What are Damages Based Agreements?
Damages based agreements (DBAs) are legal contracts that allow for the payment of a fee based on the amount of damages (or damages recovery) that is received in relation to a particular legal action. The purpose of a DBA is to set out in advance the agreed basis on which a damages recovery will be distributed between solicitor and client. DBAs therefore have the same purpose as they do in other civilised jurisdictions, namely to strike a balance between access to justice and the prevention of abuse.
A DBA must be in writing and signed by both parties. It must specify either a percentage share or an alternative formula for calculating the solicitors’ fee out of the damages recovered . The scope of work to be undertaken and the costs of that work, the time scales, the risk of loss, the amount of recovery and the client’s responsibility to pay court fees, disbursements and any liability for recovering those costs are all matters that can be included or excluded from the agreement.
DBAs are now being used to fund litigation in England and Wales and have been made the subject of a Code of Conduct in the wake of Jackson LJ’s recommendation. In its report on access to justice in personal injury actions, the Committee on Standards in Public Life (CSPL) has recommended restrictions on the use of DBAs.
How Do Damages Based Agreements Function?
Damages based agreements (DBAs) are agreements between a lawyer or law firm and a client whereby the lawyer or law firm agrees to be paid a percentage (up to 100%) of any amount received, known as damages, in respect of a legal claim, once that claim has been settled or determined.
A DBA can be applied to a variety of legal claims, including high value public law claims, individual challenges to decisions made by public bodies, financial mis selling cases, employment tribunal claims, and Group Litigation Orders. A DBA can even be used in Group Litigation Orders where there is a large number of individuals with similar claims.
The key element which distinguishes DBAs from other forms of funding (including CFA’s and ATE insurance) is that with a DBA the lawyer or law firm’s fees are not payable on a time and materials basis. Instead they are derived only from a percentage of the damages ultimately received by a claimant.
In practical terms, a DBA is a contract which will specify a percentage of damages which will be paid to the lawyer or law firm. If a case is won and damages are paid, the percentage will be calculated and taken from the award of damages to cover the lawyer or law firm’s fees. If a case is lost, the lawyer or law firm receives nothing in line with the contingency nature of the DBA. This has the effect of placing the risk of losing the claim on the receiving party (or its insurer) rather than the claimant.
If a case settles, the lawyer or law firm also has the right to recover the amount of any disbursements. Therefore, although the fee may be on a contingency basis, there will still be provision for the payment of the disbursements.
Individual claims can be aggregated in order to form a Group Litigation Order (GLO). Where a GLO is being formed all claimants must enter into a DBA with their lawyer or law firm. The percentage of damages they agree to pay will depend on the number of claimants involved. As a general rule, the larger the GLO the lower the percentage to be paid.
Cost-Benefit Analysis of Damages Based Agreements
From the client’s perspective, there are a number of advantages to entering into a damages-based agreement. The most important thing to bear in mind is that it focuses on getting to a settlement without tying you into more debt.
Chasing a case through the courts can be incredibly stressful and expensive. Engaging a solicitor to write letters and make court applications can quickly rack up costs, even if the court awards those costs back to the person being pursued. That can mean that a business or individual suddenly has to find a large sum of money to pay your solicitor.
DBAs help to avoid getting caught in that trap. If you lose the case, you may have to pay some of the other side’s costs, but then you’re done with. If you win, you only have to pay your lawyer a percentage of what you recover, and you should get legal costs back from the other side.
DBAs can often lead to a quicker settlement, as solicitors won’t be so keen to enter into them if they think a case will be difficult to win, or could become protracted. You’ll also know exactly how much you’re going to pay, provided you win of course, so you don’t have the worry of owing your legal team a huge sum of money at the end of the case.
However, there are also downsides to be aware of. The first is just that the DBA percentage is often higher than a lawyer’s hourly rate. This is because the lawyer is taking risks on the outcome of the case. In the words of the DBA Code of Conduct, "the terms of a DBA must reflect the relative risks to which each party is exposed and must not unfairly disadvantage any party."
Because of this, it’s important to remember that DBAs aren’t a cheap way to get legal representation. You still need to be sure that the case is worth pursuing; winning a case with a DBA may still cost a significant amount of your damages.
Clients also need to be aware that by entering into a DBA, they are committing to use a particular law firm throughout their case. Although a DBA gives the same rights to both parties, it’s no different from any other kind of retainer with a lawyer in this respect. Once you’ve entered into a DBA, you can’t simply change your mind as you would in a conventional agreement and use another firm because you’ve met a new solicitor you like better or had a change of heart about the case.
In cases where you believe a DBA is appropriate, you should definitely include a clause allowing you to change your legal representation after giving notice, provided your new law firm are also prepared to commit to a DBA, or "switch the agreement" to them as the case progresses.
The Legal Landscape of Damages Based Agreements
DBAs have been subject to an increased level of scrutiny in relation to the conduct of solicitors and the bills that they submit to the court for assessment, as was reflected in the decision of Cukurova Finance International Ltd. v Alfa Telecom Turkey Ltd., which we discussed previously on this blog. In addition, the issue has been discussed as part of the Civil Justice Council’s report on BTE insurance, which considered whether or not there should be a new court procedure to challenge DBAs. As a result, we can expect that practitioners who enter into DBAs will need to adjust to an evolving body of case law and secondary regulation.
The legal basis for DBAs is the provisions of the LASPO 2012 Act which were brought in in stages and are set out in sections 45-61. It should be noted that prior to the introduction of DBAs a new statutory regime was introduced for CFAs PCT/27/10 The Conditional Fee Agreements (Amendment) Regulations 2012/267 for which consultation took place and with which DBAs largely comply.
Regulation 2 – 10 of the Conditional Fee Agreements Regulations 2013, states that a DBA is void except if it satisfies certain conditions. For example, the DBA must:
(a) be in writing;
(b) identify the parties;
(c) state the circumstances in which the payment of damages by the client to the lawyer would be required;
(d) state the method of calculating the success fee to be paid if the DBA is determined under regulation 9 or 10 of the DBAs Regulations;
(e) contain a provision for the payment of disbursements by the client to the lawyer in accordance with regulation 8 of the DBAs Regulations.
(f) Where the agreement provides for the lawyer to be paid a percentage of damages, the agreement must make clear when the payment becomes due and provide that it is payable out of the damages recovered:
(i) if the agreement is terminated before it becomes payable, the former client must pay the lawyer remuneration calculated on the same basis;
(ii) where damages are to be recovered, the remuneration is not payable until the recovery of the damages;
(iii) if damages are not recovered, the lawyer is not entitled to any remuneration unless payment of damages by the defendant, one or more of the defendants or another party is guaranteed under an agreement which is enforceable against that defendant, those defendants or that other party;
(g) contain a statement that the client may be liable to pay a financial award to the relevant defendant or pay costs to any other person, such as ATE cover or where liability is admitted.
(h) contain a statement that the client has the right to cancel the agreement within 14 days.
Regulations 3, 4 and 5 set out the information that must be provided to the client before entering into the agreement. These include that the DBA is not the only option that the client has and that the client should take independent legal advice before entering into the agreement.
Regulation 9 sets out the conditions under which a DBA will come to an end. Here the solicitor has an obligation to notify the client in writing that the agreement is coming to an end and a statement setting out the disbursements for which the lawyer wishes to obtain a financial award from the client.
Regulation 10 details the circumstances under which the lawyer can elect to appeal, seek permission to appeal or apply to have an order or judgment varied. The lawyer does not have the same duty to inform the client in writing of the expiry of the agreement as under Regulation 9.
Finally, an inflation-adjusted limit on the amount recoverable by way of success fee is set out in Regulation 3(3). This will have to be observed by practitioners entering into DBAs and lawyers will need to be familiar with this regulation.
Damages Based Agreements and Their Comparison to Alternate Fee Arrangements
Damages based agreements can be distinguished from other fee arrangements: the most notable are costs-attended "no win no fee" arrangements and offer to accept the risk of litigation in exchange for all or a significant proportion of any damages recovered. The former are very rare in England, because statute forbids their being made in personal injury claims (except in certain circumstances) and they are almost universally subject to the integrity of the Solicitors’ Indemnity Fund. The latter are sometimes used in highly speculative cases (e.g. NICE judicial reviews, or patent revocation proceedings) where the likelihood of success is not high but the potential pay-off would be very large .
As a general rule, the assumption must be that DBAs will be subject to the Solicitors’ Indemnity Fund rules, just like more conventional costs-attended "no win no fee" arrangements, and that it will not be possible to agree a DBA if the client is unlikely to be able to pay its own costs. So in insolvency cases, for example, a DBA is unlikely to be appropriate nor especially attractive to the client, where the outcome of the action is uncertain, but the creditor’s costs are certain. In fact, the most obvious cause of a DBA failing to get off the ground will be a verdict that the arrangement would result in the client being worse off than in a more conventional arrangement.
Illustrative Case Studies of Damages Based Agreements
In practice, damages based agreements (DBAs) have been applied in a variety of ways. A number of examples are provided below:
- An immigration barrister, Ian Thomas of No.5 Barristers’ Chambers, has used DBAs successfully in three public law challenges. In each case his success fees were agreed at 20%, permitting the client to avoid paying his normal hourly rate. Two of the cases successfully challenged the UK Government’s failure to properly implement new EU Directive 2004/38 on the free movement of EU citizens. The other was a successful appeal re the failure to follow natural justice in a Home Office decision.
- A family law solicitor entered into a DBA with a representative claiming that he had been injured at work. The DBA provided that the claimant would pay the normal, lower, fixed fee of £2,500 and 6.5% of the compensation, plus VAT. In return, the solicitor agreed to act on a ‘no-win-no-fee’ basis. The DBA meant that the solicitor effectively had a ‘damages based retainer’, and the court found that the 6.5% retainer was a ‘percentage’ for the purposes of section 58AA of the Courts and Legal Services Act 1990 (CLSA).
- Alternative business structures are actively using DBAs to assist in promoting their brand and attract clients. For example, National Accident Helpline recently stimulated discussion of DBAs through its ‘Napoleon complex’ marketing campaign, as well as a new marketing campaign using DBAs for its ‘serious injury’ legal service.
- Solicitors working on a class action claim against a big supermarket chain for years are unlikely to be paid a penny if the action succeeds because of the supermarket’s ‘drop dead’ defence. Yet, as found by the Legal Ombudsman, not one firm told clients about DBAs and that this was an option for them. The fact is that some law firms just do not get it when it comes to providing real access to justice to clients. A DBA clearly would have been a suitable option in this kind of case.
- In Austria lawyers applying DBAs is part of a wider concept. There is vertical fee regulation, including the possibility of a percentage fee of up to 10% of litigation damages, and horizontal fee structures, where under certain circumstances the lawyer will receive an agreed minimum increase in his hourly fee. The Legal Affairs Committee of the Austrian Parliament is currently discussing the possibilities of redactable, electronic fixed fees through a mixture of a system of red tape and a system of relaxation of the rules, which would introduce DBAs into a wider concept for European lawyers.
The Future of Damages Based Agreements
Future trends in relation to Damages Based Agreements are likely to focus around legislation and regulation, as clients will want to ensure that their lawyers are sufficiently regulated to protect the consumer.
It is also likely that changes to the Justice System following the forthcoming review of the Justice System, Championing Change which is to be held by the Ministry for Equalities and Human Rights Commission will provide further encouragement of both the use of DBAs and their future regulation.
The introduction of a single body to regulate lawyers may result in the introduction of a new body to regulate all types of fees, such as DBA, Conditional Fee Arrangements, Damages Based Agreements, Hybrid Arrangements and Retainer+DBA Approach. Such a body could monitor trends and ensure the system remained transparent and fair .
DBAs are constantly evolving and the next generation of practitioners are likely to develop this agreement further, perhaps allowing for Limited DBAs which would operate over a smaller time period, whereby costs would be based on a simple percentage rather than differing tariff. DBAs are currently being used in clinical negligence and this is also likely to develop as practitioners become more comfortable with this type of arrangement.
The introduction of alternative methods of resolving disputes; mediation, arbitration, online courts and other private tribunals will require further development of a DBA tailored to suit these differing forms of resolution. Merging the language of civil procedure with the legal terminology of ADR may also be an emerging trend as ADR becomes the forefront of civil litigation.