Damages Based Agreements – is this seed of litigation funding finally starting to flower?

27 Nov 2017

Since April 2013, contingency fee agreements, referred to as Damages Based Agreements (DBAs), became legal in all contentious business, other than criminal and family proceedings. This provided parties to litigation with an alternative risk sharing arrangement to Conditional Fee Agreements (CFAs). So, nearly 5 years on, where do DBAs fit within the litigation landscape?


Putting these arrangements into context, a CFA is an agreement with a representative that provides that its fees and expenses will only be payable if the client wins a case, usually with a success fee. It is also known as a “no win, no fee” agreement, or, for partial CFAs, a “no win, low fee” agreement. When Lord Justice Jackson recommended that lawyers should also be permitted to enter into contingency fee agreements in civil litigation generally, DBAs were the outcome of his reforms in 2013.   


In terms of civil litigation, a DBA is a form of "no win, no fee" arrangement between a representative and a client, which provides that the client will make a payment to the representative if the client obtains "a specified financial benefit" (usually damages paid by the losing side). The amount of the payment will be determined as a percentage of the compensation received by the client. If the client is unsuccessful, the representative will not be paid for the work done under the DBA.


CFAs and DBAs are both risk sharing agreements. The basic difference between a CFA and a DBA is that under a CFA, a client will be liable to pay a fee if it wins its case, by reference to the costs incurred with its lawyer. The success fee will be set without reference to the amount recovered. Under a DBA, if there is success a client will pay a sum that is referable to the amount recovered, which will be the source of the fee payment. The higher the recovery, the higher the fee. A DBA will focus on the degree of success of the recovery, whereas a CFA will not.


Accordingly, for clients that may have limited resources, or the desire not to commit significant funds to litigation or a wish for reward to be based upon the degree of success, a DBA may be suitable. This may be the case where a lawyer’s costs of progressing a case may well be very high in proportion to the damages that may be recovered, leading potentially to a higher fee under a CFA by comparison.


If a case proceeding under a DBA is successful, the calculation of the amount due under that DBA will need to take account of VAT and disbursements, such as the fees of counsel, experts and court fees. It is possible for counsel to enter into a related DBA with a lawyer, but experts cannot do so. It will also be necessary to take into account any costs that have been paid or are payable by another party to the proceedings by agreement or order. These will be set off against the DBA payment. This reflects the “loser pays” costs regime in the UK, which does not follow the basic US contingency fee model, where each party bears their own costs. Lawyers who have entered into a DBA will therefore still need to do costs budgeting and to record the hours spent on a matter for the purpose of any assessment when recovering costs from the losing side. These factors may have been seen by lawyers as unattractive and resulted in DBAs not immediately catching on.


There are caps on the sums that can be recovered, so that for cases other than personal injury cases a DBA must not provide for a payment (including VAT) that is more than 50% of the "sums ultimately recovered" by a client. (For a personal injury case, it is 25%). In the recent case of Bolt Burdon Solicitors v Tariq, the Court of Appeal upheld a decision that a DBA containing an agreement to pay 50% of the sum recovered was fair and reasonable. In that case, the sum of the law firm’s time costs would have yielded a much lower figure, but the court upheld the bargain made, where the client had sought a risk sharing agreement based upon the degree of success. The caps only apply to claims or proceedings at first instance; there is no cap on the percentage of damages that can be taken on appeal.


It is possible for a lawyer and client to consider a staged DBA, whereby the percentage payable varies depending on the stage at which the case is successfully concluded (increasing the percentage the longer the case proceeds, given the increasing amount of work that will have been carried out on the client's behalf). The maximum percentage would still have to be within the cap.


If a client loses its claim, the law firm will not receive any payment. However, the client will usually still be responsible for paying expenses (unless the firm has agreed otherwise). Importantly, a client on a DBA will still be liable for adverse costs in the event of a claim failing. It may choose to take out After the Event (ATE) insurance to cover these adverse costs. However, in the case of ATE insurance policies entered into from April 2013, it is no longer possible to recover the ATE insurance premium from the losing side and the client will have to pay for the premium.


The so-called indemnity principle also applies to DBAs. This means that under the “loser pays” costs regime, if the claimant's lawyer is entitled to a contingency fee under the DBA that is less than the amount of recoverable costs, the recoverable costs from the losing defendant will be limited to the amount of the contingency fee.


It is possible for defendants in civil litigation to consider DBAs, if they have a counterclaim that they wish to bring, putting them in the position of a “reverse” claimant. It will be for the lawyer to weigh up the merits of claims and counterclaims as part of its due diligence in considering whether to enter into a risk based agreements such as a DBA with its client. The risk of non-recovery from the other party will also be a vital consideration.


Litigation funders have an interest in this area and have been offering alternative solutions, whereby a law firm that has entered into a DBA with its client may enter into a separate agreement with a funder to cover the lawyers' work in progress and costs in return for a share of the contingency fee. This has led to an increase in referrals to litigation funders by lawyers considering a DBA with their client.


It is fair to say that DBAs have taken some stuttering steps in the early years. The Regulations are not considered to be all-encompassing and the sanction of non-compliant DBAs being unenforceable has been a further disincentive. There remain some difficulties in understanding exactly how DBAs will work in practice. The Law Society has suspended work on a model DBA and it advises that, until the DBA Regulations are amended, care should be taken when entering into these agreements.


Be that as it may, DBAs are starting to gain some traction and, if properly understood and followed, can provide clients with an alternative method of funding litigation both profitably and with reduced risk in comparison to more conventional arrangments.

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