What changed?

Since 1 April 2013 contingency fees, or damages-based agreements (DBAs), have been permitted for contentious work (ie litigation or arbitration proceedings) in England and Wales. This means that lawyers can conduct litigation and arbitration in this jurisdiction in return for a share of any damages.

Before 1 April 2013 such arrangements were not permitted for contentious work in England and Wales, though they were permitted for employment and other tribunal work (which is technically considered non-contentious business). In contrast:

How was the change implemented?

Section 45 of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) amended section 58AA of the Courts and Legal Services Act 1990 to permit DBAs. Certain requirements that DBAs must meet in order to be enforceable are set out in the Damages-Based Agreements Regulations 2013.

Why were DBAs introduced?

Lord Justice Jackson recommended the introduction of contingency fees in part because he considered it desirable that as many funding methods as possible should be available to litigants, particularly once CFA success fees and ATE insurance premiums would no longer be recoverable from the losing party (see “Conditional fee agreements (CFA s) / after the event (ATE) insurance”).

He also saw particular force in the freedom of contract argument: if the client wishes to enter into a contingency fee agreement with its lawyer, it should be free to do so.

Can DBAs be used by defendants?

Given that the DBA Regulations define the payment under the DBA as part of the sum recovered by a party to the proceedings, DBAs are only available to claimants (or counterclaimants) and not defendants to an action.

In September 2015 the Civil Justice Council issued a report and recommendations following a review of the regulations governing DBAs undertaken at the request of the Ministry of Justice. The working group was chaired by Professor Rachael Mulheron of Queen Mary University London and included Maura McIntosh of Herbert Smith Freehills. The report made a total of 45 recommendations, including proposing a number of technical amendments aimed at clarifying the regulations, as well as changes to allow defendants to use DBAs.

See also the reference below to a further review of the DBA Regulations conducted in 2019. This recommended that the DBA percentage payment would be applied to the “financial benefit” received by the client, rather than (necessarily) a sum recovered by the client, and therefore DBAs would be available to defendants.

To date however no such changes have been made.

Is the contingency fee recoverable from a losing defendant?

The defendant will not necessarily have to pay the full amount of the contingency fee if the claim is successful. Costs are recoverable on what is known as the “Ontario model”, since it is based on the system that operates in Ontario, Canada. This means that:

  • The claimant’s recoverable costs will be assessed in the conventional way – ie how many hours were reasonably spent on the case, what is a reasonable rate for those hours, and (where costs are assessed on the standard rather than the indemnity basis) do the costs meet the test of proportionality (see “Proportionality”).
  • If the contingency fee agreed with the lawyer is higher than the figure arrived at through that exercise, the claimant will have to pay the shortfall out of the damages.

Accordingly, the existence of a contingency fee arrangement will not increase the amount of the defendant’s costs liability.

It may however decrease the defendant’s costs liability. The indemnity principle applies to DBAs, so that the claimant cannot recover more in costs than it is liable to pay its own lawyer. Therefore, if the agreed contingency fee is lower than the figure arrived at through a traditional costs assessment, the defendant will only have to pay the lower amount.

To illustrate, say a claimant has agreed a contingency fee of 30% with its lawyer and is awarded damages of £1 million. The claimant owes its lawyer £300,000.

  • If the costs recoverable from the defendant are assessed at £200,000, then the claimant has to pay its lawyer the excess £100,000 out of its damages – i.e. the claimant keeps £900,000 of the damages.
  • If the assessed costs are £400,000 then the defendant only has to pay the lower contingency fee figure of £300,000 due to the indemnity principle, and there is nothing further for the claimant to pay its lawyer.

The fact that the indemnity principle applies to DBAs also means that if a claimant’s DBA is unenforceable as a result of a breach of the applicable legislation or regulations, the defendant will not be liable for costs if the claim against it is successful.

What if the defendant does not pay the costs it is ordered to pay?

Where the claimant’s solicitor is acting under a DBA, the DBA Regulations appear to impose on that solicitor the enforcement / credit risk in recovering costs from the defendant. This is because, under Regulation 4, the client can only be required to pay the solicitor net of amounts paid or payable by another party.

Arguably, this also means that the solicitor cannot require the client to pay until recoverable costs have been assessed or agreed between the parties, which can take some considerable time.

Is there a cap on the level of contingency fee?

Contingency fees for most types of claim are subject to a 50% cap. In employment tribunal cases (where contingency fees were already permitted) the previous 35% cap continues to apply. Personal injury and clinical negligence claims are subject to a 25% cap.

The caps operate differently for the different types of claim:

  • The 50% cap is inclusive of VAT and counsel’s fees (where these are incurred by the solicitor as a disbursement) but not other disbursements.
  • The 35% cap for employment tribunal cases is inclusive of VAT but not counsel’s fees or other disbursements.
  • The 25% cap for personal injury cases is inclusive of VAT and applies only to damages excluding future pecuniary loss. It seems that the cap applies to the total level of the contingency fee that the lawyer can charge (including amounts recovered from the defendant), in contrast to the initial draft of the DBA regulations under which the cap appeared to operate on the net fee that could be deducted from the client’s damages (after deducting amounts recovered from the defendant).

The effect of exceeding the applicable cap is to render a DBA unenforceable against the client, which means that (under the indemnity principle) the defendant will have no liability for costs.

Are partial DBAs permitted?

The DBA regulations appeared to preclude partial or “hybrid” DBAs, whereby a lawyer could receive for example a reduced hourly rate as the case proceeds which is payable win or lose, plus a contingency fee in the event of success. Regulation 4 provides that a DBA cannot require the client to pay anything other than the “payment”, which is capped at 50% of any recovery, and non-counsel disbursements. This appeared to suggest that, if there was no recovery, the lawyer could have no entitlement other than non-counsel disbursements.

In setting up the Civil Justice Council review of DBAs, referred to above, the government made it clear that it ruled out the introduction of “hybrid” arrangements which combine a DBA with some other form of retainer such as hourly rates (see Government rules out “hybrid” Damages-Based Agreements (DBAs) – despite widespread criticism of the restriction including by Lord Justice Jackson and other senior judiciary, and the fact that it has widely been blamed for the slow take-up of DBAs. And in fact the terms of reference for the review clarified that the government’s policy objection was only to what the report calls “concurrent hybrids”, where the two forms of retainer exist at the same time. It did not object to “sequential hybrids” where there are different types of retainer for different stages of a case.

However, the reasoning of the majority of the Court of Appeal in Zuberi v Lexlaw Ltd [2021] EWCA Civ 16 means that the DBA Regulations do not in fact preclude hybrid DBAs – whether “concurrent” or “sequential”: see “Court of Appeal confirms regulations governing Damages-Based Agreements (DBAs) do not preclude terms providing for payment of time costs on termination, nor do they preclude hybrid arrangements“. (This decision also clarified the position relating to termination of DBAs.)

Are lawyers acting under a DBA liable for adverse costs?

The DBA Regulations are silent as to whether lawyers will be liable for adverse costs where they act under a DBA. Lawyers acting under a CFA are not liable for adverse costs, unless they agree to indemnify the client for its adverse costs liability. In contrast, third party funders are potentially liable for adverse costs.

Does the opponent have to be notified of the existence of a DBA?

There is no obligation to notify an opponent of the existence or terms of a DBA, and indeed the current notification requirements in respect of CFAs and ATE insurance policies no longer apply where the additional costs resulting from such arrangements are no longer recoverable from the opponent.

This is consistent with the position for third party funders, where there is generally no obligation to notify the opponent or the court of the funding arrangement.

Can DBAs be used in collective actions?

DBAs are prohibited for the form of collective action introduced in October 2015 for competition law claims in the Competition Appeal Tribunal. This is intended to act as a safeguard against the risk of frivolous or unmeritorious actions arising from the introduction of an opt-out regime.

Potential further reform

As noted above, the Civil Justice Council’s report and recommendations following its review of the regulations governing DBAs made a number of recommendations, including technical amendments aimed at clarifying the regulations. The Master of the Rolls welcomed the report, urging the government to consider amending the regulations to help promote confidence in DBAs and encourage their greater use.

On 7 February 2019 the government published the results of its post-implementation review of Part 2 of LASPO, the legislation implementing the introduction of DBAs (as well as other aspects of the Jackson reforms). The review noted that almost all respondents, across the spectrum, agreed that DBAs are rarely used, and that the DBA Regulations should be redrafted to ensure DBAs are a more viable funding method for a greater number of cases. Particular concerns said to be raised about the regulations included: the lack of payment of a reasonable sum for work done on termination; uncertainty around early termination and the indemnity principle; uncertainty around whether “sequential” hybrid DBAs were permitted; and the payment of counsel’s fees. Most respondents were said to have endorsed the conclusions and recommendations of the Civil Justice Council’s Working Group.

An independent review of the drafting of the DBA Regulations was undertaken by Professor Mulheron and Nicholas Bacon QC in 2019. They presented a proposed redrafted version of the DBA regulations for consultation in October 2019: see “Damages-based agreements (DBAs): promising proposals for reform”. Their supplemental report was provided to the Ministry of Justice in June 2021 but to date has not been published.

However, some of the uncertainties identified in the post-implementation review were addressed by the Court of Appeal in the Zuberi v Lexlaw Ltd decision referred to above: see “Court of Appeal confirms regulations governing Damages-Based Agreements (DBAs) do not preclude terms providing for payment of time costs on termination, nor do they preclude hybrid arrangements“.

Note: Content up to date as at 10 June 2022

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