Candey Limited v Tonstate Group Limited & Ors.

A damages-based agreement cannot lawfully require a defendant to pay legal representatives a percentage of money or assets which the defendant successfully retains. The client must obtain a financial benefit by acquiring something from the opposing party. Avoiding or reducing a liability does not satisfy that requirement.

The statutory scheme also requires the representative’s payment to come from sums recovered by the client. A counterclaim may support an enforceable agreement, but only if it produces such a recovery. An agreement falling outside these limits remains unlawful and unenforceable under the common law.

The appellant solicitors acted under a damages-based agreement for a client facing claims concerning companies and shares, while also pursuing claims and a counterclaim. A settlement required the client to transfer most of his shares but allowed him to retain 22,500 shares. After his bankruptcy, the solicitors claimed a percentage of their value and sought a charge under section 73 of the Solicitors Act 1974.

Zacaroli J held in [2021] EWHC 1122 (Ch) that retaining the shares neither triggered payment under the agreement nor constituted a recovery permitted by the statutory regime. In [2021] EWHC 1826 (Ch), he alternatively held that the respondents’ charging order had priority.

The central issues were whether a non-counterclaiming defendant may enter an enforceable damages-based agreement based upon liabilities avoided, whether the relevant Regulations were valid, and whether this agreement covered the retained shares.

1. The appeals were dismissed. An agreement requiring a defendant to pay legal representatives a percentage of money or assets which the defendant avoids paying or transferring is not a damages-based agreement within section 58AA(3) of the Courts and Legal Services Act 1990. It is therefore unlawful and unenforceable. Avoiding a detriment leaves the defendant no better off than before the litigation and does not amount to obtaining a specified financial benefit: paras 51–57, 84.
2. The word “obtains” in section 58AA(3) envisages the client acquiring something not previously possessed, by necessary implication from the opposing party. The expression is wider than damages and can include debts and other financial recoveries. It does not include retaining existing money or property, or avoiding part of an asserted liability: paras 52–57.
3. The Damages-Based Agreements Regulations 2013 are consistent with that construction. Regulation 1(2) defines the representative’s payment by reference to a sum recovered or damages awarded. Regulations 4(1) and 4(3) likewise require payment to be drawn from sums ultimately recovered by the client. Recovery from the opposing party is therefore a necessary prerequisite to payment: paras 58–62.
4. The Regulations were not ultra vires. The statutory scheme permits damages-based agreements in principle but authorises the Lord Chancellor to prescribe which forms are enforceable. It was lawful to permit only agreements remunerating representatives from sums recovered on a claim or counterclaim: paras 63–66. A counterclaiming defendant may use such an agreement only if the counterclaim produces a financial recovery from the claimant: para 86.
5. On its proper construction, the agreement itself required a financial recovery from an opponent. Its title, the definition of “Proceeds”, its no-recovery provision and its post-termination clause all supported that conclusion. The retained shares had belonged to the client throughout, and retaining them conferred no measurable financial benefit. The absence of any mechanism for valuing the private-company shares provided further support: paras 67–83.
6. Since the solicitors had no contractual entitlement to a percentage of the shares’ value, they had no charge over the shares. The competing-priority issue arising from the second judgment did not fall for determination: para 84.

• Court of Appeal (Civil Division): Dismissed both appeals. It upheld the conclusion that the solicitors had no entitlement under the damages-based agreement. The alternative dispute about priority between charges consequently did not arise: [2022] EWCA Civ 936.
• High Court, Chancery Division: Zacaroli J held that retaining shares did not trigger payment under the agreement and that an agreement providing otherwise would be unenforceable: [2021] EWHC 1122 (Ch).
• High Court, Chancery Division: On a contrary hypothesis, Zacaroli J held that the solicitors’ equitable interest was defeated by the respondents’ charging order acquired for value without notice: [2021] EWHC 1826 (Ch).