DISCOVER THOMSON REUTERS CONTACT & SUPPORT PRACTICAL LAW PRACTICAL LAW DISPUTE RESOLUTION BLOG by Maura McIntosh Professional support consultant at Herbert Smith Freehills SEPTEMBER 15, 2015 A future for Damages-Based Agreements? Civil Justice Council recommendations for reform The introduction of DBAs (aka contingency fees) in April 2013 was one of the headlinegrabbing aspects of the Jackson reforms. For the first time, lawyers would be able to conduct litigation or arbitration in England and Wales in return for a share of the winnings. But there is a big difference between being able and being willing, and it soon became clear that most lawyers were not willing. As Professor John Peysner noted in his report on the impact of the Jackson reforms prepared for the Civil Justice Council Cost Forum in March 2014: “DBAs appear to be like the Yeti: they are believed to exist in practice but hardly any sightings have been made.” A rare breed The lack of enthusiasm for DBAs has been widely attributed to the inability of firms to offer hybrid arrangements, which combine a DBA with some other form of retainer; for example, a reduced hourly rate as the case proceeds plus a share of damages if it ultimately succeeds. In i
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
9/15/2015 A future for DamagesBased Agreements? Civil Justice Council recommendations for reform | Practical Law Dispute Resolution blog
http://disputeresolutionblog.practicallaw.com/afuturefordamagesbasedagreementsciviljusticecouncilrecommendationsforreform/#more902 1/4
DISCOVER THOMSON REUTERS CONTACT & SUPPORT
PRACTICAL LAW
PRACTICAL LAW DISPUTE RESOLUTION BLOG
by Maura McIntoshProfessional supportconsultantat Herbert SmithFreehills
SEPTEMBER 15, 2015
A future for Damages-Based Agreements? CivilJustice Council recommendations for reformThe introduction of DBAs (aka contingency fees) in April 2013 wasone of the headlinegrabbing aspects of the Jackson reforms. Forthe first time, lawyers would be able to conduct litigation orarbitration in England and Wales in return for a share of thewinnings.
But there is a big difference between being able and being willing,and it soon became clear that most lawyers were not willing. AsProfessor John Peysner noted in his report on the impact of theJackson reforms prepared for the Civil Justice Council Cost Forumin March 2014:
“DBAs appear to be like the Yeti: they are believed to existin practice but hardly any sightings have been made.”
A rare breed
The lack of enthusiasm for DBAs has been widely attributed to the inability of firms to offerhybrid arrangements, which combine a DBA with some other form of retainer; for example, areduced hourly rate as the case proceeds plus a share of damages if it ultimately succeeds. In
i
9/15/2015 A future for DamagesBased Agreements? Civil Justice Council recommendations for reform | Practical Law Dispute Resolution blog
http://disputeresolutionblog.practicallaw.com/afuturefordamagesbasedagreementsciviljusticecouncilrecommendationsforreform/#more902 2/4
other words, if a lawyer agrees to act under a DBA it must be a full “no win no fee” agreement.This obviously increases the level of risk for the lawyer.
The ban on hybrids resulted from the wording of the regulations governing DBAs. It came as asurprise to the profession when the draft regulations were published in January 2013. It may alsohave come as a surprise to the government; it is not entirely clear whether the initial exclusion ofhybrids was a policy decision or an accident of drafting. At the March 2014 Cost Forum, LordFaulks (Minister of State for Justice) said the government was considering the way forward onDBAs and hoped to make an announcement in relation to hybrids soon. This was generallyinterpreted as recognition that change was needed, although it obviously fell short of anycommitment to permit hybrids. However, the government had clearly come down against hybridsby the time it announced the CJC review (see below).
Other drafting problems may have contributed to the unpopularity of the regulations. For instance,currently the only payment a solicitor acting under a DBA can receive if the claim fails is noncounsel disbursements. This means the solicitor is on the hook for counsel’s fees win or lose(unless counsel has agreed to act under a DBA). Further, the losing defendant, not the solicitor,gets the benefit if the costs the claimant would be entitled to recover from the defendant on atraditional basis are greater than the agreed fee under the DBA. This is because of the continuedapplication of the indemnity principle, and is arguably something of a windfall.
Civil Justice Council review
In November 2014, the Ministry of Justice asked the Civil Justice Council to review the DBAregulations to consider possible improvements. However, it expressly ruled out the introductionof hybrids, which “could encourage litigation behaviour based on a low risk / high returnsapproach”.
The CJC working group was chaired by Professor Rachael Mulheron of Queen Mary UniversityLondon and I was pleased to be included as a member. The group met six times to discussdrafting and policy issues. Its report, with 45 recommendations, was published in September2015.
Concurrent vs sequential hybrids
The working group’s terms of reference clarified that the government’s policy objection to hybridarrangements applies only where the two forms of retainer (the DBA and, for example, hourlyrates) exist at the same time. The report refers to this as “concurrent hybrids”. The governmentdoes not object to “sequential hybrids” where there are different types of retainer for differentstages of a case.
However, it is not clear where the boundaries lie. Could a firm agree an hourly rate up to but notincluding trial, and then a DBA for the trial work? From a policy perspective it is difficult to seehow that is better than combining a reduced hourly rate throughout the case with a contingencyfee on success.
Another question: once the DBA kicks in, can the firm retain the hourly rate fees? Or does ithave to swap its “bird in the hand” for the possibility of two (or more) in the bush? If a swap isnecessary, then this doesn’t really mitigate the firm’s risk: if it agrees a DBA, it has to be the
9/15/2015 A future for DamagesBased Agreements? Civil Justice Council recommendations for reform | Practical Law Dispute Resolution blog
http://disputeresolutionblog.practicallaw.com/afuturefordamagesbasedagreementsciviljusticecouncilrecommendationsforreform/#more902 3/4
“nuclear option” of a no win, no fee deal. This is not, in reality, different forms of retainer existingsequentially, but rather one form entirely displacing the other.
It is also unclear whether separate forms of retainer could be agreed for separate stages of thecase in the sense of separate legal tasks, or perhaps separate Precedent H phases. Forexample, could there be a DBA for the whole case save for the disclosure and witnessstatement phases, which would be charged on hourly rates? Similarly, it is unclear whether youcan agree a DBA for the claim and hourly rates for the counterclaim. Neither of these is exactly“sequential”, but they appear to be permitted by the government’s draft regulations. This isbecause the draft regulations permit a DBA for “part” of the proceedings without defining what ismeant by a “part”.
To clarify these issues, the working group recommended that the regulations need to:
Define what is meant by a “part” of proceedings to which a DBA can apply.Clarify whether lawyers can retain the benefit of the nonDBA retainer, regardless of whetheranything is ultimately payable under the DBA.
Why not concurrent?
Although the CJC was not asked to review the government’s policy on concurrent DBAs, theworking group considered this and a number of other policy issues as part of the CJC’s ongoingfunction of keeping the civil justice system under review. Unfortunately the working group wasunable to reach consensus on whether concurrent hybrid DBAs should be permitted, contrary togovernment policy. Some members considered that there was no good reason to prohibit theiruse, and that market freedom should prevail; others considered that the case in their favour hadnot been proven. The working group recommended that the government should be encouraged toevaluate the arguments in favour of concurrent hybrid DBAs.
To my mind, the government’s policy stance against concurrent hybrids is very difficult to squarewith other aspects of its policy, including its position on sequential hybrids and third partylitigation funding. Funders offer a form of “hybrid DBA”. Here, the lawyer effectively trades part ofthe contingent DBA payment for a guaranteed ongoing fee from the funder. Such arrangementsdo not offend government policy even though they are aimed at achieving precisely the sameresult as a concurrent hybrid DBA from a lawyer’s perspective. The lawyer will be paid a (lower)fee if the action is lost and a percentage of winnings if the action is won. The only difference isthat the client is not given the same flexibility. It seems the client can only have a full “no win, nofee” DBA. He or she cannot negotiate a lower contingent DBA payment in return for paying aguaranteed ongoing fee to the lawyer. It is therefore difficult to see any policy reason to banconcurrent hybrids but permit funder hybrids.
Other recommendations
Some other important points coming out of the report and recommendations include:
DBAs should be available to defendants, as per the government’s draft 2015 DBAregulations.It should be open to a solicitor and client to agree the trigger for payment under the DBA. Forexample, this could be from securing a judgment, or securing cash or other “money’s worth”.
9/15/2015 A future for DamagesBased Agreements? Civil Justice Council recommendations for reform | Practical Law Dispute Resolution blog
http://disputeresolutionblog.practicallaw.com/afuturefordamagesbasedagreementsciviljusticecouncilrecommendationsforreform/#more902 4/4
That is in contrast to the current position, where payment can only be made out of sumsactually recovered (which obviously will not work for defendant DBAs, if introduced).The regulations should clarify whether the DBA fee can be calculated according to the resultof the case at first instance, or whether it will always be conditional on the outcome of anyappeal.Counsel’s fees should be treated as an expense which is outside the 50% DBA cap (unlessCounsel is acting under a DBA). This would mean that solicitors are no longer on the hook fordisbursements for counsel’s fees if the case is lost.The regulations should clarify whether or not lawyers acting under a DBA are immune fromadverse costs orders (socalled Hodgson immunity, which applies to CFAs).Most members of the working group were in favour of moving to a “success fee” model ofDBA (so that the DBA payment would be in addition to recoverable costs, rather than the twobeing offset against one another). This would have the advantage of reversing the current“windfall” for a defendant where recoverable costs exceed the DBA payment. However, thecurrent 50% DBA cap might need to be reduced if the success fee model is implemented.On balance, the indemnity principle should be abolished insofar as it relates to DBAs.
Next steps
The Master of the Rolls has welcomed the working group’s report, and has urged the governmentto consider amending the regulations to help promote confidence in DBAs and encourage theirgreater use.
In my view, very significant amendments are needed, including addressing the issues relating tosequential and concurrent hybrids, if DBAs are to play a major part in the funding of commerciallitigation. The ball is now firmly in the government’s court.
Related Documents
