REUTERS | Dominic Ebenbichler

Damages-based agreements: a chance to make them work?

It is now more than eight years since Sir Rupert Jackson published the final report in his Civil Litigation Review, which recommended sweeping reforms to how litigation is funded. It is more than five years since those reforms were implemented, in large part, via Part 2 of the inaptly named (for these purposes) Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO). The government’s recently launched post-implementation review of the legislation gives those affected by the reforms an opportunity to say what is, and isn’t, working via an online survey.

One aspect of the LASPO reforms that made more of a splash in the press than in practice, as things turned out, was the decision to introduce contingency fees in the form of damages-based agreements (DBAs). These allow lawyers to conduct civil litigation in return for a share of any damages, which had previously been permitted only in limited areas such as employment tribunal work (which, oddly, is categorised as non-contentious work). But it soon became clear that DBAs were not gaining traction among practitioners (even those who were keen in principle to take them up) as a result of the restrictive manner in which the new regime was implemented.

Five years on, that remains the case. The impression one gets is that some firms are dipping a toe in the DBA waters, and a few may be paddling, but no one is really plunging in.

Why the low take-up?

The key culprit in all of this, it is generally agreed, is the Damages-Based Agreements Regulations 2013. These introduced a number of restrictions which appear arbitrary, at best, and which took the profession by surprise, not least the apparent ban on hybrid arrangements which prevent lawyers combining a DBA with some other form of funding (such as a reduced hourly rate as the case proceeds combined with a share of any damages on success). That restriction had not been foreshadowed in any of the government’s pre-legislative materials, and I suspect it may not have been intentional on the government’s part. In any event these restrictions, combined with various drafting infelicities in the regulations themselves, significantly increased the risks associated with the new regime and made DBAs less attractive to those who might otherwise offer them.

As long ago as November 2014, the Ministry of Justice (MoJ) recognised that there were some drafting issues with the DBA Regulations and asked the Civil Justice Council (CJC) to review them to consider possible improvements. At that point, the government expressly ruled out the introduction of hybrids, which it said “could encourage litigation behaviour based on a low risk / high returns approach”. However, it became apparent in the course of the CJC’s work that the government did not object to so-called “sequential hybrids”, where different forms of retainer apply at different stages; the objection was only to “concurrent hybrids”, where the different forms of retainer exist at the same time. To date, however, the regulations have not been amended to make that policy clear.

The CJC working group was chaired by Professor Rachael Mulheron of Queen Mary University London and had various members including myself. Its report was published in September 2015. Although the working group was asked to consider matters of drafting, rather than policy, the report did address policy issues such as the ban on hybrids. It made a total of 45 recommendations on both aspects. The key recommendations are outlined in a post I published on this blog at the time.

Unfortunately, it seems the report has sat in a drawer at the MoJ since publication, as no response has ever been received from government (though it seems that is about to change).

Post-implementation review

In June this year, the government launched its post-implementation review of Part 2 of LASPO, including the introduction of DBAs. It is somewhat behind schedule as the review was due to be completed five years after implementation (so by 1 April 2013), but, as with many things, it is better late than never. The review is intended to examine whether the legislation has met its objectives, and whether there are unintended consequences that need addressing.

As part of the review, the government has published the MoJ’s initial assessment of the reforms. This recognises that there has been some criticism of the current DBA regulatory regime, namely, both that:

  • It does not work on its own terms.
  • The policy should be changed, for example to allow hybrid DBAs.

It refers to the CJC report on DBAs, saying that the government will consider the next steps on that report in the context of the findings of the post-implementation review. So it appears that the CJC report is finally to be dusted off, though what if anything will be done beyond that remains a mystery for the time being.

There are some clues in the MoJ’s assessment, however, which seem far from promising to those hoping for major changes in terms of policy. The paper emphasises that the government has sought to tread carefully in implementing reforms, given the potential for unintended consequences. It states that “introducing a new form of funding, particularly one that may be best suited to very high value claims, deserves caution” and that DBAs may be more suited to “niche areas”. As for hybrids, the paper identifies a risk that they may be particularly attractive for lawyers in very high value, speculative litigation.

Stakeholder survey

The initial assessment paper encourages stakeholders to complete an online survey by 24 August 2018 “to provide evidence and substantiated views” in relation to five areas of reform introduced by Part 2 of LASPO, including DBAs. The survey takes a high level approach, simply asking respondents to say, in their experience, what have been the impacts of the various reforms – a question to which the answer from many respondents, in relation to DBAs at least, might well be “not a lot” given the apparent low take-up.

However, the MoJ’s paper gives more of a steer as to the areas where it would welcome comment. In particular, it asks for views on:

  • Whether the DBA Regulations should be revised in line with the CJC’s report on drafting issues.
  • The advantages, disadvantages and risks in changing policy, for example to allow hybrid DBAs.
  • What could be done to mitigate any risks.
  • Whether guidance to lawyers on funding arrangements needs amendment.

CJC conference

The CJC held a stakeholder conference on Friday 29 June, which the MoJ’s paper describes as a focal point of the post-implementation review. The conference was chaired by Sir Robin Knowles and included remarks by Sir Rupert to give “the architect’s view of the reforms in practice”. His message, in relation to DBAs, was that the reform was less successful than hoped, in that DBAs are not being used very much due to the technical deficiencies in the DBA Regulations and the ban on hybrids. To address the former, he urged the government to implement the CJC’s recommendations on drafting issues as part of the post-implementation review. In relation to the latter, he could see no possible reason for the ban, particularly as hybrid conditional fee agreements (CFAs) are permitted. He noted that the same criticism (that is, potentially supporting high value, speculative litigation) could be made of third party litigation funding, but in fact both provide another means of access to justice for those who cannot afford it.

And as has been said before, including by other speakers at the conference, it seems entirely arbitrary that lawyers cannot offer the client a hybrid DBA but can achieve a similar economic result (for the firm, but not the client) by partnering with a litigation funder to share the risk and reward. Or indeed, as Verity Jackson-Grant explains on this blog, by insuring some of the firm’s risk under the DBA.

At the CJC conference, Professor Mulheron echoed Sir Rupert’s calls for the government to implement the recommendations on drafting issues in the CJC report, emphasising that if (as per the MoJ’s paper) the DBA regime requires “caution” it also deserves “clarity”. She said it is simply not good enough that lawyers and clients don’t know how to draft a DBA to comply with the regulations.

Termination woes

One issue on which the DBA Regulations are currently far from clear is whether a DBA can include a clause providing for payment on some other basis (for example, hourly rates) if the client terminates the DBA without cause. The CJC report simply noted the working group’s view that the ability to draft a suitable DBA was sufficient protection for the legal representative against inappropriate, or unfortunate, termination by the client. That assumes, however, that such a clause will not invalidate the DBA, an issue which has now been litigated at least twice to my knowledge.

This issue arose in a case in which I was part of the Herbert Smith Freehills team representing solicitors and counsel seeking payment under their DBA following successful litigation. They were met with the challenge that the DBA was invalid because (among other reasons) it included a right to receive payment on hourly rates in the event of termination in certain circumstances (though the DBA had not in fact been terminated in that case). The case went to trial but settled on this point before judgment.

The issue also arose in a case brought by London law firm Lexlaw Ltd, which was described by its Managing Principal, Ali Akram, at the CJC conference. The DBA entered into by Lexlaw contained a term providing for payment on hourly rates if the DBA was terminated by the client. The DBA was in fact terminated by Lexlaw’s client following an indication that the opponent would make a substantial offer, which was then made and accepted after termination. Lexlaw brought a claim for its fees and the client countered that the DBA was unenforceable due to the termination provision. That issue will be tried as a preliminary issue unless the case settles.

This is merely one, albeit vivid, indication of the difficulties caused by the current lack of clarity in the DBA Regulations. Other issues are identified in the CJC report and outlined in my previous post.

Next steps

The MoJ’s initial assessment paper states that a report will be prepared by MoJ officials later in 2018, drawing on views of stakeholders and the available data. It will then be for ministers to decide what further actions to take.

Like Sir Rupert and many others, I believe the government’s policy on hybrid DBAs is impossible to justify, particularly given the potential for achieving a synthetic hybrid arrangement in combination with litigation funding or insurance. A change to this policy would allow lawyers greater flexibility to offer commercial clients options for simple, transparent fee agreements that give the “skin in the game” many clients want them to have.

But putting aside hybrids, and whatever decision is reached on that issue, I hope that the MoJ will heed the calls for clarity, including on the crucial issue of termination, so that lawyers and clients know what is or is not permitted in a DBA. Until the regulations are clarified, or the issues are litigated to the point that there is binding authority on their interpretation, there will be lingering doubts about enforceability. That is not a recipe for a successful funding regime.

Herbert Smith Freehills Maura McIntosh

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