Article published on the future for Damages-Based Agreements

In early September the Civil Justice Council issued its report on DBAs, which makes a number of drafting and policy recommendations aimed at improving and clarifying the statutory regime governing DBAs.

Maura McIntosh, who was a member of the CJC working group, has published a post on Practical Law’s Dispute Resolution blog entitled “A future for Damages-Based Agreements? Civil Justice Council recommendations for reform”. Click here to download a copy of the post (or here for the Practical Law Dispute Resolution blog homepage).

Civil Justice Council recommendations for reform of Damages-Based Agreements (DBAs)

The Civil Justice Council has today issued its report and recommendations following its review of the regulations governing DBAs. The review was prompted by a request from the Ministry of Justice last November (see post). The working group was chaired by Professor Rachael Mulheron of Queen Mary University London and included Maura McIntosh of Herbert Smith Freehills. Continue reading

Government rules out “hybrid” Damages-Based Agreements (DBAs)

The Ministry of Justice has asked the Civil Justice Council (CJC) to review the regulations governing DBAs to consider possible improvements, but has ruled out the introduction of “hybrid” arrangements where a lawyer could combine a DBA with some other form of retainer such as hourly rates. According to the CJC’s press release issued today, the government has ruled out such arrangements as it considers they “could encourage litigation behaviour based on a low risk/high returns approach”.

The exclusion of hybrid DBAs came as a surprise to the profession when the draft regulations were published in January 2013 (see post), as there was no advance warning of the restriction and it went against the recommendations of the working party set up to consider such issues. The restriction has been widely criticised, including by Lord Justice Jackson in his keynote speech at a recent Law Society conference. Lord Dyson, Master of the Rolls and Chairman of the CJC, has expressed disappointment at the government’s decision not to permit hybrid DBAs.

The CJC working group will be chaired by Professor Rachael Mulheron of Queen Mary University London and its membership and terms of reference will be published shortly. The issues the group will consider are said to include changing the regulations so that defendants will be able to use DBAs; currently they are available only to claimants (or counterclaimants) and not defendants to an action.

To date there has been very little take-up of DBAs in commercial cases. This has been attributed, in large part, to the inability of firms to offer hybrid arrangements, though other problems with the drafting of the regulations may have contributed to their lack of use. If that is indeed the key factor, then whatever improvements are made to the regulations as a result of the current review may do little to increase the popularity of DBAs.

Draft Damages-Based Agreements Regulations have surprising implications

The government yesterday published the draft Damages-Based Agreements (DBA) Regulations 2013, which were laid before Parliament on 21 January. Subject to approval by resolution of each House of Parliament, the Regulations will come into force on 1 April this year.

As drafted, the Regulations appear to have the surprising effect of precluding 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. In other words, if a lawyer agrees to act under a DBA this must be a full "no win no fee" agreement, so that the lawyer receives no fee if the client recovers no damages. This goes against last summer's recommendations from the DBA working party (see post) which concluded that there was no reason to prevent parties instructing their lawyers under partial DBAs, analogous to "no win lower fee" arrangements that are permitted where a lawyer is instructed under a conditional fee agreement or CFA.

We understand that these sorts of hybrid arrangements are used by commercial claimants in US litigation. Such claimants will not normally agree a “traditional” contingency fee, where the lawyer gets 30% or 40% of any recovery but no fee if the claim is unsuccessful, but may agree a modified fee arrangement, with for example a discounted hourly rate combined with a smaller contingency fee or uplift in the event of success.

We had expected that the introduction of contingency fees for civil litigation would allow greater flexibility for firms wishing to meet the demands of commercial clients for more creative billing solutions. It appears, however, that the Regulations will leave little room for flexibility.

In fact, as drafted, the only payment a solicitor acting under a DBA would be permitted to receive if the claim failed would be non-counsel disbursements, which means that the solicitor would be on the hook for counsel's fees where counsel was not acting under a DBA and those fees were incurred by the solicitor as a disbursement. This seems unlikely to have been the intention of those drafting the Regulations.

50% cap on contingency fees for commercial cases

The government has given further details of its plans to introduce contingency fees, or “damages based agreements” (DBAs), for civil litigation. It has said that in non-personal injury claims (excluding employment tribunal cases) there will be a 50% cap on the amount of damages that can be taken as a contingency fee (see the new webpage launched by the MoJ to provide further information on its civil justice reforms being implemented in April 2013).

The decision to impose a 50% cap is in contrast to the recommendations of the working party set up to consider this and other issues relating to the introduction of DBAs. The working group recommended that there should not be a cap on the level of contingency fee that could be charged in commercial cases. It could not agree on whether there should be a cap for consumer / small business claims, but said that if there was to be such a cap, it should be set at 50% (see post). The government has adopted this level of cap for all non-personal injury cases (save for employment tribunal cases, where there is a 35% cap). Continue reading

Working party recommends no cap on contingency fees for commercial cases

The working party set up to consider fundamental issues relating to the planned introduction of contingency fees, or “damages based agreements” (DBAs), published its report and recommendations on Friday (3 August). The key recommendations affecting commercial clients are:

  • There should not be a cap on the level of contingency fee that can be charged in commercial cases. Opinion was split as to whether there should be a cap for consumer / small business claims – if there is to be such a cap, it was agreed that the cap should be 50%.
  • Lawyers should not be liable for adverse costs where they act under a DBA, unless they agree to indemnify the client for adverse costs liability. This is consistent with the position where lawyers act under a conditional fee agreement (CFA).
  • Partial DBAs should be permitted, where the lawyer receives for example a reduced hourly rate as the case proceeds plus a contingency fee in the event of success.
  • There should be no obligation to notify opposing parties where a lawyer acts under a DBA. The working group envisages that the current notification requirements for CFAs and after-the-event (ATE) insurance will be removed once the additional costs for such arrangements are no longer recoverable from an opponent (another change being introduced to implement the Jackson reforms). Continue reading