Damage Based Agreements

On 1 April 2013 wide-scale reforms of civil procedure were brought into force as a result of Lord Justice Jackson’s Review of Civil Litigation Costs, which represents the biggest overhaul of civil procedure since 1999.  The reforms are intended to promote access to justice at proportionate cost and present radical changes to existing rules relating to claims procedure, costs, and of particular note, the ways in which litigation can be funded:  Jackson brings the advent of damages-based-agreements (or “DBAs”) in civil proceedings, extending the admissibility of this method of litigation funding which was previously not available other than in limited non-contentious civil business and employment claims.

DBAs are a type of ‘contingency fee agreement’ under which a solicitor (or other legal representative) provides services in return for a sum determined by reference to the amount of a “specified financial benefit” obtained in connection with the matter in relation to which the services are provided.   This will usually mean that instead of being paid on a conventional hourly rate basis, a solicitor is instead paid a percentage sum of the damages recovered for the client from the losing party.  Some noteworthy consequences follow from this: firstly, the wording of the new legislation seems to suggest that DBAs cannot be used to fund defence cases; and secondly, payment falls due not merely where a solicitor obtains a favorable outcome for the client, but only after a monetary sum or some other “specified financial benefit” is actually recovered.

The percentage sum of what is recovered permitted to be agreed as the solicitors’ payment is capped to a maximum 50% in commercial claims, 35% in employment claims, and 25% in personal injury claims.  Importantly, this percentage sum includes VAT, and also barrister’s fees, the latter of which are the solicitors’ own responsibility to pay if the claim fails.  Disbursements, such as court fees and expert’s fees, are not included in the percentage sum and are the client’s liability to pay if the claim fails.  If the case is successful, disbursements will usually be recoverable from the losing party.

Further, in the event of success, solicitors’ costs are recovered from the losing party on a conventional basis, but insofar as the sum due to the solicitor under the DBA exceeds what would be recoverable under a normal fee agreement based on hourly rates, the successful client makes up the difference due to the solicitor from the sums recovered.  If, on the other hand, costs on the normal hourly rate basis exceed what would have been recoverable under the DBA, the ‘indemnity principle’ imposes a cap on the costs recoverable to the sum payable under the DBA.

In a challenging economic climate, it is no surprise that claimants may be reluctant to embark on expensive litigation with its inherent risks.  The DBA model therefore presents claimants with an opportunity to access justice and pursue their claims with the added confidence that because of the shared litigation risk, solicitors and their clients are working towards the common goal of recovery from the opposing party.  However, the nature of the risk posed to solicitors agreeing to provide services on a DBA basis: that they might receive no payment for their services as well as being liable to unrecoverable barrister’s fees, mean that DBAs are only likely to be offered to clients who have high value claims with both strong prospects of success and recoverability.

The firm’s litigation team specialises in civil & commercial litigation and dispute resolution.  For further information regarding litigation services or funding agreements, call 0121 450 7800 or send an e-mail to enquiries@rlksolicitors.com.