Candey Limited v Tonstate Group Limited & Ors.

This appeal concerned whether a damages-based agreement (DBA) can lawfully provide for a defendant (who is not a counterclaiming claimant) to pay his lawyers a percentage of sums or assets which he has successfully resisted transferring to his opponent. The court held that a DBA, as defined by s.58AA of the Courts and Legal Services Act 1990 and regulated by the Damages-Based Agreements Regulations 2013, contemplates payment only from a financial recovery obtained by the client from an opposing party. A defendant retaining assets claimed against him does not thereby "obtain" a specified financial benefit as required by the statute, and the Regulations consistently require payment to be a percentage of sums recovered by the client. Accordingly such agreements are not lawful DBAs and are unenforceable. The particular DBA in issue was also construed as applying only to recoveries from opponents, and did not entitle the solicitors to a percentage of the retained shares; consequently they had no equitable charge under the Solicitors Act 1974 over those shares.

This case arose from complex disputed litigation between shareholders and directors in the Tonstate group. The appellant solicitors (Candey Ltd) had entered into a short written agreement described as a "Damages Based Agreement" with their client, Mr Edward Wojakovski, who faced multiple claims including a claim for return of shares (the Shares Claim). The DBA purported to entitle the solicitors to 25% (later 29%) of the "Proceeds" recovered in or arising out of the proceedings, including "benefits". Following settlement of the Shares Claim by a consent order, Mr Wojakovski retained 22,500 shares (a reduced holding) and later became bankrupt. The solicitors claimed payment under the DBA calculated by reference to the value of those retained shares and sought an equitable charge under s.73 of the Solicitors Act 1974, contending their lien took priority over a charging order obtained by the respondents.

At first instance Mr Justice Zacaroli gave two judgments: (i) the April 2021 judgment [2021] EWHC 1122 (Ch) construing the DBA and holding it did not entitle the solicitors to payment from retained shares and that, if it did, it would not comply with the 2013 Regulations; (ii) the July 2021 judgment [2021] EWHC 1826 (Ch) addressing priority of charges and holding the respondents' charging order prevailed. The solicitors appealed on four grounds challenging construction, enforceability under the Regulations, an ultra vires argument, and priority of the charging order; the respondents raised, by way of Respondents' Notice, that the statutory definition of DBA cannot extend to incoming claims against a defendant.

The Court of Appeal examined (i) whether the statute and Regulations permit DBAs entered into by non-counterclaiming defendants to be paid from sums or assets they retain, (ii) the proper construction of the DBA in this case, and (iii) whether the Regulations were ultra vires. The court concluded that the statutory definition in s.58AA(3) requires the client to "obtain a specified financial benefit" (i.e. acquire something by reason of or from an opposing party) and the 2013 Regulations consistently define "payment" as part of the sum recovered by the client and limit payment to a percentage of sums ultimately recovered by the client. Parliamentary materials and the Explanatory Memorandum supported the view that DBAs were envisaged as a claimant's funding mechanism. The court therefore held that a DBA which purports to remunerate solicitors from assets a defendant merely retains after successfully resisting a claim is not a lawful DBA and is unenforceable. Applying the proper construction to the written agreement, the court found it depended on a financial recovery from opponents and did not give rise to entitlement to a percentage of the retained shares. Accordingly the appeals were dismissed.

Appeal dismissed. The Court of Appeal held that (1) a "damages-based agreement" within s.58AA of the Courts and Legal Services Act 1990 and the Damages-Based Agreements Regulations 2013 contemplates payment only from a financial recovery obtained by the client from an opposing party; (2) a defendant (who is not making a counterclaim resulting in a recoverable sum from the claimant) does not "obtain" such a financial benefit merely by retaining assets claimed against him; (3) the 2013 Regulations consistently require payment to be a percentage of sums recovered by the client and do not permit payment from assets merely retained by a defendant; and (4) on proper construction the DBA in this case required a recovery from opponents and did not entitle the solicitors to a percentage of the retained shares, so they had no enforceable charge over them.

Appeal to the Court of Appeal from two judgments of Mr Justice Zacaroli in the High Court (Chancery Division): [2021] EWHC 1122 (Ch) (April judgment on construction and Regulations) and [2021] EWHC 1826 (Ch) (July judgment on priority of charging order). Permission to appeal was granted by Lord Justice Singh.