The single potential benefit of damages-based agreements (DBAs) is that it is a form of out and out contingency fee agreement (see also Part 1), that is taking a percentage of damages, which is available for contentious work, and thus can be used once proceedings have been issued, in contrast to a contingency fee agreement under section 57 of the Solicitors Act 1974, which cannot be used once proceedings have been issued.
It also allows for one agreement to be used from the moment the client comes in until the case is resolved, in contrast to the Underwoods Method, which involves a contingency fee agreement, a bridging agreement and a conditional fee agreement (CFA), and which also involves the fact that, under a CFA, you cannot just take a straight percentage, but rather the lawyer’s bonus for taking the risk of not getting paid is calculated by reference to an uplift on ordinary costs. I deal with conditional fees generally in the third part of this blog.
If it was as simple as that, then I would advise using DBAs all the time, but in fact I advise never using them.
There are two central problems which mean that almost no DBAs have been used since their inception in civil proceedings in 2013; they are compulsory if working on a contingency base in employment tribunal matters.
Firstly, credit must be given to the client against the contingency fee for all costs recovered from the other side, which is not the case with a contingency fee agreement, and is not the case with a CFA, where the risk-based element, that is the success fee, is specifically not recoverable from the other side, and so there can never be any costs to set off against the full success fee chargeable to the client.
Under DBAs, but not contingency fee agreements in personal injury and other civil work, there are statutory caps on the percentage damages to be charged, and these are:
- Personal injury: 25%.
- Employment: 35%.
- Other civil work: 50%.
All of these percentages include VAT, and in any civil case that goes the distance, or anywhere near the distance, the costs recoverable from the other side are likely to exceed 50%, and therefore the client pays nothing, and the solicitor gets not a single penny for taking the risk of no pay in the event of defeat. Thus, the solicitor is worse off in two ways as compared with charging by the hour win or lose.
The first and obvious one is that the solicitor does not get paid in the event of defeat, but the second one is that even on victory and having taken the risk of getting no fee on defeat, the solicitor earns less than on the traditional hourly rate, win or lose. This madness is known as the Ontario principle. The second main, and related, problem is that the indemnity principle applies, and therefore the recoverable costs from the other side are limited to the amount charged in the DBA, which is itself limited by Parliament.
Let us take a civil claim worth, say, £100,000 in damages and which is one. Let us say that the recovered costs are £60,000 and the unrecovered solicitor and own client costs are £15,000.
Under the old-fashioned hourly rate, win or lose, basis, the solicitor will charge £75,000 costs as follows:
- Recovered costs: £60,000.
- Unrecovered costs payable by client: £15,000.
- Total: £75,000.
Consequently, the client receives £85,000 in the damages of £100,000 less the unrecovered costs payable by the client of £15,000.
The client will receive £100,000 damages as the indemnity principle limits recoverable costs to £50,000 and so that is all that the solicitor can charge, and as the whole sum is recovered from the other side, the client pays nothing at all. Thus, the solicitor gets £50,000, rather than £75,000, even though the solicitor has taken all of the risk. The client who has taken no risk in relation to its own lawyer’s fees, gets the full £100,000.
You could not make it up.
Damages-based agreements: still never use them
Leave to appeal granted by Court of Appeal
The Court of Appeal has now given permission to appeal against the decision set out below. In granting permission, Lloyd LJ stated:
“Although the purposive interpretation arrived at by the judge seems more likely than not to prevail in the end, the appellant’s construction is arguable, and the issue is of sufficient general importance to merit consideration by the full court.”
In Lexlaw Ltd v Zuberi, the Chancery Division of the High Court held that a DBA which required the client to pay for time and expenses to date if the client terminated the agreement, was a valid agreement under the Damages-Based Agreements Regulations 2013.
Here, the client sought to terminate the agreement. The claim settled and the claimant firm of solicitors sought to recover its fees based on that settlement, under the usual principles of DBAs. The client argued that as the agreement provided for “an amount to be paid by the client” which was other than the payment calculated by reference to regulation 4(1) of the 2013 Regulations, it was unenforceable.
The court rejected that argument.
The decision confirms what most of us thought anyway, that is that if the agreement is terminated by the client before a right to share in any proceeds has arisen, then the solicitor can charge for work done to date on any basis specified in the agreement, including the hourly rate.
Regulation 4 limits a solicitor’s charge to an agreed percentage of damages, not to exceed the permitted cap, plus expenses recovered from the other side.
The Chancery Division held that it was an obvious consequence of preventing representatives getting their time costs on a client determination that those representatives would be reluctant to enter into DBAs and that would be contrary to the purpose of making such agreements lawful, so as to facilitate access to justice.
That would have the knock-on effect of creating less choice for clients wanting to bring civil litigation claims.
This is a welcome and sensible decision, but I must admit I had always assumed that this must be the case, as it was the case under the original 2010 Regulations and there was no suggestion that different laws should apply for other civil work outside the employment jurisdiction.
It does not mean that DBAs are worth entering into; there are very few circumstances where a DBA is to be preferred to the Underwoods Method of a pre-action contingency fee agreement under section 57 of the Solicitors Act 1974, followed by a CFA.
The key disadvantage of DBAs is that the damages cap not only limits the charge to the client, but due to the indemnity principle, limits recoverability from the other side. For example, in a general civil claim, the percentage limit in a DBA is 50%. That means that a successful client cannot recover more than that sum from the other side. In sharp contrast, CFAs can limit the amount to be paid by the client without causing indemnity principle problems.
Furthermore credit must be given to the client for costs recovered, which in any substantial litigation means that the client will pay nothing, due to the combination of the cap, the indemnity principle and having to give credit. In stark contrast, the risk-based success fee in CFAs is not recoverable, so there can never be anything to offset against it.