Damages-Based Agreement Invalidated For Failure to Comply with Regulatory Requirements

REEVES v FRAIN [2025] EWHC 185 (SCCO)

The judgment in Reeves v Frain comprehensively examined the enforceability of Damages-Based Agreements (DBAs), ruling that the agreements were invalid due to non-compliance with statutory regulations on litigation funding, with significant implications for solicitors’ cost recovery in probate proceedings involving a £100 million estate.

The essential feature of a DBA is that it provides for payment to the representative to be made only from what is recovered by the client in the matter in which the solicitors were instructed (whether or not it must also be obtained from the opposing party). In this case, the Defendants were not seeking recovery in the claim from the Claimant any sum out of which the Payment could be made.

Citations

Re Trepca Mines Ltd (No. 2) [1962] 3 WLR 955 Champerty is unlawful under common law due to the risks it poses, such as inflaming damages, suppressing evidence, or suborning witnesses. Agreements deemed champertous are unenforceable unless expressly sanctioned by statute. Wallersteiner v Moir (No. 2) [1975] 1 QB 373 Contingency fee agreements by lawyers were illegal and contrary to public policy before statutory frameworks allowing controlled exceptions were introduced. Awwad v Geraghty & Co [2001] QB 570 Solicitors acting under agreements that give them a larger financial interest in the outcome of litigation than their clients breach public policy by creating conflicts of interest. Quintavalle v Secretary of State for Health [2003] 2 AC 687 Statutory interpretation requires courts to look beyond the literal wording to discern the legislative purpose behind an enactment, ensuring that its intent is realised in application. Pollen Estate Trustee Co Ltd v Revenue and Customs Commissioners [2013] EWCA Civ 753 The purposive interpretation of statutes involves construing language to meet the intended purpose and ensuring compatibility with the statute’s overall framework and objectives. R (Edison First Power Ltd) v Central Valuation Officer [2003] UKHL 20 Courts adopt a presumption against interpreting statutes to produce unreasonable results, unless such interpretation aligns clearly with legislative intent. Hollins v Russell [2003] 1 WLR 2487 Noncompliance with statutory conditions does not necessarily render a funding agreement unenforceable. Departures must materially impair the protection afforded to the client or the administration of justice. Garrett v Halton Borough Council [2006] EWCA Civ 1017 Breach of statutory conditions for funding agreements renders such agreements unenforceable unless the departure is immaterial and does not prejudice client protection or justice administration. Zuberi v Lexlaw Ltd [2021] EWCA Civ 16 Terms within litigation funding agreements that conflict with statutory conditions cannot be enforced. However, elements of agreements that are separate and non-conflicting may be upheld under specific circumstances. Candey Ltd v Tonstate Group Ltd [2022] EWCA Civ 936 A damages-based agreement (DBA) must provide for lawyers’ remuneration to be paid out of financial sums recovered in the litigation, with contingent financial benefits alone insufficient under statutory regulations. Diag Human SE v Volterra Fietta [2023] EWCA Civ 1107 Public policy considerations preclude partial enforcement of contingency fee agreements where their core terms contravene statutory requirements, even when attempting severance. Radford v Frade [2018] EWCA Civ 119 Subsequent agreements that attempt to supplement or contradict existing retainer terms require explicit evidence. Default terms within general conditions cannot override specific funding agreements such as DBAs. Gill v Heer Manak Solicitors [2018] EWHC 2881 (QB) A solicitor’s retainer is an entire agreement covering all work necessary to the relevant matter unless explicitly provided otherwise. Therium Funding v Bugsby Property LLC [2023] Costs LR 1641 Litigation funding agreements involving third-party funders are subject to distinct public policy considerations compared to agreements directly involving solicitors, especially regarding severance of unlawful terms. PACCAR Inc and others v Competition Appeal Tribunal and others [2023] UKSC 28 Funding arrangements must align with statutory provisions to ensure fairness in litigation and prevent disruption caused by noncompliant agreements. Herbert v HH Law [2019] EWCA Civ 527 Disbursements chargeable by solicitors must comply with statutory oversight, reflecting legislative intent to manage risks associated with additional expenses on top of agreed retainers. Jones v Wrexham Borough Council [2007] EWCA Civ 1356 Terms used interchangeably, such as “expenses” and “disbursements,” in funding contexts must be interpreted contextually, ensuring consistency with legislative drafting and client protection principles. St James’s House v Wilkin Chapman LLP [2024] EWHC 1716 (KB) Sufficient evidence, such as clear documentation, is required to prove the existence and terms of a solicitor-client retainer. Ambiguities are resolved against the enforcing party.

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Key Points

A damages-based agreement (DBA) is enforceable only if it complies strictly with the statutory requirements prescribed by section 58AA of the Courts and Legal Services Act 1990 and the Damages-Based Agreements Regulations 2013. Non-compliance renders the DBA unenforceable. [21, 22, 29, 59]
To be valid, a DBA must provide for payment to the representative to be made only out of sums recovered by the client in the relevant claim or proceedings. A DBA is incompatible with claims where no ascertainable sum is recovered (e.g., declaratory relief without a financial recovery). [52–65]
The “payment” under a DBA must include all disbursements incurred, including counsel’s fees, except in employment cases. A DBA that excludes counsel’s fees from the “payment” and treats them as separate expenses breaches the statutory requirements. [81–91]

Regulation 4 of the Damages-Based Agreements Regulations 2013 requires that the payment owed to the representative under a DBA must be net of any costs recovered inter partes. The absence of express provision in the DBA to this effect may result in non-compliance. [122–123]
Violations of the statutory requirements governing DBAs are assessed for materiality. A departure from the rules is considered material if it adversely impacts consumer protection or the proper administration of justice, regardless of actual financial harm in the specific instance. [42–47, 115]

The DBAs do not comply with the DBA rules. The essential feature of a DBA is that it provides for payment to the representative to be made only from what is recovered by the client in the matter in which the solicitors were instructed. In this case, the Defendants were not seeking any sum recovered from the Claimant out of which the Payment could be made.

Key Findings In The Case

The court found that the Damages-Based Agreements (DBAs) entered into by the Second and Fourth Defendants were unenforceable because the DBAs did not comply with the statutory requirement that payment to the solicitor must be made solely out of sums recovered by the client in the relevant claim or proceedings. No ascertainable sum was recovered in the claim, which sought declaratory relief, rendering the DBAs incompatible with the statutory framework. [52–65]
The court held that the DBAs impermissibly treated counsel’s fees as separate expenses rather than including them as part of the “payment” under the agreements, thereby breaching Regulation 4(1) of the Damages-Based Agreements Regulations 2013. [81–91]
The DBAs did not expressly provide that the payment to the solicitor would be “net of” any inter partes costs recovered, as required by Regulation 4(1). While the court did not conclusively decide whether this alone rendered the DBAs unenforceable, this omission was raised as a significant defect. [122–123]

The court found that the work undertaken by the solicitors following the judgment on 31 January 2022, including attendance at consequential hearings, fell within the scope of the DBAs. Consequently, the solicitors’ attempt to impose a new private retainer for this work after 16 February 2022 was held to be unwarranted and likely void or voidable for misrepresentation or mistake. [124–140]
The court determined that the defects in the DBAs were material, as they undermined the client protection safeguards established by the statutory framework and carried potential implications for the proper administration of justice. This justified the finding that the DBAs were wholly unenforceable. [42–47, 115]

The essential feature of a DBA is that it provides for payment to the representative to be made only from what is recovered by the client in the matter in which the solicitors were instructed. In this case, the Defendants have obtained a declaration in their favour, but this does not constitute a financial recovery or sum recovered as required under the 2013 Regulations.

Background

The case of Reeves v Frain represents a complex and significant legal dispute involving probate proceedings and a detailed examination of Damages-Based Agreements (DBAs). The underlying dispute concerned the validity of a will dated 7 January 2014, made by Kevin Patrick Frain, which was challenged by his daughter, Louise Michelle Reeves. The Second and Fourth Defendants maintained that the 2014 will was invalid, alleging it was procured without the deceased’s consent.

On 31 January 2022, following an extensive trial, Green J delivered a judgment in favour of the Defendants, pronouncing probate of the deceased’s earlier will dated 18 April 2012 and declaring the 2014 will invalid. The court found that the Claimant had not proven that the deceased knew and approved the 2014 will. The estate in question was substantial, valued at approximately £100 million.

The Defendants funded their legal action through Damages-Based Agreements (DBAs) with The London Litigation Partnership Ltd (LLP). These agreements were structured to provide legal representation in exchange for a percentage of any financial recovery. The DBAs were entered into in late 2020 and early 2021, with the Second Defendant’s agreement dated 16 February 2021 and the Fourth Defendant’s dated 16 December 2020.

Costs Issues Before the Court

The primary legal issues centred on the enforceability of the Defendants’ DBAs and whether they complied with the statutory requirements outlined in the Courts and Legal Services Act 1990 and the Damages-Based Agreements Regulations 2013. Specifically, the court was required to determine four key issues:

1. Whether the DBAs provided for payment out of sums recovered, as mandated by the regulations
2. Whether counsel’s fees were improperly charged as expenses in addition to the primary payment
3. Whether the payment was properly ‘netted off’ against inter partes costs recovery
4. Whether the DBAs had been wrongfully terminated or repudiated by the solicitors

The Parties’ Positions

The Claimant argued that the DBAs were unenforceable due to multiple regulatory breaches. Her primary contentions were that:

– The DBAs did not provide for payment exclusively from sums recovered
– Counsel’s fees were improperly charged as additional expenses
– The agreements failed to properly net off inter partes costs recovery
– The solicitors had effectively repudiated the agreements through their correspondence of 16 February 2022

The Defendants contended that the DBAs were valid and enforceable, arguing that:

– The definition of ‘financial benefit’ in the Act was broad and should be interpreted purposively
– The agreements substantially complied with regulatory requirements
– Any departures were immaterial and should not invalidate the entire agreement
– The solicitors had not repudiated the DBAs and the agreements remained valid

The Court’s Decision

Costs Judge Brown comprehensively rejected the Defendants’ arguments, finding that the DBAs were unenforceable on multiple grounds. The key findings were:

1. The DBAs failed to comply with the requirement to provide payment from sums recovered, as the claim was for a declaration and did not involve a quantifiable monetary recovery
2. Counsel’s fees were improperly charged as expenses, in violation of the regulatory framework
3. The agreements could not be saved through severance due to public policy considerations
4. The solicitors’ attempts to create a new private retainer were ineffective and potentially void

The judgment represents a stringent interpretation of the DBA regulations, emphasising client protection and strict compliance with statutory requirements. The court’s approach underscores the continuing significance of public policy considerations in litigation funding arrangements.

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