High Court confirms Damages-Based Agreements (DBAs) cannot be used by defendants

In a recent decision, the High Court has confirmed that a Damages-Based Agreement, or DBA, will not be enforceable if it purports to entitle the legal representative to be paid a percentage of a benefit retained by a defendant to litigation, as opposed to a sum recovered in respect of the claim: Tonstate Group Ltd v Wojakovski [2021] EWHC 1122 (Ch).

The decision leaves open the question of whether a DBA will be enforceable if the legal representative’s percentage payment is calculated by reference to the value of some benefit other than money that has been recovered in the litigation.

The decision is not surprising, in that the Damages-Based Agreements Regulations 2013 have generally been understood to preclude the use of DBAs by defendants, and potentially also where the litigating party is to receive a benefit other than money. One of the proposals the Civil Justice Council was asked to consider in its 2015 government-mandated review of the DBA Regulations was to change the Regulations “so that defendants will be able to use DBAs, by widening the application of the regulations where the party receives a specified financial benefit (rather than restricting them to receiving a payment)”, and the government put forward a draft revised set of regulations which included amendments to implement this change. The working group’s recommendations included improvements to the drafting of this provision. However, these proposals were never taken forward.

A proposal to apply the DBA percentage payment to the “financial benefit” received by the client, rather than (necessarily) a sum recovered by the client, was also put forward in 2019 following an independent review of the DBA Regulations by Professor Rachael Mulheron and Nicholas Bacon QC. We understand that their supplemental report, prepared following a consultation on the proposals, will be submitted to the Ministry of Justice in the near future. Continue reading

Commercial litigation podcast series – Episode 6: General update

In this sixth episode of our series of commercial litigation update podcasts, we briefly outline the impact of Brexit on disputes and dispute resolution clauses, focusing on practical points for commercial parties. We also look at some developments on privilege and funding, as well as an update on witness evidence reform, and finally we consider the outlook for competition class actions, particularly in light of the Supreme Court decision in the Mastercard case shortly before Christmas. This episode is hosted by Anna Pertoldi, a partner in our litigation team, who is joined by Maura McIntosh, a professional support consultant, and Daniel Woods, a senior associate.

Our podcast is available on iTunesSpotify and SoundCloud and can be accessed on all devices. A new episode will be released every couple of months. You can subscribe and be notified of all future episodes.

Below you can find links to our blog posts on the developments and cases covered in this podcast:

Anna Pertoldi
Anna Pertoldi
Partner
+44 20 7466 2399
Maura McIntosh
Maura McIntosh
Professional support consultant
+44 20 7466 2608
Daniel Woods
Daniel Woods
Senior associate
+44 20 7466 2403

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

The Court of Appeal has confirmed that a Damages-Based Agreement, or DBA, can include a clause which entitles the legal representative to payment on a time cost basis if the DBA is terminated before the conclusion of the litigation: Zuberi v Lexlaw Ltd [2021] EWCA Civ 16.

DBAs, otherwise known as contingency fees, are a form of retainer in which the legal representative charges a percentage share of recoveries if the claim succeeds. They were introduced as part of the Jackson reforms in 2013 but have not been widely used, in large part due to a lack of clarity in the 2013 DBA Regulations which govern the regime.

One of the areas that has caused some confusion is whether a DBA can include a clause providing for payment on some basis other than a share of recoveries (for example, hourly rates) if the DBA is terminated, or whether including such a term will render the DBA invalid. The present decision helpfully (and unanimously) confirms that such a term is not objectionable and will not affect the validity of the DBA.

A further issue is that the DBA Regulations appear to preclude so-called hybrid DBAs, which combine a percentage share of recoveries on success with some other form of payment, eg reduced hourly rates as the case proceeds. This is because of Regulation 4(1), which provides that a DBA “must not require an amount to be paid by the client other than” the DBA “payment” (that is, the lawyer’s percentage share of damages) and the expenses incurred by the lawyer, in each case net of sums recovered from the losing opponent.

The apparent prohibition on hybrid DBAs came as a surprise to the profession when the regime was introduced in 2013 and has been widely criticised over the years, including by members of the senior judiciary. The government subsequently clarified that its policy objection was to “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 DBA Regulations were never amended to clarify the position (despite the recommendations of a Civil Justice Council working group in 2015). A subsequent review of the DBA Regulations by Prof Rachael Mulheron and Nicholas Bacon QC in 2019 recommended that a form of hybrid DBA should be permitted, with the lawyer able to recover a reduced fee (up to 30% of irrecoverable costs) if the claim failed. The supplementary report in that review was expected in 2020 but has been delayed and is expected early this year.

Against that background, it is noteworthy that the reasoning of the majority of the Court of Appeal in the present case means that the DBA Regulations do not in fact preclude hybrid DBAs – whether “concurrent” or “sequential”. On that basis, the DBA regime offers greater flexibility than previously thought for lawyers and sophisticated commercial clients to agree fee agreements which allow the lawyer to share in both the risk and reward of the litigation. This increased flexibility, together with the new clarity on termination provisions, seems likely to lead to a broader take-up of DBAs. Continue reading

Article published – Damages-based agreements and termination: a small chink of light

Damages-based agreements (or DBAs), under which a lawyer can receive an agreed percentage of any damages in the event of success, were introduced to civil litigation in England and Wales in 2013 as part of the Jackson reforms. But the take-up of DBAs has been slow, in large part due to a lack of clarity in the Damages-Based Agreements Regulations 2013 which govern the regime.

One of the areas that has caused some confusion is whether a DBA can include a clause providing for payment on some other basis (for example, hourly rates) if the DBA is terminated, or whether including such a term will render the DBA invalid. The High Court has recently given judgment upholding a DBA despite the presence of such a clause, in Lexlaw Ltd v Zuberi [2020] EWHC 1855 (Ch).

Maura McIntosh has published a post on Practical Law’s Dispute Resolution blog which considers the decision and the way forward for DBA reform. Click here to read the post (or here for the Practical Law Dispute Resolution blog homepage).

Article published – Redrafted DBA Regulations: a promising basis for reform

As explained in this previous post, a proposed redrafted version of the regulations governing Damages-Based Agreements (DBAs) has recently been published, and addresses many of the key problems with the current regulations, the DBA Regulations 2013.

Maura McIntosh has published a post on Practical Law’s Dispute Resolution blog which welcomes the redraft of the regulations and suggests some further amendments, in particular to the provisions allowing hybrid DBA arrangements (which combine a DBA with some other form of funding). Click here to read the post (or here for the Practical Law Dispute Resolution blog homepage).

Damages-based agreements (DBAs): promising proposals for reform

A proposed redrafted version of the regulations governing DBAs was presented yesterday at a conference at The Old Hall, Lincoln’s Inn. The 2019 draft regulations have been prepared by Professor Rachael Mulheron and Nicholas Bacon QC, who were invited by the Ministry of Justice to conduct an independent review of the 2013 DBA Regulations in light of the government’s recognition that they “would benefit from additional clarity and certainty” (see this post). The 2019 draft regulations and explanatory memorandum, and some worked spreadsheets for illustrative purposes, are available here.

The 2019 draft regulations address the key problems with the 2013 Regulations, which have been widely criticised. Many of the issues with those regulations were identified in a review conducted by a Civil Justice Council working group chaired by Prof Mulheron in 2015 (see this post) but the recommendations made by that working group were never implemented. It is hoped that the 2019 draft regulations will receive a different reception, as the Ministry of Justice has indicated that it will give careful consideration to the proposals, though it has re-emphasised the importance of ensuring that any amended DBA regime includes proper protections for clients to avoid any potential for abuse.

Some of the main changes proposed in the 2019 draft regulations are set out below:

  • “Hybrid” DBAs are permitted, so that the lawyer can recover a reduced fee (up to 30% of irrecoverable solicitor and counsel costs) if the claim fails. This is a welcome change, as the previous ban on hybrids was seen as a significant factor in the low take-up of DBAs and reduced the flexibility for lawyers to meet client demands for alternative fee arrangements.
  • Costs recovery is based on the “success fee” model, rather than the so-called Ontario model, which means that recoverable costs are paid to the lawyer in addition to the DBA percentage payment (rather than being set off against the DBA payment as currently). This is likely to make DBAs more feasible in lower value cases and removes the potential for a “windfall” reduction in the opponent’s costs liability.
  • The quid pro quo for the introduction of the success fee model, where recoverable costs are added to the DBA percentage payment, is a recommendation to reduce the maximum percentage from 50% to 40% (in non-personal injury cases – a lower cap applies in the personal injury context).
  • The DBA percentage payment is applied to the “financial benefit” received by the client, rather than (necessarily) a sum recovered by the client. This means that DBAs should be available in a broader range of claims, such as those involving recovery of a valuable asset rather than damages, and also for defendants based on the financial benefit represented by avoiding a potential liability.
  • There is flexibility for the lawyer and client to agree terms regarding payment where the DBA is terminated – a point that is far from clear in the 2013 DBA Regulations (see this post on Practical Law’s Dispute Resolution Blog). The default position under the draft regulations is that the lawyer can charge costs, expenses and counsel’s fees if the client terminates, or if the lawyer terminates where the client has behaved unreasonably – but that is subject to alternative terms being agreed in the DBA.
  • The draft regulations preclude the possibility of entering into DBAs for representative actions under CPR 19.6 which proceed, in effect, on an opt-out basis. The aim is to achieve consistency with the position in relation to “opt-out” class actions in the Competition Appeal Tribunal, as DBAs are prohibited in that context.

Feedback on the draft regulations is requested by 15 November 2019. We will be reviewing the draft regulations in greater detail and feeding into that process.

Anna Pertoldi
Anna Pertoldi
Partner
+44 20 7466 2399
Maura McIntosh
Maura McIntosh
Professional support consultant
+44 20 7466 2608
Jan O'Neill
Jan O'Neill
Professional support lawyer
+44 20 7466 2202

Government accepts need for greater clarity in regulations governing damages-based agreements

The government has today published the results of its post-implementation review of the key legislation that implemented the costs and funding aspects of the Jackson reforms in April 2013: Part 2 of the Legal Aid, Sentencing and Punishment of Offenders Act 2013 (LASPO). The review includes the introduction of damages-based agreements (or DBAs), as well as the removal of recoverability for conditional fee agreement (CFA) success fees and after-the-event (ATE) insurance premiums.

The government’s conclusion is that, on balance, the LASPO Part 2 reforms have been successful against their objectives, including reducing costs, reducing the number of unmeritorious cases, and promoting access to justice at proportionate cost.

However, in relating to DBAs, the government accepts that the DBA Regulations 2013 “would benefit from additional clarity and certainty”. The review notes that almost all respondents, across the spectrum, agreed that DBAs are rarely used, and that the 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 include: 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 are permitted (where a DBA and some other form of retainer are combined for different stages of the case, rather than concurrently); and the payment of counsel’s fees. Most respondents are said to have endorsed the conclusions and recommendations of the Civil Justice Council’s Working Group on DBAs, chaired by Professor Rachael Mulheron, which produced a detailed report on these issues in 2015 (see this post).

Encouragingly, the report states that an independent review of the drafting of the regulations is being undertaken by Professor Mulheron and Nicholas Bacon QC, and that the government will give careful consideration to the way forward in the light of their report, which is expected later in 2019.

What is not clear, however, is whether the government will give further consideration to issues of policy, as well as drafting, for example in relation to permitting hybrid DBAs – a reform which the review notes was strongly supported by many commercial litigators, as well as by Sir Rupert Jackson. However, it also notes that some commercial lawyers cautioned against allowing hybrids DBAs. The government’s current view on the issue is not expressed, though there is a general comment in relation to DBAs that the government “needs to exercise caution to avoid creating unintended consequences”.

Article published – Damages-Based Agreements: A chance to make them work?

The government has recently launched its post-implementation review of the key legislation that implemented the Jackson reforms, including the introduction of damages-based agreements (or DBAs), back in April 2013: Part 2 of the Legal Aid, Sentencing and Punishment of Offenders Act 2013 (LASPO). The review includes a stakeholder conference held by the Civil Justice Council on 30 June and an online survey to give those affected by the reforms an opportunity to make their views known.

The MOJ’s initial assessment of the reforms, published in advance of the CJC conference, recognises that there has been some criticism of the current DBA regulatory regime, which is widely blamed for the perceived low take-up of this method of funding.

Maura McIntosh has published a post on Practical Law’s Dispute Resolution blog which considers the post-implementation review and the views expressed at the CJC conference, specifically focussing on the issues relating DBAs and how they can be addressed. Click here to read the post (or here for the Practical Law Dispute Resolution blog homepage).

Lord Justice Jackson urges extension of his reforms to insolvency proceedings

In a lecture delivered on 16 October, Lord Justice Jackson has argued the case in favour of bringing insolvency litigation into line with other types of civil litigation, where CFA success fees and ATE insurance premiums are no longer recoverable from losing opponents: see the 2015 Mustill lecture “The Civil Justice Reforms and Whether Insolvency Litigation Should Be Exempt”.

When the Jackson reforms were implemented in April 2013, the government announced that there would be a two year delay for insolvency litigation, which meant that the pre-Jackson regime of recoverable success fees and ATE premiums would continue for proceedings brought by liquidators, administrators, trustees in bankruptcy, and companies in liquidation or administration. The exception was due to end in April 2015, and that was reported to be the government’s intention as recently as September 2014 (see post).

However, in February this year, following lobbying by the Association of Business Recovery Professionals concerned at the impending end to the insolvency exception, the government announced that the exception would continue “for the time being” (see post). The announcement stated that the government would consider the appropriate way forward and set out further details later in the year. To date, we have seen no further indication of government policy on the issue.

Continue reading

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).