Contingency fees or damages-based agreements (DBAs)

What changed?

From 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:

  • Lawyers could conduct litigation under conditional fee agreements (CFAs), where they would get a success fee (up to 100% of the normal fee) if the case succeeded and nothing, or sometimes a discounted fee, if it was lost (see "Conditional fee agreements (CFA s) / after the event (ATE) insurance").
  • Third parties could fund litigation in return for a share of the proceeds. This is known as third party funding, or litigation funding. Litigation funders are regulated by a voluntary code of conduct which was introduced in 2011 (see "New code of conduct for litigation funders").

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. To date the working group's recommendations have not been taken forward.

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 appear 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 suggests that if there is no recovery the lawyer can have no entitlement other than non-counsel disbursements. Therefore, if a lawyer agrees to act under a DBA this must be a full “no win no fee” agreement.

The question of whether the DBA Regulations preclude such arrangements was not initially free from controversy. Some suggested that it may be possible to have a separate agreement outside the DBA which provides for a reduced hourly rate, together with a "no win no fee" DBA. We wrote to the Ministry of Justice to point out the confusion that had been caused by the Regulations as drafted and to ask whether, as a matter of policy, the Regulations were intended to preclude partial DBAs. In response the MoJ stated that one of the requirements for a DBA to be enforceable is that "the payment is to be determined by reference to the amount of the financial benefit obtained" and that, ultimately, it will be for the court to decide whether any agreement is enforceable in light of the legislation.

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.

In fact the terms of reference for the review clarified that the government’s policy objection is only to what the report calls “concurrent hybrids”, where the two forms of retainer exist at the same time. It does not object to “sequential hybrids” where there are different types of retainer for different stages of a case.

The Civil Justice Council working group was divided on the question of whether concurrent hybrid DBAs should be permitted, contrary to current government policy: some members considered that there was no good reason to prohibit their use, and that market freedom should prevail; others considered that the case in their favour had not been proven. However, the working group recommended that the government should be encouraged to evaluate the arguments in favour of concurrent hybrid DBAs.

In relation to sequential DBAs, the group recommended that the government should clarify whether the solicitor can retain the fees payable under the non-DBA funding agreement, or whether that sum must be offset against the contingency fee under the DBA.

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 at least up to the amount of the funding contributed under the principle established in Arkin v Borchard Lines Ltd and others [2005] EWCA Civ 655.

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

What are the implications for commercial parties?

To date there has not been significant take up of DBAs in commercial cases. This has largely been attributed to difficulties with the Regulations, including the lack of flexibility in relation to hybrids.

Where commercial parties are defending claims brought under a DBA, there is the benefit that (unlike the previous position with CFAs and ATE insurance) the defendant's liability for costs is not increased by the fact the claimant has chosen to enter into a DBA. Indeed the defendant's costs liability may be decreased, if the fee agreed under the DBA is less than the amount that would have been recoverable on a traditional inter-partes costs assessment.

Third party litigation funders have developed various sorts of hybrid arrangement aimed at allowing law firms to receive part payment on an hourly basis as the case proceeds together with a share of a contingency fee in the event of success. Such arrangements offer law firms some of the benefits of contingency fee work but with a funder taking on some of the risk.

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. To date, however, the government has taken no steps in response to the report.

Note: Content up to date as at 16 January 2017

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