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).

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