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Article: November 2015: EU Litigation Update

Business Litigation Reports

Damages Based Agreements—Latest Developments. The United Kingdom has historically been averse to straight contingency based fee arrangements between clients and their lawyers, believing these led inevitably to conflicts of interest. It took until 1990 for statutory provision to be made for conditional fee arrangements (CFA), whereby a discount on standard rates may be given in exchange for an uplift on those rates in the event of a defined “success.” However, all other forms of contingency fee agreements continued to amount to unlawful maintenance and champerty in contentious matters.

It took a further decade for that position to change. On January 14, 2010, Lord Justice Jackson’s final report, following his review of civil litigation costs, was published. He recommended that lawyers should be in civil litigation generally (See Jackson LJ, Review of Civil Litigation Costs: Final Report, 21 December 2009, p. 133, available at https://www.judiciary.gov.uk/wp-content/uploads/JCO/Documents/Reports/jackson-final-report-140110.pdf). With effect from April 1 2013, contingency fee agreements, referred to as Damages Based Agreements or “DBAs” for short, became legal in all contentious business, other than criminal and family proceedings (Section 45, Legal Aid, Sentencing and Punishment of Offenders Act 2012).

The DBA is meant to be a “no win, no fee” arrangement between lawyer and client, requiring the client to make a payment to the representative if the client obtains “a specified financial benefit,” ordinarily damages in the case (DBA Regulations 2013: Explanatory Memorandum, paragraph 2.1). The amount of the payment will be determined as a percentage of the compensation received by the client (Section 58AA, Courts and Legal Services Act 1990). If the client is unsuccessful, no payment is due. If the DBA does not comply with the relevant legislation the client will not have to pay the lawyer, even upon success. The level of risk for the lawyer is thus very high. Finally, a no hybrid-DBA arrangement – namely one where the lawyer receives both some level of fee income and also a share of damages – is permissible. This was perhaps the last nail in the coffin for DBAs, at least in terms of their use in substantial commercial litigations – as one commentator noted: “DBAs appear to be like the Yeti: they are believed to exist in practice but hardly any sightings have been made.” (See John Peysner, Impact of the Jackson reforms: Some Emerging Themes Report, presented at the Civil Justice Council Cost Forum, March 21, 2014, available at https://www.judiciary.gov.uk/wp-content/uploads/2014/05/impact-of-the-jackson-reforms.pdf).

The prohibition against hybrid arrangements stemmed from Regulation 4 of the DBA Regulation, 2013, which provides that, in any claim or proceedings, a DBA must not require the client to pay an amount other than the contingency fee and any non-counsel expenses. Initially, it was unclear whether this exclusion of hybrids was a policy decision or an accident of drafting. Many commentators believed that it was the latter, and that it would be only a matter of time before the Government would clear things up. But in November 2014, the Government announced that it had ruled out extending the regulations to permit hybrid DBAs, as it is considered such arrangements could “encourage litigation behaviour based on a low risk/high returns approach” (See Civil Justice Council, News Release, November 10,2014, available at https://www.judiciary.gov.uk/related-offices-and-bodies/advisory-bodies/cjc/working-parties/civil-justice-council-cjc-to-look-at-damages-based-agreements-revisions/). At the same time though, the Government asked the Civil Justice Council (CJC) to take a detailed look at some technical revisions to the DBA Regulation, so as to seek to increase their popularity and use within the profession.

These recommendations were published in the first week of September 2015 (Report) (See Civil Justice Council, The Damages-Based Agreements Reform Project: Drafting and Policy Issues, 2 September 2015, available at https://www.judiciary.gov.uk/wp-content/uploads/2015/09/dba-reform-project-cjc-aug-2015.pdf). The Report clarifies in its terms of reference that the Government’s policy objection to hybrid arrangements applies only where the two forms of fee arrangements – i.e. fee income based and share of damages – exist at the same time, referred to as “concurrent hybrids.” The Government does not object to arrangements where there are different types of retainer for different stages of a case, termed “sequential hybrids.”

But this clarification does not get us very far. Significant issues of how a ‘sequential hybrid’ DBA would work in practical terms remain: can a firm take a DBA for fees up to trial and then hourly rates for the trial, or is it based on the type of work undertaken, or by splitting fees incurred on claims and counterclaims. The draft regulations suggested by the Report refer to “part” of the proceedings, but what precisely constitutes a “part” is unclear.

Perhaps in light of these remaining inherent uncertainties, the Report itself finally recommends that certain aspects of how such an arrangement would work should be clarified. It also recommends that the Government should be encouraged to evaluate the arguments in favour of ‘concurrent hybrid’ DBAs. This is a necessary and logical development in this area of the law if DBAs are ever to work in the United Kingdom, at least for the purposes of large scale commercial disputes. From a policy perspective, it is difficult to see how the scenarios of ‘sequential hybrids’ described above are any better than allowing combinations of, say, a reduced hourly rate throughout the case with a contingency fee entitlement on success.

In the meantime, third party funders have stepped into the mix taking advantage of the legal lacuna. The trend is for the law firm which has entered into a DBA with its client to conclude a separate agreement with a funder to cover the lawyers’ work in progress, in return for a share of the contingency fee. The Report acknowledges this trend, but concludes that it does not infringe the Government’s current policy on DBAs. It does seem, though, that a yet further opportunity has been missed to bring not only greater clarity and certainty but also greater flexibility to this area of legal practice in England, where both practitioners and clients with material commercial disputes have been calling out for just that.