised as a benefit derived from the proceedings: “At most, what [the Defendant] derived from the proceedings was the avoidance of a detriment to the extent that he retained [12.5% of] the Shares”.

The Judge noted that the DBA was entitled “Damages Based Agreement” and noted that the “the essential feature of damages is that they are recovered from another party in the proceedings”.  Further, the DBA later stated that the Solicitors would be entitled to no payment at all if the Defendant did not recover any monies (which was seen as an important indication of the parties’ intentions as to the scope of the DBA).

The Judge next looked as whether the agreement was enforceable (i.e. in the event that “Proceeds” included the retention of the Shares). Pursuant to the DBA Regulations of 2013 the DBA “must not require any amount to be paid” other than “that part of the sum recovered in respect of the claim or damages awarded that the client agrees to pay the representative” (emphasis added).

In summary:

(1) on the proper interpretation of the DBA, the Solicitors were only entitled to payment if the Defendant recovered something from the litigation (retention of the Shares, held pre-litigation, was not a recovery); and (2) a DBA must be limited to “payment [as] a proportion of the amount recovered by the client in the proceedings” (emphasis added).

The judgment confirms that DBAs should not be used by those acting for defendants (at least not unless the defendant is pursuing a counterclaim seeking a recovery from the claimant).

No costs in Small Claims track appeal, and no retrospective re-allocation

In Smith v RBS [2021] EWHC Civ 977, RBS sought permission to bring an appeal against a PPI judgment. The claim, in Bodmin County Court, was allocated to the small claims track and judgment was entered in a sum under £2,000, comprising repayment of PPI premiums, interest and small claims track costs.

RBS sought to appeal on two grounds: (1) the PPI contract had been terminated before 6 April 2007 (i.e. before s 140A-C of the Consumer Credit Act 1974 came into force); and (2) the claim was time-barred under s 9 of the Limitation Act 1980.

Mrs Smith contended that, if permission to appeal was granted, the grant should be subject to a condition pursuant to CPR 52.6(2)(b) that RBS pay her reasonable costs of the appeal. Mrs Smith, in her written submission, stated in a footnote that “this is a prospective costs order… distinguished from [authorities] where the Court of Appeal (expressing regret at the outcome) held that there could be no costs order in favour of the successful party in a case proceeding on the small claims track after determination of … appeal …”.

The Permission to Appeal (PTA) was considered by a single Judge. She granted permission subject to the condition that RBS was to pay Mrs Smith’s reasonable costs of the appeal, to be agreed between the parties or, in default of agreement, determined by the Court.

Mrs Smith filed a notice of application in respect of the condition to cap (in reality to fix) the costs at £136,656 inclusive of VAT. RBS cross-applied to set aside the condition on the ground that there was no jurisdiction to impose a costs condition on an appeal in a case which was tried following allocation to the small claims track.

The Court of Appeal considered its own jurisdiction, noting that “the full court does not sit on appeal from the single Lord or Lady Justice (LJ) who granted permission”.

Accordingly, the Court could only discharge or vary the PTA if there was a compelling reason to do so – but it noted that if the condition was one which the Judge, determining the PTA, had no power to impose, that is a compelling reason to set it aside.

The Court held that, under CPR 27.14(2), a court may not award costs in a case allocated to the small claims track, noting that CPR 27.14(2) is “clear, and extends to the costs of an appeal”. Therefore, in respect of cases on the small claims track, the Court has no power to make an order for costs.

While the Court considered situations in which it may impose a condition on a party’s continuing participation in a case, it drew a distinction between the imposition of (i) a condition which it would not ordinarily make, and (ii) a condition which it could never make because statute or a rule of court expressly prohibits it.

Mrs Smith sought an alternative way of upholding the condition – she asked the Court to re-allocate the case to the fast track or multi track. This received short-shrift because it was too late (such application would have needed to be made in the County Court), as “Appeals in [the Court of Appeal] do not proceed on the small claims track, fast track or multitrack: these are county court concepts. [The Court of Appeal] cannot rewrite the history of the case”.

The costs condition was set aside.