My client wants to end a damages-based agreement. Are they liable for costs?

I act for a client under a damages-based agreement. The client wishes to end the retainer and believes they are not liable to pay any costs. A clause in the agreement states that, upon termination, the client becomes liable to pay the costs and expenses incurred up to the date of termination. Is the client correct?

The question of recoverability of costs from the client will depend upon the precise wording and construction of the termination clause within your firm’s damages-based agreement (DBA).

It will also be necessary to determine whether your firm’s DBA is compatible with regulation 4(1) of the Damages-Based Agreements Regulations 2013, which states that:

“a damages-based agreement must not require an amount to be paid by the client other than

(a) the payment, net of

(i) any costs […] and

(ii) […] counsel’s fees, that have been paid or are payable by another party […]; and

(b) any expenses […] net of any amount […] paid or payable by another party.”

This point was considered recently by the Court of Appeal in Lexlaw v Zuberi [2021] EWCA Civ 16.

The Court of Appeal concluded that the DBA termination clause used by Lexlaw Ltd was not incompatible with regulation 4(1).

Consequently, the client remained liable for legal costs incurred by their solicitors up to the date of termination of the DBA.

The court concluded that regulation 4(1) is premised on there being recovery available from damages recovered and that the client remains contractually liable to the solicitor in the event of termination.