On 17 October 2019, at the invitation of the Ministry of Justice (MoJ), Professor Rachel Mulheron of Queen Mary University of London and Nicholas Bacon QC delivered their initial draft Damages-based Agreement Regulations 2019 for England and Wales, pursuant to their independent review of the DBA Regulations 2013. The DBA Reform Project is now seeking feedback from practitioners and other stakeholders before 15 November 2019.
At a launch event in Lincoln’s Inn, Robert Wright (Head of Civil Litigation Funding and Costs) of the MoJ expressed gratitude for the considerable effort made by the team and indicated that the reforms could progress through the legislative process in around a year, if the government approves the changes and resources are available to implement them. However, whether both the reforms meet with government approval, and whether there are sufficient resources to make them a reality in this timescale, may only become clearer after the feedback is considered.
The draft regulations provide considerable clarity in several places worthy of more detailed analysis and discussion, not least the improvements made to the regulations to allow defendants to benefit from DBAs and termination scenarios. However, there are two key pillars to the suggested reforms that underpin many of the other changes, namely the replacement of the Ontario model with the success model and the introduction of the hybrid DBA.
These two major changes make DBAs more commercially desirable for law firms. This is seen as essential to make DBAs a viable option in a post-LASPO environment, as originally envisaged by Sir Rupert Jackson at the time his Review on Civil Litigation Costs was published.
However, when improving the lawyer’s position, other amendments were deemed by the team as necessary to maintain a balance, so as not to make the regulations weighted in favour of practitioners to such a point that the government ultimately cannot support them.
The success fee model
In a move that will be welcomed by practitioners, the team propose ditching the Ontario model in favour of adopting the success fee model (Regulation 4(1)(a)(i)-(iii))
The difference is that the lawyer’s share of the financial benefit recovered by the client (that is, the DBA payment) under the Ontario Model must include recovered costs. Recovered costs are kept outside of the DBA payment with a success fee approach, save for counsel’s fees, leading to less reduction of the lawyer’s share of the financial benefit received by their client. The DBA payment will therefore only deduct irrecoverable costs, counsel’s fees and irrecoverable VAT.
The current approach can be confusing for clients. It can lead to situations where the DBA payment is consumed by the recovered costs in cases that take longer than expected. Indeed, the indemnity principle could lead to solicitors receiving less than the recoverable costs because their entitlement is capped by the DBA payment percentage under the DBA.
However, in a move designed to appease any fears that the new approach might lead to over-compensation, the statutory caps for the DBA payment have been reduced as follows:
- Commercial litigation: 50% (2013); 40% (draft 2019).
- Personal injury: 25% (2013); 20% (draft 2019).
Furthermore, any liability of the client to an after the event (ATE) insurance premium is expressly outside the DBA payment under the draft regulations, providing further clarity. The ATE premium is included in the definition of expenses.
Similarly, the regulations expressly confirm that the activity of third party funding is excluded so as to not accidentally capture third party funders under the regulations.
Hybrid DBAs (Regulation 4(1)(b))
The confusion and consequences of the Ontario model were never popular with lawyers. However, the problem that really prevents DBAs from flourishing is the notion that the law firm cannot receive a penny until the client has received the financial benefit. The lack of cash flow and the adoption of 100% risk are cited as reasons why DBAs are not being utilised, this despite the existence of funding and insurance products for law firms to provide cash flow and risk mitigation services behind the scenes.
The new draft regulations install the possibility of hybrid DBAs to replace the current all or nothing DBAs, in a move which will be a popular concept with most firms, large or small.
Under the new proposal, solicitors and counsel can charge up to 30% of their base fee (the parties can agree a lower percentage) payable on account. Most would welcome this major alteration to the regime, albeit predictably there will be some calls to increase the cap beyond 30%. The authors of the draft regulations recognised that this was not a figure based on science, but rather was intended to reflect that the fact that some cash flow to pay operating costs seems reasonable.
Sir Rupert Jackson has himself written a letter in support of these two core changes. One might expect this to carry weight with the government, but it would be unwise to take government support for granted. The MoJ remains concerned that it does not replicate what Mr Wright described as the “excesses of the Pre-LASPO regime”. It will assess for itself whether hybrid DBAs could lead to an undesirable outcome. It will be examining whether the changes could lead lawyers to prioritise their own commercial returns over the client’s best interests, for example. Pre-empting such scrutiny, Nicholas Bacon QC was quick to point out that the many and varied protections that consumers of legal services enjoy within the general law will still apply regardless, and the contract itself will govern many aspects of the retainer that could otherwise lead to abuse. The intention of the proposals is to make the DBA an option capable of being utilised by the profession, not to be prescriptive about every permutation.
Ultimately though, Mr Wright said that the biggest question for the MoJ is why make these changes now, when so many other things require their attention. The 2015 Civil Justice Council report on DBAs suggested similar changes to those in the draft 2019 Regulations, but that report was left to gather dust at the MoJ. Those lobbying for these proposed reforms will therefore need to answer that question quickly, whilst they have momentum.