Maura McIntosh explains the proposals to amend the rules relating to damages-based agreements (DBAs), looking at the key issues with the 2013 regulations and how changes might encourage more practitioners to use DBAs.

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Proposals to reform the regulations governing DBAs were published in October 2019 and have been broadly welcomed by practitioners. The proposals are the product of an independent review conducted by Professor Rachael Mulheron, Queen Mary University of London, and Nicholas Bacon QC.

Details of the proposals, including proposed redrafted regulations and an explanatory memorandum, are available on the Queen Mary School of Law website.

Background to the proposals

The Damages-Based Agreements Regulations 2013 have been the subject of widespread criticism. They are blamed, to a large extent, for the slow take-up in the use of DBAs since they were introduced into the litigation landscape in England and Wales in April 2013, as part of the Jackson reforms. Various difficulties with the 2013 regulations were identified in a previous review conducted in 2015, at the government’s request, by a Civil Justice Council (CJC) working group chaired by Professor Mulheron, of which I was a member. But the recommendations made by that working group were never implemented.

In February 2019, the Ministry of Justice (MoJ) published the results of its post-implementation review of Part 2 of the Legal Aid, Sentencing and Punishment of Offenders Act 2013 (LASPO), the legislation that implemented the costs and funding aspects of the Jackson reforms, including the introduction of DBAs. In its review, the MoJ noted that it appeared that DBAs were rarely used. It accepted that the 2013 regulations “would benefit from additional clarity and certainty” to allow DBAs to become a more viable funding method for a greater number of cases. And it referred to Professor Mulheron and Mr Bacon’s review, indicating that the government would give careful consideration to the way forward in the light of their report once published.

The redrafted regulations proposed in October address many of the key difficulties with the 2013 regulations, as outlined below. There are a few drafting niggles, the most significant of which is that the redrafted regulations require irrecoverable costs, counsel’s fees and VAT (where not recoverable) to be netted off from the DBA percentage payment, when they should simply be included within it. But assuming such issues are addressed, the redrafted regulations provide a helpful basis for much-needed reform in this area.

Hybrid DBAs

A hybrid DBA combines a DBA with some other form of retainer. It may, for example, provide that the lawyer is entitled to a reduced hourly rate as the case proceeds, which is payable win or lose, plus a contingency fee in the event of success.

The 2013 regulations prohibit hybrid DBAs because they provide, at regulation 4, that a DBA cannot require the client to pay anything other than the contingent DBA payment (which is capped at 50% of any recovery) and non-counsel disbursements. The upshot is that if there is no recovery the lawyer can have no entitlement other than non-counsel disbursements. Therefore, if a lawyer agrees to act under a DBA, this must be a full “no win no fee” agreement. This has been seen as a significant factor contributing to the profession’s lack of enthusiasm for entering into DBAs and has reduced flexibility for lawyers seeking to meet client demands for alternative fee arrangements.

The lawyer is left with an unenviable choice between the risk of being paid nothing if the DBA is terminated by the client without cause or the risk of invalidating the DBA

In setting the terms of reference for the CJC’s 2015 review of DBAs, the government made it clear that it ruled out the introduction of certain types of hybrid DBA – that is, those where two forms of retainer exist at the same time, dubbed “concurrent hybrids” in the CJC report. Interestingly, it did not object to “sequential hybrids”, where there are different types of retainer for different stages of a case. The CJC working group was divided on the question of whether concurrent hybrid DBAs should be permitted, but recommended that the government should be encouraged to evaluate the arguments in their favour.

Under the current proposals, hybrid arrangements are to be permitted, whether they are concurrent or sequential. There is, however, an important restriction. If the client receives nothing, the lawyer can receive up to 30% of their fee (plus any recoverable costs, which are likely to be minimal in these circumstances). The aim is to mitigate the lawyer’s risk by enabling recovery of at least some contribution to basic costs if the claim fails. But there are two obvious questions.

1. What if there’s a low recovery?

What happens if the claimant wins what is in effect a pyrrhic victory, so that it receives only a very low recovery, and does not recover its costs or recovers only a small proportion? In those circumstances, the current drafting means that the lawyer would likely recover less than the 30% they would be entitled to receive if the client lost the case outright. This seems an obvious lacuna.

2. Is 30% the right figure?

The drafters have suggested 30%, recognising that this figure will ultimately be a matter for the MoJ to determine, following consultation, if the redrafted regulations are taken forward. Nonetheless, it may be seen as a very low starting point, given the apparent aim of mitigating risks so as to establish DBAs as a more viable form of funding.

Terminated agreements

The 2013 regulations are far from clear as to whether a DBA can include a clause providing for payment on some different basis (for example, hourly rates) on termination. The lawyer is left with an unenviable choice between the risk of being paid nothing if the DBA is terminated by the client without cause (perhaps where a favourable settlement is likely or inevitable) or the risk of invalidating the DBA by including what seem sensible protections in the event of termination.

The redrafted regulations propose flexibility for the lawyer and client to agree terms regarding payment on termination. The default position, if nothing else is agreed in the DBA, is that the lawyer can charge costs, expenses and counsel’s fees if the client terminates, or if the lawyer terminates where the client has behaved unreasonably. This change will be welcome to practitioners.

Costs recovery

Under the 2013 regulations, costs are recoverable on what is known as the “Ontario model”. This means that recoverable costs are assessed in the conventional way, as if there were no DBA, and set off against what is payable under the DBA. The successful claimant’s lawyer is entitled only to the DBA payment, plus non-counsel disbursements, even if that is less than the amount that would otherwise be recoverable on assessment.

Accordingly, the existence of a DBA will not increase the amount of the defendant’s costs liability, but it may decrease that liability due to the application of the indemnity principle, if the amount due under the DBA is less than the otherwise-recoverable costs. This is sometimes seen as a surprising “windfall” for the losing defendant at the expense of the winning claimant’s lawyer.

In contrast, under the proposed reforms, costs recovery is based on the success fee model, which means that recoverable costs are paid to the lawyer in addition to sums due under the DBA, rather than being set off. This is likely to make DBAs more feasible in lower value cases, and also removes the potential windfall effect.

The quid pro quo for introducing the success fee model is a recommendation to reduce the maximum percentage DBA payment from 50% to 40% in non-personal injury cases. (A lower cap applies in the personal injury and employment contexts, though employment cases are excluded from the current proposals.)

Non-monetary claims and DBAs for defendants

Currently, the DBA percentage can only be applied to sums recovered, for example as a debt or damages. The obvious implication is that DBAs are available only on monetary claims.

Under the proposals, the DBA percentage is applied to the “financial benefit” received by the client, rather than (necessarily) a sum recovered. This means that DBAs should be available in a broader range of claims, such as those involving recovery of a valuable asset rather than damages. In principle, it should also mean that DBAs can be used by defendants, based on the financial benefit represented by avoiding or reducing a potential liability.

DBAs for representative actions

DBAs are currently prohibited for “opt-out” collective proceedings in the Competition Appeal Tribunal, under the regime introduced by the Consumer Rights Act 2015. The proposed changes would similarly preclude the possibility of entering into DBAs for representative actions under Civil Procedure Rule (CPR) 19.6, as this is also effectively an opt-out regime. There have not been many damages actions brought under CPR 19.6, due to its strict “same interest” requirement. However, in the recent high-profile case of Lloyd v Google LLC [2019] EWCA Civ 1599, the Court of Appeal allowed a representative action to proceed on a claim for damages for the loss of control of personal data, which does not rely on any personal circumstances affecting individual claimants.

Next steps

The deadline to submit feedback on the proposed redrafted regulations was 15 November 2019. Professor Mulheron and Mr Bacon are preparing a supplementary report based on the feedback received, which I understand will be available in early 2020.

As noted above, the MoJ indicated in its post-implementation review of Part 2 of LASPO that it would carefully consider the proposals that come out of the current review. This was reiterated by the MoJ’s head of civil litigation funding and costs, Robert Wright, at the launch event for the proposed redrafted regulations.

It is difficult to predict what the MoJ will decide. What seems clear is that the MoJ is wary of unintended consequences resulting from any reforms and it is therefore likely to tread carefully. Before adopting these (or any) proposals, it will no doubt wish to be satisfied that they give sufficient protection for clients, at least when combined with existing professional conduct obligations.