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A future for Damages-Based Agreements? Civil Justice Council recommendations for reform

The introduction of DBAs (aka contingency fees) in April 2013 was one of the headline-grabbing aspects of the Jackson reforms. For the first time, lawyers would be able to conduct litigation or arbitration in England and Wales in return for a share of the winnings.

But there is a big difference between being able and being willing, and it soon became clear that most lawyers were not willing. As Professor John Peysner noted in his report on the impact of the Jackson reforms prepared for the Civil Justice Council Cost Forum in March 2014:

“DBAs appear to be like the Yeti: they are believed to exist in practice but hardly any sightings have been made.”

A rare breed

The lack of enthusiasm for DBAs has been widely attributed to the inability of firms to offer hybrid arrangements, which combine a DBA with some other form of retainer; for example, a reduced hourly rate as the case proceeds plus a share of damages if it ultimately succeeds. In other words, if a lawyer agrees to act under a DBA it must be a full “no win no fee” agreement. This obviously increases the level of risk for the lawyer.

The ban on hybrids resulted from the wording of the regulations governing DBAs. It came as a surprise to the profession when the draft regulations were published in January 2013. It may also have come as a surprise to the government; it is not entirely clear whether the initial exclusion of hybrids was a policy decision or an accident of drafting. At the March 2014 Cost Forum, Lord Faulks (Minister of State for Justice) said the government was considering the way forward on DBAs and hoped to make an announcement in relation to hybrids soon. This was generally interpreted as recognition that change was needed, although it obviously fell short of any commitment to permit hybrids. However, the government had clearly come down against hybrids by the time it announced the CJC review (see below).

Other drafting problems may have contributed to the unpopularity of the regulations. For instance, currently the only payment a solicitor acting under a DBA can receive if the claim fails is non-counsel disbursements. This means the solicitor is on the hook for counsel’s fees win or lose (unless counsel has agreed to act under a DBA). Further, the losing defendant, not the solicitor, gets the benefit if the costs the claimant would be entitled to recover from the defendant on a traditional basis are greater than the agreed fee under the DBA. This is because of the continued application of the indemnity principle, and is arguably something of a windfall.

Civil Justice Council review

In November 2014, the Ministry of Justice asked the Civil Justice Council to review the DBA regulations to consider possible improvements. However, it expressly ruled out the introduction of hybrids, which “could encourage litigation behaviour based on a low risk / high returns approach”.

The CJC working group was chaired by Professor Rachael Mulheron of Queen Mary University London and I was pleased to be included as a member. The group met six times to discuss drafting and policy issues. Its report, with 45 recommendations, was published in September 2015.

Concurrent vs sequential hybrids

The working group’s terms of reference clarified that the government’s policy objection to hybrid arrangements applies only where the two forms of retainer (the DBA and, for example, hourly rates) exist at the same time. The report refers to this as “concurrent hybrids”. The government does not object to “sequential hybrids” where there are different types of retainer for different stages of a case.

However, it is not clear where the boundaries lie. Could a firm agree an hourly rate up to but not including trial, and then a DBA for the trial work? From a policy perspective it is difficult to see how that is better than combining a reduced hourly rate throughout the case with a contingency fee on success.

Another question: once the DBA kicks in, can the firm retain the hourly rate fees? Or does it have to swap its “bird in the hand” for the possibility of two (or more) in the bush? If a swap is necessary, then this doesn’t really mitigate the firm’s risk: if it agrees a DBA, it has to be the “nuclear option” of a no win, no fee deal. This is not, in reality, different forms of retainer existing sequentially, but rather one form entirely displacing the other.

It is also unclear whether separate forms of retainer could be agreed for separate stages of the case in the sense of separate legal tasks, or perhaps separate Precedent H phases. For example, could there be a DBA for the whole case save for the disclosure and witness statement phases, which would be charged on hourly rates? Similarly, it is unclear whether you can agree a DBA for the claim and hourly rates for the counterclaim. Neither of these is exactly “sequential”, but they appear to be permitted by the government’s draft regulations. This is because the draft regulations permit a DBA for “part” of the proceedings without defining what is meant by a “part”.

To clarify these issues, the working group recommended that the regulations need to:

  • Define what is meant by a “part” of proceedings to which a DBA can apply.
  • Clarify whether lawyers can retain the benefit of the non-DBA retainer, regardless of whether anything is ultimately payable under the DBA.

Why not concurrent?

Although the CJC was not asked to review the government’s policy on concurrent DBAs, the working group considered this and a number of other policy issues as part of the CJC’s ongoing function of keeping the civil justice system under review. Unfortunately the working group was unable to reach consensus on whether concurrent hybrid DBAs should be permitted, contrary to 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. The working group recommended that the government should be encouraged to evaluate the arguments in favour of concurrent hybrid DBAs.

To my mind, the government’s policy stance against concurrent hybrids is very difficult to square with other aspects of its policy, including its position on sequential hybrids and third party litigation funding. Funders offer a form of “hybrid DBA”. Here, the lawyer effectively trades part of the contingent DBA payment for a guaranteed ongoing fee from the funder. Such arrangements do not offend government policy even though they are aimed at achieving precisely the same result as a concurrent hybrid DBA from a lawyer’s perspective. The lawyer will be paid a (lower) fee if the action is lost and a percentage of winnings if the action is won. The only difference is that the client is not given the same flexibility. It seems the client can only have a full “no win, no fee” DBA. He or she cannot negotiate a lower contingent DBA payment in return for paying a guaranteed ongoing fee to the lawyer. It is therefore difficult to see any policy reason to ban concurrent hybrids but permit funder hybrids.

Other recommendations

Some other important points coming out of the report and recommendations include:

  • DBAs should be available to defendants, as per the government’s draft 2015 DBA regulations.
  • It should be open to a solicitor and client to agree the trigger for payment under the DBA. For example, this could be from securing a judgment, or securing cash or other “money’s worth”. That is in contrast to the current position, where payment can only be made out of sums actually recovered (which obviously will not work for defendant DBAs, if introduced).
  • The regulations should clarify whether the DBA fee can be calculated according to the result of the case at first instance, or whether it will always be conditional on the outcome of any appeal.
  • Counsel’s fees should be treated as an expense which is outside the 50% DBA cap (unless Counsel is acting under a DBA). This would mean that solicitors are no longer on the hook for disbursements for counsel’s fees if the case is lost.
  • The regulations should clarify whether or not lawyers acting under a DBA are immune from adverse costs orders (so-called Hodgson immunity, which applies to CFAs).
  • Most members of the working group were in favour of moving to a “success fee” model of DBA (so that the DBA payment would be in addition to recoverable costs, rather than the two being offset against one another). This would have the advantage of reversing the current “windfall” for a defendant where recoverable costs exceed the DBA payment. However, the current 50% DBA cap might need to be reduced if the success fee model is implemented.
  • On balance, the indemnity principle should be abolished insofar as it relates to DBAs.

Next steps

The Master of the Rolls has welcomed the working group’s report, and has urged the government to consider amending the regulations to help promote confidence in DBAs and encourage their greater use.

In my view, very significant amendments are needed, including addressing the issues relating to sequential and concurrent hybrids, if DBAs are to play a major part in the funding of commercial litigation. The ball is now firmly in the government’s court.

Herbert Smith Freehills Maura McIntosh

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